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Life Insurance Definitions You Should Know

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Term Life: A type of life insurance that covers you for a period of years and then expires or must be converted. This is the least expensive type of life insurance, and has no cash value.

Universal Life: A type of policy that has a savings plan component along with the life insurance. This is a good type of policy if you want something that will give you some additional resources later in life.

Whole life: Life insurance for which you pay a level premium in return for a level face value. It builds cash which you can borrow against. Note: if you want a premium that never changes, you want guaranteed whole life. There are "modified" whole life and "variable" whole life policies which will have premium changes as you get older.

Accumulation Value: This is the savings accumulation in a Universal policy. It is money you can actually draw from if you were to have an emergency. It grows each month as you pay your premium and as the company applies interest.

Annually renewable: A policy that can be renewed every year. Generally, when applied to a Term life, it means the premium will increase each year.

Beneficiary: The person or organization who will receive the payment when the insured individual dies

Cash Value: All whole life policies build a cash value. This is the amount of money you would receive if you decided to surrender or "cash in" your life insurance. If you life to age 100, the cash value will equal the death benefit.

Contestability: All insurance companies have a right to "contest" a claim if the insured dies in the first two years. If an individual lied on an application or failed to reveal a condition that would have resulted in denial, the company will refuse to pay the claim. They will, however, return all of the premium. After two years, the company has to pay even if you did conceal something.

Conversion rights: A common clause usually applicable to a term policy. Once the initial term expires, the insured usually has the right to convert the term to anything the company offers; the new premium will be determined by the age of the insured.

Decreasing Term: A conversion option for most Term policies and a common form of mortgage life insurance. The premium remains the same (level), but the face value decreases each year.

Face value: The original amount of insurance for which the insured applied. This is the benefit that will be paid upon the death of the insured.

Grace period: Most policies allow you a period of time when your policy remains in force even if you are late on a payment. Some Universal policies allow you as much as 60 days. You will, however, need to get caught up on all past due premiums to bring your policy current.

Graded benefit: A type of policy that has no medical underwriting—meaning anyone can get it—but has a waiting period before it will pay the entire face value. The waiting period usually does not apply if the insured dies in an accident. Also, during the waiting period, the premium plus interest will be returned, so the insured never actually loses any money.

Insurability: The conditions you must meet in order for the company to write insurance on you. If you have severe medical conditions, you are likely to be turned down.

Medical Underwriting: The term used for the medical review that is conducted prior to issuing a policy.

Premium: The periodic payment you must maintain to have the insurance.
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