10 Commonly Misunderstood Insurance Terms

Insurance lingo can be confusing, which can leave you feeling a bit overwhelmed, or even downright turned off if you’re trying to purchase a policy. Trying to understand terms like contestability period, underwriting, accelerated death benefit, and more can be enough to make you want to close your laptop and give up. Don’t worry, though, below are the most commonly misunderstood insurance terms with their definitions, so you can be a life insurance pro in no time!  

1. Accelerated Death Benefits illustration of a stack of money

Accelerated death benefits are a type of rider (see below) that can be added to a policy, which lets you use some of your life insurance death benefits before you pass away. This is usually meant for people who are terminally ill and need money to help pay their medical bills, such as bills for hospice care.

2. Annuity

You (or your beneficiaries) can choose how to receive your benefits after you pass away; an annuity is one choice that will give your beneficiaries an income for life. An annuity allows you to save money on taxes and is flexible in terms of how you get paid, when you get paid, and for how long you receive payments. Annuities are popular among retired people because they can offer protected income for the rest of their life.

3. Contestability Period

During the contestability period, which is a set amount of time after you’ve purchased your policy, your insurer will review your application to make sure you didn’t misrepresent anything; if you pass away during this time, your insurer might investigate (and possibly deny) claims. This period usually starts as soon as the policy is issued and will usually last for around 2 years.

4. Conversion Right

calendar with 31 days
If you miss a premium payment, some insurers will allow you a grace period.

If you have a term life insurance policy, you might be able to convert it into a permanent life insurance policy later on. Policies that include this option are known as conversion right term life insurance policies.

5. Grace Period

If something happens and you miss a premium payment, some insurers will allow you a grace period, or extra time to catch up on your payments, before they terminate your policy. This will usually only last around 30 days, and after it is over, you could lose your policy.

6. Insurable Interest

If you want to take out a life insurance policy on someone else (with their knowledge), you will have to prove insurable interest. This means you will have to show that you would suffer some kind of financial harm if the person were to die.

7. Living Benefits

Some life insurance policies will provide benefits while you are still alive, such as the accelerated death benefits mentioned earlier, long-term care benefits, and policy loans.

8. Preferred Rates

Cheaper, or “preferred,” rates are offered by insurers to applicants who are at a lower risk of dying. Life insurance companies decide who to offer preferred rates to by looking at health history, smoking habits, gender, and lifestyle.

9. Rider

This is an additional amount of coverage that you can add to your life insurance policy or an extra option that you can add for coverage, like a long-term care rider.

10. Underwritinganalytics on an ipad and paperwork next to it

This is the process that insurance companies use to decide if they want to offer you a policy, and what your rate will be. When you apply for life insurance, a professional called an underwriter will look at multiple factors, including your health and lifestyle, and make a decision.

Need Help?

Hopefully, you’re feeling more confident now that you know these common terms, so now it’s time to find the right policy for you! Remember, your family has financial obligations that will not go away when you are gone; they will need your help more than ever with their expenses, and the last thing you want them to worry about is money while they are grieving. There are many great affordable life insurance options to choose from that will provide enough money for your family, for a low monthly price. 

The best way to find the right life insurance policy for you and your specific needs is by working with an agent specializing in life insurance. We have provided the top life insurance companies in the nation below; each offers hassle-free assistance and the most competitive rates. Always check multiple sites to make sure you have bargaining power and know the advantages of each company. Make sure a hard time isn’t made harder by a financial burden, check life insurance rates today.

Key Tax Benefits of Your Life Insurance Policy

Most people don’t think that taxes and life insurance have anything to do with each other, but in reality, nothing could be further from the truth. One wrong move when purchasing your policy, and you and your beneficiaries could face large tax consequences, resulting in lost money. But on the other hand, if you play your cards right, you could actually see some tax advantages to your life insurance policy. For example, policies like whole or permanent life insurance can not only provide your family with financial security when you are gone, but can also help you avoid the taxes that come with stocks or retirement accounts. Find out just what tax benefits you could get from your life insurance policy.

Tax-Advantaged Growth

coins stacked in rows getting larger each time
Not only do you get tax-deferred cash value with your whole life insurance policy, but there are other tax benefits.

First things first: you should be aware that, if you have a whole life insurance policy, the cash value that comes with your policy will not be taxed while it grows. Your cash value is tax-deferred, meaning your money will grow more because it is not being eaten away by taxes each year. 

Tax-Free Exchanges For Other Policies

Did you know that you have the option to change your life insurance policy if it no longer works for you? Not only that, but if you decide to switch plans or buy a new one, you will not have to face any tax consequences: you will be able to do what is known as a tax-free 1035 transfer on your cash value, which is similar to rolling over a 401k. 

Accelerated Death Benefits

If you are diagnosed with a terminal illness, or have to surrender your life insurance policy early, notify your life insurance company of your condition: if you meet the requirements of your  policy, you could receive tax-free accelerated death benefits.

Early Distributions Are Tax-Free, Depending On Your “Basis”

If you have a whole or permanent life insurance policy, you will have a cash value that continues to grow tax-free over time, and if you decide to take an early distribution, or withdrawal, from your cash value,  you will only owe taxes on any amount that goes over your what is known as you basis, or the amount you have paid in premiums. 

So, let’s say you have a policy for which you have already paid around $10,000 in premiums, and your cash value is around $40,000. If you withdraw $5,000, you will not pay any taxes on your withdrawal, because it does not exceed the $10,000 premiums-paid basis. But if you choose to take out $30,000 from your cash value,  you will owe taxes on the $20,000 that exceeds your basis. 

Tax-Free Loansstacks of money

Sometimes the unexpected happens, and you could need to borrow a large sum of money – if you do, you will be able to borrow from your life insurance policy, tax-free! You have the option to borrow an amount that exceeds the amount you have paid in premiums without facing any tax consequences by taking out a loan up to the amount you have in cash value. Just be aware that your insurance company will charge you interest until you pay the loan back, and each insurance company has its own rates; you will also have the choice to not repay the loan and have it deducted from your death benefit, or pay your loan back to keep your death benefits larger for your family. It is important to note, though, that if your policy lapses, you could owe taxes on the loan you have taken out. 

Looking For A Policy?

Life insurance is a great way to protect your family and continue to help them financially when you are gone. They will need your help more than ever with their expenses after you pass, and the last thing you want them to worry about is money while they are grieving. There are many great affordable options to choose from that will provide tax benefits for your family, for a low monthly premium. The best way to find the right life insurance policy for you and your specific needs is by working with an agent who specializes in life insurance. We have provided the top life insurance companies in the nation below; each offers hassle-free assistance and the most competitive rates. Always check multiple sites to make sure you have bargaining power and know the advantages of each company. Make sure a hard time isn’t made harder by a financial burden, check life insurance rates today.