Insurance can be a complex topic, filled with terminology that may seem overwhelming at first. However, having a clear understanding of these terms is crucial in making informed decisions about your insurance coverage. In this article, we will break down some of the most important terms related to insurance, providing you with the knowledge you need to navigate the insurance landscape confidently.
Agent
An insurance agent is a licensed representative of an insurance company who assists in soliciting and negotiating insurance contracts. Agents can either be independent, representing multiple insurance companies, or direct writers, exclusively selling policies for one company. They provide valuable services to policyholders, offering guidance and support throughout the insurance process.
Annuity
An annuity is a contract that provides a periodic income at regular intervals, usually for life. It offers a way to accumulate funds for retirement or provide a guaranteed income stream. Annuities can be either annuity certain, which provides income for a specified number of years, or lifetime annuities, which continue for the life of the annuitant.
Application
The application is a statement of information made by a person applying for life insurance. It helps the insurance company assess the acceptability of risk and determine underwriting classification and premium rates. The information provided in the application is crucial in evaluating the applicant’s insurability.
Beneficiary
The beneficiary is the person named in the insurance policy to receive the insurance proceeds upon the death of the insured. This individual can be anyone chosen by the policyholder, and multiple beneficiaries can be named. It is important to keep beneficiary designations up to date to ensure the intended recipients receive the policy benefits.
Cash Surrender Value
The cash surrender value is the amount that becomes available in cash if a policy is voluntarily terminated by the policy owner before its maturity or death benefit payout. It is calculated by subtracting surrender charges, outstanding loans, and interest from the cash value stated in the policy. Policyholders can choose to surrender their policy for its cash value if needed.
Direct Response
Direct response insurance is sold directly to the insured by the insurance company itself, either through its own employees, via mail, or over the counter. This method eliminates the need for intermediaries, such as agents or brokers, streamlining the purchasing process for the insured.
Dividend
A dividend is a return of part of the premium paid on participating insurance policies. It reflects the difference between the premium charged and the actual mortality, expense, and investment experience of the insurance company. Dividends are considered a refund of a portion of the premium and are not taxable distributions.
Evidence of Insurability
Evidence of insurability refers to statements or proof of an applicant’s health, finances, or job status provided to the insurer. This information helps the insurance company determine whether the applicant is an acceptable risk for life insurance coverage.
Face Amount
The face amount is the stated amount on the policy that will be paid upon the death of the insured or at the policy’s maturity. It does not include additional amounts payable under special provisions or acquired through the application of policy dividends.
Insurable Interest
Insurable interest refers to the lawful and substantial economic interest a person has in the continued life of the insured. It is required when purchasing life insurance on another person. For individuals related by blood, insurable interest is established through love and affection.
Premium
The premium is the payment made by the policy owner to the insurance company in exchange for insurance coverage. It can be paid in one payment or a series of regular payments, such as annually, semi-annually, quarterly, or monthly. The premium charged is based on the expected risk, expenses, and profit contingencies of the insurer.
Settlement Options
Settlement options are the various ways in which policyholders or beneficiaries can choose to receive policy benefits other than immediate cash payment. These options include interest options, fixed amount options, fixed period options, and life income options. Each option provides different payment terms and can be tailored to meet the specific needs of the policyholder or beneficiary.
FAQs
Q: Can an independent agent provide the same level of service as a direct writer?
A: Yes, independent agents can offer the same level of service as direct writers. They represent multiple insurance companies, giving policyholders access to a wide range of options and personalized recommendations.
Q: Are dividends taxable?
A: No, dividends received from participating insurance policies are not considered taxable distributions. They are treated as a refund of a portion of the premium paid.
Q: How often can I change the beneficiary on my policy?
A: You can change the beneficiary on your policy at any time by submitting a written request to the insurance company. It is important to review and update your beneficiary designation regularly to ensure it aligns with your current wishes.
Q: What happens if I surrender my policy for its cash value?
A: If you surrender your policy for its cash value, you will receive the amount stated in your policy, minus surrender charges, outstanding loans, and any accrued interest. Surrendering a policy terminates the insurance coverage.
Q: Can I purchase insurance without going through an agent or broker?
A: Yes, you can purchase insurance directly from an insurance company through their direct response channels. This allows you to bypass the intermediaries and interact directly with the insurer.
Conclusion
Understanding insurance terms is essential in making informed decisions about your coverage. We have covered key terms such as agent, annuity, beneficiary, cash surrender value, and more, providing you with a solid foundation for navigating the insurance landscape. By familiarizing yourself with these terms, you can confidently communicate with insurance professionals and ensure that you are making the best choices for your insurance needs.
