Accelerated Benefits – Benefits available in some life insurance policies prior to death, which may be used to help pay the costs of long-term care or terminal illness.
Accidental Death Benefit – A provision added to a life insurance policy for payment of an additional benefit if death is caused by an accident. This provision is often referred to as “double indemnity.”
Accumulated Value – The cash value of a policy at any given time. Percentage policy charges, surrender charges and credited interest would be based on this value.
Actuary – A specialist in the mathematics of insurance who calculates rates, reserves, dividends and other statistics
Age Limits – Most policies have limits on the age of the insured. Most have maximum issue ages. Some have minimum ages. And some have a combination of maximum and minimum issue ages.
Age Nearest Birthday – A way of calculating the age of the insured – using six months before or six months after the actual date of birth to determine age.
Agent – An individual who sells and services insurance policies in either of two classifications:
• An independent agent represents multiple insurance companies and services clients by searching the market for the most advantageous price for the most coverage. The agent’s commission is a percentage of each premium paid.
• A career agent represents only one company and sells only its policies. This agent is paid on a commission basis in much the same manner as the independent agent.
Annuity – A financial product that allows a person to save for the future on a tax-deferred basis and then allows the person to choose a payout option that best meets the need for income when the person retires. Payment options include a lump sum, income for life, or income for a certain period of time.
Application – A series of questions that give the insurer the information necessary to effectively assess the risk. By signing the application, the proposed insured certifies the accuracy of the information. The application becomes a part of the policy at issue and may be used to determine the validity of a claim in the case of misrepresentation or misstatement of fact.
Assets – Insurance company assets refer to “all the available properties of every kind or possession of an insurance company that might be used to pay its debts.” There are three classifications of assets: invested assets, all other assets, and total admitted assets. Invested assets refer to things such as bonds, stocks, cash and income-producing real estate. All other assets refer to nonincome producing possessions such as the building the company occupies, office furniture, and debts the company is owed, usually in the form of deferred and unpaid premiums. Total admitted assets refer to everything a company owns. “All other” plus “invested assets” equals total admitted assets. By law, some states don’t permit insurance companies to claim certain goods and possessions, such as a company airplane, so these are classified in the “all other assets” category, declaring them “nonadmissable.”
Assignment – A policy or a portion of a policy’s benefits (and/or cash value in the case of life insurance), and/or a death benefit may be assigned to a third party who can demonstrate insurable interest.
Attained Age – An insured’s age at a particular time. For example, many term life insurance policies allow an insured to convert to permanent insurance without a physical examination at the insured’s then attained age. Upon conversion, the premium usually rises to reflect the insured’s attained age and diminished life expectancy.
Automatic Premium Loan – A provision in a life insurance policy that any premium not paid by the end of the grace period (usually 30 or 31 days) will be paid automatically by a policy loan if there is sufficient cash value.
Beneficiary – The person or financial entity (for instance, a trust) named in a life insurance policy as the recipient of policy proceeds in the event of the insured’s death.
Broker – An insurance salesperson that searches the marketplace in the interest of clients, not insurance companies.
Broker-Agent – Independent insurance salesperson who represents particular insurers but also might function as a broker by searching the entire insurance market to place an applicant’s coverage to maximize protection and minimize cost. This person may be licensed as an agent and a broker.
Business Life Insurance – A policy that has been purchased to solve a potential business problem, such as funding a buy-sell agreement, insuring a key employee or providing nonqualified retirement benefits Buy-Sell Agreement. An agreement between business owners, which details how the business will be transferred in the event of the death or disability of one or more owners. Buy sell agreements are often funded with life insurance and disability buy-out insurance to ensure that money is available to complete the transaction in the case of a triggering event. Buy-sell agreements are typically either cross-purchase (where owners buy policies on each other) or entity purchase (where the business purchases the policies and would generally use the proceeds to retire the stock of the owner who suffered the triggering event).
Cash Value – Also known as the cash surrender, this is the amount available in cash upon surrender of a permanent life insurance policy before it becomes payable upon death or maturity.
Capital – Equity of shareholders of a stock insurance company. The company’s capital and surplus are measured by the difference between its assets and its liabilities. This “cushion” protects the interests of the company’s policyowners as well as providing a source for dividends to shareholders and investments in new ventures
Cash Value – Some life insurance policies, usually permanent types like whole life, universal life or variable universal life insurance, can accumulate money in a cash value account. In addition to paying for insurance coverage, a portion of your premium goes toward a cash value account that grows tax-deferred over time.
CERTIFIED FINANCIAL PLANNERTM – CFP® – A professional credential awarded by CFP Board of Standards for successfully completing a curriculum of insurance and financial planning concepts.
Chartered Financial Consultant (ChFC®) – A professional designation for successfully completing a curriculum of insurance and financial planning concepts through the American College.
Chartered Life Underwriter (CLU®) – A professional designation for successfully completing a curriculum of life insurance related concepts through the American College.
Children’s Rider – A rider on a parent’s policy that covers any and all children born to or adopted by the insured.
Claim – A formal request for payment related to an event or situation that is covered under an in-force insurance policy.
COLI (Corporate-Owned Life Insurance) – Policies owned by corporations to insure their key people and fund deferred compensation plans.
Collateral Assignment – See “Assignment”
Commission – Fee paid to an agent or insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer and the marketing methods
Contingent Beneficiary – The party designated to receive proceeds of a life insurance policy following the insured’s death if the primary beneficiary predeceased the insured
Conversion Privilege – A provision, generally in a term life insurance policy, guaranteeing the insured’s right to convert the policy to a permanent policy at the same insurability rating within a specified time limit.
Convertible – Term life insurance coverage that can be converted into permanent insurance regardless of an insured’s physical condition and without a medical examination. The individual cannot be denied coverage or charged an additional premium on the permanent plan for any health problems.
Convertible Term Insurance Policy – A term life insurance policy that gives the policy owner the right to convert
(or exchange) the policy to a permanent plan of insurance.
Cost Basis – The accumulated premiums paid for a cash value life insurance policy. The cost basis can generally be surrendered tax-free and is recognized as the first money to come out of the policy. In the event the policy was a modified endowment contract (MEC), the cost-basis would be the last money to come out of the policy.
Cost of Living Rider – Also called “Cost of Living Adjustment Rider” – can be added to a policy to help benefits keep pace with inflation, when the insured is disabled and receiving disability benefits for more than a year.
Cost Recovery – Permanent life insurance allows the ability to surrender cash values – up to the amount of premiums paid – income tax-free.
Coverage – The scope of protection provided under an insurance policy. In life insurance, living and death benefits are listed
Credit Life Insurance – Life insurance underwritten to pay off a specific loan balance, with the borrower as the insured and the creditor as beneficiary.
Death Benefit – The amount of money payable to the beneficiary as a result of the death of the insured. The death benefit is the policy amount plus any accumulated dividends or cash value, less any surrenders and outstanding loans against the cash value.
Decreasing Term Insurance – Term insurance with a fixed premium and a death benefit that decreases at a stated rate over the course of the policy period.
Deferred Annuity – A contract in which annuity payouts begin at a future date.
Defined Benefit Plan – A pension plan that specifies the benefits an employee will receive after retirement. Benefits typically are based on length of service and salary, and usually are funded by the employer on behalf of each plan participant.
Defined Contribution Plan – A pension plan that specifies the contributions made by employees, and in many cases, the employer on behalf of each plan participant. These funds accumulate for each plan participant until retirement. At retirement, funds are distributed either as a lump sum or monthly annuity. Benefits are based on the amount of contributions plus earnings.
Dividend – In life insurance, an amount of money returned to the owner of a participating policy. The money is a partial refund of the premium paid. It results from actual mortality, interest and expenses that were more favorable than expected when the premiums were set. Dividends are not guaranteed.
Dollar Cost Averaging – The method of purchasing securities by investing a fixed amount of money at set intervals. When the price is up, you buy fewer shares. When the price is down, you buy more shares. It is usually advised to make the purchases on the same day of each period.
Endowment Insurance – A type of permanent or cash value life insurance where the cash value equals the death benefit at a given age (often 65). At that time, the policy is completed or “endowed.”
Estate Planning – Generally, a process using life insurance in a trust to provide money to pay estate taxes and costs. The process is also used by business owners to plan their eventual departure from the business.
Estate Taxes – Taxes levied against the estate of the deceased.
Evidence of Insurability – A requirement for potential insureds to provide proof of physical or medical tests such as blood pressure or cholesterol screening before purchasing an individual insurance policy.
Face Amount – The amount stated on the face of a life insurance policy that will be paid in the case of death or policy maturity. It does not include dividend additions, or additional amounts payable under accidental death or other special provisions.
Fiduciary – A person or organization that is authorized to control or manage pension assets, or that is authorized or responsible for administering a pension plan. Fiduciaries are legally obligated to discharge their duties solely in the interest of plan participants and beneficiaries, and are accountable for any actions that may be construed by courts as breaching that trust.
Fixed Annuity – An annuity contract in which the premiums you pay are invested in the general assets of the life insurance company, and the company guarantees a fixed payout every month.
Free Look Provision – An individual life insurance and annuity provision that gives the policy owner a stated time, usually 30 days after the policy is delivered, in which to cancel the policy and receive a full refund on the initial premium payment.
Grace Period – A period (usually 30 or 31 days) following each insurance premium due date, other than the first due date, during which an overdue premium may be paid. All provisions of the policy remain in force throughout this period.
Guaranteed Interest Contract – A contract offered by insurance companies that guarantees a rate of return on assets for a fixed period, and payment of principal and accumulated interest at the end of the period.
Guaranteed Renewable Policy – A policy in which coverage is guaranteed to a specified age as long as premiums are paid. The premium could be changed by an insurer for a certain class of individuals.
Guideline Premium – IRS Code 7702 stipulates the maximum premium that can be paid – either in a lump sum or on an ongoing basis – for a given amount of death benefit at a given age. The guideline premium cannot be violated or the policy will no longer qualify as life insurance according to the code.
Immediate Annuity – A contract in which annuity payouts begin immediately or within one year.
Incontestable Clause – A clause that generally allows the insurance company to contest the payment of a benefit for up to two years from issue for misstatements in the application. Fraud and misrepresentation are generally not protected by an incontestable clause and may be contested even after the two-year period has expired.
Insurable Interest – The interest an insurance policy beneficiary has in the risk that is insured. The beneficiary of a life insurance policy has an insurable interest in the insured when the beneficiary is likely to benefit if the insured continues to live and is likely to suffer some loss or detriment if the insured dies.
Insured – The person on whose life an insurance policy is issued.
Irrevocable Beneficiary – A life insurance policy beneficiary who has a vested interest in the policy proceeds even during the insured’s lifetime because the policy owner has the right to change the beneficiary designation only after obtaining the beneficiary’s consent.
Irrevocable Trust – A trust in which the ability to change any provisions rests with an independent trustee – not with the trust grantor. This concept is often used in estate planning in order to move or leverage assets outside the grantor’s estate. Typically, the favored asset held in the trust is a life insurance policy on the life or lives of the grantor(s).
Key Person Life Insurance – Life insurance, generally owned by and payable to a business, covering the life of an employee whose death would cause financial hardship to the business.
Lapsed Policy – An insurance policy terminated at the end of the grace period because of nonpayment of premiums. Most term policies will automatically lapse after attainment of a certain age. (Also nonforfeiture value.)
Level Premium – A premium that is guaranteed not to increase for a stipulated period of time.
Life Expectancy – The age at which, statistically, 50 percent of the people at a given current age will be dead.
Life Insurance – Insurance that pays a stipulated benefit upon proof of the death of the insured.
Limited Payment Life Insurance – A concept where excess premiums are made in the early years of a cash value life insurance policy, using growth in the policy to pay premiums in later years. This concept may or may not offer guarantees, depending on the policy provisions and level of funding.
Long-Term Care Insurance – An insurance contract that provides financial protection if a person is unable to care for himself or herself because of a chronic illness, disability, or cognitive impairment, such as Alzheimer’s disease.
Long-Term Disability (LTD) Insurance – Group disability coverage provided by an employer for employees, which typically provides benefits for two years or longer.
Material Misrepresentation – A misrepresentation that would effect the insurance company’s evaluation of a proposed insured.
Minimum Premium – In life insurance, a contractual minimum declared by the insurer to put the policy in force.
Modified Endowment Contract (MEC) – A life insurance contract that satisfies the present-law definition of a life insurance contract but fails to satisfy the modified endowment “seven-pay” premium limits. The death benefit from a modified endowment will still be generally income tax-free, but lifetime distributions are taxed as gain-out-first (LIFO), rather than basis first (FIFO). Additional transactions are included as distributions subject to taxation such as loans, capitalized loan interest and collateral assignments. An additional 10% tax penalty may apply if the taxpayer is under age 591⁄2. A modified endowment contract is generally not desirable if the intent is to receive lifetime distributions.
Mortality Tables – Charts that show the death rates of a particular group of lives at certain ages, derived from statistics that count deaths in a population by age compared to those still alive at that age.
NAIC – The National Association of Insurance Commissioners. An association of the various state insurance commissioners, who collaborate to codify certain insurance laws and regulations.
Non-Cancelable and Guaranteed Renewable Policy – A policy that cannot be changed or canceled except for nonpayment of premiums – nor can the policy premiums be increased before age 65, regardless of changes in income, occupation or health.
Nonforfeiture Provision – Provision that guarantees there will be no loss of the cash value in a permanent life insurance policy for nonpayment of premium. Nonforfeiture provisions generally include cash surrender, extended term insurance or reduced paid-up insurance.
Nonforfeiture Value – The value of a life insurance policy if it is cancelled, either in cash or in another form of insurance.
Paid-Up Insurance – A life insurance policy that will accept no further premiums.
Paid-Up Additional Insurance – A dividend option available in many whole life policies that uses the annual dividend to purchase paid-up insurance at the attained age of the insured. The paid-up insurance is added to the stipulated death benefit of the base policy.
Participating Life Insurance – A policy that gives the insured the opportunity to participate in dividends which may be declared annually by the issuing company.
Permanent Life Insurance – Life insurance designed to provide lifelong financial protection. As long as the person pays the necessary premiums, the death benefit will be paid. Most permanent policies have a feature known as cash value that builds up, tax-deferred, over the life of the policy and can be used to help fund financial goals, such as retirement or education expenses.
Policy – The printed document issued to the policy owner by a company stating the terms of the insurance coverage.
Policy Anniversary – As a general rule, the date on which coverage under an insurance policy became effective
Policy Illustration – A policy illustration shows how your life or disability insurance policy will work. It illustrates premiums, death benefits, cash values, and information about other factors that may affect your costs.
Policy Loan – The amount that can be borrowed under a life insurance policy at a specified rate of interest from the issuing company by the policyowner, who uses the value of the policy as collateral for the loan. In the event the policyowner dies with the debt partially or fully unpaid, the insurance company deducts the amount borrowed, plus any accumulated interest, from the amount payable to beneficiaries.
Policy Rider – An amendment to an insurance policy that becomes part of the insurance contract and either expands or limits the benefits payable under the contract.
Premium – The payment, or one of regular periodic payments, that a policy owner makes to own an insurance policy.
Qualified Plan (Tax-Qualified Plan) – An employee retirement benefit plan that meets Internal Revenue Code requirements. Employer contributions to such plans are immediately deductible by the employer, and contributions to and earnings in such plans are not included in the employee’s or beneficiary’s income until actually distributed to that recipient.
Rated Policy – A policy that has been issued with additional premiums as the result of unfavorable underwriting characteristics of the insured. For example, the proposed insured may have a medical condition not serious enough to decline the policy, but it creates additional risk for the insurer.
Reduced Paid-Up Insurance – A nonforfeiture provision in a whole life or endowment policy providing for a paid-up policy with a reduced face amount, based on cash value at the time premiums are no longer paid and the age of the insured.
Re-entry Term – A term policy providing for renewal at a certain point in time, if the insured provided the insurer with satisfactory evidence of insurability.
Renewal – The automatic re-establishment of in-force status effected by the payment of another premium.
Reinstatement – The restoration of a lapsed insurance policy. The company requires evidence of insurability and payment of past due premiums plus interest.
Rider – An amendment to an insurance policy that modifies the policy by expanding or restricting its benefits or excluding certain conditions from coverage.
Risk Class – Risk class, in insurance underwriting, is a grouping of insureds with a similar level of risk. Typical underwriting classifications are preferred, standard and substandard, smoking and nonsmoking, male and female.
Second-to-Die Insurance – Also known as “Survivorship Life” or “Joint Life” – a policy covering two lives, where the death benefit is payable on the death of the second life. This concept is commonly used in estate planning, where the first spouse to die leaves his or her estate to the surviving spouse, using the unlimited marital estate tax deduction. The death benefit would be triggered upon the death of the second spouse, when the estate would become taxable.
Section 1035 Exchange – This refers to a part of the Internal Revenue Code that allows owners to replace a life insurance or annuity policy without creating a taxable event.
Section 7702 – Part of the Internal Revenue Code that defines the conditions a life policy must satisfy to qualify as a life
insurance contract, which has tax advantages.
Settlement Options – One of several ways, other than immediate payment in a lump sum, in which the insured or beneficiary may choose to have insurance policy proceeds paid.
Social Security – A federal program that provides retirement, disability and survivor benefits to qualified individuals.
Standard Risk – A category of risk that meets the underwriter’s definition of standard or favorable risk.
Straight Life Annuity – An annuity whose periodic payouts stop only when the annuitant dies.
Substandard Rating – See “Rated Policy”
Suicide Clause – A clause common to life insurance policies that provides the insurer is not required to pay the death benefit if the insured commits suicide within a stipulated period of time, usually two years.
Surrender Charge – A charge that may be assessed against the accumulated values of a policy if full or partial surrender is made.
Survivorship Life Insurance – See “Second-to-Die Insurance”
Term Insurance – Life insurance that covers the insured for a certain period of time, known as the term. The policy pays death benefits only if the insured dies during the term. Term policies usually do not build up any of the nonforfeiture values associated with permanent life policies.
Term Rider – A rider on a permanent or term life insurance policy that covers the insured or another party with term insurance.
Underwriting – The process of classifying applicants for insurance by identifying characteristics such as age, gender, health, occupation and hobbies. People with similar characteristics are grouped together and are charged a premium based on the group’s level of risk.
Universal Life Insurance (Adjustable Life) – A type of permanent life insurance that allows the insured, after the initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. This policy also permits the insured to reduce or increase the death benefit more easily than under a traditional whole life policy. To increase a death benefit, the insurance company usually requires a person to furnish satisfactory evidence of continued good health.
Variable Annuity – A contract in which the premiums paid are invested in subaccounts that invest in shares of an underlying mutual fund offered by the insurance company, including bond and stock funds. The selection of subaccounts should depend on the level of risk a person wants to assume. The account value reflects the performance of the underlying mutual funds in which you decide to invest and any additional subaccount fees. Over the long term, variable annuities invested in equities generally reflect the growth and performance of the economy and can help serve as a hedge against inflation.
Variable or Variable Universal Life – A type of permanent insurance with death benefits and cash values that vary with the performance of a portfolio of investments, which invest in a corresponding mutual fund. A person allocates premiums among a variety of investments offering different degrees of risk and reward, including stocks, bonds, combinations of both, or subaccounts that guarantee interest and principal.
Variable Universal Life Insurance – A combination of the features of variable life insurance and universal life insurance under the same contract. Benefits are variable based on the value of underlying separate accounts, and premiums and benefits are adjustable at the option of the policyholder.
Vesting – The right of an employee to all or a portion of the benefits he or she has accrued, even if employment terminates. Employee contributions, as in a 401(k) plan, are always fully vested. Employer contributions vest according to a schedule defined by the plan and are usually based on years of service.
Viatical Settlement Contract – A written agreement entered into between a viatical settlement provider and a viator under which the viatical settlement provider will pay compensation in return for the viator’s assignment, transfer, sale devise or bequest of the death benefit or ownership of all or a portion of the insurance policy or certificate of insurance to the viatical settlement provider. A viatical settlement contract also includes a contract for a loan or other financial transaction secured primarily by an individual or group life insurance policy, other than a loan by a life insurance company pursuant to the terms of the life insurance contract, or a loan secured by the cash value of a policy.
Viator – The owner of a life insurance policy or a certificate holder under a group policy insuring the life of an individual with a catastrophic, life-threatening or chronic illness or condition who enters or seeks to enter into a viatical settlement contract.
Waiver of premium – A provision that sets certain conditions under which an insurance policy will be kept in full force by the company without the payment of premiums. It is used most frequently for those policyholders who become totally and permanently disabled, but may be available in certain other cases.
Whole Life Insurance – A common type of permanent life insurance. With this type of policy, premiums generally remain constant over the life of the policy and must be paid periodically in the amount specified in the policy.