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Decoding Life Insurance Terms

Outset Financial
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Money in its physical form. In accounting, cash is money you can access immediately. For example, the money in your checking account is considered cash.

Cash and Life Insurance

Life Insurance is paid out to your beneficiary in tax free cash. If you accidentally die, your policy is paid out immediately in dollars versus if your money is in your home. If you leave your family a house it could take months to sell and delay your loved ones' means to pay expenses. It is unclear what the home value (the price the house will sell for minus the home owners loan and realtor fees) will actually be. Selling a home involves a lot of factors outside one’s control. A forced sale because your family does not have cash to pay for immediate expenses (bills, funeral, medical, and more) could mean the house leaves them much less cash than you expected. With a life insurance policy you know exactly how much your family will get immediately.

Cash Accumulation or Living Benefits

Set Life Policy (Whole life insurance, Universal Indexed Life aka permanent life insurance) has a cash value component that grows (compounds) over time. This is also called a Living Benefit. This money is yours and can be used anytime for:

  • Emergencies - e.g., fix the roof, repair the dishwasher
  • Opportunities - e.g., start a new business
  • Education - we prefer this to a 529 plan, because if your child doesn’t go to college or college is free, you can use the money for whatever you like
  • Income Supplement - e.g., you need money to pay extra expenses

Cash Value = Savings Element = Living Benefit

It equals how much money you have paid to the insurance company plus the tax deferred compound interest your money has earned.

Compound Interest

“Your money makes you money.” Interest accrues and is added to the accumulated interest from previous periods as well as the principal amount. In a compound account, you earn money on both the cash you have saved and the added interest earned.

When your money is in a compound account, it means a set or variable interest rate number has been assigned to the account. That number is the rate (or how much interest) your money is earning you by sitting in the account.

Death Benefit or Face Amount

Is the amount of money your insurance policy is worth which will be paid to your beneficiary.

Death Benefit and Taxes

There are none! The money paid out to family, friends, a business or charity is not taxed.

Estate Creation

When you are younger, you may not have had the time to build an estate (aka a lot of money) and the death benefit would leave your family with more money than your premature death allowed you to save and earn.

Fixed Payment (Premium) Schedule

This is the payment plan you agree to for paying for your policy, either once a month, quarterly even once a year.


Essentially, it’s the transfer of risk. Insurance is a contract that transfers the risk of a financial loss from one party (you) to the insurance company. The insurance provider agrees to cover certain losses if they occur.

Level Premium

OK, let’s break it down so it’s easy to understand. Level literally means “even.” Premium means “the payment required to keep a policy in force” (think ‘rent check’). So Level Premium means your payment stays at the same price for life. You never need to worry about applying for life insurance in the future.

Level Term Insurance

The simplest form of life insurance which has a death payout only. It is usually the least expensive /

Living Benefits

These are the financial advantages that are available to the policy owner (aka the person who buys the policy aka you) while they are alive! That’s right: Life insurance has benefits YOU can use while YOU’RE alive!

Mortgage Payoff

A whole life policy or Indexed Universal policy’s death benefits can be used to pay off a mortgage

Policy Surrender

You decide to give up the policy and reclaim the money you have paid in. When you do this (obviously) you give up the death benefit.


The payment required to keep an insurance policy in force (it’s sort of like rent or mortgage payments: as long as you keep paying it, you keep getting it).

Speculative Risk

You could lose or win. The stock market and gambling are examples of this kind of risk. Insurance does not cover these types of risk. It covers risks where only a loss can occur. You wreck your car, you are too sick to work, you die. Even though getting married is the biggest financial risk people take in their lives it can not be insured because there is an equal chance it will be a success or failure.

Survivor Protection

This is what most of us think of when we hear “life insurance.” It means that people are protected financially when they die.

Tax Deferred

While taxes will be owed on this money at some point, they are not due now.

Term Life Insurance

A policy that’s in place for a fixed duration of time. There is a defined start and end date for the policy (i.e., it is not necessarily in effect until you die, if you live beyond the end of the term).

Whole Life Insurance

A permanent insurance policy. As long as the premiums are paid, the policy is in place. If the policy is paid in full while you’re alive, it stays in effect until death.