Life Insurance Terminology & Definitions

You might be thinking about buying life insurance. Or you might already have an insurance policy – one you purchased or perhaps one your employer provides.

Either way, you've probably discovered the language of life insurance can be a bit confusing.

But once you learn that language, you'll see that life insurance is a remarkably flexible financial instrument.

7 commonly used terms & what they mean

1. Term insurance.

Term life insurance covers a specified period of time, anywhere from a year to the time you reach age 65 or 70, depending on the contract. Such insurance provides a sense of assurance. If the term ends and it's not ever needed, the policy pays no benefits.

2. Permanent or whole insurance.

Also known as ordinary or standard, this refers to a policy you keep for your entire life and which pays a benefit when you pass on. Permanent insurance typically has fixed premiums and death benefits, though there are kinds that offer variable premiums and benefits.

3. Conversion.

Interchangeable with "conversion privilege" or "convertible." It refers to the option you have to continue your coverage after the term of your original policy expires. Term life insurance coverage may be able to be converted into permanent insurance regardless of your health – and without the need for another medical examination.

4. Cash value.

This type of benefit pays your beneficiary upon your death. But it also can accumulate value during the contract holder's lifetime. In other words, you may use it as a savings vehicle. You can treat the contract's cash value as a tax-sheltered investment (which means the interest and earnings on the policy aren't taxable) or as a fund from which to borrow^.* If you cancel the policy, you'll receive the accumulated cash value.

5. Rider.

This is a written supplemental agreement attached to the contract expanding or limiting the contract's benefits. Some riders require an additional fee. The idea is that the contract doesn't lock you in. It can provide flexibility as your needs and circumstances change.

6. Paid-up additions.

These are additional amounts of life insurance you may be able to purchase using dividends from your contract.

7. Modified endowment contract.

Commonly referred to as an MEC, this offers a unique option: The contract's death benefit that's paid to the beneficiary isn't taxed as income. One point to note: MECs have tax considerations that you'll want to explore with a tax advisor before you sign up.

Many of these words and phrases might seem bewildering at first. Your Thrivent Financial representative can help you decipher them in more detail and decide which options are right for you.

And even if they feel complicated, don't let that deter you from buying life insurance. Doing so is a smart move – and a loving one – for you and your family.