401(k) Plan A profit-sharing plan established by an employer in which there are three types of contributions: employer contributions, employee contributions from after-tax income; and employee salary reduction (elective) contributions.
403(b) annuity A tax-deferred annuity in which an employer sets aside a portion of the money that would otherwise be part of an employee’s pay.
A
Absolute assignment. See Assignment, Absolute.
Accelerated death benefit. Provisions or riders involving the payment of all or a portion of a life insurance policy’s face amount prior to the insured’s death because of some specified, adverse medical condition of the insured.
Accidental bodily injury. A clause stating that a bodily injury must meet one test to be a covered loss: The result (the injury itself) must be unforeseen or unexpected.
Accidental Death Rider. An attachment to a life insurance policy that provides for payment of an additional benefit if the insured's death results from an accident as defined in the rider. Sometimes referred to as double indemnity because many such riders pay double the face amount of the policy to which they are attached.
Accidental Death and Dismemberment Rider. An attachment to a life insurance policy that provides for payment of an additional benefit if the insured's death results from an accident as defined in the rider or payment of an additional benefit for accidental loss of certain limbs and/or eyesight, depending upon the particular rider.
Accidental means. A clause stating that a bodily injury must meet two tests to be a covered loss: Both the cause of the injury and the result (the injury itself) must be unforeseen or unexpected.
Accumulation Period. For an annuity, the period during which money is paid into the annuity and left to earn interest until the liquidation or payout phase begins. Compare to Liquidation Phase.
Accumulation Units. Funds invested in a variable annuity; the number of accumulation units purchased depends upon the dollar amount invested and the value of a single accumulation unit at the time of investment. Investors never have fewer accumulation units than the number purchased, but the value of the accumulation units fluctuates with the performance of investments in the separate account. Compare to Annuity Units.
Actual authority or powers. With regard to authority extended to an agent acting on behalf of an insurance company, the authority that is expressly stated in a contract between the agent and the insurance company. Also called express authority.
Actuaries. Individuals who determine insurance premiums and reserves using their best estimates of future losses and expenses, with an eye towards competitiveness.
Adhesion. Contract of. Refers to the characteristic of an insurance policy that requires one party, the insured/ policyowner, to "adhere" or agree to terms stipulated by the other party, the insurer, with little or no option to negotiate the terms.
Admitted insurer. An insurance company that has been authorized by a state's insurance department to do business in that state. Also called an authorized insurer.
Adverse selection. From an insurance company's perspective, the selection and subsequent insuring of too many higher risk insureds as compared to insureds who pose a lower risk of loss.
Adjustable Premium Whole Life Insurance. See Universal Life Insurance.
Adjusted gross estate. The gross estate less all allowable deductions except bequests to the surviving spouse and to charities.
Administrator. A person appointed to administer a decedent’s estate.
Agency Authority. Authority to act on behalf of a principal, such as an insurance company, that the principal grants to its agents-those who represent it. Also called powers of agency. See Actual, Apparent, Express and Implied Authority
Agent. One who represents and acts on behalf of another known as the principal. In the insurance business, the agent acts on behalf of the insurance company, selling that company's policies. Compare to Broker.
Agent's Statement. A portion of an insurance application that is completed by the agent, providing any information the agent has about the applicant and the agent's opinion and recommendations about the applicant's insurability and suitability for coverage.
Aleatory Contract. Refers to the characteristic of an insurance policy that both parties to the contract do not necessarily offer equal value.
Alien Insurer. From the perspective of an insurance company domiciled in the United States, refers to an insurance company organized under the laws of another country.
American Agency System. See Independent Agent.
Amount at Risk. In a life insurance policy that accumulates cash values, refers to the difference between the face amount (death benefit), and the policy's cash value, which is the pure insurance protection.
Annual renewable term. Term policies with level death benefits and premiums increasing annually.
Annuitant. The person designated to receive income payments from an annuity during the liquidation phase.
Annuity. A product marketed by life insurance companies into which an individual, the annuitant, makes either a single large premium payment or a series of smaller payments over a longer period known as the accumulation phase, alter which a scheduled flow of income is paid for the annuitant's lifetime or for other periods according to the annuity contract.
Annuity Units. In a variable annuity, the fixed number of units used for determining the amount of income payments to the annuitant, resulting from the conversion of accumulation units purchased during the accumulation phase. Once fixed, the number of annuity units remains level throughout the liquidation phase, but the value of each unit fluctuates with the performance of investments in the separate account. Compare to Accumulation Units.
Apparent Authority or Powers. With regard to authority extended to an agent acting on behalf of an insurer, authority an agent is reasonably believed to have from the perspective of a third party.
Application. In the insurance business, the applicant's request for an insurance company to provide a life insurance policy. Includes information about the applicant that permits the insurer to decide whether to issue the policy as requested.
Assignment. Transfer of an insurance policy's ownership rights and/or benefits from one person to another.
Absolute. A policy assignment under which all rights and control are fully and permanently transferred to another person.
Collateral. A policy assignment to a creditor as security for a debt, permitting the creditor to first recover its outstanding loan if the policyowner defaults on the loan or if the insured dies before paying off the debt.
Conditional. A policy assignment subject to certain conditions as specified in the assignment and occurring only if those conditions actually occur.
Partial. A conditional policy assignment under which only a portion of the rights and/or benefits are assigned.
Assumed interest rate (AIR). The minimum interest rate that an insurance company has determined the cash value of a variable life insurance policy must earn in order to cover the cost of insurance.
Attained age. The current age of an insured person or the age the person will be at some time in the future. Compare to Original Age.
Authorized Insurer. An insurance company that has been admitted or authorized by a state's insurance department to do business in that state. Also called an admitted insurer.
Automatic Premium Loan Provision. An optional life insurance policy provision that allows the insurer to borrow from the policy's cash value to pay a premium the policyowner fails to pay during the grace period, thus keeping the policy in force. If the provision is activated, the premium payment is treated as a loan and interest is charged to the policyowner.
Automatic reinsurance treaty. Where the direct-writing company must transfer an amount in excess of its retention of each applicable insurance policy to the reinsuring company immediately upon payment of premium and the issuance of the policy, and the reinsurer must accept the transfer that falls within the scope of that agreement.
Aviation Exclusion. A provision commonly included in certain life insurance policy riders stating that the rider does not apply if death or disability occurs from an aviation accident unless the insured was a passenger on a regularly-scheduled flight of a commercial airline.
B
Back-End Loading. A method of charging sales and administrative expenses associated with a life insurance policy under which no charges are deducted from premium payments before they are deposited into the cash value account; instead, charges or loads apply later when certain trams-actions occur. Also see Front-End Loading, Loading and No-Load.
Bailout. A feature in some annuity contracts permitting the buyer to terminate the annuity if the interest rate the insurer pays falls below a rate specified in the contract. Buyer may withdraw all principal and interest earned without paying surrender charges.
Beneficiary. In a life insurance policy, the person or entity designated to receive the death benefit when the insured person dies.
Contingent or Class II. An alternate or second named beneficiary designated to receive the death benefit only if the primary beneficiary dies before the insured dies.
Irrevocable. A beneficiary designation that may never be changed; no policy transactions may occur without the consent of an irrevocable beneficiary.
Primary or Class I. The first named beneficiary designated to receive the death benefit when the insured dies.
Revocable. A beneficiary designation under which a different beneficiary may be named at any time at the policyowner's option; the most common type of beneficiary designation.
Binding Receipt. A type of conditional receipt under which the insurance company agrees to pay a small death benefit if the applicant dies within a specific limited period of time whether or not the insurance company would ultimately decide to issue the policy.
Branch Office. Refers to an insurance distribution arrangement whereby the insurance company owns the office and pays an agent to manage the office and other insurance company employees. Also called a managerial system.
Broker. (noun) One who is in the business of selling insurance, but who represents clients rather than insurance companies, seeking the best insurance policy for client needs. Compare to Agent. (verb) The act of submitting insurance applications to various insurers.
Business Continuation Insurance. Refers to insurance purchased for the purpose of funding a buy/sell agreement for business owners. Also called business insurance. Also see Buy/Sell Agreement.
Business Insurance. See Business Continuation insurance.
Buy/Sell Agreement. An agreement between business partners that if a business owner dies, his or her interest in the business will be sold to and purchased by specified others for a predetermined price. Life insurance policies are a common method for funding such an agreement. Also see Business Continuation Insurance.
Buy term and invest the difference. Where an individual purchases a low-cost term insurance policy instead of a cash-value policy, and invests the difference between the premium into a mutual fund or other investment media.
Bypass trust. A trust that hold property not left to the surviving spouse, also known as a credit shelter trust, non-marital trust and residuary trust.
C
Capital stock and surplus. the excess of company’s assets over its liabilities.
Career agents. Commissioned life insurance agents who primarily sell one company’s products.
Cash Accumulation Value. The amount credited to a cash value life insurance policy that the insurer pays interest on. Also referred to as cash value. Compare to Cash Surrender Value.
Cash or Deferred Arrangement (CODA). An arrangement whereby an employee defers receiving a portion of current income to allow the employer to contribute that portion to a retirement plan, especially a 401 (k) plan. Also called a salary reduction plan.
Cash Surrender Value. In a cash value life insurance policy, the amount of monies the policyowner would receive if the policy was surrendered. Compare to Cash Accumulation Value.
Cash Value. See Cash Accumulation Value and Cash Surrender Value.
Cash-value accumulation test. Test applying mainly to traditional cash-value policies requiring that the cash surrender value not at any time exceed the net single premium required to fund future contract benefits.
Cash-value corridor requirement. Under tax laws regarding life insurance policies, fulfilled if the policy’s death benefit at all times is at least equal to certain percentage multiples of the cash value.
Cash value life insurance. A life insurance policy that includes a savings feature whereby a part of each premium is paid into an account that builds cash values upon which the insurer pays interest. The cash value is owned by the policyowner and may be used as collateral for loans or paid to the policyowner upon surrendering the policy to the insurer. Also called permanent life insurance.
Catastrophe (catastrophic) insurance. Contract that covers multiple insured losses arising from a single accident or occurrence.
Certificate of Insurance. Under a group insurance plan, the evidence of insurance provided to the group members in lieu of an actual policy, with the policy or master contract being held by a master policyowner, such as an employer.
Certified Financial Planner (CFP). A designation awarded by the College of Financial Planning, or one who has earned the designation by meeting certain experience requirements, completing a specific course of study and successfully passing examinations on topics related to financial planning services and products.
Charitable remainder trust (CRT)”. A living, irrevocable tax-exempt trust in which the donor contributes property to the trust, reserving to himself or herself or someone else, an income stream from the trust, with the residual trust corpus ultimately passing to a charity.
Charitable remainder unitrust (CRUT). A trust the pays a fixed percentage of the fair market value of its assets to the income beneficiary at least annually. Trust assets are revalued each year, so the income will vary by year.
Chartered Financial Consultant (ChFC). A professional designation awarded by the American College, or an individual who has earned the designation by meeting experience requirements, completing a specific course of study and successfully passing examinations on topics related to financial planning services and products.
Chartered Life Underwriter (CLU). A professional designation awarded by the American College, or a life insurance agent who has earned the designation by having the required experience, completing a specified course of study and successfully passing examinations on topics related to life insurance company products and operations.
Classification. The process of assigning a proposed insured to a group of insureds of approximately the same expected loss probabilities as the proposed.
Close corporation; closed corporation; closely held business. Businesses whose ownership interests have no ready market. Usually owned and managed by same person(s), with small number of owners and ownership interest not readily marketable.
Coinsurance plan. A reinsurance plan under which the reinsurer assumes a proportionate share of the risk according to the terms that govern the original policy.
Collateral assignment. A temporary transfer of only some policy ownership rights to another person.
Collateral Assignment. See Assignment, Collateral.
Commingling, Holding policyowner’s money in an account with other funds of the insurer.
Commissioner of Insurance. The person designated to oversee a state's insurance department and to be responsible for enforcing the state's insurance laws and regulations. Called superintendent of insurance in some states.
Commissioner's Standard Ordinary Table (CSO). See Mortality Table.
Common Disaster Provision. A provision often included as part of the beneficiary designation of life insurance policies to resolve the question of whether an insured died before or after the primary beneficiary when both ultimately die from a common event; provides for policy proceeds to be held in trust for three months. If the primary beneficiary is still alive after three months, the death benefit is paid to that person. If the primary beneficiary dies before the three-month period ends, proceeds are paid to the contingent beneficiary.
Concealment. By an applicant or insured, the withholding of material information from the insurance company in order to gain a benefit that would not have been available had the insurance company known the concealed facts.
Conditional Assignment. See Assignment, Conditional.
Conditional Receipt. A receipt for premium payment given to the insurance policy applicant, stating the conditions under which the insurance will be considered to be effective as of the date of the receipt. Also see Binding Receipt.
Consanguinity. A blood relationship.
Consideration. Refers to an exchange of value in a contract. In an insurance contract, the policyowner's consideration is the premium paid and the insurer's consideration is the insurance protection provided.
Consumer reporting agency. US Fair Credit Reporting Act defines as an inspection company that collects and sells information about individual’s employment history, financial situation, credit-worthiness, character, personal characteristics, mode of living, and other possibly relevant personally identifiable information.
Contestable Period. A specified period, usually one or two years, beginning on the insurance policy effective date, during which the insurer may challenge or contest information provided by the applicant. After the contestable period ends, the insurer may not void the policy. Also see Incontestable Clause.
Contingent beneficiary. See Beneficiary, Contingent.
Contract. A legal agreement that is enforceable if it is between two or more competent parties, has a specific purpose and that purpose is legal, and value or consideration is included as part of the contract. An insurance policy is a contract.
Contributory Plan. A group insurance plan that requires at least a portion of the premium to be paid by participants in the plan. Participation is optional for each group member, but a high number, usually at least 75% of eligible group members must choose to participate. Compare to Noncontributory Plan.
Convertible Term Insurance. A type of term insurance that permits conversion of the policy to cash value life insurance within the time limits specified in the policy.
Conversion privilege, Group Life. In some group life insurance plans, a feature that allows the insured to convert the coverage to an individual cash value life insurance policy upon leaving the group, usually without proving insurability. The privilege generally must be exercised within 30 or 31 days after separation from the group.
Corporate Stock Redemption Plan. A method used by the owners of closely held corporations to allow the corporation to purchase shares of a deceased stockholder's stock as part of a buy/sell agreement that may be funded by life insurance. Also see Business Continuation Insurance and Buy/Sell Agreement.
Cost basis. Under income tax law, the sum of the premiums paid of a life insurance policy less the sum of any dividends received in cash or credited against the premiums.
Cost of insurance. The contributions each insured must make as his or her pro-rata share of death claims in any one year.
Cost of Living Rider (COLA). A rider that may be added to a life insurance policy giving the policyowner the option to purchase an additional amount of insurance to help offset the effects of inflation. The amount of insurance available is tied to the consumer price index and has a maximum upper limit per year. For whole life policies, the additional amount is usually provided by one-year term insurance. For universal life policies, the death benefit simply increases.
Cross-Purchase Plan. A type of buy/sell agreement under which each partner purchases and owns a separate life insurance policy on every other partner's life and receives the death benefit if any partner dies. Compare to Entity Purchase Plan.
Credit Life Insurance. A form of group insurance available to creditor-debtor groups wherein the creditor is the beneficiary of a term insurance policy on the debtor's life; used to protect the creditor's interest.
Crummey trust. A trust in which the annual $10,000 gift tax exclusion is available for gifts made to the trust if funds are withdrawn by a beneficiary within a limited time period.
Current Assumption Whole Life Insurance. See Interest-Sensitive Whole Life Insurance.
Current Declared Interest Rate. In a flexible premium deferred annuity, the interest rate the insurer is currently paying and will pay for a specified period. May be adjusted at the insurer's discretion and remains in effect for another specified period.
Current Interest Rate. In nontraditional life insurance policies, an interest rate comprised of both the minimum guaranteed interest rate specified in the policy and the excess interest rate which is an unspecified rate in excess of the guaranteed rate. Also, see Excess Interest Rate & Guaranteed Interest Rate.
D
Death Benefit. In a life insurance policy, the policy proceeds or amount that is paid to a beneficiary when the insured dies.
Death proceeds. The policy face amount and any additional insurance amounts paid by reason of the insured’s death, such as accidental death benefits and the face amount of any paid-up insurance or any term rider.
Debit insurance. Any type of insurance sold through the home collection of premium system of marketing.
Decreasing Term Insurance. A type of term insurance under which the death benefit gradually decreases over the term of the policy until it eventually reaches zero and the policy expires. Often used to cover a homeowner during the period of a mortgage. Available both as a separate policy and as a rider attached to a cash value life insurance policy. In some riders, the face amount may decrease to a certain amount at which point the amount remains at that level until the end of the term, when it abruptly drops to zero. Compare to Increasing Term Insurance and Level Term Insurance.
Deferred Annuity. A type of annuity under which the liquidation phase is deferred until some time in the future, with the buyer making flexible annuity premium payments that accumulate and earn interest until the liquidation phase begins. Also refers to deferred taxation of interest paid on the annuity. Compare to Immediate Annuity.
Defined Benefit Plan. A type of corporate retirement plan under which the amount of the retirement benefit is defined or established in advance according to a predetermined formula. Contributions are then made with the objective of providing the predetermined benefit. Compare to Defined Contribution Plan.
Defined Contribution Plan. A type of corporate retirement plan under which a specified formula is used to determine the amount of the contribution that will be made for participants, while the exact amount of future benefits remains unknown. Compare to Defined Benefit Plan.
Direct Recognition. A principle applied to participating life insurance policy dividend payments that takes into account the interest rate the insurer earns on an outstanding loan and the dividend interest rate the company assumes would have been earned on the borrowed cash value if that amount had not been borrowed. When direct recognition is applied, policies without loans outstanding are paid a higher dividend than those with loans outstanding.
Direct response. Distribution channel in which the customer deals directly with the insurer without any intervening intermediary or firm.
Direct Writer. Refers to an insurance distribution system wherein insurance companies deal directly with potential clients rather than using agents.
Disability. Inability to perform gainful employment. Total disability is defined in one of two ways for insurance purposes: (1) inability to perform the individual's previous work or work for which the individual is qualified by training or experience or (2)inability to perform any type of gainful employment.
Disability Income Rider. A type of rider that may be attached to a life insurance policy to provide a monthly income if the insured becomes disabled according to the insurer's definition of disability.
Disintermediation. When a person borrows at one rate and can invest the loan proceeds at a higher rate.
Dismemberment. Refers to the loss of certain parts of the body. In the accidental death and dismemberment rider, typically refers to the loss of certain limbs and is used inclusively for loss of eyesight when such loss is covered. Also see Accidental Death and Dismemberment Rider.
Distribution system. Any of several different methods by which life insurance products are marketed.
Dividend. In a participating life insurance policy, a refund to the policyowner of excess premiums paid when an insurer experiences more profit than anticipated due to savings on operating expenses, improved mortality or higher investment returns.
Dividend options. In a participating life insurance policy, any one of several options under which the policyowner may choose to use dividends, such as: cash dividend, premium reduction, paid-up policy, paid-up additions, accumulation at interest or one-year term insurance.
Domestic insurer. From the perspective of a given state, an insurance company organized and operating under the laws of that particular state. Compare to Alien Insurer and Foreign Insurer.
Domiciled. In reference to an insurance company, indicates the location of the home office, the state where the insurance company was organized, e.g., "domiciled in Ohio."
Double Indemnity Rider. See Accidental Death Rider.
Downstream holding company. Formed by a mutual insurance company and sits in the middle of the intercorporate structure.
E
Education IRA. A tax-favored trust of custodial account created to pay the cost of a beneficiary’s education.
Eligibility period. Under a group insurance plan, a short period after employees first become eligible to participate in the plan, often 30 days, during which employees must enroll in order to acquire coverage without proving insurability.
Employee Retirement Security Act (ERISA). Federal law enacted to protect the interests of participants in employee benefit plans as well as the interests of the beneficiaries.
Endorsement. Technically and historically, a provision added to an insurance policy by being written on the policy form. Often used inter-changeably with the term “rider” to indicate a provision added by attachment to the policy.
Endowment. A promise to pay a certain sum in case the insured dies within the term of the policy or the same sum if the insured survives the period.
Entity Purchase Plan. A type of buy/sell agreement under which a business partnership as an entity purchases and owns a life insurance policy on the life of each partner. If a partner dies, the death benefit is paid to the partnership entity. Compare to Cross-Purchase Plan.
Errors and Omissions Insurance (E&O). A form of professional liability insurance that insurance agents may purchase to cover their liability to others for inadvertent mistakes agents might make, causing loss to clients.
Escheat. To transfer all of a decedent’s property to the state when there is no Will and no relatives exist.
Estate Tax. See Federal Estate Tax.
Estoppel. Refers to the principle that a party who has waived a right, either expressly or by implication, cannot later request reinstatement of that right.
Excess Interest Rate. In nontraditional life insurance policies, an unspecified rate of interest, established at the insurer's discretion and subject to change, over and above the guaranteed interest rate. Usually related to a known financial index such as the yield on U.S. Treasury securities. Also see Current Interest Rate and Guaranteed Interest Rate.
Excess interest Whole Life Insurance. See Interest-Sensitive Whole Life Insurance.
Exclusion Ratio. Under the rules for liquidating an annuity, refers to a method for determining what portion of each annuity payment represents return of premium, and is therefore untaxed, and what portion represents interest, and is subject to taxation.
Executive bonus plan. An arrangement under which t he employer pays for individually issued life insurance for certain selected employees.
Express Authority or Power. See Actual Authority or Power.
Extended Term Insurance. A nonforfeiture option that maintains the policy's death benefit amount by using the cash value to pay for it as term insurance for whatever period the available cash will provide at the insured's attained age. Any outstanding policy loan is deducted from the death benefit amount and from the cash value before determining the length of the term.
F
Face Amount. The dollar amount shown on the front or face of a life insurance policy, indicating the death benefit-the amount that will be paid to beneficiaries if the insured person dies. The amount actually paid might be different if a policy loan is outstanding or if riders or other provisions increase or decrease the death benefit.
Facultative reinsurance. Reinsurance basis under which each application is underwritten separately by the reinsurer.
Fair Credit Reporting Act. A federal law designed to protect consumers by providing that they be notified if they are being investigated by an investigative agency and establishing certain procedures that allow consumers to challenge and correct errors in information kept on file about them.
Family coverage. Usually refers to a combination of permanent and term insurance under which the family breadwinner is covered by cash value life insurance and other family members' lives are covered by term insurance.
Family income coverage. A combination of permanent and term insurance providing that, when the insured dies, the cash value life insurance death benefit is paid in a lump sure followed by installment payments of the term insurance as income to the survivors. Under some policies, the installment income from the term insurance is paid first and when the income period expires, the lump sum benefit from the cash value life insurance is paid.
Federal Estate Tax. A tax the federal government assesses at death on estates valued at more than $600,000. Life insurance proceeds can avoid federal estate taxation if the insured has no incidents of ownership and if the estate is not the beneficiary of the policy.
Fiduciary. Refers either to people entrusted to handle matters involving others' financial affairs or to the actions of people so entrusted. Life insurance agents are considered to have fiduciary responsibilities in their relationships with clients.
First to die insurance. Pays the face amount of the policy on the first death of one or two or more insureds covered by the policy – also known as joint life insurance.
Fixed amount temporary annuity. An annuity liquidation method that guarantees income payments of a specified amount only until the annuity funds are depleted, rather than for the annuitant's lifetime.
Fixed-amount option. An annuity certain with the income amount fixed.
Fixed Annuity. See Flexible Premium Deferred Annuity.
Fixed period temporary annuity. An annuity liquidation method that guarantees to pay income for a specified period of time, with the amount of each income payment calculated to extend over that period, rather than for the annuitant's lifetime.
Fixed-period option. An annuity certain with the time period fixed.
Flexible-Premium Adjustable Life Insurance. See Universal Life Insurance.
Flexible Premium Deferred Annuity (FPL). An annuity purchased by means of premiums that are flexible in both amount and frequency of payment and for which payout is deferred until some future date. Deferred also refers to deferral of interest taxation until payout. Also called fixed annuity.
Flexible-Premium Variable Life Insurance. See Variable Universal Life Insurance.
Foreign insurer. From the perspective of a given state, an insurance company operating within that state, but organized under the laws of a different state. Compare to Alien Insurer and Domestic Insurer.
Fraternal Insurance Company. A type of insurer organized on a nonprofit basis solely for the benefit of its members; may not issue stock; must have elected officials, a lodge system and ritualistic work. Also called fraternal benefit societies and fraternal orders.
Fraud. In regard to insurance, refers to any illegal act, including misrepresentation or concealment, designed to deceive the insurance company in order to gain a benefit.
Free Look Provision. A life insurance policy provision required by most states, allowing the policyowner to inspect the policy for a specified period of time, often 10, 15, 20 or 30 clays, and return the policy to the insurer, if desired, for a refund of the entire premium.
Front-end loading. A method of charging sales and administrative expenses against a policy by deducting a certain percentage from each premium payment before the payment is credited to the cash value account. Also see Back-End Loading, Loading and No-Load.
G
GAAP reserves. Life insurance reserves that are calculated using the insurer’s realistic expectations for morbidity, mortality, persistency, and investment return on a net-level premium basis.
General Agent (GA). A person operating within a life insurance distribution system as an independent business person rather than an employee of an insurer, under a contractual agreement with one or more insurance companies to sell their products. General agents usually hire other agents and share in their commissions.
General partnership. A partnership in which each partner is actively involved in the management of the firm and is fully liable for partnership obligations.
Generation Skipping Transfer Tax (GST), Tax levied when a property interest is transferred to persons who are two or more generations younger than the transferor.
Grace period. In a life insurance policy, refers to a stipulated period of time, usually 30 or 31 days, after the premium due date, during which the policyowner may pay the premium and keep the policy in force.
Graded premium. A method of charging premiums for life insurance policies under which the amount of premium is relatively low at the beginning of the policy period and gradually rises over the years to a certain point, at which time the premiums reach a level that is maintained for the duration of the policy.
Gross estate. The value of all property or interests in property owned or controlled by the deceased person.
Gross premium. The premium amount a policyowner actually pays, based upon mortality rates, assumed interest on investments and operating expenses. Compare to Net Premium.
Group Insurance. Various insurance plans made available to people who are members of a common group, such as employer-employee groups, multiple employer-employee groups, organized unions, associations and creditor- debtor groups. The employer or other entity is the master policyowner and administers the plan on behalf of the group members.
Group permanent insurance. A group contract under which benefits, usually including a life insurance feature, are funded by a level-premium group annuity contract issued to the employer with certificates of coverage given to the employees.
Guaranteed Insurability Rider. An attachment to a cash value life insurance policy that guarantees the insured may purchase additional amounts of insurance without proving insurability on specified option dates in the future, with the option ending when the insured reaches an age stipulated by the insurer, often age 40. Specifies minimum and maximum amounts that may be purchased. Rates are at the insured's attained age. Also called purchase option rider.
Guaranteed interest rate. In a cash value life insurance policy, a relatively low specified interest rate the insurer guarantees will be paid on the accumulating cash values. Also see Current Interest Rate and Excess Interest Rate.
Guideline level premium. Part of income tax law under which a premium is computed using interest at the greater rate of 4% or the rate guaranteed in the contract.
H
Holding company. Financial corporations that own or control one or more subsidiary companies.
Home Office. Refers to the primary location of an insurance company in the state where the insurer was organized and operates.
HR-10 Plan. See Keogh Plan.
Human life value. A measure of the actual future earnings or values of services of an individual, the capitalized value of an individual’s future net earnings after subtracting self-maintenance costs, such as food, clothing and shelter.
I
Immediate Annuity. An annuity purchased with a large single premium, permitting income payments to begin as soon as the annuitant desires; insurers often allow the annuitant to defer the first income payment for up to five years. Always a single-premium annuity funded by one large lump sum deposit. Also called Single Premium Immediate Annuity.
Impaired Risk. See Substandard Risk
Implied authority or powers. With regard to authority extended to an agent acting on behalf of an insurer, authority that is implied, although not expressly granted, by the agent's contractual agreement with the principal.
Incontestable clause. A life insurance policy provision specifying a certain period of time, usually one or two years from the policy's effective date, after which the insurer may no longer challenge or contest any statements or information from the applicant that Would allow the insurer to void the policy.
Increasing Term Insurance. A type of term insurance, typically available only as a rider to a cash value life insurance policy, providing for an ever-increasing amount of insurance during the specified term. The increased death benefit resulting from increasing term may be paid to beneficiaries either as a refund of premiums paid for the term rider or as a return of the cash values, in addition to the face amount.
Indemnity. A policy in which the insured suffering a loss covered under the policy, are entitled to recover an amount not greater than that which would be necessary to place the insured in the same pre-loss financial position.
Independent Agent. An individual who operates under an insurance distribution system as an independent, self-employed person, rather than as an employee of an insurance company, and who is appointed by and represents any number of insurance companies that pay commissions to the agent for sales of their products. This method of marketing insurance is also called the American Agency System.
Indeterminate premium. A life insurance policy premium that fluctuates as the interest rate changes.
Individual life insurance. Policy written on the life of a single person as differentiated from group insurance that is written on many lives. Compare to Group Insurance.
Individual Retirement Account/Annuity. A tax-favored retirement plan available only to individuals and their spouses who meet certain legal requirements for establishing such plans. Maximum deductible amounts are specified according to income, phasing out entirely at specified income levels. Also see Spousal IRA.
Industrial insurance. Life and health insurance policies issued to individuals in small amounts, usually less than $2,000, with premiums collected on a weekly or monthly basis at the home of the policyowner.
Inflation protection. Ensures that the benefit amount increases with the cost of living.
Initial reserve. The reserve at the beginning of the policy year, which equals the terminal reserve for the preceding year, increased by the net-level annual premium for the current year.
Inspection company. See Consumer reporting agency.
Insurability. Refers primarily to medical and health factors, but also to a variety of other characteristics examined by an insurance company to determine whether a particular individual is one whose life the insurance company is willing to insure.
Insurable interest. When an individual can reasonably expect to receive pecuniary gain from that person’s continued life, or conversely, if he or she would suffer financial loss on the person’s death. Expectation of monetary loss that can be covered by insurance.
Insurance. A device to spread the cost of financial loss among many people by transferring the cost through an insurance company so the financial loss to anyone individual is small.
Insurance adviser. One who provides advice about selecting appropriate insurance products to members of the public in exchange for a fee. Not employed by or having an agency contract with an insurance company.
Insuring clause. In a life insurance policy, a provision stating the general promises of the insurer to pay the death benefit when the insured dies.
Inter vivos. A trust that is created during life, also known as a living trust.
Interest option. A settlement option in which the proceeds remain with the insurer and a guaranteed amount or interest earned on those proceeds are paid to the beneficiary.
Interest-out-first Rule. An Internal Revenue Service rule that applies to premature withdrawals from annuities, requiring that if the cash value of the annuity is greater than the premiums paid at the time of withdrawal, the withdrawal will be taxed entirely as interest to the extent that the cash value exceeds the premiums paid.
Interest-Sensitive Whole Life Insurance. A nontraditional type of life insurance designed to reflect interest rates in the marketplace. Specific features vary among insurers, but many include a minimum guaranteed interest rate as well as a fluctuating current interest rate. Some policies have indeterminate premiums, while others are fixed. Some may allow reduction of the death benefit in lieu of premium increases. Also called excess interest whole life and current assumption whole life.
Intestate. A person who dies without a valid Will or without having made a complete disposition of his or her property.
Irrevocable beneficiary. See Beneficiary, Irrevocable
Irrevocable life insurance trust (ILIT), An insurance policy on the grantor’s life owned by an irrevocable inter vivos trust with the policy proceeds payable to the trust who is the beneficiary.
Irrevocable trust. A living trust in which the grantor permanently relinquishes ownership and control of the trust property.
J
Joint and Last Survivor Annuity. An annuity liquidation method that pays an income to two annuitants while both are living, then continues payments of the same amount to the survivor after one annuitant dies. Also called joint and survivorship annuity.
Joint and One-Half Survivor Annuity. An annuity liquidation method similar to the joint and last survivor annuity except when one annuitant dies, the survivor's income payment is reduced to half the amount that was paid when both were living. Similar annuities may be written for different proportions, such as two-thirds or three-fourths.
Joint and Survivorship Annuity. See Joint and Last Survivor Annuity.
Joint Annuity. Any of several types of annuity liquidation methods that provide joint payments to two annuitants.
Joint Life Annuity. A type of joint annuity liquidation method under which income payments are made as long as both annuitants are alive, but cease when either one dies, with no survivorship or death benefits paid. (Rarely written.)
Joint tenancy with right of survivorship. Property owned by two or more persons and, on the death of any owner, his or her ownership interest passes automatically to the survivors.
Jumping Juvenile Policy. A life insurance policy written on the life of a juvenile, usually a child underage 15, with a small death benefit that rises abruptly at a specified age, usually 21, to a much larger amount, often five times as much as the original amount. The insured need not prove insurability when the benefit increases, nor does the premium change. Also called junior estate builder.
Junior Estate Builder. See Jumping Juvenile Policy.
Juvenile Insurance. A life insurance policy written on the life of a juvenile as defined by the insurer, usually a child under age 15.
K
Keogh Plan. A qualified retirement plan available to self-employed people and their employees and often funded with life insurance or annuities. Participants must adhere to specified maximum contributions. May be either a defined benefit or a defined contribution plan. Also called HR-10 Plan.
Key Employee Insurance. An insurance policy purchased by a business to cover the life of an employee who is considered vital to the financial success of the business and who may or may not be an owner or officer. If the employee dies, the death benefit is paid to the business. Also called key person insurance.
L
Lapse rates. A measure of the proportion of policyowners who voluntarily terminate their insurance during a year.
Lapsed policy. A life insurance policy that has terminated because of failure to pay the premium.
Law of large numbers. A principle that states when statistics are derived from a large population, the more reliable the assumed statistical probabilities will be; the basis of life insurance in terms of insuring a large enough pool of people to be able to predict the probability of deaths occurring.
Legal reserve. Insurance company funds held separately or kept in reserve in order to pay obligations the insurer has assumed; exact amounts required are determined by law.
Legal Reserve Stock Company. See Stock Insurance Company.
Level premium. A premium amount that remains the same throughout the life of an insurance policy.
Level Term Insurance. A type of term insurance under which the amount of insurance available is the same or level throughout the policy period.
License. State-issued document certifying that an individual is permitted to solicit and sell insurance in a particular state.
Life expectancy. Based upon mortality tables, the average estimated length of life remaining for a person at any given age.
Life income option with period certain. The most popular life income option – the installments are payable for as long as the primary beneficiary lives, but should this beneficiary die before a predetermined number of years, installments continue to a second beneficiary until the end of the designated period.
Life Insurance. Life insurance is a device to spread the cost of financial loss resulting from death from an individual to a group through an insurance company by transferring the cost so the financial loss to any one individual is small.
Limited partners. Partnership having at least one general partner and one or more limited partners who are not actively engaged in partnership management and who are liable for partnership obligations only to the extent of their investment in the partnership.
Limited Payment Life Insurance. A type of cash value life insurance policy that requires payment of premiums only for a limited number of years as stipulated in the policy. At the end of the limited payment period, the policy remains in force for the insured's lifetime with no further premium payments required.
Liquidation phase. For an annuity, the period during which the annuitant receives periodic income payments that systematically deplete the funds in the annuity. Compare to Accumulation Phase
Living Will. A legal instrument which sets forth the wishes of the individual as to the use of life-sustaining measures in cases of terminal illness, prolonged coma, or serious incapacitation.
Loading. Charging sales and administrative expenses to purchasers of financial products, including life insurance policies and annuities.
Long-term care insurance. Insurance that covers physical or mental incapacity that prohibits the insured from partaking of activities of daily living.
M
Marital deduction. Deduction of the value of property left to a surviving spouse.
Marketing. Providing of products well suits to consumer’s needs through effective, and appropriate distribution channels.
Mass marketing. (Also called Mass Merchandising) Coverage for a group of individuals under one policy, usually all members belong to a particular company, union or trade association.
Master contract. Under a group insurance plan, a policy issued to the one charged with administering the plan, such as an employer. Also called master policy.
Material misrepresentation. See Misrepresentation, Material.
McCarran-Ferguson Act. Federal law exempting insurance from federal anti-trust laws and reinforcing state rights to regulate the insurance business. Also called Public Law 15.
Medical Information Bureau (MIB). A medical information clearinghouse created and supported by member insurance companies. Receives and retains files of consumer medical information provided by member companies and discloses that information only to members. Consumers have the right to request disclosure of information in their MIB files, with medical information disclosed only to a physician to explain to the consumer.
Misrepresentation. Providing inaccurate or misleading information. For life insurance purposes, refers specifically to information provided by the applicant when attempting to secure insurance coverage or by an agent in any situation.
Misstatement of age. A policy provision stating that if the insured’s age is found to have been incorrectly stated, the amount of insurance will be adjusted to be that which would have been purchased by the premium, had the correct age been known.
Material.For insurance purposes, a misrepresentation that affects or would have affected the insurer's decision to issue the policy.
Managing General Agent (MGA). An independent insurance wholesaler who contracts insurance agents with insurers the MCA represents, for the purpose of selling the insurers' products to consumers. Also called marketing general agent.
Mass Merchandising. As a life insurance distribution system, the practice of dealing directly with clients for the marketing of group insurance products as opposed to individual insurance products.
Modified coinsurance plan. A reinsurance coinsurance treaty with a provision that requires the reinsurer to pay the ceding company a reserve adjustment, with the net effect of making the arrangement a yearly renewable term reinsurance agreement.
Modified endowment contract (MEC). A life insurance policy which was entered into after June 20, 1988, that meets the IRC Section 7702 definition of life insurance, but fails the seven-pay test.
Modified premium. A life insurance policy premium that is set at a very low fixed amount for three or four years, after which the amount is raised to a much higher level and remains at that level for the duration of the policy.
Monthly debit ordinary. Ordinary life insurance policies which are typically written in the $5,000 to $25,000 range, with premiums collected monthly at the policyowner’s home.
Mortality rate. Refers to the average number of people of a given age who are expected to die each year.
Mortality table. A life insurance table that shows mortality rates-the average number of every 1,000 living people of a given age from zero to age 100, who are expected to die each year. One such table, used to compute legal reserves, is the Commissioners' Standard Ordinary Table or CSO, which is updated periodically and bears the issue year of the latest update.
Mortgage insurance. A life insurance policy purchased for the purpose of paying off a home mortgage if the insured dies. Decreasing term insurance is often used for this purpose, but any type of life insurance policy may be used.
Multiple Employer Trust (MET). A group of small employers who have grouped together in order to obtain group insurance benefits typically available only to larger groups.
Mutual life insurance company. A form of insurance company organization under which the policyowners also technically own the company. May issue participating policies that allow policyowners to share in dividends, when declared. May not issue stock. Compare to Stock Insurance Company.
N
National Association of Insurance Commissioners (NAIC). An organization of insurance commissioners and superintendents that promotes communication about insurance regulation and practices and recommends model laws related to insurance in all states for the purpose of helping standardize laws and practices.
National Association of Securities Dealers (NASD). National organization of companies that sell securities, including insurance companies that sell variable products, with whom insurance agents must be registered as representatives in order to sell products that are considered securities.
Net amount at risk. The actual amount of pure life insurance protection, which is calculated as the difference between the policy reserve (at that point) and the face amount.
Net premium. The premium determined by calculating; a mortality rate and assumed interest in overall insurance company investments; not the premium paid by the policyowner, which also considers the insurers operating expenses. Also see Gross Premium.
No-Load. Refers to an arrangement whereby sales and administrative fees are not directly deducted from premiums; instead, the insurer recoups expenses by taking a percentage of current earnings.
Non-Admitted Insurer. From the perspective of a particular state, an insurance company that has not been authorized to do business in that slate. Also called an unauthorized insurer.
Noncontributory plan. A group insurance plan under which participants in the plan are not required to pay any portion of the premiums. The plan must cover 100% of eligible employees.
Nonforfeiture Options. Options available for receiving the cash value of a life insurance policy the owner is no longer going to keep in force. They include: receiving cash, using the cash value for a paid-up policy of a lesser amount or purchasing extended term insurance.
Nonforfeiture provision. A provision in an insurance policy which stipulates the options available under a cash-value policy if the policyowner elects to terminate the policy and explains the basis or method used to determine these optional values.
Non-participating policy. A type of policy that does not share in any dividends that maybe paid by the insurance company providing the policy. Compare to Participating Policy.
Nonproportional reinsurance. A reinsurance agreement wherein the reinsurer pays a claim only when the amount of the loss exceeds a specified limit. (Also known as excess-of-loss coverage.)
Non-resident agent. An agent doing business in a state other than the state where the agent is licensed and resides.
O
Ordinary Life Insurance. See Whole Life Insurance.
Original age. For insurance policies, the age of the insured when a policy was originally issued on the insurers life. Compare to Attained Age.
Outsourcing. Hiring an independent “outside” company to perform specific tasks.
Own occupation. A clause that determines that an insured is totally disabled when they cannot perform the major duties of their regular occupations.
P
Paid-up policy. A life insurance policy for which no further premium payments are due contractually but the policy remains in effect.
Partial Assignment. See Assignment, Partial.
Participating policy. A type of policy that shares in any dividends that may be paid by the insurance company providing the policy. Compare to Non-Participating Policy.
Partnership. A voluntary association of two or more individuals for the purpose of conducting a business for profit as co-owners.
Payment mode. The frequency with which insurance premiums are paid, such as monthly, quarterly, semiannually and annually.
Payor Rider. A rider attached to a life insurance policy, usually on the life of a juvenile, providing that premium payments will be waived if the person responsible for paying premiums dies or becomes disabled, or in some cases, only if the person dies.
Pension plan. A plan established by an employer specifically to provide retirement benefits for employees. May be a qualified plan by meeting IRS requirements to receive certain tax advantages. May be either a defined benefit or a defined contribution plan, and must conform to a formula to determine either the amount of benefits or the amount of contributions
Peril. A cause of a disability or death of a person(s).
Permanent Life Insurance. Life insurance intended to remain in force for the entire life of the insured and build cash values that are available to the policyowner for policy loans or if the policy is terminated.
Per Capita beneficiary designation. An arrangement to handle situations where there is more than one primary beneficiary. If one of the primary beneficiaries dies before the insured dies, it provides that any primary beneficiaries still living divide the entire policy proceeds equally.
Persistency rate. The ratio of the number of a group of policies that continue coverage on a premium-due date to the number of policies that were in force as of the preceding date.
Personal-Producing General Agent (PPGA). A self-employed insurance agent who operates similar to a general agent, but does not usually hire other agents. Compare to General Agent.
Per Stirpes beneficiary designation. An arrangement to handle situations where there is more than one primary beneficiary and if one of the primary beneficiaries dies before the insured dies, it provides that any primary beneficiaries still living receive their original shares and the share of the deceased primary beneficiary passes on to that deceased beneficiary's survivors.
Planned premium. The rate at which insurance companies bill, according to the request of the policyowner, in order to overcome the concern that policyowners may inadvertently allow their policies to lapse. (Also known as target premium.)
Policy form number. Legal designation used by an insurance company when filing a specific policy with the state insurance department.
Policy loan provision. A provision in a life insurance policy under which insurers must make requested loans to policyholders according to specified limitations.
Policy reserves. The amounts necessary for the fulfillment of contract obligations as to future claims. The present value of future claims.
Policyholder (Policyowner). The person or entity who pays a premium to an insurer in exchange for an insurance policy. In this text, policyholder and policyowner are the same.
Policy Summary. A summation of selected features of a life insurance policy prepared and attached to the policy by the insurer for delivery to the policyowner/insured.
Portfolio reinsurance. Reinsurance of specific blocks of insurance policies.
Powers of Agency. See Agency Authority.
Preferred risk. For life insurance underwriting purposes, one who qualifies for the best life insurance rate a particular insurer offers. For some insurers, refers to the nonsmoker category. Not all insurers have a preferred risk class. Compare to Standard Risk and Substandard Risk.
Premium. For an insurance policy, the amount an insured pays in order to acquire and keep the insurance in force.
Premium deposit rider. An additional policy feature that allows the policyowner to deposit amounts to pay future premiums.
Premium Tax. See State Premium Tax.
Primary Beneficiary. See Beneficiary Primary.
Pre-need funeral insurance. Life insurance policies that are designed &/or sold to fund a pre-arranged funeral.
Present value. The principal amount that must be invested at the present time in order to accomplish some objective in the future.
Principal Sum. In the accidental death and dismemberment rider, refers to the face amount of the life insurance policy to which it is attached, when specifying the portion of that amount that will be paid for various types of dismemberment losses.
Probate. The (judicial) process by which a Will of a deceased person is authenticated to a court.
Proceeds. The death benefit of a life insurance policy.
Producer. A term used to refer collectively to people involved in selling or soliciting life insurance, including agents, brokers and solicitors. Some states issue a producer's license rather than having different licenses for different types of personnel.
Professional reinsurer. An insurer whose exclusive business is reinsurance.
Profit-sharing plan. A corporate plan designed to share company profits with employees in the form of a retirement plan. May be a qualified plan by meeting IRS requirement s to receive certain tax advantages.
Proportional reinsurance. Reinsurance agreements in which the reinsurer and the ceding company share premiums and claims on a risk in a specified proportion.
Purchase Option Rider. See Guaranteed Insurability Rider.
Q
Qualified plan. Any retirement plan that meets the requirements of the Internal Revenue Code to be eligible for special tax treatment.
Qualified terminable interest property. Property passing from the decedent in which the surviving spouse is entitled to a lifetime income payable at least annually, from the property.
R
Rebating. A regulated practice forbidden by most states, involves offering a potential insurance buyer something of value other than the policy to induce the buyer to purchase the policy. Includes splitting commissions with the buyer, refunding part of the premium, giving valuable gifts or any other valuable inducement.
Reciprocal agreement. An agreement between two state insurance departments whereby each state's licensed resident agents are permitted to sell insurance in the other state without qualifying for an additional license, instead operating as a non-resident agent in that state. Also see Non-Resident Agent and Resident Agent.
Reduced paid-up insurance. An option on a life insurance policy that permits the policyholder to use the cash surrender value as a net single premium, to purchase a reduced amount of paid-up insurance of the same type as the original policy, exclusive of any term or other riders.
Re-entry feature. A feature of some automatically renewable term policies permitting a lower renewal rate if the insured elects to have a medical examination and proves continuing good health.
Refund Annuity. An annuity liquidation method that provides a lifetime income for the annuitant and also guarantees the return of an amount equal to premiums paid, either to the annuitant or to survivors if the annuitant dies before receiving income equal to premiums. Beneficiaries can receive a lump sum cash refund of unreturned premiums or installments of the same amount the annuitant was receiving.
Reinstatement provision. A provision in a life insurance policy that gives the policyowner the right to reinstate a previously lapsed policy under certain conditions.
Reinsurance. The purchase of insurance by an insurance company.
Reinsurer. An insurance company that assumes the risk of another insurance company.
Renewable Term Insurance. A type of term insurance that permits the insured to renew the policy without proving insurability when the stipulated term expires. Most insurers renew for a like term automatically unless the insured specifically refuses renewal, with premium determined at the insured's attained age. Option to renew expires at an age specified by the insurer, typically 60, 65 or 70. Also see Re-entry Feature.
Replacement, Policy. Refers to replacing an existing life insurance policy with another policy. While not necessarily illegal, a replacement made without providing the policyowner with a complete and accurate comparison of the two policies and the advantages and disadvantages of replacement is called twisting, which is illegal.
Representation. In an insurance application, statements made by the applicant which are believed, but not guaranteed, to be true.
Reserve. An amount determined conservatively to be sufficient to meet future losses and contingencies and any incurred but not paid, obligations. A reserve is a liability for the insurance company.
Resident Agent An agent licensed in and doing business in the state of residence. Compare to Non-Resident Agent Also see Reciprocal Agreement.
Retired lives reserve (RLR). In group insurance, a reserve that is accumulated by an employer prior to retirement of an employee, that will be used to pay premiums on term insurance after the employee retires.
Reverse split dollar plan. An insurance policy with the pure death protection payable to the corporation and death proceeds equal to the cash value, payable to the employee’s beneficiary.
Revocable Beneficiary. See Beneficiary, Revocable.
Revocable trust. A living trust that the grantor of the trust can change or terminate as they wish, and can regain ownership of the property.
Rider. An attachment to an insurance policy that changes or adds provisions not included in the original policy. There is an additional charge for riders added at the insured's option to provide additional benefits for the insured. Also called an endorsement.
Risk. Uncertainty of financial loss; term used to designate an insured or a peril insured against.
Risk corridor. In a life insurance policy, refers to the minimum amount at risk that must be maintained over and above the policy's cash value in order for the policy to continue to be treated as life insurance for tax purposes. Also called tax corridor.
Roth IRA. An individual retirement account (IRA) in which withdrawals after age 59½ are completely free of income tax, provided the account has existed for at least five years.
S
Salary Reduction Plan. See Cash or Deferred Arrangement and 401 (k) Plan.
Savings Bank Life Insurance. A type of life insurance provider operating only in the states of Connecticut, Massachusetts and New York and offering relatively limited amounts of life insurance.
Second to die insurance. Life insurance policy that insures the lives of two or more persons, and that pays the death proceeds only on the second or last to die.
Section 303 Stock Redemption. A partial redemption of corporate stock, permitted by Section 303 of the Internal Revenue Code, which can be used as the basis for a buy/sell agreement funded by life insurance. Also see Buy/Seri Agreement.
Securities. Financial instruments that are evidence of debt, such as stocks and bonds, which pose a risk of loss to the buyer. Includes certain life insurance products, such as variable life insurance and variable annuities, whose financial performance depends upon the performance of securities investments.
Securities and Exchange Commission (SEC). Federal body having regulatory authority over the sale of securities and securities-based products, including variable insurance products.
Separate account. The cash value account for variable life insurance or variable annuities, comprised of the portion of premiums invested in securities, but required to be kept separate from the insurance company's general investment account.
Settlement Options. The several options available to life insurance policy beneficiaries for receiving the death benefit. If the death benefit is not paid in a lump sum, beneficiaries may receive: only the interest by leaving the principal with the insurer; regular income payments of a fixed amount; income for a fixed period of time; a lifetime income.
Seven-pay test. A method that determines if a life insurance policy qualifies for the tax treatment of a life insurance policy, which it would if the cumulative amount paid under the life insurance policy at any time, exceeds the cumulative amount that would have been paid had the policy’s annual premium equaled the net-level premium for a seven-pay life policy.
Single Premium Deferred Annuity (SPDA). An annuity purchased with a large one-time lump sum premium rather than by flexible premium payments and for which liquidation is deferred until sometime in the future.
Single Premium Immediate Annuity (SPIA). See Immediate Annuity.
Single Premium Variable Life Insurance. A variable life insurance policy purchased with a large one-time lump sum premium rather than by periodic premium payments.
Single Premium Whole Life (SPWL) insurance. The life insurance policy is paid-up from inception with a single payment, and the policy has immediate and substantial cash values.
Sole proprietorship. A business, unincorporated, owned by one person who usually also manages the business.
Solicitor. In the life insurance business, one who acts on behalf of an agent or broker to locate potential insurance buyers, but who does not actually sell insurance.
Spendthrift Clause and Spendthrift Trust. A clause included in some life insurance policies and a corresponding trust established to receive the death benefit of a life insurance policy in order to protect the proceeds from creditors. Periodic income payments are made from the trust to the beneficiary. Laws differ among the state concerning the extent of protection such trusts actually provide.
Spousal IRA. An Individual Retirement Account/Annuity established to receive contributions for both a wage earner and spouse, and thus eligible for a slightly larger annual contribution.
Standard nonforfeiture laws. Laws that requires cash value life insurance policies to state the mortality table and rate of interest used in calculating life insurance nonforfeiture values to be provided by the policy, as well as a description of the method used in calculating the values.
Standard risk. For life insurance underwriting purposes, one who poses an average risk of dying at certain points in the future and forms the basis upon which basic life insurance premiums are determined. This represents most insureds. Many insurers have different standard risk rates for smokers and nonsmokers.
State premium tax. A tax assessed by some states against each insurance premium; where applicable, included in the insured's premium payment and sent to taxing authorities by the insurer.
Step-rate Premium. A premium that increases to reflect the insured's attained age at designated tunes rather than remaining level; may refer to a renewable term premium.
Stock insurance company. A form of insurance company organization under which stockholders, not policyowners, own the company and share in profits. Stocks and/or bonds may be offered to the public for purchase and new issues may be offered to raise capital. Also called legal reserve stock company. Compare to Mutual Insurance Company.
Stock Redemption Plan. See Section 303 Stock Redemption.
Straight Life Annuity. An annuity liquidation method providing lifetime income payments to the annuitant. When the annuitant dies, all payments stop regardless of how much of the annuity accumulation has been liquidated. There are no survivor benefits.
Straight Life Insurance. See Whole Life Insurance.
Substandard Risk. For life insurance underwriting purposes, one who poses a greater than average risk of loss to the insurance company and thus pays the highest rates. Also called impaired risk and special class risk.
Suicide Clause. A standard provision in life insurance policies stipulating a period of time, usually one or two years, after the policy effective date during which, if the insured commits suicide, the death benefit will not be paid, but premiums will be returned to the survivors.
Superintendent of Insurance. See Commissioner of Insurance.
Surrender Charge. In an annuity, a gradually-decreasing percentage of the annuity value, charged against the annuity if the buyer surrenders the policy any time during a specified number of years immediately following the annuity purchase. Disappears after from five to 20 years, depending upon the insurer. Specific percentages differ by insurer.
Surrender value. See Cash Surrender Value.
Survivorship life insurance. A life insurance plan wherein two or more lives are insured, and death proceeds are paid only on the death of the second or last to die (also known as second-to-die insurance).
T
Tax Sheltered Annuity (TSA). A special type of annuity, available only to tax-exempt organizations specified in the Internal Revenue Code as 403(b) and 501(c)(3) organizations, through which an employer uses a portion of what would otherwise be the pay of the employee, to purchase the annuity.
Term Insurance. A life insurance policy with no cash values that is written for a specified period of time, after which the policy expires without paying a death benefit if the insured is still living.
Terminal reserve. The reserve at the end of any given year.
Terminally ill. When an individual has been certified by as physician as having a medical condition that can reasonably be expected to result in death within 24 months or less.
Testator, A person who makes a Will.
Transparency. Used in interest-sensitive products which assures that accurate information needed by customers, intermediaries, rating agencies and government agencies will be readily available.
Trust. A legal agreement wherein one party transfers property to another party, and the second party (trustee) holds the legal title and manages the property for the benefit of others.
Twisting. In life insurance marketing, the illegal act of inducing an insured to replace an existing life insurance policy with a policy the agent is selling, without providing the insured with an accurate and complete comparison of the two policies and an explanation of the advantages and disadvantages of replacement.
U
Unauthorized insurer. From the perspective of a particular state, an insurance company that has not been authorized to do business in that state. Also called a non-admitted insurer.
Underwriting. The process of selection and classifying a potential insured, by examining and investigating an insured to determine whether or not the insurance company is willing to provide the insurance requested and on what basis.
Unfair Claim Practices. A group of provisions related to insurance claims and representing one of the unfair trade practices prohibited by law; may differ from state to state, but usually based upon a model law recommended by the National Association of Insurance Commissioners.
Unfair Trade Practices. A group of provisions specifying certain actions prohibited by state law in insurance transactions and usually based upon a model law recommended by the National Association of Insurance Commissioners.
Uniform Simultaneous Death Act. A law adopted by most states providing that, if the insured and the primary beneficiary appear to have died simultaneously and there is no evidence that the primary beneficiary outlived the insured, it will be assumed that the insured died last, making the life insurance policy's proceeds payable to the contingent beneficiary.
Unilateral contract. Refers to a characteristic of a life insurance policy whereby only one party to the agreement must fulfill the contract; in this case, the insurer is required to pay the death benefit as long as premiums are paid, whereas the policyowner has the option to stop paying premiums and give up the insurance.
Universal Life Insurance. A life insurance policy characterized by flexible premium payment and an adjustable death benefit, as well as payment of a higher interest rate on cash values than traditional life insurance policies. A low rate is guaranteed and there is potential for a higher rate. Also called adjustable premium whole life and flexible-premium whole life.
Universal Variable Life Insurance. See Variable Universal Life Insurance.
Upstream holding company. A holding company formed by one or more stock companies.
Utmost Good Faith, Contract of. Refers to the characteristic of a life insurance policy that causes each party to rely upon the good faith of the other party in being truthful and keeping the promises made as part of the contract.
V
Vanishing Premium. A premium-payment arrangement whereby after the policy has been in force for a certain period of time, dividends and/or interest earned on cash values are used to pay premiums to keep the policy in force and no additional premium payments are required from the policyowner.
Variable Annuity. An annuity characterized by no guaranteed amount of return during the accumulation or liquidation phases since the amount of annuity funds available depends upon the performance of investments in the separate account; subject to securities regulation.
Variable Life Insurance. A life insurance policy that has a minimum guaranteed death benefit that may be greater as the result of fluctuations in the separate investment account; cash surrender values may fluctuate, no interest rate is guaranteed; subject to securities regulation.
Variable Universal Life Insurance. A life insurance policy characterized by combining features of both variable and universal life policies. Provides a variable and adjustable death benefit, a minimum guaranteed death benefit, flexible premium payments; subject to securities regulation. Also called flexible-premium variable life, Universal Life II, and Universal Variable Life.
Viatical Settlement. An arrangement whereby a policyowners sells a life insurance policy to a viatical settlement firm.
Viatical Settlement firm. A specialized company, or a group of investors, that purchases life insurance policies, usually from terminally ill individuals.
Viator. A person who sells their life insurance policy to a Viatical Settlement firm.
W
Waiver. Voluntary relinquishment of a privilege or right.
Express. A waiver that is knowingly and intentionally given.
Implied. Awaiver given by implication rather than knowingly or intentionally given.
War exclusion. A provision in a life insurance policy that excludes coverage if the insured’s death occurs under certain military conditions.
Waiver of Premium rider. An attachment to a life insurance policy that allows the policy to continue in force without further premium payment if the insured becomes disabled and unable to work; disability is defined in the rider.
Warranty. A statement that is guaranteed to be absolutely and literally true; important in insurance as contrasted with representations on an application since information on the application is considered to be a representation rather than a warranty.
Whole life insurance. Traditional type of permanent cash value life insurance under which premiums are paid and the policy exists for the entire life of the insured (usually age 95, 98 or 100, but insurers may use other ages). Also called straight life and ordinary life.
Will. A legal declaration of an individual’s wishes as to the disposition to made of his/her property on death.
Y
Yearly renewable term. Term policies with level death benefits and increasing premiums.