Dave Ramsey Says You Need to Understand These Terms Before Buying Life Insurance

It's important to understand the finer points of life insurance.

When it comes to buying life insurance, consumers can't afford to make mistakes. That's because this insurance offers important protection for loved ones left behind after a death. Without the right coverage, surviving family members could struggle to pay funeral costs and other bills without the income the deceased was providing.

Unfortunately, the purchase process can be confusing -- especially for those who don't know the lingo.

The good news is that learning some of the basics can help ensure the right coverage is put in place. In particular, finance expert Dave Ramsey recommends understanding a few key terms before buying coverage.

Life insurance terms consumers should know

Ramsey recommends learning some industry-specific language before buying life insurance in order to make it easier to understand how this coverage will work and what different policies are offering. Specifically, there are seven specific terms Ramsey says consumers should make certain to understand. They are:

1. Death benefit: The death benefit is the money that is paid out by the insurance company when a covered person dies.
2. Beneficiaries: Beneficiaries are people who will receive the death benefit. As Ramsey explains, the beneficiary can be "anyone you name," but often the person who purchases coverage will name their spouse or children as their beneficiaries.
3. Claim: This is how the beneficiaries recover the death benefit when a death occurs. As Ramsey explains, it involves making a "formal request to the life insurance company to receive the death benefits." Every insurer has their own steps involved in making a claim.
4. Insured: Insured is the person whose life the policy covers and whose death prompts payment of the death benefit.
5. Policy: Ramsey describes the policy as "the contract between you and the insurance company." It spells out the terms of coverage.
6. Policyholder: This is the person who owns the policy. Usually, the insured and policyholder are the same, but that's not always the case. "You could also buy a policy for another person," Ramsey said.
7. Premium: The premiums are the amount paid for coverage. Policyholders can pay premiums annually or monthly.

As Ramsey explains, learning these definitions is "pretty simple stuff," but consumers need to know these "few common terms to really understand how life insurance works."

How to get the right life insurance coverage

Knowing the lingo mentioned above will help consumers make informed choices when shopping for and purchasing coverage. But that's just the first step. Getting the right coverage also involves:

• Choosing what type of life insurance to buy: Term life is more affordable than whole life, but offers coverage only for a limited time. Since most people only need coverage while loved ones are depending on their income, term life is often the better choice.
• Deciding how much coverage is needed: Ramsey recommends purchasing insurance to cover 10 to 12 times the insured person's annual income, but consumers may also wish to use the DIME formula and buy coverage to repay their debt, replace their income, cover their mortgage costs, and educate their kids.
• Shopping around for insurance coverage: Policy prices and terms can vary from one insurer to the next. Getting quotes from several different companies can make finding the right policy easier.

Knowing the language Ramsey recommends will be helpful during the process of shopping for life insurance coverage and making a final purchasing choice.