Life Insurance Term Meaning

English Vocabulary Lesson

In this lesson, we will explain in simple words what is the meaning of term life insurance. We will discuss key insurance concepts, review a story dialogue that uses life insurance terms in context, and take a vocabulary quiz to test your understanding.
life insurance term meaning

Basic Insurance Vocabulary and Term Life Insurance

Insurance is an agreement between you and a company. You pay a certain amount of money regularly (for example every month), and the company (called an insurance company) agrees to pay a larger amount of money if something specific happens (for example, an injury, illness, accident, or death).
Insurance
If that thing does not happen, then the insurance company keeps the money. If that thing does happen, then the insurance company pays a large amount of money to you or the people you selected in advance.
A premium is the monthly cost of your insurance. The regular payments you make are called premiums.
premiums
Life insurance is a type of insurance that provides a payment to the people you have named as beneficiaries if you pass away (die). This can be used to help pay final expenses, such as funeral costs, or provide an income for your family.

Beneficiaries are the people you select to receive the money from your life insurance plan if you pass away.
Beneficiaries

Death benefit is the money that will be paid to the beneficiaries if you pass away. It is also called face value.
Death benefit
For example, Bob signs a life insurance agreement (called a life insurance policy). Bob pays a small amount of money each month (a premium). If Bob passes away, then Bob's family (who he selected as the beneficiaries) receive a large amount of money from the insurance company. This money is called a death benefit (or face value).

Let's say Bob's family receives $500,000. In that case, the death benefit / face value is $500,000.
(A policy is a signed document containing the agreement between you and the insurance company.)
life insurance policy
Term life insurance is a type of life insurance that covers you for a specific length of time, usually between 10 and 30 years. If you pass away during the term (time period) of your life insurance, the insurance company will pay a sum of money to the beneficiaries you have named. If you do not pass away during the term of your life insurance, then no payment is made.
Term life insurance


Life Insurance TERM versus WHOLE

Whole life insurance is much more expensive than term life insurance.

Whole life insurance is a type of insurance that is not limited to a specific term and lasts your entire life (as long as you keep paying your premiums). In addition, in a whole life insurance plan, some of the money you pay is invested by the insurance company.
Whole life insurance

To invest means to buy things with the hope of future profit. For example, if someone invests in a house, they buy the house with the hope that it will increase in value and be worth more money later.
investing

Let's say that Bob purchased a house at $200,000. Five years later, the house is worth $250,000. That means that Bob can make a profit of $50,000 (if he sells the house).
a house

In a whole life insurance plan, some of the money you pay is invested to make a profit. That part is called cash value.

Cash value is the money that is invested and grows over time in a whole life insurance plan.
Cash value in insurance

So in a whole life insurance plan, every payment covers the following:

  • keeping the insurance active so that beneficiaries can receive the death benefit in case the insured person passes away (the face value)

  • investing some of the money for the purpose of making a profit (cash value)

  • fees and different costs of running the insurance plan (insurance company costs, insurance agent costs, etc.)
    (An insurance agent is a person who sells insurance).
insurance agent

Example:

Bob purchases a whole life insurance policy. Every month he pays a premium of $100.
The face value of the insurance policy he purchased is $100,000. This means that if he passes away, his beneficiaries will receive $100,000 (the death benefit).

So the monthly payment of $100 goes to cover the future death benefit, the costs of the insurance company and insurance agent, and a small part is invested to generate future profit.

As a result, Bob manages to save $5000.

The way for Bob to get the money he saved is to cancel his life insurance. Then he can receive the $5000. But, he will no longer be insured, and no death benefit will be paid to his family if he passes away.

Bob could also withdraw some or all of his cash value. But that would reduce his death benefit or even eliminate it completely. (To withdraw means to take the money out.)
withdrawing

Another option Bob has is to apply for a loan against the cash value of his life insurance. That means that he can borrow some money from his insurance company because they have his money. In return, Bob will pay interest. (Interest is the money that you pay to borrow money from somebody else).
a loan

If Bob passes away, his family receives the death benefit ($100,000), but not the cash value ($5000). This means the insurance company keeps the money Bob saved (the $5000).

Story Dialogue to Demonstrate Using Life Insurance Terms in Context

Story Dialogue to Demonstrate Using Life Insurance Terms in Context
Bob: I need to get some life insurance. Do you know what type is best for me?

Agent: Well, it depends on how long you want to be covered.

Bob: I'm in my 30s and I want to make sure my family is taken care of if something happens to me.

Agent: Then a term life insurance plan might be best for you. It's less expensive than whole life insurance, but it only lasts for a specific length of time, usually between 10 and 30 years.

Bob: What about whole life insurance?

Agent: Whole life insurance lasts your entire life. It's much more expensive than term life insurance, but it also has a cash value that grows over time. So if you ever need to borrow money, you can borrow against the cash value.

Bob: Why do I need to borrow my own saved money and pay interest on it?

Agent: You don't have to borrow against it, but it's an option if you want access to the money you saved.

Bob: Hmm, I see. Why is whole life insurance much more expensive than term life insurance?

Agent: Well, whole life insurance has more fees and costs associated with it. Plus, insurance agents are paid more on whole life policies than on term policies.

Bob: Why is that?

Agent: Whole life insurance is permanent coverage, which means that the insurance company will most likely have to pay out on the policy at some point. In contrast, with term life insurance, there is only a small chance that the company will ever have to pay out, so premiums are lower.

Bob: I suppose they need to make a living too... Makes sense. So what's you best advice?

Agent: If you can afford it, I suggest getting a term life policy now and investing the difference. That way you'll have coverage if something happens to you, and your money will be growing while staying under your control. And who knows, maybe you'll accumulate enough assets that you eventually won't need life insurance at all! 

Bob: Thanks for being so truthful! That sounds like a solid plan. Let's get started!

Agent: Glad to help! Let's begin by filling out some paperwork...


This is an example of how life insurance terms can be used in context.
Disclaimer: This English vocabulary lesson is for informational and educational purposes only. It is not intended to be a substitute for professional advice.

Vocabulary Quiz: Test Your Understanding
1) What is the meaning of "cash value"?
A. An account within a life insurance policy that grows over time.
B. The amount of money paid out by an insurance company if the insured passes away.
C. A regular payment to the insurance company.

2) What is the meaning of "death benefit"?
A. An account within a life insurance policy that grows over time.
B. The amount of money paid out by an insurance company if the insured passes away.
C. A regular payment to the insurance company.

3) What is the meaning of "premium"?
A. An account within a life insurance policy that grows over time.
B. The amount of money paid out by an insurance company if the insured passes away.
C. A regular payment to the insurance company.

4) Which type of life insurance is usually much less expensive?
A. Whole life insurance
B. Term life insurance
C. They cost roughly the same

5) What is the meaning of "term life insurance"?
A. Life insurance that lasts your entire life.
B. Insurance coverage for a specific period of time.
C. An account within a life insurance policy that grows over time.

6) What is the meaning of "whole life insurance"?
A. Life insurance that lasts your entire life.
B. Insurance coverage for a specific period of time.
C. An account within a life insurance policy that grows over time.


Answers

Answers
1. A | 2. B | 3. C | 4. B | 5. B | 6. A