Life insurance is a fairly simple product, but some of the terminology surrounding it can be complicated. If you’re looking at your life insurance options, here are some key terms:
Whole life insurance. Whole or universal life insurance policies provide coverage for your lifetime. Whenever you die, your beneficiary receives a payout.
Term life insurance. A more affordable alternative to whole life insurance, term life insurance only provides coverage for a specified period of time.
Beneficiary. Your beneficiary is the individual designated by you to receive the insurance benefit in the event of your death.
Contingent beneficiary. A contingent beneficiary is the individual designated by you to receive the insurance benefit if the beneficiary is no longer alive. This might happen, for example, if you and your beneficiary are both killed in an auto accident.
Probate. In the above scenario, when you haven’t named a contingent beneficiary, the insurance benefit might be tied up in probate court, delaying and reducing the payout.
Collateral assignment. You can take out a life insurance policy with a lender as a beneficiary, so the lender will be compensated if you die.
Exclusions. Exclusions are circumstances that are not covered under the terms of your policy. If you have a current life insurance policy, be sure to look closely at these exclusions and discuss them with your insurance pro if you have questions or concerns.
Underwriting. Underwriting is the process insurance companies use to determine the risk of issuing you a policy. They will decide whether to accept this level of risk when the underwriting process is complete.
Rates. As part of the underwriting process, insurers set rates for their coverage. The biggest factors considered during the underwriting process are gender, age, and health, but your occupation and hobbies may also be considered if they’re particularly risky (like being a pilot or having a hobby like skydiving).