Your life insurance offers protection to those who depend on you for financial support. Life insurance terms explain payment into the policy and how and when money is paid out. Life insurance and annuities are not the same, although life insurance companies sell both. Life insurance provides benefits upon your death or at the end of the period of coverage. Annuities pay out based on a withdrawal schedule set up at the time of purchase.
Term Life
Term life policies are in effect for a specific length of time--usually five, 10 or 20 years. During that time, if you die, your beneficiaries receive the value of the insurance. After the specified time period, you have no life insurance unless you purchase a new policy or have a convertibility clause in your policy. Term life policies are less expensive than cash-value life insurance.
Convertibility
If your term life insurance has a convertibility clause, it means that you can purchase permanent or cash-value life insurance without a medical examination. Converting a term policy to a cash-value policy increases your costs. However, it may be important to have convertibility if your health declines and you would not otherwise be eligible for life insurance.
Renewability
Term life insurance policies may have a renewability clause that allows you to add terms to the end of your policy. For example, if you purchase a 10-year term policy, after 10 years you can add another five or 10 years to the term policy for an increased premium or payment without a medical exam.
Cash-Value Life
A cash-value life insurance policy pays a specified death benefit, just as term life insurance does. It also accumulates a cash value because a portion of your premium payment is placed into an account that accumulates money over time through investments. Some cash-value life insurance allows you to withdrawn money during your life from the accumulated cash or borrow against the policy, usually at a low interest rate.
Riders and Endorsements
Riders and endorsements are life insurance terms that describe additions you can make to core life insurance policies. Endorsements may include additional term life coverage, guaranteed insurability that allows you to purchase additional coverage regardless of age and health status, accidental death coverage and a disability waiver that suspends your premiums while maintaining coverage if you become disabled. Typical riders include extending coverage to spouses and children. Riders and endorsements increase the cost of your policy.
Benefit and Premium Schedule
Premiums are the amount you pay for life insurance coverage. It is an amount calculated by the insurance company based on the length and amount of coverage. Most life insurance companies also require a physical exam, and your health status effects cost and insurability.
Term life insurance only pays at the time of your death, assuming your policy is in effect. Cash-value life may pay your beneficiaries a fixed lump sum or pay out monthly for a fixed period of time. Your beneficiary may also select a life refund that pays him a fixed monthly amount for his lifetime. The monthly payment amount is calculated at the time of your death and takes into consideration the life expectancy of your beneficiary.
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