Plan For Tomorrow | Understanding common life insurance and annuity terms
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Understanding common life insurance and annuity terms

Monday 4 December 2023 | Reading Time: 6 minutes

The financial world comes with many words and concepts, and understanding common terminology can be helpful in successful money management and making sound financial decisions. If you’re building a financial plan and exploring annuities and life insurance, there are several terms are associated with these products that may be confusing. To better understand these solutions and how they work, here are common annuity and life insurance terms you may come across when exploring these financial solutions.

What is life insurance?

To help financially protect a chosen beneficiary, life insurance can provide a death benefit if an insured passes away. The death benefit can be used as the beneficiary wants, including:

  •  Replacing lost income
  •  Passing on an inheritance
  •  Supplementing retirement income

Some life insurance policies also offer living benefits in the event of a being diagnosed with a qualifying illness.

Life insurance terms and definitions

Having life insurance coverage can help ensure a family can continue their current lifestyle if the unexpected happens. There are different types of life insurance policies to match different financial needs, life stages, and the length of coverage needed. Common terms used when talking about life insurance include:

Term life insurance

Provides life insurance coverage for a set period, often 10, 15, 20 years, or 30 years. Term plans are often the most affordable type of life insurance protection and can be a good fit for young families or anyone with temporary financial needs that need to be covered.

Permanent life insurance

Can provides life insurance coverage for a person’s entire life and may offer the opportunity to build cash value that can be accessed through policy loans or withdrawals.

Indexed universal life (IUL)

A type of life insurance that offers death benefit protection and the opportunity to build long-term cash value by earning interest linked to the movement of a selected stock market index over a specific period. Although growth is based on a stock market index, the premium is not invested in the market or the applicable index.

Effective date

The date when a life insurance policy goes into force. Once active, if the insured passes away after this date, the beneficiary may be eligible to receive the death benefit.

Underwriting

The process where an insurer determines the risk associated with insuring a life insurance applicant by evaluating medical history, health conditions, family history, and potentially bloodwork and exam results.

Policyowner

The owner of a life insurance policy and the only person who can name beneficiaries and make changes to the contract.

Insured

The person on which the life insurance policy is written.

Beneficiary

The person(s) who receive the death benefit of the life insurance policy.

Cash value

The portion of specific life insurance policies that can earn interest and may be accessed through withdrawals or policy loans for future financial needs.

Death benefit

The amount of money paid to beneficiaries following the insured's death.

Living benefits

Benefits that allow the policyowner to access a portion of the policy's death benefit while the insured is still living and if the insured is diagnosed with a qualifying illness. The money can be used to pay hospital bills, replace lost income during treatment, or for other financial needs.

Claim

The process following the death of an insured when the beneficiary files for a policy’s death benefit. An insurance company will typically require a completed claim kit that may include a death certificate, life proof of death claimant’s statement, and other documents.

What is an annuity?

An annuity is an insurance contract between an annuitant and an insurance company where, in exchange for a premium, the insurance company offers growth potential and the option for guaranteed income. The annuitant will receive payments immediately or in the future and can use this money to supplement their retirement income.

Annuity terms and definitions

Several types of annuities can meet a person’s specific needs, goals, and risk tolerance. Depending on the type of annuity chosen, there may be some general annuity terms, as well as terminology specific to the product. Here are several terms that are commonly used when discussing annuities:

Immediate annuity

A type of annuity often purchased with a lump sum payment where the annuitant begins receiving an income stream within a short period, often within five years.

Deferred annuity

A type of annuity that can offer tax-deferred growth to help build retirement savings and guarantees income as a lump sum or income stream later in life.

Variable annuity

A type of annuity that offers a range of investment options and may grow on a tax-deferred basis based on the performance of those chosen investment options. The contract value can fluctuate based on the ups and downs of the stock market.

Fixed annuity

In exchange for premium payments, this type of annuity earns a fixed rate of interest and can offer a stream of guaranteed income payments in retirement.

Annuitant

An annuitant is an individual who collects the payments of an annuity investment. The annuitant may be the owner of the annuity, or in cases where the annuity owner has passed away, the surviving spouse.

Premium

The money that an annuitant pays to an insurance company, either in a lump sum or multiple contributions, in exchange for income payments in the future.

Accumulation phase

The period when an annuity may earn interest and increase in value. This phase begins when premiums are paid.

Annuitization phase

The period of time when the annuitant begins to receive payments from the annuity, either in a lump sum or multiple income payments.

Beneficiary

The person who will receive the remaining contract value or premiums paid following the annuitant's death.

Rider

Optional additions to an annuity contract that can provide benefits that meet specific needs, such as long-term care, income, or leaving a legacy. Riders are typically added for an additional cost.

Withdrawal charge

Also known as a surrender fee, these charges require an annuitant to pay a fee if funds are withdrawn early or during a certain period of time.

Seeking help to boost financial knowledge

When trying to understand the terminology associated with financial products like annuities and life insurance, it can be beneficial to seek the guidance of a financial professional. As experts in their field, they can define terms using more common language, answer questions, and explain solutions in more detail. A deeper understanding of financial concepts and vocabulary can help make financial planning and money management more successful and allow you to plan for the future more confidently.


The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.

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