Life Insurance Terms
Estate tax
A Tax payable to the federal government in some cases state governments on the death of an individual. There are federal and state rules for calculating the tax. Life insurance can go to the beneficiary, free of income tax liability, but without properly planning the amount of the death benefit may be included as part of the deceased's estate and subject to estate tax
Disclosure statement
A comparison form required by various state regulatory agencies to be given every policy owner when replacing an existing policy with another
Hazard
A condition present that increases the chance of a possible loss. Three primary types: physical hazards (faulty wiring in the building), moral hazards (dishonest or criminal activities), and morale hazards (leaving keys in the ignition, carelessness)
Fair credit reporting act
A federal law passed in 1970 that provides an insurer with the right to receive additional information with regard to applicants for insurance coverage. This law permits and sure to conduct a consumer report on applicants and proposed insureds. An applicant for insurance must be informed of the purpose of the report. If coverage is declined due to information in the report, the insurer must provide the name and address of the reporting agency so that the applicant may secure a copy of the information in the report
Exclusion ratio
A formula used to determine what portion of a periodic annuity payment is taxable
Estoppel
A legal principle that protects the insured if the insurer or its producers make an error and later the insured attempts to deny a claim. For instance, a producer makes a false representation to a applicant who relies on the statement. Later harm is caused to the policy owner when a claim is denied because of this reliance. The insurer will then be estopped or prevented from denying the claim
Extended term insurance
A non-forfeiture option available when a policy is surrendered in which the same face amount of the policy is continued in force for a specified additional period of time. However the coverage has changed from permanent to level protection. This is the nonforfeiture option that provides the policy owner with the greatest face amount of coverage
Deferred compensation
A plan that allows selected individuals to differ the receipt of income in accordance with a written agreement with their employer. May be qualified or nonqualified
Family policy
A policy covering the entire family. Whole life insurance covers the primary insured, breadwinner, with varying amounts of level term on the best of the family
Family maintenance policy
A policy that combines a whole life policy and a level term rider. It's provides for the payment of a monthly income during a stated period of years once the insured dies. The monthly income is payable from the date of death to the end of the preselected period. The payment of the face amount of the policy is payable at the end of the preselected period.
Family income policy
A policy that combines a whole life policy with a decreasing term rider in order to provide a death benefit together with monthly income payments to the beneficiary. Monthly income payments are made only from the date of death until maturity date of the contract. Then the lump sum part of the whole life coverage is paid
Facility of payment clause
A provision in a policy that permits the insurer to pay the insurance proceeds to persons other than the insured, designated beneficiary, or the estate of the insured in order to pay burial expenses
Incontestable clause
A provision of life insurance policies that states once the policy has been in force for two years, during the lifetime of the insured, the insurance company may not challenge the validity of the policy. Over the years, case law has established precedence that the incontestable clause applies to cases of fraud
Dividend
A refund of part of the premium under a participating policy or a share of surplus funds. Derived from savings in mortality and expenses
Dependent rider
A rider that maybe added to a life insurance policy specifically to provide coverage for dependents of the primary insured. Dependence riders may cover a spouse or children or dependents parents. A family rider may cover the primary insured spouse and children (natural and adopted)
Fixed period
A settlement option under a life insurance policy that pays the beneficiary an amount of monthly income for a specified period of time rather than a lump sum settlement
Grace period
A specified period of time after a premium payment is due, during which the protection of the policy continues even though the payments for the renewal premium has not yet been received
Contributory plan
A term applied to a group insurance plan under which both employee and employer contribute to premium payment this is also referred to as the shared premium plan
Cross- purchase plan
A type of buy sell plan where is partner buys a policy covering each of the other partners in order to have sufficient funds available to buy out the deceased partner's interest upon his or her death
Equity indexed annuity
A type of fixed or non-variable annuity. The contract pays a guaranteed minimum interest rate and account assets are tied to an index such as Standard and Poors. If he index is higher than the guaranteed rate each year, the contract owner receives the greater return. If the index is lower than the guaranteed rate, the contract owner receives the minimum guaranteed rate
Endowment
A whole life policy that, following an endowment period, pays a stated amount to the insured. If the insured dies during the endowment period, the face amount of the policy is paid to the primary beneficiary
Free-look period
All life insurance policies must include at least a 10 day free look-period in a life insurance contract. It begins when the policy is delivered by the producer. It's during this period the policy owner decides to return the contract to the insurer, he/she will receive a full premium refund. A mail order or direct response insurer must include a free look period of at least 30 days
Defined contribution plan
An employee benefit plan under which each participant's benefits are based solely upon the contributions made to the participants account. The amount of the contributions will determine the future benefit at retirement
Executor
An individual named in the will and approved by a probate court to carry out the provisions of the will. If the named individual can not or will not accept the appointment then the probate court will name an administrator
Fraternal association
An organizations that markets life and health insurance product solely to its members
Defamation
An unfair practice where a producer or insurer makes false and maliciously critical statements regarding the financial condition of the competing insurer
Fixed annuity
And annuity contract that pays a predetermined amount of income every month to An annuitant. The insurer bears the investment risk in a fixed annuity
Foreign ensurer
And insurer conducting business in a state other than the state in which it was organized or chartered. This classification of insurer is licensed to conduct business in a particular state but its principal office is situated in another state
Exclusions
Another name for exceptions
Face amount
Another name for the death benefit of a policy
Evidence of insurability
Any statement or proof of a person's health history and current health status that qualifies that person for coverage
Implied authority
Authority granted to a producer by an insurer that is not specifically identified in the agency agreement
Increasing term insurance rider
Characterized by an increasing amount of term life coverage each year. Ttwo primary types: return of premium rider and a return of cash value rider
Guaranty fund
Each state has a life and health insurance guaranty fund that is designed to protect policy owners against the insolvency of an insurer. In order for the fund to be operated all the insurers licensed to sell life and health insurance must participate
Defined benefit plan
Employee benefit retirement plan that uses a definite formula to determine the exact benefit amount. Employer contributions to the plan I'm actuarially determined. The benefit to be paid in the future Will determine the amount of the contributions
General agent
Given supervisory authority over the agents under his or her jurisdiction. Usually performs the following functions: selecting, writing and servicing the insurance business in force of his or her territory. Generally, signs contracts with agents to sell and service the insurer's policy and contracts. Usually not an employee of the life insurance company but self employed like an independent agents
Decreasing term insurance
I type of temporary or pure protection characterized by reducing face amount each year. Sometimes called mortgage redemption or mortgage protection insurance it is primarily used in conjunction with debt or loan
Corridor
In universal life insurance a level of pure insurance must be maintained more than the accumulated cash value. Tax law regulates the amount
Binding Receipt (Unconditional Receipt)
Insurance becomes effective on the date of the receipt and continues for a specified period of time or until the insurer declines the application
Credit life insurance
Life insurance designed to pay the balance of a loan if the insured dies before the loan has been repaid in full. Generally sold by a lender or finance company
Conversion Period
Life insurance includes the conversion privilege that permits the policy owner the right to change coverage from term life to whole life with without demonstrating insurability if effected during a 31 day conversion period. Also available to employee if he or she wishes to change group term coverage to permanent whole life insurance
Immediate annuity
Pays a monthly income commencing one, three, six, or 12 months after purchase. This type of contract must be funded with a lump sum or single premium
Experience rating in group insurance
Premium is computed on the basis of past losses and expenses incurred by the insurer in the settlement of claims and other expenses involving a particular group
Fiduciary responsibility
Producers possess this responsibility since they handled the monies of the public. Producer must account for all premiums collected or they have failed to uphold this duty. Anyone who possesses this duty must act with a high degree of trust
Exceptions
Provisions in a policy that eliminate coverage for specified causes of death
Death benefit
The amount that is paid upon the death of the insured. Also called the face amount, coverage amount or policy proceeds
Express authority
The authority granted to a producer by an insurer as identified in the agency agreement to which both parties agreed
Convertibility
The base of the policy owner to exchange an existing policy for other policies offered by the insurance company. May be the conversion of individual term insurance to an individual payment plan that company sells or the conversion of group disability, life or health to an individual plan
Death claim
The completed form that proves the insured's death. Must be filed with the insurer along w/ a copy of the death certificate in order to receive policy proceeds
Discount value
The difference between an amount due in the future and its present value computed at a specific rate of interest
Guideline premium
The maximum premium that can be paid into Universal Life Policies and still have the benefit to qualify as life insurance under federal tax laws. If the guideline premium is paid on a regular basis there may be little margin for any additional premium payments into a Universal Life Insurance policy account
Dividend options
The owner of a participating life insurance policy is granted several choices in which to receive or use dividends earned: receive the dividends in cash, use it to reduce the premium, apply it to purchase paid-up additional amounts of life insurance, leave it to accumulate at interest, use it to purchase one year term insurance
Domestic insurer
Uninsured conducting business in the state in which it was formed, organized or chartered. A company that has its home or principal office in the state in which it is conducting business
Deferred annuity
Where income payments commence more than one year after the payment of the first (or single) premium to the insurer, usually at retirement
Annuity
a contract btwn an insurer and owner affording periodic income payments for a fixed period of time or during the lifetime of an annuitant. May be defined as the systematic reimbursement or liquidation of an estate
Annuity Surrender Charge
a fee charged by the insurance company for a partial or full withdrawal of funds made during a specified period after the annuity is funded. Contract language determines the size of the fee and the length of surrender charge period. Intended to discourage the movement of funds for the defined period, allowing the insurance company to recover their setup and administration costs
Accidental Death and Dismemberment Insurance
a form of insurance affording benefits in the event of accidental death; the accidental loss of sight, speech or hearing; loss of use of limbs (paralysis); or loss of member (arm or leg)
Cash Refund Annuity
a life annuity contract which provides that upon the death of the annuitant, a beneficiary will receive a lump sum payment that represents the difference between the amount the annuitant paid to the insurer and the total income payments received by the annuitant
Accidental Death Benefit
a lump sum payment for loss of life due to an accident that was the direct cause of death. The cause of cause of death must be accidental for a benefit to be payable under the policy
Actuary
a person who calculate policy rates, reserves, and dividends and makes other applicable statistical studies and reports
Automatic Premium Loan
a provision in a life insurance policy that states that if the policy owner fails to pay a premium by the end of the grace period, the amount of the premium due will be loaned to the insured automatically from the policy's cash value. However, the cash value of the policy must be sufficient to cover the automatic loan. Generally, the policy owner must request that this provision be made a part of the policy at the time of the application (they may also request it once the contract takes effect)
Buy-Sell Agreement
agreement btwn partners in a business or btwn an owner and a key employee. Provides for the continuation of the business when, for example, one of the partners dies. The remaining partners "buy-out" the interest of the deceased partner by paying an agreed upon amount of funds to the deceased' survivors. Life insurance is generally used to fund or support the agreement
Annuity Certain
an annuity that provides a benefit payment payable for a specialized length of time regardless of whether the annuitant lives or dies
Agent
an authorized rep of an insurer who is licensed to sell life insurance and annuity contracts. Represents the insurer who sponsors him or her
Assignee
an individual to whom the rights under a life insurance contract are transferred
Consultant
an individual who provides advice and consultation for a fee. Must secure a consultant's license and referred to as insurance advisers counselor, specialist, or analyst
Alien Insurer
an insurer organized under the laws of a country other than the US
Authorized Insurer
an insurer that possesses a certificate of authority in a particular State. Also called an admitted or licensed carrier
Accident
an unforeseen, unintended, unexpected event, or fortuitous event that causes death, injury or damage
Commission
compensation or payments made by an insurer to a producer for the sale of an insurance policy
Certificateholder
covered employee in a group life or health plan. Employer receives the master policy and each employee receives a certificate or a booklet describing their group benefits. Possesses an incident of ownership in the contract since they are allowed to designate the beneficiary
Certificate of Insurance
document containing info regarding the master policy of a group indicating that an employee has coverage
Concealment
failure by an applicant to disclose in his or her application a material fact that is relevant to the acceptance or the declination of an application for insurance coverage
Conditional Receipt
form, normally required to be signed by agent and given to the prospective owner at the time a new application is completed. Issuing is subject to company rules. Most require that agent collect an initial premium and most most usually grant some level of limited coverage, under special conditions, before issuance of the policy. W/o valid receipt, no coverage is in force until policy is issued, delivered, and accepted (initial premium paid)
Ceding Company
in a reinsurance transaction, this is the insurer that transfers risk to another insurer called the reinsurance company
Attending Physician Statements
known as APS, used when the application or medical examiner's report reveals conditions or situations, past or present, about which more info is desired. Because of physician/patient confidentiality, the applicant must sign an authorization, which allows the physician to release info to the company underwriter
Backdating
making the effective date of a policy earlier than the application date. Used to make the issue age lower than at applicant's real age in order to get a lower premium. State laws normally limit the time to which policies can be backdated to six months. Not allowed to variable contracts due to the nature of the investment
Accelerated benefits rider
may be added to a life insurance policy that permits the policy owner to "accelerate" or receive a certain percentage of the death benefit while the insured is still alive when he or she has been diagnosed with a terminal illness. Whatever amount is paid to the owner under the rider is subtracted form the face amount when death occurs and the remainder is paid to the designated beneficiary
Address Change
most states require that a producer notify the applicable regulatory department of any residence/business address change. And if a producer legally changes his/her name, notice of the change must be provided
Consideration
one of the requirements of a valid contract. Representations on the application and the premium is the policy owner's consideration. The insurance company's "promise to pay" is its consideration
Buyer's Guide
pamphlet that describes and compares various forms of life or health insurance. Must be provided to a consumer by the producer when prod. trying to solicit insurance. Guide makes info available to the consumer that assists them in making an informed decision when purchasing coverage
Contingent Beneficiary (Secondary)
person who is entitled to a death benefit only if there is no primary beneficiary when the insured dies. Minor may be listed but an insurer is not permitted to pay policy proceeds to a minor beneficiary
Continuing Education
regulations in place that require producers and other insur. professionals to maintain competency on a reg basis to hold license. License may be suspended or revoked until compliance is completed
Commingling
that a producer is combining premiums collected with personal funds. Not a legal activity and may be construed as larceny
Assignment
the act of transferring ownership rights of a life insurance policy by the owner to a third party (assignee). If all rights and the entire contract are assigned to another party an *absolute* assignment has occurred. If one or some of the rights of the policy are transferred to another party but not all, a *collateral or conditional* assignment has taken place
Attained Age
the age that a person or an insured has attained on a given date. Based on either the nearest bday or last, depending upon the practices of the company. "current age"
Cash Surrender Value
the amount that is available in cash upon the surrender of a policy by the owner before or after the policy matures (a as a death claim or otherwise). aka surrender value
Age Change
the date halfway between bdays when the age of the applicant changes to the next higher age. With some insurers, the age is based upon the applicant's age at his nearest bday. In others, it is based upon the ages of his last bday
Claim
the demand to an insurer for the payment of benefits under a policy
Cash Value
the equity portion of a whole life policy that increases w/ each subsequent premium payment. Interest is paid by the insurer on the cv which is tax deferred. In a whole life policy the cv is designed to equal the policy's death benefit at age 100, when a traditional WL is designed to mature
Annuitant
the individual whose life the annuity is based. If the annuity is paid out for a lifetime, the annuitant's age is used to determine payments. The person who normally receives the annuity payment, however, that may not or may not be the case
Certificate of Authority
the name of the license to transact insurance business that is issued to an insurance company
Accumulation Period
the pay in period of an annuity during which the contract owner receives tax deferral. During this period the contract owner is referred to as the policyowner. Once this period end, the annuity phase or the income phase commences
Annuitization
the period for which annuity benefits are paid
Beneficiary
the person(s) designated to receive policy proceeds in the even of the insured's death. Policies may include a primary, contingent (secondary), or tertiary beneficiary
Application
the statement of information given when a person applies for life, health, or disability insurance. The insurance company's underwriter uses this info as a basis in determining whether the applicant qualifies for acceptance under the company's guidelines. Attached to and made part of all individual contracts.
Adverse Selection
the tendency of a disproportionate number of poor risks to seek or buy insurance or maintain existing insurance in force (the selection again the insurance company). Sound underwriting reduces adverse selection
Common Disaster Clause
this provision defines the method of payment of the proceeds of the policy by the insurer if the insured and the named beneficiary die simultaneously in the same accident
Additional Premium
used in universal life policies. Can be paid into the policy account in an amount above the target premium. current tax laws limit the amount of excess cash value that can be accumulated in a life insurance policy. The insurance company may not accept the additional premium if it nears this limit without increasing the limit of life insurance (subject to underwriting)
Age Based Penalty
when an individual prematurely withdraws funds prior to age 59.5 from an annuity, a modified endowment contract, or a qualified plan, he or she will be assess a 10% penalty. No such penalty will be assessed if the distribution is made after this stipulated age