How to Understand Your Life Insurance Policy
Your guide to reading the fine print for life insurance policies, both term and whole/universal, from our friends at Policygenius.
Buying life insurance is an involved process, and chances are, once you’ve signed the dotted line, you know what you’re getting into. But if you have your policy in your hands and still have questions, you might need help deciphering what you’ve just purchased. This article helps to give you a starting place; it is not a replacement for professional financial advice on life insurance choices.
Your life insurance policy is a binding document, and, as such, it has a lot of legalese, but it’s nothing you can’t handle. Each carrier’s policies will look a little different, so if your policy isn’t in this exact order, that’s okay.
In general, there are three key parts of your life insurance policy:
Read on to learn more about each of these components if you’re considering looking at life insurance policies.
Life Insurance Declarations Page
This section goes by a few different names — it’s often also titled “policy specifications” or “schedule of benefits,”but the content is the same. This is the executive summary, with all the important information about you and your policy, including:
- Name(s) of the insured and the policy owner: This is usually the same person — you — but you could be buying a policy for someone else, in which case you’re the policy owner and they’re the insured
- Policy type: Either term or permanent
- Policy number: This makes you official
- Policy issue date: The date your policy is active, or in force
- Rate class or premium class: The class the underwriters have put you in based on your medical exam, history, and age
- Term length: For term insurance, the term of your policy
- Riders: Any riders you have will be listed here, and then detailed later in the policy
Policy Terms and Definitions
Also known as “general provisions,” the policy terms and definitions section of your life insurance contract is devoted to decoding some of the more complicated language that you’ll encounter in your policy.
Here are some of the terms likely to be included:
- Death benefit: The amount of money that will be paid out to your beneficiary or beneficiaries upon your death.
- Beneficiary: A recipient of your policy’s death benefit. Your beneficiary can be one person, multiple people, or even an organization. You choose who the death benefit goes to, and what percentage of the benefit each beneficiary receives.
- Coverage date or Policy date: The date that your policy is considered to be in force, or active. If you die on the effective date, then your policy will pay the death benefit.
- Insurance age: Your age on your birthday closest to the policy date.
- Premium: Amount you pay for your policy.
- Non-participating: Means that the policy doesn’t receive any dividends issued by the insurer.
You can learn more about life insurance definitions at Policygenius.
Also called the insuring agreement, this section puts to use all the terms and definitions from the previous section, summarizing the promises the insurance company is making to you and that you’re making to it (namely, how much you’re going to pay them, and how much they’ll pay your beneficiaries in the event of your death).
Premium and payment information
This section lists your premium amounts. For term life policies with level premiums that do not change as you age, this section will include monthly and annual premium amounts. For permanent policies, which act as investment vehicles and may have variable premiums, this section will showcase a table with the premiums over time.
This section also includes info on the grace period — the time you have after your premium due date during which your policy will remain active — and reinstatement terms, which will detail when and how you can reinstate your policy if you let it lapse. This section also usually has exclusions, for example, a suicide exclusion, which notes that the policy won’t pay a death benefit if you commit suicide within two years of the policy issue date.
Ownership and conversion rights
This section details your rights to transfer your policy or convert it to a permanent life policy. The language in this section will let you know what your options are.
This section will list out the person, people, or organizations that you’ve chosen to receive your death benefit when you die. It will also outline payment details for your beneficiaries, including whether they can choose a lump sum payment or installments.
This section details the riders listed on the policy specifications page. Each rider will be fully detailed here, including definitions, exceptions, and guidelines. Here are some common life insurance riders that may be built into your policy or that you may have opted to include:
- Disability income rider: Replaces your income if you become disabled and cannot work
- Disability waiver of premium: Waives premiums if you become disabled
- Term conversion rider: Allows you to convert a term life insurance policy to a permanent policy at the end of the term
- Acceleration of death benefit rider: Pays out all or a portion of the death benefit if you’re diagnosed with a terminal illness
- Long-term care rider: Like acceleration of death benefit rider, will pay out all or part of the death benefit to pay for the costs of long-term care services if you’re critically ill
- Critical illness rider: Pays a lump-sum benefit (subtracted from your death benefit) if you are diagnosed with a covered critical illness.
This article originally appeared on Policygenius, a licensed insurance broker. Betterment is not an insurance broker and this article is not insurance advice nor an offer for particular insurance products or services.
The content was not written by an insurance agent, and it is intended for informational purposes only, and it should not be considered legal or financial advice.
If you submit an application through Policygenius for your insurance needs, Betterment will receive a payment from Policygenius. Betterment makes no representations or recommendation regarding the insurance policies offered through Policygenius, and Betterment is not responsible for your decision to purchase a particular policy.
How Does Betterment Calculate Investment Returns?
Understanding and using time-weighted and money-weighted returns within your Betterment dashboard.
What Is A Life Insurance Beneficiary?
If you have an active life insurance policy when you die, your insurer will pay out a death benefit. The person or organization you choose to receive the death benefit is called the beneficiary.
How To Buy Life Insurance
Life insurance is meant to help complete your financial plan, but buying life insurance can be a confusing experience. Luckily, we’ve outlined eight steps you should take to purchase life insurance.
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