Common Life Insurance Terms You Should Know
If you have just gotten out of residency, or maybe already attending and looking to organize your financial picture, life insurance is on the list.
Here are the most common terms you should be familiar with as you apply for and purchase life insurance as a physician, divided into four categories:
- The parties of a life insurance contract
- Benefits offered by life insurance contracts
- Terminology associated with application and underwriting
- Contract terminology
The parties of a life insurance contract
The agent: This is the individual who sells you the insurance policy. Agents are licensed by the states in which they do business and contracted with the insurance companies they represent. Typically, they earn a commission from the insurance company on a sold policy.
The applicant: The person or entity applying for insurance company. In most cases, this will be the same as the policy owner and/or insured, but not always.
The beneficiary: This is the person(s) or entity(s) named in the policy as the death benefit recipient(s) upon the death of the insured.
The contingent beneficiary: Also known as a secondary beneficiary, it’s a person(s) or entity(s) who receive death benefits if the primary beneficiary is deceased at the time benefits become payable.
The insurance company: Also known as the carrier, this is the company that issues the policy, receives the premium payment and pays out the contractual benefits.
The insured: This is the individual whose life is covered by the life insurance policy. The death of the insured will trigger the payment of the death benefit.
The policy owner: The person or entity that owns the policy maintains the contractual rights of the policy. For example, they can determine the beneficiary and whether to cancel the policy. In many cases, the policy owner is the same as the insured and/or the payor.
The policy payor: A person or entity that pays the necessary premium to keep the policy in force. The payor is often the policy owner, as well as the insured.
Benefits offered by life insurance contracts
Accelerated Death Benefit: Many policies will pay out — or accelerate — a portion of the policy’s death benefit in the event the insured is diagnosed as terminally ill.
Accidental Death Benefit: Because accidental deaths are often the most disruptive to the families of an insured, company often include an additional death benefit over and above the contractual benefit if the insured’s death is caused by an accident.
Cash value: Whole life and universal life insurance policies can build cash value, which the policy owner can access through withdrawals, loans, or policy surrender.
Death benefit: This is the amount of money to be paid to the policy’s beneficiary(s) upon the death of the insured, as specified in the life insurance contract.
Term conversion: This is a provision that enables a term life insurance policy owner to convert the contract to a permanent policy, such as whole life, with the same amount of coverage and without additional underwriting
Terminology associated with application and underwriting
Attending Physician’s Statement (APS): The proposed insured’s medical history and exam results will be provided in this document, which is used by the insurance company to determine underwriting classification.
Backdating: Insurance companies often allow applicants to make the effective date of the policy earlier than the application date as a way to make the insured “younger.” This can result in a more favorable premium. You can typically backdate a policy six months.
Face amount: The amount of coverage applied for.
Guaranteed issue: This is a type of insurance policy that does not require medical underwriting or insurability. This is most common with group life insurance policies.
Rating class: The insurance company’s underwriting guidelines will place an insured in a category based on the amount of risk. Rating classes determine the premium amount required. Those insured may be classified as standard risk, substandard, preferred, or other terms.
Underwriting: This is the process of evaluating the risk posed by an insured based on age, gender, health, vocation and other criteria. The underwriting process determines whether an insured qualifies for life insurance coverage and what they will be required to pay in premium.
Amendment: This is a formal document that corrects or revises an insurance policy after it’s been issued. It becomes part of the legal insurance contract. A common amendment occurs when an insurance company is purchased by another, informing existing policy owners that the acquiring company is now legally responsible for policy benefits.
Assignment: The transfer of the policy’s ownership rights from one person or entity to another.
Contestability period: If the insurance company finds material misrepresentations on the application during this period, it can deny a claim. For example, if the insured’s age or health condition was not accurate on the application and the insurance company discovers this during the contestability period, a claim can be denied. Once this period expires, the insurance company has no legal recourse if it finds inaccurate application information. Contestability periods are typically the first two years from the date of issue.
Effective date: Also known as the policy date or issue date, this is the date a life insurance policy goes into effect.
Free-look period: Once a policy has been issued, you can legally cancel it without penalty and with a full refund of any paid premiums if done inside the free-look period. Each state has a minimum free-look period, ranging from 10 to 30 days after policy delivery. Some insurers offer free looks above the state minimum.
Grace period: You have time, typically 30 days, from the due date of your premium payment to pay the required premium before the policy lapses. If the insured passes away during a grace period, the policy’s death benefit will be paid, minus the unpaid premium amount.
Lapse: This refers to policy termination due to non-payment of premium.
Premium: This is the amount of money required to be paid by the policy payor/owner to the insurance company to provide coverage.
Suicide clause: A provision that states if the insured dies by suicide within a certain period, typically two years, that the policy’s death benefit will not be paid out. Instead, the insurance company will return premiums paid to the payor.
Surrender: Canceling a life insurance contract.