Confusing Term Life Insurance Definitions, Made Simple
Buying term life insurance can be a daunting experience for some people. Just like in many industries, insurance policies use words that are defined differently than what the common definition is. As the insurance industry has a vocabulary of its own, the best thing to do would be to educate yourself on some of the key words so that when it comes time to apply for your term life insurance coverage it is a clearer and less intimidating process.
The following is a list of the more uncommon definitions that you will need to understand before buying a term life insurance policy:
1. Proposed Insured
The individual who is applying for the term life insurance coverage.
2. Beneficiary
The beneficiary of your term life insurance policy is the person designated by you to receive the policy benefits upon your death. You may designate that the benefits from your policy be allocated to multiple beneficiaries or even a charity. Beneficiary designations may be changed at any time.
3. Date of Birth
Age is an important factor in the insurance industry. The premiums you will be charged for term life insurance coverage are based in large part on the age of the proposed insured. Some companies use the attained age of the insured in this calculation, while other companies use the nearest age of the insured.
4. Attained Age
Some insurance companies use the proposed insured's "attained age" when determining the age for term life premium calculations. This method uses the proposed insured's actual age in years. For example, if the proposed insured is 39 years and 5 months old they would be classified as a 39-year old, as would a person who is 39 years and 8 months old. Basically, unlike the "nearest age" method, months are not a consideration in attained age.
5. Nearest Age
The "nearest age" method for determining age takes into account whether the proposed insured is nearer in age to their last birthday or their next birthday. For example, a woman who is 24 years and 5 months old would be classified as a 24-year old woman for the term life premium calculations. In contrast, a male who is 34 years and 9 months old would be classified as a 35-year-old man for the premium calculations.
6. Premium and Premium Mode
The premium is the amount a term life insurance company charges you in exchange for a life insurance policy.
The premium mode is basically the frequency in which premiums are paid by the insured. Typically, the total annual premium is slightly higher when payments are spread out over the course of the year as opposed to being paid in a lump sum. For instance, if you choose to break down your annual premium into two or four payments per year, typically a company will charge an extra two or three dollars per payment. Check with your carrier as some companies will also charge a bank fee.
7. Coverage Amount/Face Value
The coverage amount or face value is the initial dollar amount you choose as your term life insurance policy coverage. For example, if you buy a policy for $250,000.00 that is the coverage amount/face value that will be paid to your designated beneficiaries upon your death. The coverage amount/face value does not include adjustments for outstanding policy loans, withdrawals, dividends, paid-up additions or late/outstanding premium payments.
8. Underwriting Guidelines
Insurance companies use underwriting guidelines to determine the underwriting classification upon which to base their coverage. These guidelines include your health and lifestyle. The criteria includes age, gender, tobacco use, height/weight build, family history of valve replacement, heart disease, diabetes or cancer, cholesterol levels, blood pressure levels, specific health conditions, driving record, hazardous occupation or activities, military service, aviation, foreign travel or residency, U.S. citizenship and felony criminal activity. All of these underwriting guidelines are taken into consideration when evaluating a proposed insured and before giving any term life insurance premium quotes.
Typically, those in good health who do not use any kind of tobacco products or engage in any hazardous activities are charged less for their term life insurance coverage than individuals who are in poor health, use tobacco or engage in hazardous activities. Check with your carrier as insurance companies use different criteria in determining the health status and lifestyle of the proposed insured.
9. State of Residence
This is the state in which the insured or proposed insured resides. While it is self-explanatory, the important thing to consider here is that if you reside in a particular state it may be beneficial for you to buy insurance specific for your state. For example, Californians are subject to different laws than people who reside in Texas. As a resident of California it might be more beneficial for you to buy a California term life insurance policy to cover a particular life-style or to reap particular benefits.
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