While you may be able to answer the question: what is term life insurance, your insurance savvy might end there. We don’t blame you. You’ve got better things to do with your time than study the fine print of a policy offer.
But, if you do need a life insurance policy to complete your divorce settlement or to finalize your small business loan paperwork ASAP, we’ll quickly help you get up to speed on common terminology, how to get competitive quotes, and help you to review your policy options today.
» Compare: Term life insurance quotes
How does term life insurance work?
In a nutshell, when you buy life insurance, you’re trading your money for the peace of mind that your family (or business) will get one large check when you die.
If you buy term life insurance, you must die within the timeframe (10, 20, 30, or 35 years) of your policy for the money to be paid out.
If you buy whole (permanent) life insurance, the money will be paid out after you die as your policy will last your entire life.
10 reasons why you might buy a life insurance policy
- You need a policy to secure a business loan until it is repaid.
- You are getting divorced and your settlement requires a policy to secure spousal maintenance or child support until age 18.
- You are buying a home and require a policy until your mortgage is paid-in-full.
- You have a family (spouse, domestic parter, or children) who rely on your financial support. You need a policy to replace your earned income.
- You wish to leave some money to your family or pay for your final expenses.
- You are a key person in a business and your death would negatively impact the success of your company. You need a policy as part of your business plan.
- You wish to use life insurance to equalize inheritance of a family farm or business.
- You wish to donate to a favorite cause or charity via life insurance.
- You don’t want to leave your debt behind after you die. Your policy will pay it off.
- You want to fund your kid’s education, wedding, or another important milestone even if you cannot be present to witness the big day.
Now that you know why people buy a life insurance policy, let’s explain some common terminology that is helpful to understand when comparison shopping for quotes or reviewing a policy offer.
Are you asking what is term life insurance? In this post we explain all the key phrases to understand before you buy your life insurance policy.
17 Term Life Insurance Policy Phrases Explained
It’s helpful to understand what you’re buying before you take the leap in purchasing a life insurance policy. Here’s the vocabulary common to most types of life insurance policies explained in simple terms.
When you buy a life insurance policy, you can choose to give the money that is paid out upon your death to one (a primary beneficiary) or more people (multiple beneficiaries).
Each person you name can receive the percentage of your policy payout that you wish.
For example, if you name four people, each could receive 25% of the total sum to be paid out. If your policy totaled $1,000,000, then each would receive $250,000.
(2) Contingent Beneficiary
We advise you to name both a primary beneficiary and a contingent beneficiary on your life insurance policy.
Create a Team A (primary) and Team B (contingent) of beneficiaries you wish to take care of with your life insurance money.
Why two teams?
Let’s say that Team A consists of your spouse and daughter. Team B is your favorite cousin Billy.
Cousin Billy is your backup in case your spouse and daughter would die before you. Your contingent beneficiary would receive your life insurance money only if all of your primary beneficiaries have died.
(3) Death Benefit / Policy Proceeds / Payout
One of our life insurance agents calls the death benefit the “suitcase of money delivered to your family when they need it most.”
When you buy your policy, you determine at the outset how much the death benefit will be. You can buy a term life insurance policy with a payout from $50,000 to $25 million+ (depending on your net worth) easily at Quotacy.
(4) Face Value / Coverage Amount
As we explained above, when you buy your term life insurance policy, you determine the value of the death benefit by choosing your coverage amount.
This is the face value of your life insurance policy and it is the amount of money that will be paid to your family (beneficiaries) upon your death.
(5) Insurable Interest
Anyone who would be financially impacted by your death has an insurable interest on your life and may be legally named as a policy beneficiary.
Your neighbor, for example, cannot buy a life insurance policy on your life because they would most likely not be negatively impacted by your death. Not being able to borrow your lawn mower anymore doesn’t legally cut it.
In contrast, your domestic partner, spouse, or business partner, for example, all could demonstrate that your death could have a financial impact on their lives. They could be named a beneficiary and/or buy a life insurance policy on your life.
The person whose life is covered by the life insurance policy is called the insured person. This means that this person needs to die for the policy money (death benefit) to be paid out to the beneficiary or multiple beneficiaries.
(7) Life Insurance Broker / Agent
A broker is a person or company like Quotacy who distributes (sells) life insurance policies in partnership with the life insurance companies to policyholders.
Just like a mortgage broker, a life insurance broker is able to save you time and money by getting you competing bids for life insurance policies from multiple companies that they represent.
By working with Quotacy, you can compare multiple companies’ quotes for term life insurance, whole (permanent) life insurance, disability insurance, and final expense insurance for your business or family.
(8) Life Insurance Company / Carrier / Insurer
The life insurance company determines your final price for your policy because they carry the risk of insuring your life and will have to legally pay out the policy money upon your death.
A life insurance company is called a carrier because they carry the risk of insuring your life on their financial books.
A life insurance company will carry this risk until a) you die or b) you are no longer insured by a policy backed by their company.
(9) Permanent Life Insurance
There are two main types of life insurance you can buy: term life insurance versus whole life insurance.
» Learn more: Term vs. Whole Life Insurance Buying Guide
Term life insurance only covers you for part of your life (up to 35 years); whereas permanent life insurance covers your entire life.
Everyone would buy a permanent policy if it wasn’t so expensive. Alas, it is. Permanent life insurance is on average 7 to 10 times more expensive than its temporary counterpart term life insurance.
There are cases when buying a permanent life insurance policy makes the most sense and it is worth the additional premium cost. If you have a special needs child, for example, their financial needs will be better served by a policy that is guaranteed to pay out upon your death.
(10) Policyholder / Owner
When you buy life insurance, the policy insures one person’s life (Person A, the insured).
The policy owner (Person B, the policyholder) is the individual who has purchased the coverage on the insured’s life.
The beneficiary is the person (Person C, the beneficiary) who will receive the death benefit when the insured dies.
Person A (the insured) and person B (the policyholder) can be the same person. But, Person A (the insured) cannot be Person C (the beneficiary) because that person will be dead.
(11) Premium / Rate / Cost
Premium is what you will pay either monthly or annually for your life insurance policy. It is the cost of owning your policy and the cost of being insured.
You can add on benefits called riders to your life insurance policy. These policy riders provide more protection in addition to your basic life insurance coverage.
One of the most commonly added policy riders is a child rider.
A child rider from Principal, for example, can insure all of your children in case of death.
Any current children (under age 18) or future children (after 15 days old) are covered regardless of health. This benefit is especially helpful for parents with special needs children or kids with medical issues.
(13) Risk Class
Your risk class is the pool of insured individuals who share the same risk of death as you do.
For example, on average people who smoke have a higher risk of mortality than non-smokers. Aunt Jenny may have been a chain smoker who lived to a ripe old age of 100, but she’s not the norm.
If your risk of death is higher than another person’s due to your health, hobbies, or job, you will pay more for your life insurance policy.
(14) Table Rating
Your table rating is the classification that the life insurance company gives you when they determine your risk class. This table rating determines your price for your life insurance.
For example, if you have a history of stroke, heart attacks, or have a family history of heart disease, you may receive a table rating due to these risk factors and you will pay the policy rates for this risk class group for your life insurance policy.
(15) Term Life Insurance Policy
Unlike a permanent life insurance policy that will last your entire life (your whole life), a term life insurance policy will only insure you for a set number of years (10, 15, 20, 25 30, or 35 years) that you determine when you buy your policy.
Term life insurance is the most affordable type of life insurance and it is the most common type of policy purchased in the USA. It’s main purpose is to replace income or repay debt due to unexpected death.
» Calculate: Life insurance needs calculator
Underwriters work for the life insurance companies to keep life insurance prices affordable by determining 1) who may be insured or not and 2) who may be insured but needs to pay extra for having a higher risk of dying while insured.
There are many factors that underwriters take into consideration to determine your policy rates.
Underwriting is the process that the life insurance companies use to determine whether you may be offered a policy or not and to determine the cost that you will pay for your policy.
There are two types of underwriting: traditional underwriting (that includes a medical exam) and accelerated underwriting (that does not include a physical exam). Both types of underwriting end with either your application has been approved or it has been declined.
You’ve got this! You’re set on life insurance vocabulary now.
» Learn more: What is term life insurance and how does it work?
About the writer
Director of Inbound Marketing
Kate is Director of Inbound Marketing working on business strategy, SEO, and writing for QuotacyLife. Kate's gift is explaining complex financial planning and life insurance topics in a simple and direct way to help families become more financially savvy and empower themselves to make wise choices. She works with Quotacy's underwriters to ensure the financial tips shared in her blogs are spot-on and truly helpful to anyone researching the ins and outs of life insurance online. If you would like a topic to be covered in our blog, leave Kate a comment below or connect with her on LinkedIn.