Have you ever tried to read an insurance policy but were left befuddled by the terminology? Here are definitions for some of the words and phrases most commonly used in life insurance contracts or when referring to life insurance coverage:
Carrier — An insurance carrier is an insurance company that designs the policy, establishes the rates and underwriting guidelines, and assumes the financial responsibility for paying claims. Carriers also are referred to as insurers or underwriters.
Certificate — An insurance certificate is a document issued by an insurance company that serves as proof of coverage. In the case of group life insurance, the certificate outlines the coverage provided to the insured through the master contract.
Certificate holder — A certificate holder is an insured who is covered under a group life insurance master policy and may assume some of the rights and responsibilities of the policyholder, such as the responsibility to pay premiums when due, designate and change beneficiaries, determine the coverage amount, and cancel their participation under the master policy.
Claim — A life insurance claim is a formal request by a beneficiary to an insurance company to receive a policy’s death benefit after the insured has died.
Death Benefit — A death benefit is a predetermined, tax-free payment made to beneficiaries of a life insurance policy if the insured dies during the term of the policy.
Group Insurance — Group life insurance is a type of policy offered to members of a specific association, alumni group, or nonprofit organization under a master contract. Only members of the sponsoring organization are allowed to apply. Group policies leverage collective buying power to provide coverage that may be less costly compared to individual policies.
Insured — In the context of life insurance, an insured is a person whose life is covered against potential loss by an insurance policy. The insured may or may not be the policyholder or policy owner.
Permanent Insurance — Permanent life insurance is a policy that provides lifelong coverage, ensuring a death benefit for beneficiaries as long as premiums are paid. Permanent policies build a tax-deferred cash value, that can be borrowed against or withdrawn during the insured’s lifetime. An alternative to permanent insurance is term insurance (defined below).
Premium — An insurance premium is the amount of money that an insured must pay on a predetermined schedule (i.e., monthly, quarterly, semiannually or annually) to keep a policy active and maintain financial protection.
Policy — An insurance policy is a legally binding contract between an individual or organization and an insurance agency. It defines the specific risks covered, the features, benefits, eligibility, and limitations of the coverage, and the cost of coverage.
Policyholder — A person or entity that purchases and owns an insurance policy is the policyholder. This person or entity is responsible for paying premiums, controlling policy changes (such as adding insureds or changing beneficiaries), and has the authority to cancel the policy.
Policy owner — Policy owner is a term used to distinguish between a policyholder and an insured when they are not one and the same. A policy owner controls a policy that covers one or more other persons (for example, a spouse or dependents) who are the insureds. In the case of group life insurance, the policy owner controls a master policy taken out for the benefit of members of the group, who receive certificates that outline the terms of their coverage under the master policy.
Rates — Insurance rates are the price per unit of coverage that an insurance company charges to cover a risk. Rates are the basis for calculating premiums.
Term Insurance — Term life insurance is a policy that provides coverage for a specified period of time, as long as premiums are paid when due. The death benefit is only paid if the insured dies during the term of coverage. Term insurance can be provided through individual or group policies, and it is generally more economical than permanent life insurance, providing higher coverage amounts for lower initial premiums. A term life policy does not build cash value.
Termination — Insurance termination is the end of an insurance policy, marking the date coverage ceases. Termination can occur when the term of coverage expires, when coverage is not renewed, or when premiums due are not paid.
Underwriting — Underwriting is the risk-evaluation process insurance companies use to determine whether to accept an applicant, how much coverage to offer, and at what cost. Life insurance policies require medical underwriting of some degree — either through statements of health, access to medical records, medical examinations, and/or blood samples. The degree of underwriting may depend on the amount of insurance coverage requested.