Understanding Life Insurance Terms

As any legal document, a life insurance policy is full of terms the meaning of which is often difficult to understand. Essentially, a life insurance policy is a contract which has terms required by law and provisions that protect the insurance company.

While many policies have an extensive “definitions” section where you can look up important terms, some policies do not cover all confusing terms. Here are some insurance terms that are used throughout a policy that have special meaning and may help you get a better understanding of your contract:

Insured. The person whose life is insured by the policy.

Owner. The person or entity named as the owner of the policy on the application and who can exercise all rights and receive the benefits until the insured’s death. Owner has the right to change the owner, beneficiaries and methods for the payment of the proceeds of the policy.

Premium. The periodic payment you make to the insurance company for keeping the policy active. It is the price of the policy.

Beneficiary. The person who will receive the death benefits after the insured’s death.

Primary beneficiary. The person who is the first in life to receive the death benefits after the insured’s death.

Secondary (contingent) beneficiary. The person who will receive the death benefits after the insured’s death if the primary beneficiary is dead, revoked under the law, or is otherwise unavailable.

Contestability. Investigation the insurance company will conduct if the insured dies within the first two years of the policy’s effective date. The insurance company will look at the answers provided in the application for coverage to make sure there were no misrepresentation in the application.  

Nonforfeiture options. Applicable only to cash value policies, they offer the policyowner ways to stop making premium payments. 

Policy date. The effective date for all coverage provided under the policy.

Cash surrender value. Money paid to the policyowner when the policy is terminated.

Grace period. The time frame (usually 30 or 60 days) after the last premium payment was made and during which the policy will stay in effect.

Right to examine period. The number of days after delivery of the policy during which the policyowner has the right to examine the policy and return it for a refund.

Reduced paid-up insurance. A plan that lets the policyowner stop making premium payments and keep life insurance coverage that will not require premiums.

Extended term insurance. The extension of life insurance coverage for a period of time with no premium payments. In a whole life policy, extended term insurance uses cash value to buy term insurance that is the same amount as the existing life insurance.

Reinstatement. An option to re-start the policy if it terminates for failure to pay the required premium by the end of the grace period.

Paid-up additions. An option that allows the policyowner to use declared policy dividends to purchase additional life insurance coverage that is added to the amount of existing coverage. Paid-up additions do not require further premiums.

Activities of daily living. Every-day activities such as independent bathing, eating, toileting, getting up from a chair, dressing, etc. Activities of daily living, or ADL, are usually part of life insurance policies and long-term care policies.

Settlement option. An option to receive the proceeds of the life insurance policy in other than a lump sum. The settlement option allows the beneficiary to receive the death benefits in installments for a certain period of time or for the payee’s lifetime. It may also allow the insurance company to hold the proceeds at interest until the beneficiary’s death or until a certain date in the future.

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About the author

Attorney Tatiana Kadetskaya has over 10 years of experience in life insurance law representing beneficiaries and policy owners. She is best known for successfully collecting denied and delayed claims and settling complex beneficiary disputes and interpleader lawsuits.

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