The Haven Life guide to complicated life insurance terms

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

In fact, most of what we write and post here has to do with demystifying our industry — that’s why we have a whole section devoted to life insurance basics. (We also have one called “Shopping for Life Insurance,” which also includes several articles devoted to defining key terms.) And yet, there are a few esoteric words and phrases — okay, more than a few — that don’t come around all that often, but when they do, they can be super confusing. Think of these as the deep cuts of the life insurance industry — the words that true aficionados (or actuaries) know and understand.

With that in mind, we quizzed our best-in-class Customer Success team to learn what life insurance terms and conditions they get asked about most often. Here is what those team members told us, and what those terms, you know, actually mean.

Decreasing Term

Simply put, a decreasing term life insurance product is a type of life insurance where the coverage amount gradually decreases over the life of the policy. With decreasing term, the benefit is largest when you start coverage (the time when your family would need it the most) and gradually decreases over the length of the policy as things like your personal earnings grow and 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, your loved ones will be taken care of financially — that’s why the amount of coverage you purchase should be enough to cover their needs, from paying down debts or a mortgage, to future tuition costs, to everyday expenses like clothes and groceries.

So naturally, it’s pretty important that you identify who exactly will receive your death benefit, otherwise known as your beneficiary. But you might have wondered — what if something happens to them before something happens to me? That’s where it gets complicated. If you have multiple grown children, for example, and one of them 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 if your deceased child had children of their own — kids who you probably want your death benefit to take care of — who would not receive a dime unless you have specifically named them as beneficiaries with your life insurance company. Instead, your policy would be split between your surviving children.

That’s where per stirpes comes in. The idea is that, if something happens to your beneficiary before you die, then your death benefit will be paid to that beneficiary’s heirs. (In Latin, per stirpes means “by roots”; in life insurance, it means paying your death benefit to your beneficiaries’ next-of-kin in the event that your beneficiary has died or is otherwise unable to receive the benefit.)

Why would you need that? Let’s use an example. Let’s say you’ve named your two children as your life insurance benficiaries. If one of your children predeceases you, per stirpes would stipulate that their portion of your life insurance cash benefit goes to their heirs. Without per stirpes, 100% of your death benefit would go to your other living child.

If per stirpes is something you would like to use 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 (so far), double indemnity refers to the payout of an additional death benefit in the case of accidental death. (If you’ve seen the movie — and you should, it’s great — you might remember it concerns a plot to murder someone so that it looks accidental, thereby allowing the murderer to get some extra scratch. And, you know, get away with murder.) This additional benefit can 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 death and dismemberment policy, which covers a range of gruesome injuries in addition to fatalities. This is usually offered by a life insurance company as a low-cost addition to a life insurance policy. Learn more about whether this type of insurance plan makes sense for you here.

TLIC (Temporary Life Insurance Contract)

Welcome to your first course of alphabet soup. This particular “dish” refers to the temporary life insurance coverage you can get in that important time after you have applied for a term life insurance plan (including taking a medical exam), but before your policy is in place. (After all, something could happen to you during that brief window.)

If you qualify for temporary life insurance coverage, it’s a little like … well, an appetizer. You typically get the same amount of coverage at the same monthly premium — and as soon as your first payment goes through, you receive TLIC. Think of it as a bridge between your former, uncovered life, and the bountiful, relaxing, fully covered life you’re about to lead.

Best of all, this metaphorical bridge is not-metaphorically risk-free — the cost is either rolled into your first life insurance premium, or refunded (if for some reason you are declined).

MEC (Modified Endowment Contract)

And now, for your dessert course in alphabet soup (or perhaps it’s more of a linguistic gazpacho?). Anyway, this one is especially complicated, given it concerns the IRS, federal tax law limits and the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), and the seven-pay test defined therein. Should we assume you need a refresher?

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

This could have significant implications if you are using your life 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 friends with your financial policy acumen. (Or… maybe not.)

Replacement

As one of our Customer Success team members put it, “I think a big pain point in explaining replacement is that many states have their own unique definition of what is considered a replacement, so answering the question completely requires state-specific knowledge.” In other words, this isn’t a term with a universal definition, which is what makes it so complicated to pin down.

But basically, you can start with this: Life insurance coverage is not a “set it and forget it” purchase, something you think about just once and then leave it alone until you need it (or, better yet, don’t need it). Instead, it’s something where your needs might vary over the years and even decades that follow your purchase. You might get promoted or have kids, buy a house or take on debt — any or all of those things might change how much coverage you need.

At the same time, if all policyholders were constantly changing their policies, the insurance industry itself would unravel — after all, the basic idea is that a pool of the insured pay a steady rate into a pool, and then the insurers take money from that pool to cover your beneficiaries if something happens to you. If that pool is constantly gaining and losing value, the reliability and predictability that helps both insurers and the insured would evaporate.

So where does replacement come in? Replacement is a word for replacing your policy — getting new coverage to take the place of your existing coverage. This is a heavily regulated practice, in large part to protect consumers. Getting a new policy might restart the contestability period, typically a two-year span in which the insurer can contest a claim if the insured dies not long after purchasing a policy. More complex policies, like whole life or universal life insurance 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 certain amount of time. These fees tend to decline as time goes by — meaning you’ll pay more for ending a policy sooner rather than later.)

One alternative should you need additional coverage, is to… buy additional coverage. (Keep in mind that you may have to take another medical exam to finalize additional coverage and, of course, you’ll be older, so your rate for additional 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 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…”), but it actually originates with a different department of the federal government: The Internal Revenue Service. It refers to the section of the law that permits the tax-free transfer of a certain insurance product, including a life insurance policy, for another one of like kind. (And yes, this connects to the replacement conversation directly above this one.)

There are rules and regulations about what does and does not qualify for a 1035 Exchange. So, if you are thinking of attempting to exchange your policy for another one, consider speaking with a tax advisor to understand the potential implications of doing so.

Insurance Age

It turns out, you’re younger than you think. Or maybe older. Either way. The point is, for many life insurers, your age is the age you’re nearest to. That is, if your next birthday is in two months, an insurer will round up. If your last birthday was two months ago, the insurer will … consider you your actual age, more or less. The reason for this is that, physically, if you are 32 and a half, you’re closer to being 33 than 32, and your insurer will classify you accordingly.

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

Paid-Up Additions

Paid-up additions (or paid-up additional insurance) is a way of purchasing additional insurance using dividends. The gist here is that you 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 can then use to buy even more coverage. Think of it as the circle of life…insurance.

It’s worth noting that dividends are not guaranteed, the insurance company may declare them and typically, they are paid only on whole life insurance policies.

Well, there you have it. You’re now on your way to becoming a certified expert in complicated life insurance terms. The next step in your education? Apply for coverage to help financially protect you and your family. And maybe planning a movie night with Double Indemnity to celebrate.