Life Insurance Terms and Definitions

When it comes to protecting what matters most, life insurance is an easy and proactive way to ensure you're financially taking care of your loved ones. But, sometimes the insurance jargon can be confusing — we're here to help.

Life Insurance Definitions

Browse our glossary of common life insurance terms to clear up any confusion and better understand how life insurance works. Still have questions? Your American Family agent is the perfect person to ask!

A

Advanced Premium

A pre-paid premium, where a premium payment is made before it’s due. The money is typically held in an account by the insurance company and then paid to the policy when the premium is due. The money held in the account can be withdrawn under the conditions of the prepayment agreement.

Amount of Insurance

The amount of coverage purchased. Also called face amount.

Annual Renewable Term

A form of term life insurance that automatically renews on a yearly basis with increasing premiums.

Application

When applying for life insurance, you’ll fill out a statement of information which will be used by the company to assess your risk. This, along with other underwriting factors, will determine your underwriting eligibility, classification and premium.

B

Beneficiary

A person(s) or entity named in the life insurance policy that receives the death benefit upon the death of the insured. Find out more about beneficiaries.

C

Cash Value

The amount of money that accumulates in certain life insurance policies such as whole life or universal life. Some possible uses of cash value may include taking a policy loan or partial surrender.* Accessing your cash value may affect the death benefit or require additional premiums to keep your policy in force.

Cash Surrender Value

The amount of money the insurance company pays you if you voluntarily terminate a policy that has earned cash value before your death or before the policy matures.

Conversion

When all or some of your term life insurance is exchanged into a cash value life insurance policy. Read more about when to convert term to whole life insurance.

D

Death Benefit

The amount of money to be paid to the beneficiary upon the death of the insured.

Direct Response

When insurance is sold directly to you by an insurance company via phone, mail, or the Internet.

Dividend

A portion of a company’s profits that may be paid to policyowners in conjunction with a life insurance policy. Typically seen on whole life policies, dividends are a partial return of premium and are not guaranteed.

E

Endorsement

An add-on coverage to your life insurance policy that provides additional benefits or exclusions. An endorsement may require additional premium. Also known as a rider.

Extended Term Insurance

If you do not pay your premiums, an insurance company can take your surrender value in your policy and use it to purchase term insurance. You would then be covered for a specific amount of time depending on how much your surrender value was at the time of forfeiture. Extended term insurance is a nonforfeiture option only available on whole life policies.

F

Face Amount

The amount of coverage purchased. Also called amount of insurance.

Final Expenses

Expenses that incur at the time of a person’s death, including funeral costs, current bills or debt. Your life insurance policy can help cover final expense costs.

G

Grace Period

The amount of time after the premium due date when a premium payment can be made without your insurance policy lapsing.

I

Illustration

A hypothetical set of projections that depicts policy performance over a period of time.

Insured

The person(s) on whose life the policy is issued.

L

Lapse

When a life insurance policy becomes inactive due to nonpayment.

Life Expectancy

The age to which a person is expected to live. Life expectancy is considered when determining your premium.

Life Insurance

A contract with an insurance company that, in exchange for premium payments, provides a sum of money, known as a death benefit, to beneficiaries upon the insured’s death.

Limited Pay

A type of whole life insurance, where premiums are paid only for a limited number of years. Your coverage will still last a lifetime.

N

Nonforfeiture Options

A policy provision specifying how the policy cash value can be applied if the policyowner stops making payments. (See paid-up insurance, extended term insurance, and surrender.)

P

Paid-Up Insurance

Amount of life insurance available with no premium payments due; after the surrender value accrues enough to cover the premium payments. Paid-up insurance is a nonforfeiture option only available on whole life policies.

Participating vs Non-Participating Policy

A participating policy is a policy that could receive dividends from a life insurance company. A non-participating policy does not receive dividends.

Policy

The contract between the policyowner and the company.

Policy Loan

A loan issued by the life insurance company that uses the cash value of your life insurance policy as collateral. Loans are charged an interest rate and outstanding loans or unpaid interest may affect the death benefit. In addition, failure to pay the loan balance could result in policy termination.

Policyowner

The person who owns the insurance policy. Usually, the person covered by the policy, though you may own a policy that names someone else as the insured. Also known as the policyholder.

Premium

The periodic payment you make to your insurance company to keep the policy active.

R

Reinstatement

The ability to re-activate your life insurance policy after it has lapsed; subject to contract provisions, review, approval and payment.

Rider

An add-on coverage to your life insurance policy that provides additional benefits or exclusions. A rider may require additional premium. Also known as an endorsement.

S

Settlement Options

How the death benefit is paid to the beneficiaries. Usually a lump sum but can also be paid in installments.

Standard Risk

Refers to a risk that a life insurance company considers common or normal, which would qualify you for a standard rate.

Surrender

A full cancellation of your insurance policy.

T

Term Life Insurance

Provides coverage for a certain time period — or term — such as 10, 20 or 30 years. The death benefit will be paid to the beneficiary(ies) if you pass during the term. Check out our DreamSecure Simplified Term and DreamSecure Term Life Insurance policies.

U

Underwriter

The person who evaluates you for potential risks and exposures in order to determine the risk classification and whether or not the company will insure you.

Underwriting

The process used to assess your eligibility to purchase insurance and your risk classification.

Underwriting Class

The category you’re placed into based on your risk, which includes, but is not limited to, things like your age, gender, and health and possibly some sports and hobbies. The underwriting rating class/category impacts your premium. Also may be called rating or risk classification.

Universal Life Insurance

A type of long-term life insurance that offers flexible payments, an adjustable death benefit, and the cash value element of whole life insurance. Check out our DreamSecure Flexible Life Insurance policy.

W

Whole Life Insurance

A type of permanent coverage that has fixed premiums, a fixed death benefit, and guaranteed cash value. Policy may receive dividends. Check out our DreamSecure Whole Life Insurance policy.

This Life Insurance Terms Glossary is intended to be a general resource and does not replace or amend the terms or conditions in any policy, endorsement, or rider. Refer to your policy for specific terms and conditions.

*Any loans taken from your life insurance policy will accrue interest. An outstanding loan balance (loan plus interest) will be deducted from the death benefit at the time of claim or from the cash value at the time of surrender. If the loan balance grows too large for the cash value to support it, the policy could terminate. Partial surrenders may affect the death benefit and could require additional premiums to keep the policy in force.

Policy Forms: ICC18-33 (10), ICC18-33 (15), ICC18-34 (20), ICC18-35 (30), L-33 (10)(ND), L-33 (15)(ND), L-34 (20)(ND), L-35 (30)(ND), L-33 (10)(SD), L-33 (15)(SD), L-34 (20)(SD), L-35 (30)(SD), ICC18-36 (10), ICC18-36 (15), ICC18-36 (20), ICC18-36 (30), L-36 (10)(ND), L-36 (15)(ND), L-36 (20)(ND), L-36 (30)(ND), L-36 (10)(SD), L-36 (15)(SD), L-36 (20)(SD), L-36 (30)(SD), ICC21 L141 MS 01 22, L141 ND 02 22, L141 SD 02 22, ICC17-225 WL, L-225 (ND) WL, L-225 WL, ICC17-225 WL, L-225 (ND) WL, L-225 WL, ICC17-227 WL, L-227 (ND) WL, L-227 WL, ICC17-223 WL, L-223 (ND) WL, L-223 WL, ICC17-224 WL, L-224 (ND) WL, L-224 WL, ICC17-228 WL, L-228 (ND) WL, L-228 WL