Life Insurance & Annuity Glossary
A comprehensive A-Z reference of 40+ life insurance and annuity terms, written in plain language by licensed insurance professionals. Definitions are sourced from NAIC, ACLI, and industry standards.
40 of 40 terms shown
Accelerated Death Benefit
A life insurance policy provision that allows the policyholder to receive a portion of the death benefit while still alive if diagnosed with a terminal illness, typically with a life expectancy of 12–24 months. This benefit is usually included at no additional cost in modern policies.
Accumulation Value
The total cash value accumulated within a permanent life insurance policy or annuity, including all premiums paid plus interest earned minus fees and charges. In indexed universal life (IUL) policies, the accumulation value reflects credited interest based on index performance.
Annuitant
The person whose life expectancy is used to calculate annuity payments. The annuitant is often, but not always, the same person as the contract owner. Annuity payments continue for the life of the annuitant.
Annuity
A financial contract between an individual and an insurance company in which the individual pays a lump sum or series of payments in exchange for guaranteed periodic income payments, either immediately or at a future date. Annuities are primarily used for retirement income planning.
Beneficiary
The person, persons, or entity (such as a trust) designated to receive the death benefit proceeds of a life insurance policy upon the death of the insured. Policyholders can name primary and contingent beneficiaries and change them at any time.
Cap Rate
In indexed universal life (IUL) insurance and fixed index annuities, the cap rate is the maximum rate of interest that will be credited to the policy's cash value in a given period, regardless of how well the underlying index performs. For example, if the S&P 500 returns 15% and the cap rate is 10%, the policyholder receives 10%.
Cash Surrender Value
The amount of money a policyholder receives if they voluntarily terminate (surrender) a permanent life insurance policy or annuity before its maturity date or before the insured event occurs. The cash surrender value equals the cash value minus any applicable surrender charges.
Cash Value
The savings or investment component of a permanent life insurance policy that accumulates on a tax-deferred basis over time. The policyholder can access the cash value through policy loans or withdrawals. Cash value grows at a guaranteed rate in whole life policies, and at a variable or indexed rate in universal life policies.
Contingent Beneficiary
A secondary beneficiary who receives the death benefit if the primary beneficiary predeceases the insured or is otherwise unable to receive the proceeds. Also called a secondary or backup beneficiary.
Conversion Privilege
A provision in a term life insurance policy that allows the policyholder to convert the term policy to a permanent life insurance policy (such as whole life) without providing evidence of insurability (no medical exam required). This is typically available during a specific window, often the first 10–20 years of the term.
Death Benefit
The amount of money paid by the insurance company to the designated beneficiary upon the death of the insured person. In most cases, the death benefit is received income-tax-free by the beneficiary under IRC Section 101(a). The death benefit is the core purpose of a life insurance policy.
Dividend
A return of excess premium paid to policyholders of participating whole life insurance policies issued by mutual insurance companies. Dividends are not guaranteed and are determined annually by the insurance company's board of directors based on the company's financial performance. Dividends can be taken as cash, used to reduce premiums, left to accumulate interest, or used to purchase additional paid-up coverage.
Face Amount
The stated amount of the death benefit on a life insurance policy, as specified in the policy contract. Also called the face value or coverage amount. The actual death benefit paid may differ from the face amount if there are outstanding policy loans, riders, or dividend additions.
Fixed Index Annuity (FIA)
A type of annuity contract that earns interest based on the performance of a specified market index (such as the S&P 500) while guaranteeing that the principal will not decrease due to market losses. FIAs typically have a floor rate (often 0–1%) and a cap rate that limits maximum gains. They are used primarily for retirement income planning and principal protection.
Floor Rate
In indexed universal life (IUL) insurance and fixed index annuities, the floor rate is the minimum guaranteed rate of interest that will be credited to the policy or contract, regardless of how poorly the underlying index performs. A typical floor rate is 0% or 1%, meaning the policyholder's cash value will never decrease due to negative index performance.
Grace Period
A specified period (typically 30–31 days) after a premium due date during which the policy remains in force even if the premium has not been paid. If the insured dies during the grace period, the death benefit is paid minus the overdue premium.
Guaranteed Issue
A type of life insurance policy that does not require a medical exam or health questionnaire for approval. Coverage is guaranteed regardless of health status, though coverage amounts are typically limited (often $5,000–$25,000) and premiums are higher than medically underwritten policies. A graded death benefit period (typically 2–3 years) usually applies.
Indexed Universal Life (IUL)
A type of permanent life insurance that combines a flexible death benefit with a cash value component that earns interest based on the performance of a stock market index (such as the S&P 500). IUL policies have a guaranteed floor rate (typically 0–1%) that protects against market losses and a cap rate that limits maximum gains. IUL is commonly used for tax-free retirement income planning under IRC Section 7702.
Insured
The person whose life is covered by the life insurance policy. The insured is not necessarily the policy owner or the premium payer — for example, a parent may own a policy on their child's life.
Irrevocable Life Insurance Trust (ILIT)
A type of irrevocable trust specifically designed to own a life insurance policy, removing the death benefit from the insured's taxable estate. When properly structured, the death benefit passes to the trust's beneficiaries free of both income tax and estate tax. ILITs are a common estate planning tool for high-net-worth individuals.
Lapse
The termination of a life insurance policy due to non-payment of premiums after the grace period has expired. When a policy lapses, coverage ends and no death benefit is payable. Some policies with cash value may have non-forfeiture options that prevent a complete lapse.
Living Benefits
Benefits that can be accessed by the policyholder while still alive, as opposed to the death benefit which is paid after death. Common living benefits include accelerated death benefit riders (for terminal illness), chronic illness riders, critical illness riders, and access to cash value through policy loans.
Modified Endowment Contract (MEC)
A life insurance policy that has been funded with more money than allowed under federal tax law (IRC Section 7702A), causing it to lose certain tax advantages. Specifically, withdrawals and loans from a MEC are taxed on a last-in, first-out (LIFO) basis and may be subject to a 10% penalty if taken before age 59½. Proper policy design avoids MEC status.
Mutual Insurance Company
An insurance company that is owned by its policyholders rather than by shareholders. Mutual companies may pay dividends to participating policyholders based on the company's financial performance. Major mutual life insurance companies include Northwestern Mutual, MassMutual, and New York Life.
Non-Forfeiture Options
Options available to the owner of a permanent life insurance policy who stops paying premiums. Common non-forfeiture options include: (1) cash surrender value, (2) reduced paid-up insurance (a lower face amount with no further premiums due), and (3) extended term insurance (the original face amount for a limited period). These options ensure the policyholder doesn't lose all value if they stop paying.
Paid-Up Additions (PUAs)
Small amounts of additional whole life insurance purchased using policy dividends. PUAs increase both the death benefit and the cash value of the policy without requiring additional underwriting. They are a tax-efficient way to grow the value of a whole life policy.
Participation Rate
In indexed universal life (IUL) and fixed index annuity (FIA) products, the participation rate determines what percentage of the index's gain is credited to the policy. For example, if the S&P 500 returns 10% and the participation rate is 80%, the credited interest would be 8% (before any cap is applied).
Policy Loan
A loan taken against the cash value of a permanent life insurance policy. Policy loans typically carry favorable interest rates, do not require credit checks, and are not reported to credit bureaus. The loan balance accrues interest and is deducted from the death benefit if not repaid. Under current IRS rules, policy loans are generally not considered taxable income.
Policy Owner
The person or entity that owns the life insurance policy and has the right to make changes to it, including naming beneficiaries, borrowing against cash value, and canceling the policy. The policy owner is often, but not always, the same person as the insured.
Rider
An optional provision added to a life insurance policy that provides additional benefits or modifies the policy's terms, usually for an additional premium. Common riders include waiver of premium, accidental death benefit, accelerated death benefit, chronic illness, children's term, and guaranteed insurability riders.
Simplified Issue
A type of life insurance underwriting that requires answering a health questionnaire but does not require a medical exam. Simplified issue policies offer faster approval (often within days) and higher coverage amounts than guaranteed issue policies, but lower amounts than fully underwritten policies. They are ideal for individuals who want quick coverage without the inconvenience of a medical exam.
Surrender Charge
A fee charged by the insurance company if a permanent life insurance policy or annuity is surrendered (canceled) during the surrender charge period, which typically lasts 5–15 years. Surrender charges usually decrease over time and eventually reach zero.
Surrender Period
The period of time during which surrender charges apply if a permanent life insurance policy or annuity is canceled. After the surrender period expires, the full cash value is available without penalty. Surrender periods typically range from 5 to 15 years depending on the product.
Term Life Insurance
A type of life insurance that provides coverage for a specific period of time (the 'term'), typically 10, 15, 20, 25, or 30 years. If the insured dies during the term, the beneficiary receives the death benefit. If the insured survives the term, coverage expires with no payout. Term life is the most affordable type of life insurance and does not accumulate cash value.
Underwriting
The process by which an insurance company evaluates the risk of insuring a particular applicant and determines the premium to charge. Life insurance underwriting typically considers age, health history, family medical history, lifestyle factors (smoking, hazardous activities), occupation, and financial information. The result is a risk classification (preferred plus, preferred, standard, substandard) that determines the premium rate.
Universal Life Insurance
A type of permanent life insurance that offers flexible premiums and an adjustable death benefit. Universal life policies accumulate cash value based on a credited interest rate, which may be fixed (traditional UL), tied to a market index (indexed UL/IUL), or invested in sub-accounts (variable UL). The policyholder can adjust premium payments and death benefit amounts within certain limits.
Whole Life Insurance
A type of permanent life insurance that provides coverage for the insured's entire lifetime, as long as premiums are paid. Whole life policies have level (fixed) premiums, a guaranteed death benefit, and a guaranteed cash value component that grows at a fixed rate on a tax-deferred basis. Participating whole life policies from mutual companies may also pay annual dividends.
Sources & References
- NAIC Consumer Guide to Life Insurance(Accessed Feb 2025)
- NAIC Consumer Guide to Annuities(Accessed Feb 2025)
- American Council of Life Insurers — Life Insurance Basics(Accessed Feb 2025)
- Insurance Information Institute — Life Insurance(Accessed Feb 2025)
- IRS Publication 525 — Taxable and Nontaxable Income(Accessed Feb 2025)
- IRS — IRC Section 7702 (Life Insurance Contract Defined)(Accessed Feb 2025)
All sources cited are publicly available and were verified at the time of publication. Evolve Legacy Group is committed to providing accurate, up-to-date information. See our Editorial Standards for more information.
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