Common life insurance and annuity terms to know now for your future

The financial world comes with many words and concepts, and knowing how to translate common terminology can be helpful in successful money management and making sound financial decisions. If you’ve begun exploring life insurance and annuities, there are several terms associated with these products and how they work. To help understand how these solutions could fit into your financial plan, let’s define some of the common terms associated with life insurance basics and annuity basics.

What is life insurance and how does it work?

Life insurance is a contract between an insured individual and an insurance company that helps provide financial protection for their beneficiaries. By paying regular premiums, the policy provides a death benefit that is generally tax-free and is paid to a chosen beneficiary if the insured passes away. This life insurance benefit can then be used in many ways, such as replacing lost income, paying off a mortgage or other debts, covering funeral expenses, or passing on an inheritance.

Understanding how life insurance works also includes knowing the different types of coverage available. Policies may provide death benefit protection for a specific period of time, such as term life insurance, or for your entire life, known as permanent life insurance. Having coverage can be a valuable financial tool for individuals and families looking to help protect income, plan for the future, and help support long-term financial stability.

Understanding life insurance basics and terminology

A strong foundation in life insurance basics can play an important role in financial planning by helping provide financial support if the unexpected happens. By helping ease the financial burden on family members, they can continue their current lifestyle and keep future plans on track. There are different types of life insurance policies to match different financial needs, life stages, and the length of coverage needed.

Part of understanding life insurance is becoming familiar with common life insurance terminology used when discussing policies. Here are several key terms:

Beneficiary

The person(s) who receives the death benefit of the life insurance policy. Choosing a policy’s beneficiary is an important step in the life insurance process.

Cash value

The portion of specific permanent life insurance policies that can earn interest and may be accessed through withdrawals or policy loans for future 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, proof of death claimant’s statement, and other documents.

Death benefit

The amount of money paid to beneficiaries following the insured's death. When someone purchases a life insurance policy, they select a coverage amount that determines the amount that will be paid to beneficiaries.

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.

Indexed universal life (IUL)

A type of life insurance that offers death benefit protection and the potential 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.

Insured

The individual covered by the life insurance policy.

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.

Permanent life insurance

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

Policyowner

The owner of a life insurance policy and the only person who can name beneficiaries and make changes to the contract. They are also responsible for payment of the required premiums.

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.

Underwriting

Once a life insurance application is submitted, the insurance company will begin underwriting. This process is where the insurer determines the risk associated with insuring the applicant by evaluating their medical history, health conditions, family history, and potentially bloodwork and exam results.

What are annuities and how do they work?

Understanding annuities starts with seeing how these financial tools can turn savings into a steady income stream, typically for retirement. An annuity is an insurance contract that allows an individual, called the annuitant, to make a lump sum or a series of payments to an insurance company, which in return provides regular payouts, either immediately or at a future date.

A key part of understanding annuities is recognizing that annuities can grow over time, allowing the value of the contract to increase before payments begin. By offering growth potential along with options for guaranteed income, annuities can help individuals plan for retirement, supplement other income sources like pensions or Social Security benefits, and reduce the risk of outliving their savings.

Understanding annuity basics and terms

Different types of annuities can help meet a person’s specific financial goals, risk tolerances, and retirement planning needs. To boost your understanding of annuity basics, it’s helpful to become familiar with both general annuity terms and terminology specific to certain products. Knowing these terms can make it easier to compare options and make informed decisions. Here are several terms commonly used when discussing annuities.

Accumulation phase

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

Annuities vs Life Insurance

When comparing Annuities vs. life insurance, it’s important to recognize that they serve different, yet complementary, purposes in a financial plan. An annuity can provide a steady income stream during retirement and help ensure individuals do not outlive their savings, while life insurance offers a death benefit to help protect loved ones and maintain financial stability if the insured passes away. Some life insurance policies also offer living benefits or potentially, cash value accumulation that can help supplement retirement income, providing additional financial flexibility.

Together, these tools can address different financial risks. Annuities are designed to address the risk of living too long, and life insurance helps address the risk of dying too soon. Understanding how these products work and how they can fit into a broader financial strategy can empower individuals to make informed decisions for their future.

Embrace life insurance and annuity basics with North American by your side

When trying to understand annuity and life insurance terminology, it can be helpful to look to a knowledgeable resource to explain concepts in clear, everyday language and offer guidance you can trust. North American provides the tools necessary to help people protect their loved ones and boost retirement readiness. We offer a variety of flexible annuities that can help support your long‑term savings goals and provide income in retirement, including solutions that offer the right mix of growth potential and protection for your retirement assets. We also have life insurance options to help make sure your family is financially protected from life’s twists and turns. Contact North American today to start planning for your financial future.

Policy loans from life insurance policies generally are not subject to income tax, provided the contract is not a Modified Endowment Contract (MEC), as defined by Section 7702A of the Internal Revenue Code. A policy loan or withdrawal from a life insurance policy that is a MEC is taxable upon receipt to the extent cash value of the contract exceeds premium paid. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59½, with certain exceptions. Policy loans and withdrawals will reduce cash value and death benefit. Policy loans are subject to interest charges. Consult with and rely on your tax advisor or attorney on your specific situation. Income and growth on accumulated cash values is generally taxable only upon withdrawal. Adverse tax consequences may result if withdrawals exceed premiums paid into the policy. Withdrawals or surrenders made during a Surrender Charge period will be subject to withdrawal charges, processing fees, or surrender charges, and may reduce the ultimate death benefit and cash value. Surrender charges vary by product, issue age, sex, underwriting class, and policy year. Neither North American Company nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.

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