Life Insurance is an insurance policy that will pay the insured’s beneficiary a fixed amount of money, called face amount, when the insured dies. There are two types of life insurance: term and permanent. Since each insured’s need of life insurance is unique, the rule of thumb for determining the face amount is 10 to 20 times the annual gross income. Life insurance is used as a financial tool to provide the following values:
- Pay off mortgage
- Replace income for dependents
- Pay final expenses
- Maintain the family’s standard of living
- Create inheritance for heirs
- Pay estate taxes
- Create source of savings through cash value
- Protect business operation
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Term Insurance provides temporary protection (for a certain period of time) with no cash value; usually renewable and convertible. If the insured dies within the term or policy period, the face amount (or life insurance amount) of the policy is paid; if the insured survives beyond that period, nothing is paid.
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Return of Premium Term Insurance pays death benefit to your beneficiary when you die, but it will return the premiums you paid if you live beyond the term speficied.
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Cash Value is fund that accumulates in a permanent life insurance policy (whole life or universal life) and that the policyholder can access in several ways, including borrowing, purchasing paid-up life insurance, and surrendering the policy in exchange for the cash value.
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Renewable is a characteristic of a term insurance policy that permits the policyholder to renew it for additional periods without evidence of insurability.
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Convertible is a characteristic of a term insurance policy that allows the policy to be exchanged for some type of permanent life insurance policy with no evidence of insurability.
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Evidence of Insurability is a requirement by a life insurer that the insured demonstrate that he/she still meets the insurer’s underwriting standards. The insured is usually required to submit a medical questionnaire or have a physical examination to show that he/she is in good health.
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Whole Life Insurance is level-premium insurance that provides lifetime protection and builds cash values.
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Paid-Up Policy is life insurance that does not require additional premium payments to remain in force.
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Limited-Payment Life Insurance is whole life insurance in which the premiums are level but are paid only for a certain number of years. After that time, the policy is paid-up.
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Universal Life Insurance is flexible-premium life insurance that separates the protection, savings, and expense components.
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Variable Life Insurance is a life insurance policy in which the face amount of insurance and cash value vary according to the investment experience of a separate account maintained by the insurer. The policy provides permanent protection with level premiums that are invested in common stocks, bonds, or other investments. Variable life insurance is appropriate for policyowners who want some protection against inflation in the long run in their life insurance program.
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Variable Universal Life Insurance is similar to universal life insurance with two major exceptions. First, the cash values are not guaranteed, and there is no minimum interest rate guarantee. The cash value of the policy is determined by the investment experience of a separate account maintained by the insurer. The second major difference is that the policyowner can select the separate account in which the premiums are invested. Variable universal life insurance is appropriate for policy owners who would like an investment product and want to determine how the premiums are to be invested.
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Incontestable Clause states that the insurer cannot contest the policy after it has been in force for a specified period (in Texas it is two years) during the insured’s lifetime.
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Suicide Clause states that the insurer will not pay the death benefit if the insured commits suicide within a certain period (usually two years) after policy inception.
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Beneficiary is person designated in a life insurance policy to receive the death benefit.
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Participating Policies are life insurance policies that pay dividends to policyowners.
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Nonforfeiture Options are provisions in a life insurance policy that give the policy owner a choice of ways to use the cash value if the policy is terminated and that protect the policyowner from forfeiting the cash value. Three nonforfeiture options are: cash, reduced paid-up insurance, and extended term insurance.
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Rider is similar to an endorsement, modifies a life insurance policy.
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Waiver of Premium is a clause stating that the insurer will waive premiums due during the period of disability if the insured becomes totally disabled before a certain age.
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Accidental Death Benefit is a provision in a life insurance policy that doubles (or triples) the face amount of insurance payable if the insured dies as a result of an accident.
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Guaranteed Insurability Rider permits the policy owner to buy additional amounts of life insurance at standard rates without evidence of insurability.
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Note: Information provided at this Learning Center is extracted from various text books written by the American Institute for Chartered Property Casualty Underwriters (AICPCU) and from the Texas Department of Insurance (TDI).