Policy Review A–Z

Plain-English definitions of the words you will meet when you review a life insurance policy you already own: on annual statements and in-force illustrations, in beneficiary and ownership forms, and in offers to replace, sell or surrender a policy. Definitions draw on state insurance regulators, NAIC model laws and IRS guidance, but rules vary by state and by policy, so your own contract controls. This is general information, not financial, insurance, tax or legal advice; for help with your situation, contact your state insurance department, a licensed insurance professional, or a tax or legal professional.

1035 exchange: A swap of one insurance contract for another that Internal Revenue Code section 1035 treats as tax-free: a life insurance contract can be exchanged for another life insurance contract, an endowment or annuity contract, or a qualified long-term care insurance contract, but the statute does not list an annuity-to-life-insurance exchange. A tax-free exchange generally still counts as a replacement under state insurance rules, and a contract received in exchange for a modified endowment contract is itself a modified endowment contract.; Related:Replacement Modified endowment contract Surrender
Accelerated death benefit: A policy feature or rider that pays part of the death benefit while the insured is still living, typically after a diagnosis of a terminal illness, and in some policies a specified disease or a long-term care need. Whatever is paid early generally comes out of what beneficiaries receive later, so ask how much would remain. Under IRS rules, certain accelerated payments are excluded from income when the insured is terminally or chronically ill.; Related:Rider Death benefit Viatical settlement
Annual policy statement: The yearly report an insurer sends on a policy's status. Under the NAIC Life Insurance Illustrations Model Regulation, a universal life report shows items such as policy value, the amounts credited and charged during the year, the current death benefit, net cash surrender value and any loans, and it must warn you if, on guaranteed assumptions, the policy will not stay in force until the next report without more premium. It is the starting point for any annual review.; Related:In-force illustration Policy summary Lapse
Automatic premium loan: A provision that, if a premium is still unpaid at the end of the grace period, automatically takes a policy loan from the cash value to pay it, which helps prevent an unintended lapse. New York's Department of Financial Services describes it as a provision the policy owner elects and can cancel at any time. Like any policy loan, it accrues interest and, if not repaid, reduces the death benefit.; Related:Policy loan Grace period Lapse
Beneficiary: The person or organization you name to receive the death benefit; you can name more than one and say what share each receives. The NAIC notes that insurers won't pay a minor directly and suggests considering a trust or your estate instead, and the Texas Department of Insurance notes that if no beneficiary is named, or the named beneficiary has died, the benefit is paid to your estate. Reviewing beneficiaries after births, marriages, divorces and deaths is one of the most important parts of a policy review.; Related:Contingent beneficiary Revocation on divorce Policy owner
Cash surrender value: The amount you would actually receive if you voluntarily ended a cash value policy before it pays a death or maturity benefit. New York's Department of Financial Services describes it as the policy's cash value minus any surrender charge and any outstanding loans and loan interest. Statements often label it net cash surrender value.; Related:Cash value Surrender charge Surrender
Cash value: The savings element that builds inside whole life, universal life and variable life policies, which you may be able to borrow against, withdraw from or use to pay premiums. Values are often low in a policy's early years. When the insured dies, beneficiaries generally receive the death benefit rather than the death benefit plus the cash value, although some whole life policies pay both.; Related:Cash surrender value Policy loan Whole life insurance
Contestable period: The window after a policy is issued during which the insurer can review the application and deny or reduce a claim for misstatements, even mistakes unrelated to the cause of death; the Texas Department of Insurance's guide (updated December 2025) describes a two-year period for Texas policies and notes that a reinstated policy starts a new one, and the NAIC's 2015 replacement model notice says claims on most new policies can be denied for inaccurate statements for up to the first two years. Policies also commonly exclude suicide during an early period. Replacing a policy generally restarts both clocks on the new coverage.; Related:Reinstatement Replacement Evidence of insurability
Contingent beneficiary: The person or organization next in line to receive the death benefit if the primary beneficiary has died or the primary designation is otherwise ineffective, for example after a revocation-on-divorce statute applies. Naming one helps keep the money from defaulting to your estate.; Related:Beneficiary Revocation on divorce
Cost of insurance: The charge deducted from a universal or variable life policy's account value to pay for the death benefit protection; New York's Department of Financial Services calls it a mortality deduction charge. If premiums paid are lower than these charges, the difference comes out of the cash value, and if the value reaches zero the policy can lapse. Current charges can be a non-guaranteed element, which is why rising charges show up on annual statements and in-force illustrations.; Related:Universal life insurance Guaranteed and non-guaranteed elements Lapse
Death benefit: The amount the insurer pays to beneficiaries when the insured dies while the policy is in force. Unpaid policy loans plus interest are subtracted first, so beneficiaries can receive less than the face amount. The IRS says life insurance proceeds paid because of the insured's death generally aren't taxable income, with exceptions such as policies transferred for a price.; Related:Face amount Policy loan Transfer for value
Dividend: A payment from a participating policy that is treated as a refund of part of the premium when the insurer's actual claims, expenses and investment results turn out better than assumed. Dividends are not guaranteed. Depending on the policy, they can be taken in cash, used to reduce premiums, left to accumulate at interest or used to buy paid-up additions.; Related:Whole life insurance Guaranteed and non-guaranteed elements
Evidence of insurability: Proof of your health and other risk factors, such as answers to medical questions or an exam, that an insurer uses to decide whether to accept a risk and at what price. It can be required to reinstate a lapsed policy, to buy a replacement policy or to add coverage. Features such as term conversion are valuable precisely because they skip this step.; Related:Reinstatement Term conversion Replacement
Face amount: The amount stated on the face of the policy that will be paid at death or at the policy's maturity. As New York's Department of Financial Services notes, it does not include extra amounts from riders such as accidental death or amounts bought with dividends, and loans reduce what is actually paid.; Related:Death benefit
Financed purchase: Buying a new policy with money withdrawn from, borrowed against or surrendered from an existing policy. The NAIC's replacement model regulation treats a financed purchase as a replacement and warns that it reduces the existing policy's value and may reduce the amount paid at the insured's death.; Related:Replacement Policy loan Twisting
Free look period: A short window after a new policy is delivered during which you can return it for a full refund. The NAIC's 2026 Life Insurance Buyer's Guide says it is usually 10 days and usually stated on the policy's first page. Lengths vary by state; the Texas Department of Insurance's guide (updated December 2025), for example, says Texas policies have a free-look period of at least 10 to 20 days. For a policy that replaces existing coverage, the NAIC's 2015 replacement model regulation calls for a 30-day right to return, and as of October 2026 the Illinois and North Carolina insurance departments describe 20 days for replacement policies in those states. Keep your old policy in force until the new one is issued and this period has passed.; Related:Replacement Notice regarding replacement
Grace period: Extra time after a premium's due date during which you can pay without losing coverage; your policy states its own period. In Texas, the Department of Insurance's guide (updated December 2025) says most policies have a 31-day grace period and that if the insured dies during it, the benefit is paid minus the premium owed. North Carolina's Department of Insurance says policies there provide at least 31 days, and the NAIC's universal life model (2001 edition) calls for at least 30 days on flexible premium universal life, or whatever state law requires. If the premium still isn't paid, the policy lapses unless a feature such as an automatic premium loan applies.; Related:Lapse Automatic premium loan Reinstatement
Guaranteed and non-guaranteed elements: The NAIC illustrations model regulation defines guaranteed elements as premiums, benefits, values, credits or charges that are "guaranteed and determined at issue," and non-guaranteed elements as those that are not. Current interest crediting rates, dividends and many current charges are non-guaranteed. When reviewing an illustration, compare the guaranteed column with the current one to see how much of the projected result is a promise.; Related:In-force illustration Cost of insurance Dividend
Guaranty association: A state-based safety net that continues coverage or pays claims, up to limits set by law, if a member life insurer becomes insolvent. Under the NAIC's Life and Health Insurance Guaranty Association Model Act (2018 edition), the association is made up of member insurers that are assessed to fund it. Each state sets its own limits and rules, so check with your state's association or insurance department. The Texas Department of Insurance warns that if you buy from an unlicensed company, your beneficiary might not get paid if the company fails.; Related:Policy owner
In-force illustration: A projection of an existing policy's future values and benefits, defined in the NAIC model regulation as an illustration given after the policy has been in force for at least one year. The NAIC's model notice for annual reports says owners "should not consider replacement of your policy or make changes in your coverage without requesting a current illustration," and that one can be requested annually without charge. For universal life, it is the clearest way to see whether current premiums will carry the policy to the age you need.; Related:Annual policy statement Guaranteed and non-guaranteed elements Replacement
Insurable interest: A legitimate interest in the insured person continuing to live, such as close family ties or a real financial stake, which is required to buy a policy on someone else's life. Immediate family members generally have it, and employers, business partners or major creditors may in some circumstances; as the NAIC puts it, a stranger cannot buy a policy to insure your life.; Related:Policy owner Life settlement
Investment in the contract: Your tax cost in a policy. IRS Publication 525 says that in most cases it is the total premiums you paid, less any refunded premiums, rebates, dividends or unrepaid loans that weren't included in your income. Proceeds above this amount on a surrender are taxable, so ask the insurer for the figure before you surrender or sell.; Related:Surrender Modified endowment contract 1035 exchange
Lapse: The end of a policy because a required premium was not paid. A universal life policy can also lapse when its cash value is used up by charges and loans, even if you have paid premiums for years. If a policy lapses with an outstanding loan, the unpaid loan may become taxable, so check before letting a policy with a loan run out.; Related:Grace period Reinstatement No-lapse guarantee
Life expectancy estimate: An evaluation of how long an insured person is likely to live, prepared by life expectancy underwriters rather than your own doctor, which life settlement buyers use to price offers. The SEC's investor bulletin on life settlements notes that most of these underwriters are not licensed or registered by state insurance regulators and that their methods are generally not disclosed. Selling a policy usually means sharing medical records with them.; Related:Life settlement Life settlement provider
Life Insurance Policy Locator: A free NAIC tool that helps beneficiaries and executors search for lost life insurance policies and annuities of someone who has died. State regulators also suggest checking bank records, old mail, former employers and state unclaimed property programs.; Related:Beneficiary
Life settlement: The sale of a life insurance policy you own to a third party for a cash payment that is less than the death benefit and, according to the SEC, generally more than the cash surrender value. The buyer becomes the owner, pays future premiums and collects the death benefit, so your beneficiaries get nothing. State regulators warn that proceeds may be taxable, can affect Medicaid or other benefit eligibility and may not be protected from creditors; compare several offers, check licensing with your state insurance department and be wary of unsolicited pitches.; Related:Life settlement provider Life settlement broker Viatical settlement
Life settlement broker: A licensed intermediary who shops your policy to one or more settlement providers on your behalf. In New York, the Department of Financial Services says a broker represents only you and must act in your best interests, and must disclose the compensation they will receive by the time the settlement contract is signed; Illinois also requires a disclosure that the broker owes you a fiduciary duty. Check the broker's license with your state insurance department.; Related:Life settlement Life settlement provider
Life settlement provider: The company that buys the policy in a life settlement, becomes its owner, pays the remaining premiums and receives the death benefit. The SEC notes that providers obtain life expectancy estimates to set their bids and may pool policies for investors, and that many, but not all, states regulate them. Check a provider's license or registration with your state insurance regulator before you sign.; Related:Life settlement Life expectancy estimate Life settlement broker
Modified endowment contract: A life insurance policy that fails the "7-pay test" in Internal Revenue Code section 7702A because more premium was paid in its first seven contract years than the test allows. A modified endowment contract (MEC) still pays a death benefit, but loans and withdrawals are taxed earnings-first and an additional tax may apply to the taxable part, with some exceptions. Reducing benefits during the first seven contract years, or a material change such as a death benefit increase, can trigger the test again, so ask the insurer before making changes.; Related:1035 exchange Policy loan Investment in the contract
No-lapse guarantee: A universal life feature that keeps the policy in force even if your premium payments aren't enough to cover the cost of insurance, as long as you meet its conditions. The Texas Department of Insurance says you must pay your premiums on time for the guarantee to apply, and the SEC's Investor.gov notes that on variable policies these features may only be available in certain years or if a certain level of premium is paid. A review should confirm the guarantee is still intact and what it requires.; Related:Universal life insurance Lapse Cost of insurance
Nonforfeiture options: The choices a cash value policy offers if you stop paying premiums: take the cash surrender value, continue reduced paid-up coverage or continue extended term coverage. Under the NAIC's Standard Nonforfeiture Law, a default option stated in the policy takes effect if you don't choose one within the policy's deadline.; Related:Reduced paid-up insurance Cash surrender value
Notice regarding replacement: A disclosure form that, under the NAIC's replacement model regulation, the agent must give you and you both sign when a new policy may replace existing coverage, listing each policy affected. It warns about new acquisition costs, possible surrender charges, new contestable and suicide periods, and the chance that your existing policy could be changed to meet your needs at less cost.; Related:Replacement Financed purchase Free look period
Policy loan: Money borrowed from the insurer using a policy's cash value as collateral, at a fixed or variable interest rate. Unpaid loans and interest are subtracted from the death benefit, can push a policy toward lapse, and, according to Washington's insurance commissioner, may create a tax bill if the policy terminates before the loan is repaid. When a loan is connected to replacing the policy, the NAIC replacement model requires the existing insurer to notify you that borrowing may affect the policy's guaranteed and non-guaranteed elements.; Related:Cash value Lapse Automatic premium loan
Policy owner: The person or entity that owns the policy and controls it: paying premiums, naming and changing beneficiaries, taking loans, surrendering or selling it. The owner is usually the insured, the person whose life is covered, but can be a relative, a trust, a partnership or a corporation.; Related:Beneficiary Insurable interest
Policy summary: A written statement of a policy's key current figures. For policies other than universal life, the NAIC replacement model lists items such as the current death benefit, annual premium, current cash surrender value, current dividend and its use, and any outstanding loan. When you are replacing a policy, the existing insurer must offer an in-force illustration or, if it can't produce one, a policy summary.; Related:In-force illustration Annual policy statement Replacement
Reduced paid-up insurance: A nonforfeiture option that uses a policy's cash value to keep the same type of coverage in force for a smaller amount with no further premiums. It can suit someone who no longer needs the full amount or can't keep paying premiums.; Related:Nonforfeiture options
Reinstatement: Restoring a lapsed policy, usually by paying overdue premiums with interest, repaying or reinstating loans, and providing satisfactory evidence of insurability. The Texas Department of Insurance's guide (updated December 2025) says most companies will reinstate a policy within a five-year period and that reinstatement starts a new contestable period; the California Department of Insurance notes that the insurer isn't obligated to reinstate.; Related:Lapse Evidence of insurability Contestable period
Replacement: Buying a new life insurance policy or annuity when, as part of the deal, an existing one is lapsed, surrendered, assigned, reduced, converted to a nonforfeiture option or used to finance the new purchase. State regulators caution that replacing can mean new acquisition costs, surrender charges, new contestable and suicide periods and higher premiums at an older age or worse health, and they advise not canceling a current policy until the new one is in force. Pressure to cash in an existing policy to buy a new product is a common warning sign of fraud against older consumers.; Related:Notice regarding replacement Financed purchase Twisting
Revocation on divorce: A rule in some states' laws that automatically cancels a former spouse's beneficiary designation when a marriage ends, so the money goes to the contingent beneficiary or your estate instead. In Sveen v. Melin (2018), the U.S. Supreme Court noted that 26 states had adopted laws like this and held that applying Minnesota's version to a policy bought before the law passed did not violate the Constitution's Contracts Clause. Washington's insurance commissioner, for example, says an ex-spouse there can't remain your beneficiary unless a court orders it or you name them again. Rules differ by state and by type of coverage, and a court order can require a former spouse to stay on as beneficiary, so update your beneficiary form yourself after a divorce rather than relying on the law.; Related:Beneficiary Contingent beneficiary Policy owner
Rider: An amendment to a policy that adds or changes benefits, such as a waiver of premium, accidental death, guaranteed insurability, accelerated death benefit or long-term care rider. Riders usually add cost, and their definitions and limits are spelled out in the rider itself.; Related:Waiver of premium rider Accelerated death benefit
Settlement options: The ways a death benefit can be paid other than a single lump sum, such as leaving it on deposit at interest, installments for a fixed period or amount, or lifetime income for the beneficiary. Either the owner or the beneficiary may choose, depending on the policy. According to IRS Publication 525, interest earned on proceeds left with the insurer may be taxable even though the death benefit itself generally is not.; Related:Beneficiary Death benefit
Settlement rescission period: The window after you sign a life or viatical settlement during which you can cancel it. In the NAIC's Viatical Settlements Model Act (2009 version), the seller can rescind before the earlier of 60 calendar days after signing or 30 calendar days after receiving the proceeds, generally by giving notice and repaying what was received. States set their own periods: as of October 2026, Illinois uses the earlier of 30 calendar days after signing or 15 calendar days after you're paid, and New York's regulator describes a right to cancel until 15 days after you receive the proceeds. Check your state's rules and the contract.; Related:Life settlement Viatical settlement
Settlement waiting period: A limit on selling a policy soon after it is issued. The NAIC's Viatical Settlements Model Act (2009 version) bars settlements within five years of issue unless an exception applies, such as terminal or chronic illness, the death of a spouse, divorce, retirement or disability. State laws on this differ; Illinois, for example, has barred settlements within two years of issue since July 1, 2010, unless specific conditions such as terminal or chronic illness are met.; Related:Life settlement Insurable interest
Surrender: Ending a cash value policy in exchange for its cash surrender value, which ends the coverage. IRS Publication 525 says you must include in income any proceeds that exceed your cost (investment in the contract), and the insurer should send a Form 1099-R showing the total proceeds and the taxable part. Before surrendering, compare other options such as reduced paid-up insurance, a loan, a 1035 exchange or a settlement, and confirm you won't need the coverage or can't get it again.; Related:Cash surrender value Investment in the contract Nonforfeiture options
Surrender charge: A fee deducted from the cash value if you surrender a policy, or sometimes withdraw from it, during its early years. These charges are typically largest in a policy's first years, and they are one reason state regulators warn that cash value policies tend to be worth more the longer you keep them.; Related:Cash surrender value Surrender Replacement
Term conversion: A right in many term policies to exchange the term coverage for a permanent policy without answering health questions, if you act within the policy's conversion period. Premiums for the permanent policy will be higher. Conversion can be valuable if your health has changed, so note the deadline at every review.; Related:Term life insurance Evidence of insurability
Term life insurance: Coverage for a set period, such as one year or a number of years, that pays the death benefit only if the insured dies during that term and generally builds no cash value. If you stop paying premiums, it generally lapses with nothing paid back. Premiums are usually level for the term and rise if you renew.; Related:Term conversion Whole life insurance
Transfer for value: A federal tax rule: if a policy, or an interest in one, is transferred for money or other value, the death benefit later excluded from the new owner's income is generally limited to what they paid plus later premiums, with certain exceptions. IRS Publication 525 notes that death proceeds generally aren't taxable unless the policy was turned over for a price or acquired in a "reportable policy sale." Get tax advice before selling or transferring a policy.; Related:Life settlement Death benefit
Twisting: Using misrepresentation, such as misquoting premiums or misstating benefits, to persuade someone to lapse, surrender, exchange or convert an existing policy, usually to buy a new one. The NAIC's Unfair Trade Practices Act lists this as an unfair practice, and its replacement model treats replacement-rule violations as twisting. If you think an agent pushed you into an unnecessary replacement, you can file a complaint with your state insurance department.; Related:Replacement Notice regarding replacement Financed purchase
Universal life insurance: Permanent coverage with flexible premiums and an adjustable death benefit, built on an account value that is credited with interest and charged for the cost of insurance and expenses. It stays in force only as long as the account value can cover those charges, so underfunding, loans or lower interest crediting can cause a lapse. This is the policy type where an annual review and in-force illustration matter most.; Related:Cost of insurance No-lapse guarantee In-force illustration
Variable life insurance: Permanent coverage whose cash value, and sometimes death benefit, depends on investment subaccounts you choose, such as stock and bond funds, so values can fall as well as rise. Variable universal life adds flexible premiums. These policies are registered securities sold with a prospectus describing each investment option; Texas, for example, requires sellers to hold a federal securities license as well as a state insurance license, and you can check a securities broker on FINRA BrokerCheck.; Related:Universal life insurance Cash value
Viatical settlement: The sale of a life insurance policy or its death benefit, a term that is used in different ways. The NAIC's model act uses it for policy sales generally, while IRS Publication 525 (for 2025 returns) uses it for sales to qualified providers when the insured is terminally ill, meaning a physician certifies death is reasonably expected within 24 months, or chronically ill; in those cases, amounts received may be excluded from income in full or within limits. Check your state's terms and rules, and get tax advice.; Related:Life settlement Accelerated death benefit Settlement rescission period
Waiver of premium rider: A rider that lets you stop paying premiums, while coverage continues, if you develop a covered illness or disability named in the rider. Check the rider's definition of disability, any waiting period before premiums are waived, and any age limits.; Related:Rider Grace period
Whole life insurance: Permanent coverage meant to last your entire life, usually with a set premium schedule and guaranteed cash values that build over time. Participating whole life policies may also pay dividends, which are not guaranteed. Some policies let you finish paying premiums over a shorter period, such as a set number of years.; Related:Cash value Dividend