Underwriting, premiums, contestability period—terms like these might make insurance appear strange.
Fortunately, a knowledgeable insurance specialist can assist you in making sense of it all. The definitions below can do the same. In honor of Financial Literacy Month, we explained them. Continue reading to learn about some commonly misunderstood insurance terms.
Here Are Some Insurance Terms That Are Commonly Misunderstood
Death benefit accelerated: An accelerated death benefit, which is frequently added to a policy as a rider (see below), allows you to use a portion of the life insurance death benefit before you die. If you are terminally ill, this is an alternative. The accelerated death benefit is frequently used to pay off debt, cover hospice costs, or take a special trip with their families.
Annuities are financial instruments offered by some insurance firms that allow you to save money tax-free while also creating a lifetime income. You select one that suits your requirements, such as how you will pay for it (immediately or over time) and when and for how long you will accept payments. Annuities are popular among retired people because they can offer protected income for life.
A contestability term is a set length of time after a life insurance provider issues your policy. During this time, the company can review your application to ensure that nothing was misrepresented. The contestability period begins the moment the policy is issued. It normally lasts between one and two years. Its objective is to safeguard the life insurance organization from fraud.
Conversion privilege: Some term life insurance policies allow you to change them later into permanent life insurance policies. This is an excellent approach to maintain coverage while also accumulating wealth. (Learn more about permanent life insurance below.)
The death benefit is the amount of money your beneficiaries receive from the life insurance policy if you die. The death benefit is usually exempt from taxation.
In the world of disability insurance, a disability is more than just an injury or illness. Short-term disability, for
In the world of disability insurance, a disability is more than just an injury or illness. Short-term disability, for example, covers many companies’ maternity leaves. Some disability policies cover missed pay due to depression, mental illness, and drug and alcohol abuse consequences. It all depends on the policy, so make sure you read it well. Get more information on disability insurance.
Grace period: Some insurance policies, like many credit cards, may have a grace period. This is the length of time your policy will stay in effect if you do not pay your premium by the due date. The grace period is usually only around a month long.
Insurable interest: To be eligible for life insurance, you must have an insurable interest in the individual specified in the policy. This suggests that if that individual died, you would suffer some financial loss.
Living benefits: Some life insurance policies provide benefits while you’re still living. Accelerated death benefits, long-term care benefits, and insurance loans are some of the most typical living benefits. Learn more about the lifestyle benefits of life insurance.
Long-term care insurance: This type of insurance kicks in if you are unable to care for yourself for an extended period of time. It can cover the expenditures of a nursing home, adult day care, or home health care. Long-term care insurance policies come in a variety of forms. Get more information on long-term care insurance.
Permanent life insurance pays a death benefit in the same way that term life insurance does. Permanent life insurance, on the other hand, provides lifelong protection for as long as you pay the payments. It also grows in cash value on a tax-deferred basis. This money can be used to buy a home, augment your retirement income, pay an emergency bill, and other things. It’s a terrific alternative if you want to develop your wealth while also financially protecting your family. Get more information on permanent life insurance.
Preferred rates: A preferred rate is a lower cost life insurance rate. It is available to applicants who are less likely to die. Life insurers examine a person’s health history, smoking habits, gender, and lifestyle when determining preferred rates.
A premium is the payment required by an insurance provider to maintain your policy in force. Depending on the policy, you may be required to pay your premium on a yearly, quarterly, monthly, or other basis.
A rider is an additional amount of coverage that can be added to your primary insurance policy. It provides you with additional coverage for your specific requirements. Long-term care riders and expedited death benefit riders are common insurance riders. (For more information, see the definitions of long-term care insurance and accelerated death benefits above.)
Term life insurance is the most prevalent and least expensive type of life insurance. It gives coverage for a set period of time (the term). Typically, the duration is 10, 20, or 30 years. If you die during the term, your beneficiaries receive a payout (known as a death benefit). Get more information on term life insurance.
Underwriting is the process by which an insurance company determines whether or not to sell you a policy and at what premium. The underwriting is done by a professional known as an underwriter. When it comes to life insurance, the underwriter considers characteristics such as a person’s age, health, lifestyle, and other aspects.
How to Use Permanent Life Insurance to Build Wealth and More
Many individuals are familiar with how term life insurance works. But they typically don’t realize how permanent insurance works.
To recap, term life insurance protects you for a set amount of time. This is referred to as the “term.”
If you die within the period, your loved ones will get a predetermined sum of money. This is referred to as the “death benefit.” Term life insurance is a low-cost alternative that is particularly popular among parents with dependent children.
What is the definition of Permanent Life Insurance?
Permanent life insurance provides a death reward as well as lifetime protection. Furthermore, it allows you to accumulate financial worth while deferring taxes. It is money that is available to you whenever you need it for whatever reason.
How Permanent Life Insurance Contributes to Wealth
Have you considered investing your tax refund to increase your wealth? If this is the case, you should think about getting permanent life insurance.
Since 1989, Marcus T. Henderson, Sr., RFP, AIF, MRFC, president and CEO of Henderson Financial Group, Inc. in Brentwood, Tenn., has been teaching people about life insurance. He compares the distinction between term and permanent life insurance to the distinction between renting an apartment and purchasing a home.
“You genuinely own something and have equity with permanent life insurance,” he says. “You have money to use even if the death benefit is never used.”
According to Marcus, numerous consumers have used the cash worth of their permanent life insurance throughout the years. It has assisted people in purchasing a home, dealing with a financial emergency, and other endeavors. “That’s especially true now, with people living longer lives—people frequently outlive their term insurance,” he says.
Additional Advantages of Permanent Life Insurance
Aside from increasing your money, permanent life insurance has other advantages. They are as follows:
Consistent returns for peace of mind. Marcus encourages customers to compare the rates of return on cash value accounts to those on savings and money market accounts. The cash worth is nearly always far greater. He also warns against comparing that rate to stock market rates. While stocks can provide excellent rewards, they are also much riskier.
There are numerous policy alternatives. According to Marcus, many customers mistakenly believe there is only one type of permanent life insurance. There are four categories in reality. The primary distinctions between them are whether you pay a fixed or variable premium and how you choose to invest your savings.
Lifetime protection. If you continue to pay your premiums, the “term” of your perpetual life insurance policy will never expire.
Costs tend to decrease over time. Marcus informs consumers that the longer they have their permanent life insurance coverage, the less it costs. “There is even a point where the policy begins to pay for itself,” he argues.
The advantages of living. Many permanent life insurance policies allow you to tailor your coverage so that you can take advantage of it while you’re still living. They include: critical care coverage in the event of a medical emergency.
Long-term care insurance protects you in the event that you require home health care, nursing home care, or personal or adult day care.
If you have a terminal disease, you can access money from your death benefit more quickly.
Consider a Term-to-Permanent Policy.
Some term life insurance policies allow you to convert them later into permanent life insurance policies.
Marcus frequently advises his clients on “term to permanent” plans. One major reason is that ill health in the future may prevent you from obtaining permanent life insurance. “Term policies with conversion options allow you to receive permanent insurance as if you were a younger version of yourself,” he explains.
Obtaining Permanent Life Insurance
Working with an insurance specialist, such as Marcus, is an excellent method to learn more about permanent life insurance and obtain coverage. Check out our helpful tips for selecting a qualified insurance professional. Then use our Agent Locator to find a local agent.