When choosing your life insurance, it helps to understand the terms you will encounter. Here is a “list of terms with explanations” to get you started.
- Term Life Insurance: A term life insurance policy pays a death benefit to a beneficiary when the insured dies. It provides temporary insurance protection for a limited period of time, usually from five to thirty years and only pays a death benefit if the insured dies during a specific period of time. It is often used to provide income replacement for short-term needs, such as paying off a mortgage.
- Underwriting: Underwriting is a process through which an insurance company evaluates your potential risks, based on your age and medical history, as well as other factors. They decide whether to insure you, how much coverage you should receive, and how much you should pay for it. The underwriting process is generally simple for smaller policies.
- Beneficiary: The beneficiary is the person who receives the death benefit when the insured dies. You can choose who will be named as beneficiary. You can name anyone you wish or have the proceeds paid to a charity or a trust. You can also name additional beneficiaries in case your first choice has died before you.
- Death Benefit: The death benefit is the amount the policy will pay to the beneficiary when the insured person dies.
- Premium: The premium is the money you pay for your insurance coverage. You can pay for your coverage in annual, semi-annual, quarterly, or monthly payments. Depending on your policy, the premiums may increase annually or may remain level for a period of years.