The Haven Life help guide to complicated life insurance coverage terms

No matter how easy you are making life insurance, there are always going to become some terms that are confusing. It's just the nature from the beast. In ways, part of our job is to take the inherent complications of life insurance coverage, including the jargon that surrounds our industry, and translate for you personally. In the end, you and your loved ones are the people who are actually affected by your lifetime insurance, so the least we could do is be sure you understand what it's all about.

In fact, the majority of what we write and post here is due to demystifying our industry – this is exactly why there exists a whole section devoted to life insurance coverage basics. (We also have one called “Shopping for Life Insurance,” which also includes several articles dedicated to defining terms.) But, there are some esoteric words and phrases – okay, more than a few – that do not come to see things all that often, but when they are doing, they may be super confusing. Think of these because the deep cuts of the life insurance industry – what that true aficionados (or actuaries) know and understand.

With that in your mind, we quizzed our best-in-class Customer Success team to understand what life insurance conditions and terms they get asked about usually. Here is what those associates told us, and what those terms, you realize, actually mean.

Decreasing Term

Simply put, a decreasing term life method is a kind of life insurance in which the coverage amount gradually decreases over the lifetime of the insurance policy. With decreasing term, the benefit is largest when you start coverage (the time whenever your family would want it the most) and gradually decreases over the length of the policy as such things as your personal earnings grow as well as your expenses (think mortgage or student loans) lessen as the policy owner.

Per Stirpes

Before we define this term, let's think about why you're buying life insurance in the first place. It's so that, in the unfortunate event of your death, all your family members will be taken care of financially – this is exactly why the quantity of coverage you buy should be enough to cover their demands, from paying down debts or perhaps a mortgage, to future tuition costs, to everyday expenses like clothes and groceries.

So naturally, it's pretty essential that you identify who exactly will receive your death benefit, otherwise known as your beneficiary. But you might have wondered – what if something happens for them before something happens to me? That's where it gets complicated. For those who have multiple grown children, for example, and one of these predeceases you, standard practice (known as per capita) means your death benefit will be split between your named beneficiaries – likely, only your surviving children. That's not ideal in case your deceased child had kids of their own – kids who you want your death benefit to take care of – who'd not receive a dime if you don't have specifically named them as beneficiaries together with your life insurance company. Instead, your policy would be split involving the surviving children.

That's where per stirpes is available in. The idea is the fact that, if tips over to your beneficiary before you die, then your death benefit will be paid to that particular beneficiary's heirs. (In Latin, per stirpes means “by roots”; in life insurance, this means paying your death benefit to your beneficiaries' next-of-kin in the event that your beneficiary has died or perhaps is otherwise unable to get the benefit.)

Why can you need that? Let's make use of an example. Let's imagine you've named your two children as the life insurance coverage benficiaries. If a person of the children predeceases you, per stirpes would stipulate that their portion of your life insurance cash benefit would go to their heirs. Without per stirpes, 100% of the death benefit visits your other living child.

If per stirpes is one thing you would like to use together with your policy, contact our Customer Success team and they can help walk you through the process.

Double Indemnity

The only life insurance term to share a name with an Academy Award-winning film (to date), double indemnity refers to the payout of an additional death benefit in the case of accidental death. (If you have seen the movie – and you should, it is good – you might remember it concerns a plot to murder someone in order that it looks accidental, thereby allowing the murderer to get additional scratch. And, you know, pull off murder.) This extra benefit could be worth the same amount as the policy's face value – hence the double in “double” indemnity.

This rider is often part of an accidental / accident death and dismemberment policy, which provides coverage for a variety of gruesome injuries along with fatalities. This is usually provided by a life insurance provider as a low-cost accessory for life insurance. Find out more about whether this type of insurance plan is sensible for you personally here.

TLIC (Temporary Life insurance coverage Contract)

Welcome to your first course of alphabet soup. This specific “dish” refers to the temporary life insurance coverage you will get for the reason that important time once you have applied for a term life insurance plan (including going for a health check), before your policy is in place. (In the end, something could affect you in that brief window.)

If you qualify for temporary life insurance coverage, it's a little like – well, an appetizer. You normally obtain the equivalent coverage at the same monthly premium – and as soon as the first payment experiences, you obtain TLIC. Think of it as a bridge involving the former, uncovered life, and also the bountiful, relaxing, fully covered life you're about to lead.

Best of, this metaphorical bridge is not-metaphorically risk-free – the cost is either rolled to your first life insurance coverage premium, or refunded (if for some reason you're declined).

MEC (Modified Endowment Contract)

And now, for the dessert course in alphabet soup (or maybe it's much more of a linguistic gazpacho?). Anyway, this one is especially complicated, given it concerns the government, federal tax law limits and also the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), and the seven-pay test defined therein. Don't let assume you'll need a refresher?

Basically, here's the offer: Should you pay more life insurance premiums over the life of a cash-value policy (such as a permanent life insurance coverage or whole life insurance policy) than the law allows, the tax benefits of such a policy is going to be limited. And your life insurance coverage, legally speaking, will be considered a modified endowment contract (or MEC). (Evidently, before 1988, everyone was using life policies to cover revenue from the IRS. What can we say? The '80s were a heady time.)

This might have significant implications if you work with your lifetime insurance policy as an investment vehicle. Also, the next time you're in a slow moment at a cocktail party – remember those? – feel free to bring up TAMRA '88, and dazzle your pals together with your financial policy acumen. (Or- maybe not.)

Replacement

As one of our Customer Success associates put it, “I think a large pain reason for explaining replacement is that many states have their own unique meaning of what's considered an alternative, so answering the issue completely requires state-specific knowledge.” Quite simply, this is not a phrase with a universal definition, that is important so complicated to resolve.

But basically, you can begin with this particular: Insurance coverage isn't a “set it and forget it” purchase, something think about just once by leaving it alone before you require it (or, even better, don't require it). Instead, it is something where your needs might vary over the years and even decades such as the following you buy the car. You can find promoted or have kids, purchase a house or take on debt – any or all of those things might change just how much coverage you'll need.

At the same time, if all policyholders were never stand still their policies, the insurance coverage industry itself would unravel – after all, the fundamental idea is that a swimming pool of the insured pay a stable rate into a pool, and so the insurers take money from that pool to pay for your beneficiaries if something happens for you. If that pool is continually gaining and losing value, the reliability and predictability that can help both insurers and also the insured would evaporate.

So where does replacement are available in? Replacement is really a word for replacing your policy – getting new coverage to take the host to your existing coverage. This can be a heavily regulated practice, mainly to protect consumers. Getting a new policy might restart the contestability period, typically a two-year span in which the insurer can contest claims if the insured dies shortly after buying a policy. More complex policies, like very existence or universal life policies, include the actual cash value – replacing those policies might cost you significant money in surrender fees. (True to its name, a surrender fee is charged when you “surrender” your policy, or withdraw cash value above a certain amount, within a specific amount of time. These fees have a tendency to decline over the years – meaning you'll pay more for ending a policy at some point.)

One alternative should you need additional coverage, is to… buy additional coverage. (Keep in mind that you may have to take another health check to finalize additional coverage and, obviously, you'll be older, so that your rate for further coverage will probably be higher.) This eliminates the risk of replacing a policy, and generally doesn't require learning and navigating your state's legal considerations, the way in which replacement does.

1035 Exchange

Sure, it sounds like an on-ramp for the Interstate (“first, get on the 1035 Exchange, then head south until you hit Peoria-“), however it actually originates with a different department of the authorities: The interior Revenue Service. It refers to the portion of the law that permits the tax-free transfer of a certain insurance product, together with a life insurance policy, for another one of like kind. (Company, this connects towards the replacement conversation directly above that one.)

There are rules and regulations about what might or might not be eligible for a a 1035 Exchange. So, if you are thinking of trying to exchange your insurance policy for a different one, consider talking to a tax advisor to understand the possibility implications of doing this.

Insurance Age

It turns out, you're younger than you believe. Or possibly older. In either case. The point is, for a lot of life insurers, how old you are is the age you're nearest to. That is, in case your next birthday is within two months, an insurer will round up. In case your last birthday was two months ago, the insurer will – consider you your actual age, pretty much. The reason for this is that, physically, if you're 32 and a half, you're nearer to being 33 than 32, and your insurer will classify you accordingly.

This difference means you may experience a slightly higher rate when you're quoted for any monthly term life insurance premium. However, if you are just shy of the half birthday, that's just one more reason the best time for you to buy life insurance is as soon as possible.

Paid-Up Additions

Paid-up additions (or paid-up additional insurance) is a method of purchasing additional insurance using dividends. The gist here's that you simply pay premiums, your insurer pays you dividends, you use those dividends to buy more insurance, that additional coverage can, in turn, earn dividends, which you'll then use to purchase even more coverage. Think of it as the circle of life…insurance.

It's important to note that dividends aren't guaranteed, the insurer may declare them and typically, they're paid only on whole life insurance policies.

Well, that's it. You're now on your way to becoming a certified expert in complicated life insurance coverage terms. The next step inside your education? Make an application for coverage to help financially protect you and your family. And maybe planning for a movie night with Double Indemnity to celebrate.