Life Insurance Policy: Basic Terms

Published October 01, 2013

Life Insurance Policy

Life insurance is an important component of estate planning for those with dependents or a spouse who will need continued financial support. When it comes to choosing a policy, you have options. This glossary will help you understand the basic types of life insurance coverages available along with the general terms included in a policy.

Policy participants

Policy owner – The individual or entity that maintains the policy. The policy owner is typically responsible for policy maintenance (changes, renewal, etc.) and premium payments.

Insured Life – The person on whose life the policy is issued.

Beneficiary – The person or party chosen by the owner of the life insurance policy to receive the policy benefit.

Contingent Beneficiary – The party designated to receive proceeds of a life insurance policy if the primary beneficiary of the policy is deceased.

Irrevocable Beneficiary – A designated beneficiary of a life insurance policy that cannot be changed unless consent is given by the beneficiary themself. This may also be called an “absolute beneficiary.”

Policy types

Term Life Insurance – A life insurance policy that provides a stated benefit upon the holder’s death, provided that the death occurs within a specifically stated time period. Unlike a permanent life insurance policy, a term life insurance policy does not build up a cash value.

Convertible Term Insurance Policy – A term life insurance policy that gives the policy owner the right to convert the policy to a permanent plan of insurance.

Permanent Life Insurance – Life insurance that provides coverage throughout the insured’s lifetime and also provides a savings element.

Renewable Term Life Insurance – A term life insurance policy that can be renewed at the end of the policy term.

Universal Life Insurance – A form of life insurance that combines a term policy with a savings element that is invested in a tax-deferred account. The cash value of this account may become available to the policyholder. The death benefit, savings element and premiums can be reviewed and altered as a policyholder’s circumstances change.

Variable Life Insurance – A life insurance policy in which the policy owner decides how the cash value of the policy will be invested. The amount of the death benefit depends on the level of success or failure the investment has.

Whole Life Insurance – A basic type of permanent life insurance. It provides coverage that lasts a lifetime and also builds up a cash value that you can borrow against, withdraw or use to pay future premiums.

Policy terms

Cash Value – The savings element that accumulates over the lifetime of an insurance policy. This is the amount of money that becomes available to the policy owner in the event of cancellation of a life insurance policy. This may also be called “cash surrender value” or simply “surrender value.”

Dividend – A return of part of the premium.

Face Amount – The amount specified on an insurance policy that is to be paid in the event of death or maturity.

Original Age Conversion – A conversion of a term life insurance policy to a permanent plan of insurance at a premium rate, based on the insured’s age when the original term policy was purchased.

Policy Anniversary – As a general rule, the date on which coverage under an insurance policy became effective.

Premiums – Amount paid to the insurance company to buy a policy and keep it in force.

Courtesy of Zywave LP, an entity unrelated to HollandStivers & Associates LLC. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. HollandStivers & Associates LLC does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues.