Life Insurance Terms

Grace period

A period (30-31 days) after the premium due date during which the policy remains in force even if the premium hasn’t been paid. If death occurs during this period, the insurer pays the death benefit minus any unpaid premiums

(Grace on missing payment from insured)

Incontestability

After the policy has been in force for a specified period of time (2 years) the insurer cannot contest the policy or deny claims based on material misrepresentation in the application, except for nonpayment of premiums or fraud

(After 2 years claims have to be paid matter what)

Reinstatement

The process of putting a lapsed policy back in force. Requires evidence of insurability, payment of all back premiums plus interest, & repayment of any outstanding loans. Must be done with 3-5 years of lapse. A new contestability and suicide period begins.

Entire Contract

States that the policy and attached application constitute the entire contract between parties. No other documents or oral statements can modify the contract unless an executive officer signs the the change. Protects consumers from undocumented promises.

Misstatement of Age/ Gender

If the insured’s age or gender was misstated, the death benefit is adjusted to what the premium paid would been at the correct age/gender. This is not grounds for voiding the policy; the insurer pays the adjusted amount.

Primary & Contingent Beneficiary

(Types of Beneficiaries)

The primary beneficiary is the first in line to receive the death benefit. The contingent (secondary) beneficiary receives benefits only if the primary beneficiary dies before the insured or cannot be located.

Revocable vs Irrevocable Beneficiary

(Types of Beneficiaries)

A revocable beneficiary can be changed by the policy owner at any time without the beneficiary’s consent.

An irrevocable beneficiary cannot be changed without that beneficiary’s written consent & has vested rights in the policy.

Common Disaster Clause

(Beneficiary-Related Clause)

Address situation where the insured and beneficiary die simultaneously or in the same accident. Requires the beneficiary to survive the insured by a specified period (30-60 days) to receive benefits. Otherwise, proceeds go to contingent beneficiaries.

Spendthrift Clause

(Beneficiary-Related Clause)

Protects the death benefit from the beneficiary’s creditors. The beneficiary cannot assign or borrow against the benefits before receiving them, & creditors cannot attach claims to the proceeds.

(Creditors cannot take death benefit away from beneficiary because of debt owed)

Cash Payment (Lump Sum)

(Settlement Options)

The entire death benefit is paid to the beneficiary in one payment. This is the default option if no other is selected.

Life Income

(Settlement Option)

Converts the death benefit into guaranteed lifetime income payments for the beneficiary. Amount depends on beneficiary’s age, gender, and interest rates. Payments stop at beneficiary’s death.

(Death benefit proceeds are converted into lifetime payments)

Fixed-Period

(Settlement Options)

Death benefit is paid in equal installments over a specified time period (10 or 20 years). If the beneficiary dies before the period ends, remaining payments go to a successor beneficiary

Cash Surrender Value

(Nonforfeiture Options)

The amount the policy owner receives if they surrender (cancel) the permanent insurance policy. It’s the policy’s accumulated cash value minus any surrender charges and outstanding loans.

(Amount of money the policy owner gets back if they cancel a permanent life policy)

Extended Term

(Nonforfeiture Options)

Uses the policy’s cash value to purchase term insurance for the original face amount. Coverage extends for whatever period the cash value will buy, with no further premiums required.

(Uses cash value from life policy to purchase term insurance for the original face amount)

Reduced Paid-up Insurance

(Nonforfeiture Options)

Converts the policy to a permanent paid-up policy with a lower death benefit. No more premiums are due, and they policy remains in force for life with the reduced face amount.

(Uses cash value to purchase whole life insurance with lower death benefit)

Policy Loans

(Policy Loan and Withdrawal Options)

The policy owner can borrow against the cash value while keeping the policy in force. Loans accrue interest, and any outstanding loan balance plus interest is deducted from the death benefit if unpaid at death.

Automatic Premium Loans

(Policy Loan and Withdrawal Options)

A provision that automatically borrows from cash value to pay premiums if the owner doesn’t pay during the grace period. Prevents unintentional lapse but reduces cash value & death benefit.

Paid-Up Additions

(Dividend Options)

Uses dividend to purchase small amounts of additional paid-up insurance, increasing both the death benefit & cash value with medical underwriting.

Reduction of Premium

(Dividend Options)

Dividends are applied to reduce the next premium payment, effectively lowering the out-of-pocket cost.

Accumulation at Interest

(Dividend Options)

Dividends are left with the insurer to accumulate interest (similar to a savings account). The policy owner can withdraw accumulated dividends at any time.

Waiver of Premium

(Disability Riders)

If the insured becomes totally disabled (as defined in the policy, usually unable to perform job duties for 6 months), the insurer waives all future premiums while keeping they policy in force with all benefits intact.

(If policy owner becomes disabled, their premiums are waived)

Disability Income Benefit

(Disability Riders)

Provides monthly income payments (1% of face amount per month) if the insured becomes totally disabled. This is paid in addition to keeping the policy in force.

(EX: $100,000 policy = $1,000/month income benefit)

Children Rider

(Riders Covering Additional Insureds)

Provides term coverage on all of the insured’s children (current & future) for a single premium. Coverage is a modest amount ($10k - $25K) and often convertible at age 21-25.

(Provide term coverage for policy owners children; child will then convert term insurance to permanent insurance)

Accidental Death Rider

(Riders Affecting Death Benefit Amount)

Pays an additional death benefit (doubling face amount) if death results from an accident. Sometimes called double indemnity or accident death benefit (ADB).

(Death benefit proceeds are doubled if insured dies in an accident)

Guaranteed Insurability

(Riders Affecting Death Benefit Amount)

Allows the insured to purchase additional coverage at specified future dates (or events like marriage or birth of a child) without proving insurability. Amounts and timing are predetermined in the rider.

Accelerated (Living) Benefit

(Riders Affecting Death Benefit Amount)

Allows the insured to access a portion of the death benefit while living if diagnosed with a terminal illness (12-24 months to live), catastrophic illness, or chronic illness requiring long term care.

(Insurer advances death benefit to policy owner if they a diagnosed with terminal illness)

Suicide Clause

(Policy Exclusions)

No death benefit proceeds (only return of premiums) if death is by suicide within the first 2 years of the policy.

2-year periods

(Key Time Frames)

Critical time period both the incontestability clause and suicide clause. AFTER 2 years, the insurer cannot contest the policy except for fraud or nonpayment, and suicide is covered.

30-31 Day Grace Period

(Key Time Frames)

Standard grace period after the premium due date during which coverage continues without payment.

Essential to remember for exam questions about policy lapse and reinstatement scenarios.

10-30 Day Free Look Period

(Key Time Frames)

State-dependent period (varies by jurisdiction) during which a policy owner can return a newly issued policy for a full refund. Protects consumer from high-pressure sales tactics.

Accumulation Phase

(Phases of Annuities)

Paying into the annuity (building it up)

Annuitization Phase

(Phases of Annuities)

Insurer starts making payments to annuitant

Immediate Annuity

(Types of Annuities)

Insured pays a lump sum amount → payments start within 1 year

Deferred Annuity

(Types of Annuities)

Insured pays in over time → Payments start later (future date)

Fixed Annuity

(Types of Annuities)

Guaranteed interest rates with predictable and steady growth

low risk

Variable Annuity

(Types of Annuities)

Money does into a sub-account (mutual funds). Can grow or lose value

higher risk

Indexed Annuity

(Types of Annuities)

Tied to a market index (S&P500); had upside potential & floor to prevent complete loss

medium risk

Life Annuity (Straight Life)

(Duration of Annuities)

Pays until death. Highest monthly payments; nothing left for heirs incase of early death

Life with Period Certain

(Duration of Annuities)

Pays for your life, but guarantees a minimum period (ex: 10 years). If insured dies early, beneficiary gets the rest of the period

Joint & Survivor

(Duration of Annuities)

Covers 2 peoples (usually spouses) → payments continue until both die

Period Certain Only

(Duration of Annuities)

Pays for a fixed number of years regardless if insured is alive or not.

Suitability Requirements

Agents must recommend products appropriate for the clients age, financial situation, and needs

Whole Life Insurance

(Type of Permanent Insurance)

Most basic permanent policy. Everything is fixed and guaranteed

• fixed premium

• fixed death benefit

• guaranteed cash value growth.

Simple and predictable covers insured for life

Limited Pay Whole Life

(Types of Permanent Insurance)

Pay premiums for a shorter period of time (20 years) but stay covered for life.

EX: 20-Pay Life → done paying at 20 years, covered for life

Single Premium Whole Life

(Types of Permanent Insurance)

Insured makes ONE large lump sum payment upfront & will be covered for life. Instant cash value

Universal Life Insurance

(Type of Permanent Insurance)

Flexible permanent insurance. Adjustable premiums & death benefit. Cash value earns interest on current rates

Tip = EVERYTHING ADJUSTABLE