Purchasing a life insurance policy is a big step toward ensuring your affairs are in order for your family.
After much deliberation and research, you’ve elected which carrier to purchase your policy from, you’ve decided what type of life insurance policy to purchase, and you’ve chosen how much coverage to purchase.
Now, you’re faced with the printed policy in front of you, and it might as well be a foreign language.
If you’ve recently purchased your first life insurance policy, or you need some help understanding one you’ve had for a while, this guide is here to help you.
While all life insurance policies differ a little bit based on the carriers and your individual choices, there are some terms that you will see as part of every life insurance policy, no matter what.
The premium is the payment you make to the insurance company on a predetermined schedule. This could mean you pay premiums monthly, quarterly, or annually, depending on your policy.
For term life insurance policies, your premium cost covers the cost of your insurance plus administrative costs.
When purchasing a whole life insurance policy, your premiums will include both those costs, and you’ll also be able to pay more into your policy to build up a cash-value account. This account can be withdrawn from throughout your life, or you can continue to allow the investment to grow.
Your beneficiaries are those people who receive money from your life insurance policy when you die.
In many cases, beneficiaries are spouses, children, parents, or grandchildren, but you can opt to name friends and even charities as beneficiaries of your life insurance policy if you’d like.
The death benefit refers to the total amount of money your beneficiaries will be paid upon your death. If you only have one beneficiary, that person receives the entire amount of your life insurance policy; having more beneficiaries means the total amount is divided based on a percentage split you choose.
When you purchase your life insurance policy, you choose a cash value that is often - but not always - a fixed value.
If you purchase whole life insurance and the cash value portion of your policy has grown upon your death, this money also can be split amongst your beneficiaries in addition to the main death benefit.
A rider is an optional coverage you can add to your life insurance policy.
These riders can cover dependant children, pay your premiums if you’re unable to work, or can provide additional funds to pay for your final living expenses.
Riders are coverage over and above your regular death benefits, so having a death benefits rider in addition to your regular coverage, for example, doesn’t decrease the total amount of money your beneficiaries receive upon your death.
All life insurance policies have four basic sections: Declarations page, policy terms and conditions, coverage details, and rider details.
The exact information you will find in an individual life insurance policy differs from carrier to carrier and policy to policy, but you should find these four parts in every life insurance policy you review.
This portion of your policy can go by a few different names, such as policy specifications or schedule of benefits. In this section, you’ll see the executive summary of your policy and all the important details.
Some of the information found on the declarations page includes:
This is usually the same person - you - but, in the event that the policy owner is purchasing a policy for someone else, these names will be different. In cases where parents purchase a life insurance policy for their minor child, the names in this section are different.
The policy owner is the one paying the premiums, while the insured is the one whose death would trigger the payout of the death benefits.
Here you will find information on the type of policy you’ve purchased, such as a term life insurance policy or a whole life insurance policy.
This is the number the carrier allocates to your individual policy. This number is good to take note of, as it allows you to identify or confirm your policy when needed.
This is the day your life insurance application was approved and your carrier offered you coverage.
The policy issue date, however, does not denote the day you actually receive life insurance coverage; it’s just the day you were offered a life insurance policy.
This date is the day your life insurance policy goes in force and you have life insurance coverage.
The effective date is the most important date on your policy, and if there isn’t an effective date listed you don’t actually have life insurance coverage.
If you die before your policy’s listed effective date, your beneficiaries will not receive the insurance payout, even if you die after your policy’s issue date and you were approved for coverage.
Your rate or premium class is based on the health classification you were given during the underwriting process, and determines how much you pay for your policy premiums. This number is determined through an evaluation of your medical history, family history, lifestyle, and background.
There are four premium classifications:
If you received a classification with high premiums due to some factor, such as smoking, you can apply for reconsideration after you no longer meet the condition and your policy has been in force for at least a year or two.
If you opted to purchase a term life insurance policy, the length of your coverage will be listed in your policy.
Most life insurance policies allow you to purchase additional coverage, such as dependent child coverage or coverage that will pay off your mortgage, in addition to your base life insurance policy. If you elected to purchase this type of additional coverage, it will be listed in your policy.
This section offers you the definitions of some of the terms you’re likely to see on your insurance policy.
Some common terms you’ll see in this section include:
Depending on your policy and your insurance provider, the policy terms and definitions section - also called general provisions - may feature different terms.
Next, you will find a section that summarizes all the promises the insurance company is making to you, and that you’re making to it.
Some of the information outlined in this section includes:
Here, you will see the amount of money you’re expected to pay in premiums, and how often you’re expected to pay it.
If you purchased a permanent policy with variable premiums, this section will include a table showing your premiums to be paid over time.
Other information this section may spell out includes the grace period - the time you have after your premium due date during which your policy will remain active if you don’t pay - and reinstatement terms, which will tell you when and how you can reinstate your policy if it lapses.
You may also see any exclusions in your policy, such as a suicide exclusion, that may prevent your beneficiaries from receiving your death benefit.
Many term life insurance policies allow you to transfer your policy or convert it into a whole life insurance policy at the end of its term. If this is allowed, this section will include information on how you can make that transition.
This is perhaps the most important part of your policy. In this section, your selected beneficiaries will be spelled out and, if you decide to change them, any changes will be reflected here.
If you opt to have multiple beneficiaries who receive different percentages of the death benefit, those percentages will be listed next to the beneficiary names.
Many life insurance providers allow policyholders to customize their coverage by adding riders, or additional, targeted coverage on top of the regular life insurance policy. These add-ons come at an additional cost and, in some cases, allow you to reap the benefits of the coverage while you’re still alive.
Here are some common life insurance riders offered by many carriers:
This rider replaces a portion of your income in the event that you become disabled and cannot work.
In general, the coverage from a disability income rider isn’t as robust as what you’d get from specific disability insurance, so it’s best to purchase disability insurance instead of the rider.
If you become disabled and are unable to work, a waiver of premium rider can make it so that you don’t have to pay your life insurance premiums for up to six months, but you’re still covered by the insurance.
However, qualifying for this rider can be difficult because there often are very strict requirements under which your disability must fall to be eligible.
A term conversion rider allows you to convert a term life insurance policy into a whole life insurance policy at the end of the term. In many cases, this rider is included with a term policy at no additional cost.
If you are diagnosed with a terminal illness, an accelerated death benefit rider pays out a portion of your death benefit while you’re still alive. This can be used to cover your medical expenses or cost of care.
In order to qualify for the accelerated death benefits, you must provide your insurance carrier with a doctor’s note that you have a life expectancy of 12 to 24 months, although some companies may allow you to utilize this benefit if your life expectancy is less than 12 months.
Similar to an accelerated death benefit rider, a long-term care rider pays out a portion of your death benefits to cover the costs of your long-term care. This care can include a nursing home, private nurse, or other assisted medical care that may be associated with aging or a critical illness.
This rider is similar to the accelerated death benefit rider, except there isn’t usually the requirement that your condition be terminal; it just needs to be considered critical per your insurance carrier’s schedule of illnesses.
If you qualify, you will receive a lump sum of money that is subtracted from your death benefit.
Your life insurance policy can be complicated, with lots of unfamiliar terms and conditions. It’s essential that you take the time to look it over thoroughly before you finalize your agreement with your insurance company, and that you fully understand the expectations of both yourself and your insurance company.
If you need help comparing life insurance quotes to find the coverage that’s right for your needs, Insurdinary can help! You can compare premiums and plans for a variety of carriers, get a personalized quote, and apply for coverage from the comfort of your home. Get your quote today!