A-Z of life insurance: 50 terms explained and simplified
50 life insurance terms explained
In this guide, we break down and simplify some of the language you may come across when researching or opting to set up a life insurance policy. Read on to discover 50 of the most common life insurance terms and what they mean.
A type of life insurance policy that only provides coverage for death caused by an unexpected accident. This means there will be no payout if the cause of death is any other reason. For example, an accident-only life insurance policy will not cover someone who passes away from an unexpected illness or health condition.
A professional whose job it is to analyse and measure the probabilities of risk, and classify certain categories of risk. This form of risk management also involves pricing the premiums for life insurance policies.
3. Actuarial report
Also known as an ‘actuarial memorandum’; a formal report written up by an actuary that summarises and concludes the findings of an insurance risk assessment. An actuarial report is used to determine what can be covered, and the premium rates that a policy owner will have to pay.
4. Age limits
Life insurance policies come with certain age limits that you should be aware of. You need to be within a minimum and maximum age for insurance providers to provide a policy. For example, the minimum age to apply for a traditional life insurance policy is 18 years old, and normally, an individual will need to be between 50 and 80 to apply for an over 50s life insurance policy.
The individual person or organisation that you nominate to receive any pay-out. You can have multiple beneficiaries assigned on a single life insurance policy – for example, two or more of your children – meaning any pay-out should be shared among both beneficiaries.
Also known as death benefit, this is the lump sum of money that your beneficiaries should receive when you pass away.
7. Burial insurance
A type of whole life insurance policy where any pay-out after you die is intended to help with the costs of your funeral services and burial. The average cost of a funeral is £4,056.
8. Cash value life insurance
Cash value life insurance is a type of life insurance policy that comes with an additional investment feature where you can earn interest with cash value. These funds can be accessed outside of the usual death benefit sum.
The formal request for a payout made by the beneficiaries when the person with the policy has passed away or has been diagnosed with a terminal illness is known as a claim. After a claim has been made, the insurance provider will then validate it and issue the payment once it’s been approved. It’s important to make sure you fulfil the insurance policy terms and conditions, otherwise your insurer may refuse your claim.
10. Critical illness cover
Critical illness cover is an insurance policy that you take out to provide financial support if you’re diagnosed with an illness or medical condition listed on the policy. You should then receive a tax-free, one-off lump sum to help with finances like bills, mortgage payments and treatment costs. The payout could also be useful to cover any occupational alterations needed for your home, including wheelchair accessibility.
You can choose to add critical illness cover to your life insurance policy or purchase it as a standalone policy. Please note that you can’t compare standalone critical illness cover with Compare the Market.
11. Contestability period
A clause in any life insurance policy that states an insurance provider can contest paying out a death benefit within the first two years of coverage is known as a ‘contestability period’. This might be due to the failure of certain information being disclosed on the application, consequently invalidating the claim.
D – F
12. Decreasing term life insurance
A type of life insurance policy that pays out less as time goes on until it reaches £0 is known as decreasing term life insurance. It’s typically a cheaper form of life insurance and is most often used to cover mortgage or loan balances.
The total collection of money and assets owned by the policy owner is known as their estate, and can include any valuable possessions like property, land, and cars. The total sum of all assets – or their estate - will be left to the beneficiaries.
An executor is the individual person or company named in a will who is legally responsible for handling the estate and following any administration instructions left to them. Duties might include things like:
- Organising the funeral
- Paying bills
- Dealing with financial affairs
- Distributing assets to beneficiaries
15. Family income benefit
A type of life insurance that pays out a tax-free income to support family beneficiaries via periodic payments, rather than just a single lump sum. A family income benefit is designed to replace the loss of a salary if the policy owner passes away or is diagnosed with a terminal illness.
16. Guaranteed life insurance
A type of life insurance policy that you are guaranteed to be accepted for – no matter the state of your health. As the application for this type of policy has no health related qualifications, you will only answer minimal health-related questions and are not required to undergo a medical exam. The insurance provider is also not allowed to review any medical records.
Be aware that with this sort of policy, the insurance provider is less likely to pay out a death benefit during the waiting period (the first few years of coverage as the coverage is yet to come into full effect).
17. Grace period
Details of the grace period will be found in your contract agreement documents of your life insurance policy, and is period of time that you have to make a payment after you miss a deadline. You must make the payment within the grace period to prevent your policy from lapsing.
18. Group life insurance
Also known as death in service benefit, group life insurance is a type of insurance provided by some (not all) employers, that states a beneficiary will receive a lump sum of money if the employee passes away while still working for the company. If you leave the company, you will no longer be covered.
Although considered more of a benefit rather than a standard type of life insurance, it’s still designed to support your loved ones, and is provided by your employer rather than an official insurance provider.
I – J
19. Index-linked cover
Also known as indexation, index-linked cover is an optional add-on which ensures the value of your cover (the amount of benefit paid out if you die). This amount will go up in line with changes in inflation and cost of living and is a great way of protecting your long-term purchase by keeping the death benefit payout as fair and accurate as possible in the future.
If you do opt for index-linked cover, your monthly premium rates will also tend to increase.
20. Insurable interest
Someone has an insurable interest in another person when the death of that person would cause some form of loss in their lives lives, typically financial. For example, a spouse who loses their husband or wife.
It’s the fundamental element of any life insurance. Without it, a life insurance policy becomes invalid. Insurable interest is usually evaluated by the insurance provider during both the policy application and before the death benefit payment.
21. Joint life insurance
Also known as second to die or survivorship life insurance, joint life insurance is a type of policy that covers two people with an insurable interest in each other under just one policy. The policy usually ends when the first person passes away and the death benefit is paid out.
When the policy contract is breached – usually from missed premium payments – this is known as ‘lapse’. Coverage will cease once the policy has lapsed, but you may be able to reinstate it under certain circumstances, depending on the terms and conditions of your insurance provider.
23. Level-term life insurance
This is the most simple and straightforward type of life insurance; it should pay out the same amount of money if you die while insured, no matter whether you’re near the start or end of the policy. The premiums are guaranteed and will not change over the course of the coverage.
24. Living benefits rider
An optional add-on that you can apply to any life insurance policy. It allows the policy owner to apply for benefits while they’re still alive, including advanced payments. Those eligible for these types of benefits include policy owners who are terminally ill and require long-term care.
M – O
25. Medical examination
A health screening which you are required to take part in when you apply for life insurance is known as a medical examination. It usually involves blood tests, urine samples, and answering health-related questions. The purpose of a medical examination is to assess the state of your health, i.e., whether you smoke or have an underlying medical condition. You won’t be required to undertake a medical examination if you apply for guaranteed life insurance.
A failure to disclose certain details when applying for a life insurance policy, such as using misleading or incomplete information deliberately or carelessly during your application is known as misrepresentation, and may invalidate your policy.
27. Mortgage protection insurance
Also known as decreasing life insurance, mortgage protection insurance is a type of life insurance that is designed to support your loved ones financially, allowing them to pay off the rest of a mortgage and remain living in the family home when you pass away.
28. Over 50s life insurance
A type of life insurance policy exclusively for people over the age of 50, which guarantees a lump sum benefit for your loved ones when you pass away, provided you keep paying the premiums. Usually, these policies have fixed premiums.
29. Payment protection insurance
Also known as PPI, is a type of insurance policy that provides short-term cover for loans and other financial repayments under certain specified circumstances, like the holder of the policy not being able to work due to redundancy, illness, or injury.
PPI is usually sold alongside credit cards and loan applications.
The amount of money you pay to be insured is known as a premium. Most premiums are paid monthly but you can opt to pay annually or bi-annually with some insurance providers. The amount you are charged will be based on factors such as the risks involved, how likely it is you’ll make a claim, and how much money you’ll need to receive.
A legal written contract agreed upon by the policy owner and insurance provider. The policy document details the terms and agreement of the insurance coverage, including:
- What’s covered
- What’s not covered
- How long you’re covered for
- Premium rates
32. Power of attorney
A legal document that nominates a person to take control of financial affairs on behalf of someone else for a specific period of time is known as a power of attorney. This might be because they are no longer able to – or do not want to – make their own decisions. For example, they may be physically ill, out of the country for a long time, or have lost the mental capacity to make these decisions.
33. Pre-existing medical condition
An injury, illness or disease, such as asthma, heart disease, or diabetes is known as a pre-existing medical condition. It is possible to take out a policy when you have a pre-existing medical condition, but it may cost more. It’s always important to answer questions truthfully about your medical history to avoid making your policy invalid, for if and when you make a claim.
The first legal step undertaken by the nominated executor to handle the estate of someone who has passed away is known as a probate. The person’s named executor might need to apply for probate² with the higher courts to authenticate the will and legally access someone’s assets and bank accounts.
Q – R
An estimate of how much it will cost to take out a life insurance policy is a quote. These estimated rates are based on the information that you enter, and are not an official offer or contractual agreement. The official premium rates may be higher or lower once the risks have been formally assessed.
36. Return of premium rider
An optional add-on which you can apply to a life insurance policy that pays back all or some of the money you’ve acquired from payments if you outlive the policy term is known as a return of premium rider. Most insurance policies do not offer this add-on, meaning you will receive no refund if you outlive the policy term.
A clause that states the policy owner can renew the original coverage agreement if the policy is terminated for any reason, ie. they fail to pay the monthly premiums, is known as reinstatement.
38. Reviewable premiums
A type of premium that is reviewed at regular intervals by the insurance provider and may be changed at any point is a reviewable premium. These are the opposite to guaranteed premiums, which will stay the same for the duration of the policy term.
39. Risk classification
Risk classification is the process of determining the premium rates of a policy according to the observable risks of the individual seeking an insurance policy. The characteristics looked at include age, sex, and occupation of the potential policy owner, as well as whether they have any pre-existing medical conditions or family history of disease.
Insurance providers will usually classify the individual into one of three risk categories:
- Standard – those with undesirable risks
- Preferred – those with some undesirable risks
- Super-preferred – those with excellent health
40. Separation option
An add-on option for joint life insurance policy owners, separation option allows you to split the single policy into two if you and your partner separate in the future. This means you will not have to go through the hassle of researching and taking out a new policy.
41. Single life insurance
A type of life insurance policy that covers one single person. It's a standard type of insurance that should pay out a death benefit to loved ones if you pass away during the cover.
42. Suicide clause
This is a clause that states the insurance provider will not issue a death benefit if the policy owner dies from suicide within a certain amount of time, typically the first two years of cover. The purpose of this clause is to protect the insurance provider and prevent vulnerable people from committing suicide with the sole purpose of beneficiaries receiving a payout once they have passed.
43. Sum assured
The total amount paid out as a lump sum if you pass away or are diagnosed with a terminal illness. It’s another technical term for the death benefit used in the policy document.
44. Term life insurance
Also known as pure life insurance, this is a type of life insurance that covers you for a specific period of time. Your loved ones should then receive a payout if you die within the term duration. The period of time can range between one, five, 10 and 20+ years. With some policies, you have the option to renew the cover once the term has finished.
A legal agreement and estate-planning tool that allows you to leave assets to beneficiaries, without handing them full control of your estate and finances during your lifetime. When setting up a trust, you will name trustees – those you nominate to look after the assets when you pass away.
U – Z
A trained professional whose job it is to work out the risk of insuring someone is known as an underwriter. They decide whether or not to accept your application, the type of coverage you qualify for, and what premium rates you will pay.
The process of assessing how much of a risk a new applicant is, is a process similarly undertaken by an actuary who is responsible for determining the risks of each classification. Underwriting decides which classification each new applicant fits into.
48. Waiver of premium
A feature of a life insurance policy that means you are exempt from having to pay premiums if you cannot work for medical reasons, ie. you fall sick from a debilitating illness or are severely injured from an accident.
49. Whole life insurance
Also known as permanent life insurance or traditional life insurance, whole life insurance is a type of policy that guarantees a payout for your beneficiaries – provided you’ve continued to pay the premiums – regardless of when or how you pass away. Unlike other life insurance policies, there is no time limit to this coverage, hence its name. It’s designed to give you peace of mind – knowing that your loved ones should receive a lump sum, no matter what.
A will is a legal document that states your wishes on how you would like your estate to be managed and who by, once you pass away. This includes details on asset distribution and any other final wishes.