Key Concepts in Life Insurance: Policies, Types, and Features

estate planning

the process of developing a plan to administer and distribute your assets, in a manner consistent with your wishes and the needs of your survivors, while minimizing taxes

gross estate

all property owned by the decedent that might be subject to federal estate taxes upon a person's death

probate estate

the real and personal property owned by a person that can be transferred at death by will

administrator

the personal representative of the estate appointed by the court if the decedent died intestate

codicil

a document that legally modifies a will without revoking it

community property

all marital property co-owned equally by both spouses while living in a community property state

durable power of attorney for financial matters

a legal document that authorizes another person to take over someone's financial affairs and act on his or her behalf

durable power of attorney for health care

a written power of attorney authorizing an individual to make health care decisions on behalf of the principal when the principal is unable to make such decisions. Also called advanced directive for health care

ethical will

a personal statement left for family, friends, and community that shares your values, blessings, life's lessons, and hopes and dreams for the future. Also called legacy letter

executor

the personal representative of an estate designated in the decedent's will

intestacy

the situation that exists when a person dies without a valid will

joint tenancy

a type of ownership by two or more parties, with the survivor(s) continuing to hold all such property upon the death of one or more of the owners

letter of last instructions

an informal memorandum that is separate from a will and contains suggestions or recommendations for carrying out a decedent's wishes

living will

a document that precisely states the treatments a person wants if he or she becomes terminally ill

probate process

the court-supervised disposition of a decedent's estate

right of survivorship

the right of surviving joint owners of property to receive title to the deceased joint owner's interest in the property

tenancy by the entirety

a form of ownership by husband and wife, recognized in certain states, in which property automatically passes to the surviving spouse

testator

the person who makes a will that provides for the disposition of property at his or her death

tenancy in common

a form of co-ownership under which there is no right of survivorship and each co-owner can leave his or her share to whomever he or she desires

will

a written and legally enforceable document expressing how a person's property should be distributed upon his or her death

beneficiaries

those who receive benefits—property or income—from a trust or from the estate of a decedent. A grantor can be a beneficiary of his own trust

grantor

a person who creates a trust and whose property is transferred into it. Also called settlor, trustor, or creator

irrevocable life insurance trust

an irrevocable trust in which the major asset is life insurance on the grantor's life

irrevocable living trust

a trust in which the grantor gives up the right to revoke or terminate the trust

living (inter vivos) trust

a trust created and funded during the grantor's lifetime

pour-over will

a provision in a will that provides for the passing of the estate—after debts, expenses, taxes, and specific bequests—to an existing living trust

revocable living trust

a trust in which the grantor reserves the right to revoke the trust and regain trust property. The grantor can serve as the initial trustee

testamentary trust

a trust created by a decedent's will and funded through the probate process

trust

a legal relationship created when one party transfers property to a second party for the benefit of third parties

trustee

an organization or individual selected by a grantor to manage and conserve property placed in trust for the benefit of the beneficiaries

annual exclusions

under the federal gift tax law, the amount that can be given each year without being subject to gift tax—for example, $17,000 in 2023. This amount is indexed for inflation

applicable exclusion amount (AEA)

credit given to each person that can be applied to the amount of federal estate tax owed by that person at death. In 2023, the AEA was $12,920,000 per spouse.

estate tax

a tax levied on the value of property transferred at the owner's death

federal unified transfer tax

a tax on the right to transfer property from one individual to another

gift splitting

a method of reducing gift taxes; a gift given by one spouse, with the consent of the other spouse, can be treated as if each had been given one-half of it

gift tax

a tax levied on the value of certain gifts made during the giver's lifetime

unified rate schedule

a graduated table of rates applied to all taxable transfers; used for both federal gift and estate tax purposes

unified tax credit

the credit that can be applied against the tentative tax on the estate tax base

insurance policy

a contract between the insured and the insurer under which the insurer agrees to reimburse the insured for losses suffered according to specified terms

loss control

any activity that lessens the severity of loss once it occurs

loss prevention

any activity that reduces the probability that a loss will occur

risk assumption

the choice to accept and bear the risk of loss

risk avoidance

avoiding an act that exposes one to a risk

underwriting

the process used by insurers to decide who can be insured and to determine applicable rates that will be charged for premiums

multiple-of-earnings method

a method of determining the amount of life insurance coverage needed by multiplying gross annual earnings by some selected number

needs analysis method

a method of determining the amount of life insurance coverage needed by considering a person's financial obligations and available financial resources in addition to life insurance

Social Security survivor's benefits

benefits under Social Security intended to provide basic, minimum support to families faced with the loss of a principal wage earner

cash value

the accumulated refundable value of an insurance policy; results from the investment earnings on paid-in insurance premiums

convertibility

a term life policy provision allowing the insured to convert the policy to a comparable whole life policy

credit life insurance

life insurance sold in conjunction with installment loans

decreasing term policy

a term insurance policy that maintains a level premium throughout all periods of coverage while the amount of protection decreases

group life insurance

life insurance that provides a master policy for a group; each eligible group member receives a certificate of insurance

industrial life insurance (home service life insurance)

whole life insurance issued in policies with relatively small face amounts, often $1,000 or less

mortgage life insurance

a term policy designed to pay off the mortgage balance in the event of the borrower's death

nonforfeiture right

a life insurance feature giving the whole life policyholder, upon policy cancellation, the portion of those assets that were set aside to provide payment for the future death claim

portability

option to convert a group life insurance policy to an individually issued life policy

premium offset

a life insurance feature whereby premiums due can be paid using interest earned on cash values or dividends

renewability

a term life policy provision allowing the insured to renew the policy at the end of its term without having to show evidence of insurability

straight term policy

a term insurance policy written for a given number of years, with coverage remaining unchanged throughout the effective period

term (level) life insurance

insurance that provides only death benefits, for a specified period, and does not provide for the accumulation of cash value

universal life insurance

permanent cash-value insurance that combines term insurance (death benefits) with a tax-sheltered savings/investment account that pays interest, usually at competitive money market rates

variable life insurance

life insurance in which the benefits are a function of the returns being generated on the investments selected by the policyholder

whole life insurance

life insurance designed to offer ongoing insurance coverage over the course of an insured's entire life

beneficiary

a person who receives the death benefits of a life insurance policy after the insured's death

disability clause

a clause in a life insurance contract containing a waiver-of-premium benefit alone or coupled with disability income

guaranteed purchase option

an option in a life insurance contract giving the policyholder the right to purchase additional coverage at stipulated intervals without providing evidence of insurability

life insurance policy illustration

a hypothetical representation of a life insurance policy's performance that reflects the most important assumptions that the insurance company relies on when presenting the policy to a prospective client

multiple indemnity clause

a clause in a life insurance policy that typically doubles or triples the policy's face amount if the insured dies in an accident

participating policy

a life insurance policy that pays policy dividends reflecting the difference between the premiums that are charged and the amount of premium necessary to fund the actual mortality experience of the company

policy loan

an advance, secured by the cash value of a whole life insurance policy, made by an insurer to the policyholder