An Accelerated Death Benefit (ADB) rider is often included in life insurance policies at no extra cost. It provides financial support when it's needed most—during a terminal illness. If a policyholder is diagnosed with a condition that limits their life expectancy (usually to 12-24 months), they can access a percentage of the policy's face value early. This money can be used for medical bills, hospice care, or any other expense. The amount taken is deducted from the final death benefit paid to beneficiaries.
A beneficiary is the person, people, trust, or charity you name to receive the death benefit from your life insurance policy. You can name a primary beneficiary (first in line) and contingent beneficiaries (if the primary beneficiary is deceased). It is crucial to keep beneficiary designations up to date, especially after major life events like marriage, divorce, or the birth of a child, as the policy designation typically overrides a will.
Cash value is a feature of permanent life insurance policies, such as Whole Life or Universal Life. A portion of your premium payment goes toward the cost of insurance, while another portion goes into a cash value account. This account grows tax-deferred over time. Policyholders can often borrow against this cash value or surrender the policy to receive the cash value (minus any surrender charges). Term life insurance policies do not have cash value.
The contestability period is typically the first two years of a new life insurance policy. During this time, if the insured passes away, the insurance company has the right to review the original application. If they find that material information was withheld or misrepresented (e.g., hiding a smoking habit or a medical condition), they can deny the claim or adjust the benefit. After this period expires, the policy becomes incontestable, meaning the insurer generally cannot deny a claim due to misstatements.
The death benefit, also known as the face amount, is the core purpose of a life insurance policy. It is the sum of money the insurance company guarantees to pay to the named beneficiaries upon the insured's death, provided the policy is active. Life insurance death benefits are generally income-tax-free for the beneficiaries, providing full financial support for mortgage payments, living expenses, debts, or legacy planning.
Evidence of Insurability (EOI) is information required by an underwriter to decide whether to approve an application and at what premium rate. This can include medical records, results from a paramedical exam (blood and urine tests), prescription history, and driving records. 'No-exam' policies use data-driven EOI (like prescription databases and motor vehicle reports) to make instant decisions without physical exams.
Exclusions are specific situations listed in the policy where the death benefit will not be paid. Common exclusions include the suicide clause (usually for the first two years) and sometimes death resulting from high-risk activities (like skydiving or auto racing) if not disclosed or covered by a specific rider. It is important to read the policy's fine print to understand these limitations.
The face amount is the initial amount of insurance coverage purchased. For example, if you buy a $500,000 term life policy, the face amount is $500,000. In most cases, this is the amount paid to the beneficiary. However, the final payout could differ if there are outstanding loans against the cash value (in permanent policies) or if an accelerated death benefit was used.
The free look period is a consumer protection feature that allows you to review your new insurance policy with no financial risk. It typically lasts between 10 and 30 days after the policy is delivered, depending on state laws. If you decide for any reason that the policy isn't right for you during this time, you can return it to the insurer for a full refund of any premiums paid, with no questions asked.
A grace period prevents your policy from immediately lapsing if you miss a payment. Standard grace periods are usually 30 or 31 days. If the insured dies during the grace period, the death benefit is still paid, though the overdue premium is usually deducted from the payout. If payment is not made by the end of the grace period, the policy will lapse and coverage will end.
A policy lapses when the premium is not paid by the end of the grace period. Once a policy lapses, there is no longer any insurance coverage. If the insured passes away after a lapse, no death benefit is paid. Some policies have reinstatement provisions that allow you to restart the policy within a certain timeframe by paying back premiums and proving insurability again.
The policyholder (or owner) is the person who has control over the policy. They are responsible for paying premiums and have the right to name or change beneficiaries, assign the policy, or cancel it. The policyholder is often the same person as the insured, but not always (e.g., a wife can be the policyholder of a policy on her husband's life).
The premium is the cost of your insurance coverage. It can be paid monthly, quarterly, semi-annually, or annually. Factors affecting your premium include your age, health, lifestyle, the amount of coverage, and the type of policy (Term vs. Whole Life). In Term Life insurance, the premium is typically fixed (level) for the duration of the term.
Riders are optional add-ons that allow you to customize your insurance policy to fit specific needs. Common riders include the Waiver of Premium rider (waives premiums if you become disabled), the Child Term rider (adds coverage for children), and the Accidental Death Benefit rider (pays extra if death is caused by an accident). Some riders come with an additional cost, while others are included automatically.
Term Life is the most straightforward and affordable type of life insurance. It protects you for a set number of years (e.g., 10, 20, or 30). If the insured passes away during this term, the beneficiary receives the death benefit. It does not accumulate cash value. It is designed to cover temporary financial responsibilities like a mortgage or raising children.
Underwriting is the insurer's process of assessing your application. Underwriters look at your age, medical history, family history, lifestyle, and other data to determine the risk of a claim. 'Fully underwritten' policies may require a medical exam. 'Simplified issue' or 'instant' policies (like Tomorrow's) use algorithms and database checks to make rapid decisions without exams.
Whole Life insurance is designed to last your entire life, as long as premiums are paid. It guarantees a death benefit and includes a savings component (cash value) that grows at a guaranteed rate. Because of these guarantees and the lifetime coverage, premiums for Whole Life are significantly higher than for Term Life. It is often used for estate planning or final expenses.