5 Simple Explanations for Insurance Terms

Slideshow March 05, 2024 at 04:04 PM Share & Print

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When average people think about life insurance, they picture something you buy that pays off when you die. Although the payout is often called the “death benefit,” the average person might question what the benefit is if you are no longer around to enjoy the proceeds.

The insurance industry has its own terminology. This allows fellow professionals to understand what a product does but can be confusing to potential clients who do not understand industry jargon.

The average person might only associate insurance with “life insurance” without realizing that there are many other aspects of life in which insurance can deliver peace of mind.

See the accompanying slideshow for five insurance terms that advisors can help clients understand.

Bryce Sanders

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1. Whole Life Insurance

This is the type of insurance that covers you for as long as you keep paying your premiums. A portion goes toward protection, meaning the payout to your beneficiaries if you die, and another portion goes into something similar to a savings account, building cash value. In theory, the cash value eventually grows to the face value of the policy. It’s like a car running on both gas and electricity. It’s also like buying a house and eventually paying off the mortgage.

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2. Term Life Insurance

Some people don’t care for the savings element of the insurance policy; they simply want coverage if they die. They want a lump-sum payout to go to their beneficiaries, often their family. Term insurance does not have the savings component, but it also does not provide coverage forever. The word “term” means the deal stops at a set date. You can buy another term policy to replace it, but it will cost more. Why? Because you are older. This is like renting a house and getting a higher renewal rate from your landlord when the lease is up.

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3. Cash Value

Remember the savings element inside the whole life insurance policy? Its official name is cash value. It can be borrowed against, or even some can be withdrawn in times of emergency. Imagine you married, lived in a property owned by your parents and paid them rent every month. You ended up getting divorced and were surprised to learn that your parents put a portion of the rent you paid into a savings account with your name on it.

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4. Annuities

Some people want a paycheck in retirement, similar to when they were working. Annuities are a complex subject, but in simple terms, you are making a bet with insurance companies. You give them a lump sum. They say: “Thank you. This is mine now.” They agree to pay you a specific dollar amount every month for the rest of your life. The insurer has aggregated you together with plenty of other people, any one of whom might possibly get run over by a bus while crossing the street and checking their phone.

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5. Surrender Charge

When a mutual fund or annuity company puts money to work, it wants it to work over a long time horizon. Banks do the same, applying a penalty for early withdrawal on time deposits. The cost to get out of one of these investments is often called a surrender charge. Generally speaking, they decline over time. If you decide you want out after six months, the surrender charge might be 5%. If you wait four years, the charge might be 1%. This is to encourage you to leave your money in place for a long time, letting it work for you. If you ever bought an inexpensive airline ticket, decided not to travel and turned it in, you know all about these fees.

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