Life insurance policies are full of complicated financial terms and jargon. We thought it’d be useful to help make sense of them.
Term life insurance
This type of life insurance is very common. Term life insurance is often the most affordable option, but it is designed to provide coverage for only a specific period of time, such as 10, 20, or even 30 years in some cases. The most popular term life insurance policies have premium amounts that stay level.
Permanent life insurance
There are several types of permanent life insurance designed to provide coverage for your entire lifetime. These include whole life insurance, universal life insurance, and variable life insurance. Permanent insurance policies generally have higher premiums than term life insurance policies, and many build cash value over time. That means you could eventually borrow from your policy for many different reasons, including to help pay for college, supplement your retirement income, or provide cash for emergencies. There can be negative consequences to tapping a policy’s cash value, however. The move will reduce the policy's death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured. (Calculator: How Much Life Insurance Do I Need)
Depending on the amount and type of life insurance you’re buying, you’ll need to go through an underwriting process. This involves completing an application and giving the company access to your medical information. It may also require a brief medical exam, which is normally done at your home. The information collected is evaluated to determine if you qualify for coverage and how much your policy will cost. This is why it generally makes sense to buy life insurance when you’re young and in relatively good health.
Premium rate class (also known as underwriting or risk class)
Your life insurance premium is generally determined by your age when the policy is issued and your rate class. Rate classes are established during the life insurance underwriting process and will depend on a number of factors, including your family medical history, current health, and tobacco use.
Some term life insurance policies give you the option to convert to permanent life insurance without going through a second underwriting process. This allows you to lock in your insurability at your current health, and can help you get the permanent insurance you ultimately want. However, this option is only available for a limited period of time. When selecting a term life insurance policy, you should consider a company that offers competitive permanent policies to convert to at a later date.
Guaranteed insurability option
If you think you may eventually need to increase your coverage, you may be eligible for a guaranteed insurability option. This option allows you to purchase additional coverage without having to go through the underwriting process all over again. It is generally only available through permanent life insurance policies.
Disability waiver of premium
This is a rider that can be added to your life insurance policy to ensure that your premium will be waived and your coverage will continue if you are totally disabled and unable to work. (The chance that you will become disabled at some point in your working life is higher than you might think.)
These are just some of the basic terms involved in life insurance. Other more complex terms and concepts can quickly creep into discussions and considerations, which is why many people turn to a financial professional.
But these terms should help get the discussion started.
More from MassMutual...
Calculator: How Much Life Insurance Do I Need?