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  • Writer's pictureDr. Onyeka Abengowe DHA, MBA, LFP, LGBH, CTC, CBN, CNMT

Basic Life Insurance Terminologies Made Simple With Stories

Updated: Jul 12

life insurance concepts and terminologies
Life insurance basic concepts

Life Insurance - Friend or Foe

Life insurance is not the most loved topic of discussion. Matter of fact, the mention of life insurance to some people guarantees they'll avoid conversation with you for a long time. A 2022 survey by Nerdwallet found that 75% of Americans have hesitations about buying life insurance. Young adults are the least likely to buy life insurance. The top reason cited was that life insurance is confusing, making it difficult to decide on the right policy to choose.


This post aims to demystify basic life insurance terminologies using story-telling. In this enlightening read, we bridge the gap between life insurance concepts and everyday experiences, making life insurance terminologies simpler to understand. Join us as we bring clarity and understanding through the power of storytelling. Our goal is to make life insurance simple and easy to understand so more people can take advantage of the many benefits life insurance offers for families and businesses.


Death Benefit

The amount of money paid out to the beneficiaries upon the insured person's death. It is the main purpose of a life insurance policy and provides financial support to the loved ones left behind. Short Story illustration

Emily was a 34-year-old single mom with 3 young children who wanted to ensure her family's financial stability in case anything happened to her. She was in fairly good health and was able to purchase a $250,000 life insurance policy. Tragically, Emily passed away unexpectedly. Her grieving family received the death benefit from the insurance company on behalf of her children, which helped them cover funeral expenses, pay off debts, and maintain the children's standard of living during this difficult time. There was also enough money to set aside for her children's college education.


Premium

The regular payment made by the policyholder to the insurance company to keep the life insurance policy in force or active. Short Story illustration

David had been paying his life insurance premiums faithfully for many years. However, due to a financial setback, he struggled to make the payment for a couple of months. Worried about losing his coverage, he reached out to the insurance company and explained his situation. Understanding his predicament, the insurance company worked with David to customize a more manageable payment plan, making it possible for him to keep his coverage and continue to protect his family's financial future.


Grace Period

A specified period after the premium due date during which the policyholder can make a premium payment without the risk of the policy lapsing. Short Story illustration

Lisa had been consistent with her life insurance premium payments, but one month, she forgot to pay her premium by the due date. Worried about her coverage, she called the insurance company to explain the situation. The representative informed her that her policy had a grace period of 30 days. As long as she made the payment within that timeframe, her coverage would remain intact. Grateful for the grace period, Lisa made the payment promptly, ensuring the continuation of her life insurance protection.



Beneficiary

The person or entity named in the life insurance policy to receive the death benefit upon the insured person's passing. Short Story illustration

Sarah was a devoted grandmother who adored her grandchildren and wanted to leave a lasting legacy for them. She named them as beneficiaries in her life insurance policy. Unfortunately, Sarah fell ill and passed away surrounded by her family. During her last hours, she expressed how she was at peace, knowing that her grandchildren would receive the financial support to pursue their dreams. The insurance company distributed the death benefit among her beloved grandchildren, helping secure their education and future endeavors.


Underwriting

The process through which the insurance company evaluates an applicant's risk factors, such as health, lifestyle, and occupation, to determine eligibility for coverage and the premium amount. Short Story illustration

Rebecca wanted to secure life insurance coverage to protect her family. She completed the application, and the insurance company initiated the underwriting process. They requested her medical records and also conducted a review of her medications. As a result, they discovered that Rebecca had a pre-existing medical condition. However, the insurance company determined that her condition was well-managed and did not pose a high risk. Rebecca was then approved for coverage.



Cash Value

The savings component of a permanent life insurance policy that accumulates over time and can be accessed by the policyholder during their lifetime. Short Story illustration:

Michael has had a permanent life insurance policy with cash value accumulation for several years. He has been paying the premiums diligently but didn't pay attention to how much cash value his policy was accumulating. During his annual review with his independent agent, he was pleasantly surprised to discover that his policy had built up a significant cash value. Not long after, he needed funds for a down payment on a new home. Michael contacted the insurance company and was able to utilize a portion of the accumulated cash value to make the down payment for his new home. This allowed Michael to achieve his dream of homeownership while still maintaining his life insurance coverage.


Policy Loan

A feature available in certain types of life insurance policies that allows the policyholder to borrow against the accumulated cash value of the policy. Short Story illustration

Karen was aware of the benefits of cash value accumulation. As a result, she had been diligently building up cash value on her permanent life insurance policy for many years. She found herself facing a financial emergency and needed funds quickly. Instead of seeking a traditional loan, Karen decided to explore the policy loan option offered by her insurance company. She contacted them, completed the necessary paperwork, and was approved for a loan using the cash value as collateral. This allowed her to address her urgent financial needs without disrupting her long-term financial goals.


Surrender Value

The amount of money available to the policyholder if they choose to terminate their life insurance policy before the end of its term. Short Story illustration

Robert had a term life insurance policy but found himself in a financial bind. He was considering surrendering the policy to access the accumulated policy value. He contacted the insurance company to inquire about the surrender value. They explained the process and provided him with the amount he would receive upon surrendering the policy. After carefully evaluating his options, Robert decided to surrender the policy, receiving the surrender value, which provided him with much-needed financial relief during a challenging period.


Term Life Insurance

A type of life insurance that provides coverage for a specific term, usually 10, 20, or 30 years. If the insured person passes away during the term, the death benefit is paid out to the beneficiaries. Short Story illustration:

Mark was a young professional who recently got married. He wanted to ensure his wife would be financially secure if anything were to happen to him. He decided to purchase a $500,000 term life insurance policy for 20 years since he had a limited budget. A few years into the policy, Mark unexpectedly passed away in a tragic accident. His wife contacted the insurance company and received the full death benefit. The funds helped her cover funeral costs, pay off Mark's debt as well as the mortgage. Having the funds available allowed her to grieve without the stress of how to survive without his income.


Convertible Term Life Insurance

A type of term life insurance policy that allows the policyholder to convert their policy into a permanent life insurance policy without undergoing additional underwriting or providing evidence of insurability. Short Story illustration

Alex purchased a convertible term life insurance policy when he was starting his career. As the years passed and his financial situation improved, he decided that he wanted the long-term benefits of a permanent life insurance policy. Thanks to the convertible feature in his policy, Alex contacted the insurance company and expressed his desire to convert his term policy into a permanent one. Without the need for a new application or medical exams, he converted his policy, ensuring lifelong coverage and financial protection for his loved ones.


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