10 Important Life Insurance Terms You Should Know

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As one of the most complex financial products out there, life insurance requires plenty of research and analysis to fully understand. While policy documents have some definitions included to help you understand the policy, there are many terms that are left unexplained.

To help you break down different policies easier, we identified, compiled and explained some of the more confusing terms found in life insurance policies.

Table of Contents

Age Next Birthday

Your age when you purchase a life insurance policy is one of the most important factors determining your premium. However, different insurers use different definitions for age.

Commonly, you’ll find insurers using “ANB”, or Age Next Birthday. This simply means your current age plus 1 year. So if you are currently 40 years old and you are looking at a premium table, you will be paying premiums for age 41.

Age definitions aren’t limited to life insurance policies either. You will also find ANB and other age definitions in health and endowment policies.

Cash Value

If you are looking at participating policies, you’ll find that they accumulate a cash value. The cash value is the sum of money that builds up in your policy, typically after a few years. Another way of thinking about it is the savings component of your policy. It is the amount of money you will get paid if you surrender your policy early.

Related: What You Need To Know About Surrendering An Endowment Insurance Policy

Illustrated Returns/Rate

The illustrated rates are projected returns set by the Life Insurance Association (LIA) that are deemed as achievable by an insurer’s life funds over a 10-year horizon. Currently, they’re set at a lower rate of 3.00% and a higher rate of 4.25%. They are not the actual returns of your policy, nor are they the upper and lower limits of the insurance company’s investment performance.

Related: VC Compares: Endowment Plans vs ILPs — Which Should You Get?

Nominee/Beneficiary

A beneficiary or nominee is the person who will receive your life insurance payout. You can name multiple beneficiaries and they can be anyone you want, whether it is your partner, child or other family member. You may also be able to designate certain amounts to different people. For instance, you may state that your spouse will get 60% of the life insurance payout and your child will receive 40%.

There are two types of beneficiary nominations. The first is the trust nomination, where the policyholder will lose all their rights to the ownership of their policy and will need nominee agreement to revoke nominations. On the other hand, a revocable nomination gives the policyholder the right to change, add or remove nominees as they please and without consent.

Related: Guide to Estate Planning and Writing A Will

Participating vs. Non-Participating

A participating policy is a policy that takes your premiums and puts them into an insurer’s investment fund. Depending on the performance of the fund, you may earn returns on those premiums in the form of cash bonuses. These bonuses will be added to your sum assured. There are two types of bonuses in a participating policy: reversionary and terminal.

Reversionary bonuses are bonuses that are added to your policy at the end of each policy year. Once they are added to your policy, they can not be taken away. The terminal bonus is calculated when your policy matures or when you make a claim. As previously mentioned, both bonuses are dependent on the performance of the fund.

Non-participating policies are policies that do not invest your premiums into an investment fund. These policies provide guaranteed returns of the sum assured and are less risky than participating policies.

Paid-Up Policy

For some life or endowment plans, you’ll be able to convert to something called a “paid up policy”. A paid-up policy is a policy that reduces your sum assured in exchange for you not paying any more premiums. You will only keep the bonuses you received before you chose to switch your policy to a paid-up policy.

Related: Guide to Types of Life Insurance – How They Work and What To Get

Policy Illustration

When you look at a life or endowment insurance brochure, you’ll notice that there are hypothetical examples describing the policy. This is called a policy illustration and is used to show the benefits you can expect to get from the policy, along with the cost and charges. Policy illustrations use the illustrated rates to show the hypothetical payout of the policy.

Reinstatement

As with most bills, once you stop paying your insurance premiums, the service will be cut off.

Once you stop paying premiums, your policy will lapse and your cash surrender value will be used to pay for those missed premiums. Furthermore, the policy will no longer provide any coverage. However, after a certain period of time and if you meet certain conditions, you will be able to reinstate the policy and receive full coverage again.

Surrender Value

The surrender value of a policy is the sum of money you will receive if you cancel your life insurance policy before it matures.

Oftentimes, there will be a penalty associated with cancelling your policy early, so your surrender value will be less than your sum assured and any accumulated bonuses. The formula for the surrender value is the cash value – surrender charges. The total payout you get will receive will be made up of the guaranteed portion and the non-guaranteed portion that is made up of any accumulated bonuses. However, often time your surrender value will be less than the total premiums you’ve paid. This is why you so many insurers warn you to remain committed to a policy.

Waiver of Premium

A waiver of premium, or premium waiver, is commonly found as an optional add-on to your base policy. A waiver of premium will cancel all future payments if an insured event happens to you. An insured event could be anything from losing your job to becoming disabled or getting a critical illness. Even though you stop paying premiums, your policy will still keep going.

Understanding the Language Leads to Better Decisions

It is much easier to make the right decision when you understand what you are reading. Getting past the jargon can help you decipher between a solid policy or a policy that simply has good marketing. Hopefully, this guide helped explain terms you may have been confused about. To learn more about life insurance and related products, reach out for a quote.

Read More:

• Should I Get Life Insurance in My 20s and 30s?
• How Much Insurance Coverage Do You Really Need And What Insurance Plans Should You Get?
• A Complete Guide to Understanding Your Endowment Insurance Plan
• 3 Things You Must Do If You’re Cash-Strapped but Want Insurance Coverage
• How Endowment Insurance Plans Work — T&Cs You Need To Know

Cover image source: Unsplash