Applying for life insurance is an essential part of financial planning. However, customers unfamiliar with the language of insurance policies and contracts might find the terms confusing.
Our team at Alliance Income, a trusted life insurance brokerage firm in Canada, created this life insurance definition guide to make sure that customers understand their policies well enough to make informed decisions about their insurance coverage.
The life insurance definition glossary below should help as you evaluate insurance policies.
In this article
Elements of an Insurance Policy
Every insurance policy outlines the extent of life insurance coverage, the conditions under which the insurance company will pay an insurance claim, the obligations of the person who owns the insurance policy, and any additional benefits. Be sure to read it thoroughly.
The beneficiary is the intended recipient of the money that the insurer will pay out.
A clause is a section of the insurance policy contract that limits or alters the extent of coverage.
The suicide clause defines the rights of the insurer to deny coverage if the insured dies by suicide.
The incontestability clause defines the extent of the insurance company’s right to contest a claim. Once a specified number of years elapse, the insurance company may lose some rights to contest claims in certain situations.
If the insurer pays out a portion of an insurance claim, coinsurance refers to the portion of the claim that the insurer pays out.
Coverage is the amount of money that the insurance company is obligated to pay.
A death benefit is a payout by the insurance company when the insured person passes away.
The insured person is the person who has coverage under the insurance policy. Most commonly, the insured is the policy owner, but in some cases, a person or corporation can take out an insurance policy on another individual.
The insurer is the insurance company that provides coverage to the insured.
A policyholder is a person or entity that legally owns the insurance policy and is responsible for paying insurance premiums.
A life insurance premium is a sum of money that the policyholder must pay to keep the insurance policy active.
A rider is an addendum to the insurance policy that provides additional benefits or coverage. Examples of insurance riders include:
- Long-term care riders
- Return-of-premiums riders
- Waiver of premium riders
- Term conversion riders
Insurance Processes and Events
The amount and extent of coverage under an insurance policy can change over time, depending on the actions of the insured and the policyholder. Coverage can also change over time. The following terms relate to the events and processes that can change the value of the policy and its level of coverage.
For more life insurance definition information, please consult this guide from the CHLIA trade organization.
The contestability period is a period, typically two years, during which the insurance company has the legal right to contest a claim if they suspect fraud, such as lying on the application or misrepresenting the cause of death.
The contestability period prevents people who know they face an imminent threat to their life from taking out a fraudulent life insurance policy.
Financial Needs Analysis
Financial needs analysis is a step in the financial planning process in which a potential life insurance customer estimates how much insurance they will need before buying an insurance policy.
The grace period is the period of time after a policyholder misses a payment during which they have the opportunity to make up the payment. The insurance policy will lapse if the policyholder does not make up the payment during the grace period.
A lapse in insurance coverage is the cessation of coverage under an insurance policy due to one or more missed insurance premium payments.
Underwriting refers to the process that the insurance company goes through when it agrees to provide coverage in exchange for premiums. The insurance company determines the premiums it will require based on factors such as the insured person’s health, life expectancy, and status as a smoker or non-smoker.
The waiting period is the time after the issuance of the policy during which the policy does not provide coverage. The waiting period gives the insurance company time to calculate your insurance premium based on the information in your insurance application and other factors.
Life Insurance Definition List for Financial Planning
An insurance policy is a contract that places financial obligations on the insurer and the policyholder. The policy also has financial implications for the insured. All parties involved should understand the financial terms in the life insurance definition list.
An annuity is an insurance payout that occurs in installments for a fixed time period, such as monthly or yearly payments.
A policy’s cash value is the value of a permanent life insurance policy if the policyholder cashes it out.
A dividend is a payment to shareholders, including payments by insurance companies to holders of participating whole life insurance policies.
Types of Insurance
The life insurance definition list includes many types of life insurance. Before purchasing an insurance policy, an applicant should become familiar with the various types of insurance and understand how each one potentially impacts their financial situation.
Blended insurance policies contain elements of temporary life insurance and permanent life insurance policies.
Funeral insurance or burial insurance is relatively inexpensive insurance with broader eligibility requirements that provides a small amount of coverage to pay for certain types of funeral expenses. Some individuals who are ineligible for other types of insurance might be eligible for funeral insurance.
Permanent insurance, which includes whole life insurance, is insurance that has an enduring cash value. Permanent insurance functions as an investment as well as a coverage source.
Self-Employed Life Insurance
Self-employed life insurance policies provide coverage for individuals who work for themselves, in contrast to employer-provided life insurance policies.
Survivorship Life Insurance
Survivorship life insurance is a form of life insurance that covers more than one person, such as a married couple. A survivorship policy pays out only once both individuals have passed away.
Temporary Life Insurance
Temporary insurance provides insurance coverage for a specified period of time. Some short-term temporary policies provide coverage while the insured becomes eligible for long-term life insurance. Another form of temporary insurance is term insurance.
Term Life Insurance
Term life insurance provides coverage for a specified amount of time in exchange for premiums. Temporary insurance policies do not have a cash value.
Term-to-100 insurance is a form of term life insurance that provides coverage as long as the policyholder makes payments until the insured reaches age 100. After the insured reaches age 100, coverage continues but the policyholder no longer has to make payments.
Universal Life Insurance
Universal life insurance is a form of whole life insurance that allows the policyholder to decide the value of the premium they want to pay each month within the minimum and maximum limits. Paying higher premiums increases the value of the policy. The policy’s cash value can also increase or decrease based on market performance.
Whole Life Insurance
Whole life insurance provides coverage like term life insurance but without a term limit. It also has a cash value. The cash value of the policy typically increases as the policyholder makes payments. The policyholder can draw value from the policy by cashing out the policy, taking out loans using the policy as collateral, and withdrawing money from the policy.
Conclusion: Get Life Insurance With Alliance Income
Keep all these life insurance definitions in mind as you search for a policy that gives you and your family a secure financial future.
At Alliance Income, we help Canadian residents find customized life insurance, health insurance, and other forms of insurance. Please complete the online form on our website for competitive rate quotes.