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Life insurance terms can be confusing when you first come across them, so learning the language of life insurance can help when you’re thinking about or shopping for a policy.

You may know that for many people, life insurance is important to have, and perhaps you’ve started some initial research into life insurance policies.

Learning common life insurance definitions can help you make an informed decision when looking into coverage options.

Life Insurance Terms

Discover life insurance definitions, simplified.

Accidental Death Benefit

If a life insurance policy includes an accidental death benefit, the cause of death will be examined to determine whether the insured’s death meets the policy’s definition of accidental. This is often a rider, or additional benefit for an additional fee, attached to the policy. An example of an accidental death could be one caused by a car crash, slip, or machinery.

Annuity

This is a contract in which the buyer deposits money with a life insurance company for investment on a tax-deferred basis. Annuities are designed to help protect the contract holder from the risk of outliving their income.

An annuity may include a death benefit that will pay the beneficiary a specified minimum amount.

Beneficiary

This is the person or entity designated to receive the death benefit from a life insurance policy or annuity contract.

Contestable Period

For up to two years, a life insurance company may deny payment of a claim to beneficiaries because of suicide or misrepresentation on an application — for example, if the insured was listed as a nonsmoker but smoked often and died of complications related to that.

Death Benefit

The amount that will be paid to the beneficiary upon the death of the insured. The phrase “death benefit” is common life insurance terminology you’ll see in a life insurance policy.

Evidence of Insurability

In order for you to qualify for a particular policy at a particular price, companies have the right to ask for information about your health and lifestyle. An insurance company will use this information when deciding on approval and rate. If you are overweight, a smoker, or have a history of health problems, your policy will likely cost more than someone without those issues.

Free Examination Period

Also known as the “free look period,” this is a 10- to 30-day window during which you can cancel your new policy without penalty and get a refund of premiums.

Group Life Insurance

This provides coverage to a group of people under one contract. Group contracts are often sold to businesses that want to provide life insurance for their employees. Group Life Insurance can also be sold to associations to cover their members.

Insured

This is the person whose life is insured by the policy. The insured may also be the policyholder.

Permanent Life Insurance

These kinds of policies can provide lifelong coverage and the opportunity to build cash value, which accumulates tax-deferred. Whole life and universal life insurance policies fall under this umbrella term. Permanent life insurance is more expensive and complicated than term life insurance.

Policy

This is the official, legal document that includes the terms of the policy owner’s insurance. The policy will name the insured, the policy owner, the death benefit, and the beneficiary.

Policyholder

The person who owns the life insurance policy. It can be the person who is insured by the policy.

Premium

The payment the customer makes to the insurance company to pay for the policy. It may be paid annually, semiannually, quarterly, or monthly.

Term Life Insurance

This type of life insurance offers coverage for a set number of years, or “term,” of the insured’s life, commonly 20 or 30 years. If the insured individual dies during the years of coverage, a death benefit will be paid to the beneficiaries. Term life insurance costs less than permanent life insurance.

Recommended: 8 Popular Types of Life Insurance for Any Age

Underwriting

Often viewed as a mysterious process, underwriting is simply when factors are evaluated relating to the applicant’s current health, medical history, lifestyle habits, hobbies, occupation, and financial profile to determine eligibility for coverage as well as what the appropriate premiums should be.

Universal Life Insurance

With this kind of permanent life insurance, policyholders may be able to adjust their premium payments and death benefits. The cash value gains vary depending on the type of universal life insurance policy purchased.

Variable Life Insurance

With variable life, another type of permanent life insurance, the death benefit and the cash value fluctuate according to the investment performance of a separate account fund.

Earnings accumulate tax-deferred. Fees and expenses can reduce the portion of premiums that go toward the cash value.

Whole Life Insurance

Whole life is another type of permanent cash value insurance. The premiums, rate of return on cash value, and death benefit are fixed and guaranteed. The cash value component grows tax-deferred. Whole life tends to be more expensive than other types of permanent insurance.

Recommended: Term vs. Whole Life Insurance

The Takeaway

Life insurance can be an important way to protect your loved ones’ financial future in the event of your death. While its terms can be a mouthful, they don’t have to be confusing. Understanding the definitions of life insurance can help you put a plan in place to protect your family.

If you’re shopping for life insurance, SoFi has partnered with Ladder to offer competitive term life insurance policies that are quick to set up and easy to understand. You can apply in just minutes and get an instant decision. As your circumstances change, you can easily change or cancel your policy with no fees and no hassles.

Photo credit: iStock/mapodile

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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If you have a savings goal that’s coming up in the not too distant future — such as the downpayment on a home, a bathroom reno, or plumping up an emergency fund — you may want to consider some good short-term savings options.

There isn’t a hard and fast definition of short-term savings, but it’s typically considered to be money you want to use in five years or less.

While there are a number of options for short-term savings, one of the best places to start stashing cash for a short-term goal can be a savings account. They can offer safety (so you shouldn’t lose any money), liquidity (allowing you to access money when needed), and growth (meaning they are interest-bearing).

But some of these accounts offer more liquidity and higher interest than others. With a little reading and research, you can start socking your cash away in the right place — and start moving closer to those short-term savings goals.

Should You Invest Short-Term Savings?

Depending on your short-term savings goals, a savings account may be a wise move. One significant downside to any cash savings account is that they tend to have relatively low-interest rates.

You might however wonder: Should I invest this money in stocks or a mutual fund in order to meet my short-term goals more quickly?

Generally speaking, for short-term money, your goal is not necessarily to maximize returns. It is to control the risk — to keep it safe — so that the money is available when it’s needed.

While everyone’s risk tolerance is different, the downside to investing in the market is that you might lose money in the short term. Investment returns start to “smooth out,” or return their average yield, over longer periods. Shorter periods tend to be volatile and unpredictable — especially in the stock market.

To invest in the short-term would require complete flexibility — if the market were to fall steeply, it would likely be best to wait it out and avoid realizing losses. Suddenly, you’re on the market’s timeline, not your own.

Because of this, these investments may be inappropriate for an emergency fund, which needs to be accessible at all times. The same goes for those financial goals with a hard deadline (such as wanting to use this money as a down payment in two years).

That said, there’s a trade-off. Many of the options for short-term savings may not keep up with increasing prices or inflation and its impact on cost of living. For money that isn’t needed for many years to come, it can be a smart idea to consider investing to grow beyond inflation.

If you’d prefer to avoid risk with your short-term savings, here are options to consider.

Recommended: 5 Types of Savings You Should Consider Having

Option 1: Online Savings Account

Online-only savings accounts, also sometimes referred to as high-yield savings accounts, are an increasingly popular option for short-term savings. As their name implies, these banks or financial institutions only operate online. Here’s the scoop:

•   That means no brick-and-mortar locations and no chatting up a banker face-to-face with employees. The upside: When you compare accounts offered by traditional banks vs. online banks, the latter typically pass the savings onto their clients in the form of a higher annual percentage yield (APY).

•   A potentially higher rate of interest isn’t the only reason to use online-only savings accounts. The websites and mobile apps for online accounts essentially serve as storefronts, so online financial institutions often devote lots of resources to make sure they’re optimized and easy to navigate.

•   Additionally, many online-only institutions don’t have monthly account fees, which can be a real burden for those at the start of their savings journey. (For example, some traditional banks might charge a fee when you balance drops below the minimum.)

•   Banking online doesn’t mean you have to forgo the conveniences of your neighborhood bank. You can typically still do all of the important banking duties, such as depositing checks (via mobile deposit, or snapping a picture of the check on your phone), moving money back and forth between accounts, and speaking with a customer service rep.

In the past, most online savings accounts were required by the Federal Reserve to limit withdrawals to six times per month. These rules are evolving; post-pandemic, some banks dropped this rule. Before you sign up, you’ll want to understand the rules for accessing your money.

Also, while online banking is now considered mainstream, it’s always smart to do a little background research before you open an online account. You may want to check, for instance, to make sure an institution has Federal Deposit Insurance Corp (FDIC) coverage, a government-guaranteed program that protects your money.

Option 2: Certificate of Deposit

A certificate of deposit (CD) is a savings account that holds a specific and fixed amount of money, and for a designated period of time, such as six months or three years. In exchange for the deposit, the bank pays a fixed rate of interest.

Generally, CDs with longer maturities offer higher interest rates. For example, a bank is typically going to be willing to pay more for a deposit that’s guaranteed for five years as compared to three months.
As a saver, you often get more rewards for the risk.

You may also want to keep in mind that the interest rate on a CD is locked in at the point of purchase, as opposed to the interest rate in a savings account (both traditional and online-only), which may fluctuate.
If you’re interested in locking in a certain rate, you may want to consider a CD. (Although be aware that you would be locking yourself into a lower rate, if rates rise.)

While savings accounts are designed to provide regular access to your money, CDs are not. Because CDs have a fixed timeframe, there may be a penalty to access the money before the period is over. And in exchange for the lock-up period, you may find that financial institutions pay slightly more interest than online-only savings accounts.

CDs can be a good option for people who don’t need to touch their short-term savings for a certain period of time. And they are typically FDIC-insured.

Option 3: Money Market Account

A money market account (MMA) is like a mix between a savings and a checking account.

These accounts, offered by banks and credit unions, can allow you to write checks (though you may be limited on how often) and may also have a debit card. (Savings accounts, whether online or at a traditional bank, typically do not allow for check-writing.

Returns on these accounts often beat those on traditional savings accounts. Depending on what’s happening in the economy overall, an MMA may be in line with that of an online-only bank account.

However, MMAs sometimes require higher minimum balances than other types of savings accounts. So, this might be a better option for those with more money to save.

MMAs are considered a safe choice since, like other types of savings accounts, they are typically covered by FDIC if held by a bank, and National Credit Union Administration (NCUA), if held by a credit union. (Although, it’s always a good idea to double-check insurance coverage to be sure.)

Keep in mind that MMAs differ from money market mutual funds, which are not FDIC- or NCUA-insured.

Option 4: Cash Management Account

A cash management account (CMA) is a cash account offered by a financial institution other than a bank or credit union. These accounts are designed to merge the services and features of checking, savings, and investment accounts, all into one offering.

While CMAs are typically offered by financial service providers that are not themselves technically classified as banks, they are still usually covered by FDIC deposit insurance like regular bank deposits — often through a partner bank.

Generally, CMAs function similarly to a traditional checking account, yet pay interest that is often higher than most savings accounts.

Some brokerage firms require a large minimum deposit to open a CMA, or may charge monthly fees for anyone under that minimum. Before opening a checking and savings account, it’s a good idea to ask about monthly fees and minimum balance requirements.

Also, since checking and savings account providers automatically “sweep” your unused cash into investments that pay dividends or interest (which maximizes the account’s profitability), you may want to make sure those sweep accounts are low-risk or FDIC-insured.

The Takeaway

Short-term savings is money that you likely will need in the not too-distant future, such as within two to five years.

There are a number of options for short-term savings, but some of the safest bets include online savings accounts and CDs, among others. These accounts tend to be low-risk, typically allow you to have access to your money when you need it, and can offer a higher return than a traditional savings or checking account.

If you’re saving for a large purchase (perhaps a wedding or a down payment on a home, consider signing up for a high yield bank account. SoFi’s Checks and Savings Account offers a competitive APY, charges no account fees, and let’s you spend and save in one convenient place.

Start working towards those short-terms savings goals today!

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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