AFE 1 Glossary Words

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Medicare Part B

Under Medicare, optional coverage subject to an additional premium payment that covers physician, nursing, and testing services as well as durable medical equipment such as mobility devices (e.g. canes or wheelchairs), prosthetic devices, and oxygen supply machines, subject to cost sharing

Medicare Part C

Under Medicare, optional coverage that provides the option of receiving Medicare benefits under private insurance plans for beneficiaries with both Part A and B coverages under which benefits are more liberal than standard Medicare benefits and may require supplemental premiums by policyowners. Also called Medicare Advantage Plan

surrender charge

amount assessed against a policy's cash (account) value as a type of penalty for early policy termination. also called back-end load

rating agency

business that provides commentary and opinions about and ratings of the ability of financial firms to meet their obligations

economizing problem

condition of unlimited wants and limited resources

home service life insurance

encompasses industrial and monthly debit ordinary insurance

deposit taking institution

financial intermediary that takes deposits from and makes loans to consumers

balance sheet

financial statement showing assets, liabilities and owners' equity or surplus

debit

geographical territory assigned to a commissioned exclusive agent of a home service life insurer

provider

individual or organization providing health care services

Fraud

intentional deception or misrepresentation made for personal gain

single premium whole life insurance

limited-payment whole life insurance under which only one premium payment is made

free withdrawal corridor

maximum stated proportion of annuity cash value that can be withdrawn without incurring a surrender charge, such as 10%

donor

person making a gift

modal premium

premium paid other-than-annually. also called factional premium

insuring clause

required life or health policy provision stating the insurer's promise to pay the death or health benefits due, subject to policy condition. also called insuring agreement

annuity

series of periodic payments or receipts

derivatives

traded securities or contractual agreements whose cash flows depend on the value of other specified securities or indices

foreign insurer

1. in US terminology, an insurance company domiciled (incorporated) in a state different from that in which it is licensed to do business 2. in international terminology, an insurer organized in another country

Medicare supplemental insurance

Individual health insurance policy that pays benefits not covered under Medicare

comprehensive Medicare supplement policy

Medicare supplemental insurance that generally has high maximum benefit limits or is unlimited with respect to the duration of confinement in a hospital or skilled nursing facility

voidable

agreement that can be made void at the option of the innocent party

annuity certain

annuity payable over a set period without reference to whether the annuitant is alive

deferred dividends

divisible surplus payable only at the close of a stipulated number of years, such as 5, 10, 15, and 20

buyer's guide

document required to be provided to prospective life insurance buyers by the NAIC Life Insurance Disclosure Model Regulation, intended to assist prospective purchasers in deciding how much and what type of life insurance to buy and comparing the costs of similar policies

retention

dollar amount or percentage of an insurance policy's risk that a ceding company retains for its own account

juvenile endowment insurance

endowment insurance sold on the lives of juveniles, maturing at specified ages or events associated with a child's education, marriage, or independence

semi-endowment insurance

endowment insurance that pays upon survival one-half the sum payable on death during the endowment period

product implementation

final determination of rates, values, and other policy elements; the design of policy and application forms; the filing of these forms with regulatory authorities; the creation of supporting marketing materials and administrative systems that facilitate effective distribution and administration of the product; and the actual introduction of the product

mature

final performance event of a life insurance policy that terminates upon payment of the death or endowment of benefits

investment bank

financial institution that bring together investors and firms that issue securities; some investment banking activities involve the underwriting of securities and some are strictly sales intermediary activities; may engage in the sale of life insurer's products

credit default swaps

financial instruments bought by investors to protect against defaults on bonds

cash flow statement

financial statement showing the net change in a cash position over a reporting period

equity indexed annuity

fixed annuity contract whose interest crediting rate is the insurer's current crediting rate and/or a specified external index, such as the Standard and Poor's 500 index

out-of-network provider

health care services offered through a provider not affiliated with the patient's health maintenance organization or preferred provider organization, which are reimbursed in cash by the network plan

provider network

health care services offered through providers affiliated with a patient's health maintenance organization or preferred provider organization

medical necessity

health care services that generally are considered to be reasonable, necessary, and appropriate based on accepted clinical standards of care

noncancellable

health insurance policy under which premiums are guaranteed and the insured has a contractual right to continue the policy by the timely payment of premiums, usually to a specified age such as 65

joint and last survivor annuity

life annuity whose payments are determined with reference to two (or more) annuitants, providing payments for as long as either of them lives

modified endowment contract

life insurance policy entered into after June 20, 1988 that meets the Internal Revenue Code Section 7702 definition of life insurance but that fails to meet the seven-pay test and therefore is not entitled to favorable income tax treatment of distributions

indeterminate premium

life insurance policy premium charged the policyowner that can be less than that guaranteed in the contract

terminal illness coverage

life insurance policy promise to pay up to a specified percentage (e.g. from 25 to 100 percent) of the policy's face amount if the insured is diagnosed as having a terminal illness, often subject to an overall maximum payment (e.g. $250,000). also called accelerated death benefits

living benefit feature/rider

life insurance policy provision or rider that promises to pay some or all of a policy's face amount prior to the insured's death if the insured suffers specified adverse health conditions. also sometimes called accelerated benefit rider

mutual life insurance company

limited liability corporation authorized to sell life insurance, which is operated for the benefit of its policyowners who have an ownership interest in the company

stock life insurance company

limited liability corporation authorized to sell life insurance, which is owned by and operated for the benefit of shareholders who seek an adequate return on the capital they risk

irrevocable life insurance trust

living trust created to own and be beneficiary of life insurance that is not part of the grantor's gross estate yet with proceeds typically available to provide estate liquidity

shared benefit long term care

long term care insurance policy insuring two lives with the total benefit available for one or both lives

predatory pricing

lowering of prices to unprofitable levels to weaken or eliminate competition with the idea of raising prices after competitors are driven from the market

principal sum benefit

lump sum amount payable under some disability income and other insurance policies if the insured's death results from an accident

discharge planning

managed care function designed to limit the length of hospital stays to the medically necessary minimum

break even

measure of profitability calculated as the number of years until earnings equal disbursements

embedded value

measure of the expected value of a book of business (e.g. a product line) derived by taking the present value of projected future net cash flows and changes in reserves.

human life value

measure of the future earnings or value of services of an individual i.e the capitalized value of an individual's future earnings less self-maintenance costs such as food, clothing, and shelter

beta

measure of the volatility or variance of a stock's performance relative to the performance of the stock market as a whole

full preliminary term method

modified policy reserve method permitted as part of the Commissioner's reserve valuation method under US statutory accounting principles that allows an insurer to assume that the first year's premium under some policies pays only for term insurance for the first policy year and that the actual policy for reserve purposes comes into operation on year later than the age of issue and will have a one year shorter premium payment and coverage period

aggregate mortality table

mortality table showing probabilities of death by age and other possible criteria such as sex of insureds within both the select and ultimate mortality groups

ultimate mortality table

mortality table showing probabilities of death by age and other possible criteria such as the sex of insureds after the select mortality period

testamentary trust

one created through a decedent's will

call

option to buy

donee

person receiving a gift

agent

person who acts for another.

grantor

person who establishes a trust. also called a creator or settlor

policyowner

person who has the contractual right to exercise all policy options and with whom the insurer deals. also called policyholder

transferor

person who transfer a property interest; for estate tax, the decedent and, for gift tax, the donor

insured

person whose life or health is the object of an insurance policy

enter onto an annuity

point at which annuitization commences

short straddle

position established by an options speculator through the simultaneous sale of a put and a call on the same asset

capture theoy of regulation

positive economic theory holding that special interest groups within the regulated industry, being well organized and well financed, influence legislation and regulation of their own benefit

behavioral economics

positive or descriptive discipline that seeks to predict how investor and savors actually behave

contagion risk

possibility of cascading failures because of financial intermediaries being highly connected

retirement tail risk

possibility of having insufficient resources at retirement to cover an individual's entire life span

longevity risk

possibility of outliving one's financial resources

asset-liability management

practice of matching the sensitivity of the net of asset and liability values to interest rate changes

lapse-supported pricing

practice of pricing a product such that gains from lapse and surrenders are allocated to subsidize later policy benefits

immunization

practice of structuring assets and liabilities such that a change in interest rates affects asset and liability values equally

market conduct

practices associated with agents' and insurers' advertising, sales, counseling, and servicing activities

reinsurance premiums

premiums paid for insurance

utmost good faith

principle holding that parties to an insurance contract are entitled to rely in good faith upon the representation of the other, and each is under an obligation not to attempt to deceive or withhold material information from the other

estoppel

principle that prevents an individual from denying or asserting any position contrary to that established by the individual's own conduct or by previous legal determinations

precertification

prior approval of procedures, hospital admission, and length of stay that stipulates benefits will be paid

corpus

property held in a trust

replacement

purchase of a new life insurance policy and, in connection with that purchase, termination of an existing policy or values extracted from it.

identically distributed

random variables whose probability distributions prescribe the same probability to each potential occurrence, which renders the distribution's expected values and variances equal. also called homogenous

enterprise risk management

range of processes and techniques designed to protect and create value by assisting companies uncover hidden risks, improved the stability of earnings, identify opportunities in assuming risk and risk arbitrage, and discovering natural synergies across business lines

insurance penetration

ratio of yearly direct premiums written to gross domestic product within a market

indemnity reinsurance

re3insurance that indemnifies the ceding company for some or all of its reinsured underwriting losses

program sales

sales efforts targeted at a limited, particular need that can be addressed with a particular product

insurance agent

sales person licensed by the state and under contract to sell at least one insurer's products, typically for a commission and on a face-to-face basis. also called producer

dividend history

schedule of dividends actually paid under a particular participating policy or policy form

silo risk

segregation of mortality, investment, and asset/liability risk from each other, with each having its particular risk management methods

graduation

smoothing of a mortality curve, performed to eliminate irregularities in observed data that are believed not to be true characteristics of the universe from which the sample experience was extracted

apparent authority

the authority which a third person believes an agent to possess by virtue of circumstances made possible by the principal and upon which the third party is justified in relying

life annuity certain and continuous

the combination of an annuity certain followed by a pure life annuity. also called life annuity with installments certain

asset share

the conceptual segmentation to individual policies of an insurer's general account investments accumulated on behalf of a group of policies

guaranteed renewable

the contractual right within a health insurance policy to continue the policy by the timely payment of premiums, usually to a specified age such as 65, but with no guarantee as to the magnitude of future premiums

informal funding

the establishment of a reserve fund by an employer to meet future nonqualified retirement plan obligations but with the fund not formally linked to the obligation and that remains a general asset of the business subject to attachment by its general creditors

cost of insurance

the internal age-based rates assessed against each life insurance policy and based on its net amount at risk to cover its share of mortality charges for the period

private placement

the negotiation of the terms of a loan offering directly between the borrower and the buyer, in contract to securities traded on public exchanges

interest

the price paid for the use of money

policy elements

the pricing components of life insurance policies, including premium, benefits, values, credits, and charges

product margin

total of expense, mortality, and interest margins

notional amount

value of capital hedged

liquid withdrawal phase

with a guaranteed lifetime withdrawal benefit provision or rider, the initial phase of the liquidation period when withdrawal amounts are made from the policy account value

radix

with a mortality table, arbitrary number of persons assumed to be alive at the youngest age for which death rates are shown

stated value basis

with any insurance policy, stated policy benefit payable without regard to the actual economic loss suffered also called valued policy

injury

with disability income insurance, accidental bodily injury whose results were unforeseen or unexpected occurring while the policy is in force

personal insurance

1. any insurance purchased by individuals for non-commercial purposes 2. life, accident, and other insurance covering a person, in contrast to insurance covering property and liability losses

market ris

1. category of risk specified by the International Actuarial Association/ Association Actuarielle Internationale, possibility of volatile values and uncertainty in financial markets that can affect expected cash flow 2. possibility that an investment will decrease in value due to changes in market risk factors, the four standard such factors being stock prices, interest rates, foreign exchange rates, and commodity prices

liquidity risk

1. category of risk specified by the International Actuarial Association/Association Actuarielle Internationale, possibility of policyowners and borrowers making unexpected payments or withdrawals in response to changing interest rates 2. possibility that a security or asset transaction cannot be completed quickly enough to capture a gain or prevent a loss

life insurance

1. classification of insurance providing protection against the risks associated with mortality, longevity, and/or morbidity. 2. type of insurance that pays a benefit to a named beneficiary on the death of the insured. also called life assurance.

bonus

1. extra interest (e.g. 1%) credit to the annuity cash values or deposits paid over the standard crediting rate for a limited period and 2. in the UK and Commonwealth terminology, policy dividend

insurance

1. from an economic perspective, a financial intermediation function under which insureds each contribute to an insurance pool from which payments are made to them or on their behalf if specified contingencies occur; a contingent claim on the pool's assets 2. from a legal perspective, an agreement (insurance policy or contact) by which one party (policyowner) pays a stipulated consideration (premium) to the other party (insurance company) in return for which the insurance company agrees to pay a defined amount or provide a specific service if specified contingencies occur during the policy term

stress test

1. in life insurer risk management, method of applying a set of extreme assumptions to a deterministic model to ascertain financial results under a limited set of economic scenarios 2. in life insurance policy evaluations, running illustrations with reduced crediting rates and/or at less favorable charges to provide an idea of potential downside policy performance

return-of-premium term policy/rider

1. increasing cash value feature of a term or other policy that promises to provide a cash value at the end of a term of from 10 to 30 years in an amount equal to the sum of premiums paid for the policy if the insured survives to that period 2. under a disability income insurance policy, rider providing a benefit amount after a specified number of policy years equal to the sum of premium paid if no claims have been made for benefits

health insurance

1. insurance that indemnifies the insured for costs incurred or wages lost because of illness, injury, and/or incapacity 2. insurance to cover medical expenses incurred to treat an insured's sickness or injury

gross premium

1. net premium plus loading 2. premium paid to an insurer for an insurance policy

normal profit

1. opportunity cost of enterprise. 2. minimal profit that firms must acquire to remain in operation 3. maximum profit achievable in a perfectly competitive market

mortality risk

1. possibility that one's death creates undesirable financial consequences for others 2. possibility that a budgeting and savings program designed to support an individual or family to and through retirement is not completed due to the death of a breadwinner during his or her working life

human capital

1. productive capacity within each person, considered to be the driving force in economic growth 2. present value of an individual's future earnings

stop loss reinsurance

1. reinsurance that reimburses an employer for large claims incurred in a self funded medical expense plan 2. nonproportional reinsurance that reimburses a ceding company for aggregate claims above a fixed amount, a percentage of premiums, or a percentage or expected mortality

coinsurance

1. specified proportion of the excess of incurred medical expenses over the deductible that is payable by the insured 2. proportional reinsurance under which the ceding company pays the assuming company a proportionate part of the gross direct premium less commissions and other allowances, premium taxes, and overhead allocable to reinsured policies and the assuming company assumes a proportionate share of the risk according to the terms that govern the original policy

benefit of survivorship

1. survivors' share of the unliquidated funds of those annuitants or insureds who die before their expected age of survival or before their policies endow and 2. contributions remaining in the insurance pool of those who had no claims or whose claims were less than their contributions to the pool, thus providing funds to other claimants

guaranteed minimum death benefit

1. under a variable universal life policy, feature or rider that, for an additional premium, guarantees that a specified minimum death benefit will be paid irrespective of whether the policy account value is positive, provided benchmark premiums have been paid 2. under a variable annuity contract, guarantee that the amount paid on death will be the greater of the cash value or the amount invested in the contract

Form 10-K

Filing required annually by the US Securities and Exchange Commission for companies greater than a certain minimum size whose stock is traded in public markets, which provides detailed information related to the company's history, nature of its business, organizational structure, risk factors, equity, subsidiaries, and audited financial statements, among other information

Accumulated Value

Future value of a principal amount of amounts accumulated at interest

transfer for value rule

Internal Revenue Code Section 101(a)(2) which provides that death proceeds under a life insurance policy are included in gross income to the extent of the excess of gross policy death proceeds over the policy's cost basis if the policy or any interest in it was transferred to another person for a valuable consideration

section 1035 exchange

Internal Revenue Code provision permitting a tax free exchange of certain types of life insurance policies and annuities for others. also called a 1035 exchange

section 303 stock redemption

Internal Revenue Code provision permitting an income-tax-free redemption of shares of stock by qualifying estates in an amount up to federal and state death taxes due, funeral expenses, and estate administration expenses

attribution rules

Internal Revenue Code provision that attributes the stock owned by family members or estate beneficiaries to a decedent for estate taxation purposes

Accumulated book profits model

Simulation of anticipated operating experience for a block of policies using the best estimates of what the individual factors will be for each future policy year with profits and losses carried forward at a selected hurdle rate and maintained separately in a profit account

general counsel memorandum

US Treasury Department detailed analysis prepared to explain the reasoning underlying a regulation, revenue ruling, or private letter rulings

private letter ruling

US Treasury Department interpretation of a specific fact situation deemed not to be of general interest

revenue ruling

US Treasury Department interpretation of a specific fact situation deemed to be of general interest

technical advice memorandum

US Treasury Department statement prepared after the fact in response to a tax issue, usually in connection with a taxpayer audit

Medicare

US social insurance program providing health insurance coverage for the elderly, defined as anyone age 65 and over

Medicare Part A

Under Medicare, covers 1. hospital stays of up to 90 days subject to cost sharing provisions, with a lifetime reserve of 60 additional days and 2. up to 100 days in a skilled nursing facility, subject to daily cost sharing

Medicare Part D

Under Medicare, optional prescription drug coverage available only through private insurers and subject to an additional premium, providing benefits distinct from Medicare Parts A, B, and C

fraudulent transfer

Under the Uniform Fraudulent Transfer Act, payment made with the actual intent to hinder, delay or defraud a creditor. Also called fraudulent conveyance

utility

a measure of consumer satisfaction derived from economic goods

market

a system of exchange where goods or services are bought and sold

Form 10-Q

abbreviated version of a Form 10-K filing required quarterly by the US Securities and Exchange Commission for companies above a certain size and whose stock is traded in public markets

asset valuation reserve

accounting mechanism required by regulators designed to minimize volatility in an insurer's statutory surplus by earmarking portions of it to absorb realized and unrealized capital gains and losses not attributable to interest rates

interest maintenance reserve

accounting mechanism required by regulators designed to minimize volatility in an insurer's statutory surplus by earmarking portions of it to absorb realized capital gains and losses attributable to changing market interest rates

double gearing

accounting twice for subsidiary capital, once within the subsidiary and again at the conglomerate level

guaranteed living benefits

accumulation, income, and withdrawal guarantee features of annuities

book value

acquisition cost of an asset less accumulated depreciation

experience factors

actual results experienced by an insurer on a block of policies as to mortality, investment returns, expenses, taxes, and persistency

reserve

actuarially determined amount representing an insurer's liability attaching to the payment of future policy benefits. assumptions used in the reserve calculation may be statutory (SAP reserves), accounting (GAAP reserves), or economic (economic reserves) depending on the context. also called reserve capital

risk premium

additional amount that rational risk-averse individuals will pay to purchase insurance in excess of the expected value of the loss

margins

additional deaths added to a basic mortality table to develop a valuation mortality table

nonforfeiture factor

adjusted premium when it is amortized over a period shorter or at an uneven rate than that permitted

durable power of attorney

advance directive designating an individual to make financial and other decisions for a person who becomes incapacitated or is declared incompetent to conduct his or her own affairs, survives the person's incapacity, unlike some nondurable powers

medical power of attorney

advance directive designating an individual, referred to as the individual's health care agent or proxy, to make medical decisions for the person if he or she is unable to do so

do not resuscitate order

advance directive requesting no cardiopulmonary resuscitation intervention if one's heart stops or one stops breathing

living will

advance directive setting forth an individual's wishes as to the use of life sustaining measures in case of terminal illness, prolonged coma, or serious incapacitation

general agent

agent whose powers are identical to those of its principal within the limit of the particular business or territory in which the agent operates

special agent

agent whose powers are limited, extending only to acts necessary to accomplish particular transactions for which it is engaged

marketing mix

aggregation and coordination of product origination and development, distribution, compensation, and promotion of a specific product

void

agreement that has no legal force or effect

full costing

allocation of both direct and indirect expenses to specific product lines

marginal costing

allocation of only direct expenses to specific product lines

dividend options

alternative applications of dividends paid under participating life insurance policies, including most or all of the following 1. cash - pay in cash to the policyowner 2. apply toward premium payments - credit toward premium due 3. accumulate at interest - held by the insurer on deposit at interest 4. purchase paid up additional insurance - apply as a net single premium at the insured's attained age to purchase life insurance of the same type as the policy 5. purchase one year term life insurance - either in an amount equal to the cash value or for the maximum amount that the dividend will purchase or 6. add-to-cash-value - accumulate as additional cash value only, with no additional net amount at risk

alternative minimum taxable income

alternative calculation of taxable income determined by adding tax preference items to regular taxable income

rider

amendment attached to an insurance policy that provides supplemental benefits or options, usually requiring an additional premium payment

codicil

amendment that adds provisions or amends a part of a will but does not replace the will

loading

amount added to a net premium to derive a gross premium and designed to cover an insurer's expenses of operation, taxes, profits, and a margin for contingencies

economic capital

amount of financial capital required to absorb a maximum expected loss occurring with a specified probability over a specified time horizon

planned premium

amount of periodic premium that the owner of a universal life policy intends to pay and instructs the insurer to bill

target premium

amount of periodic premium under a universal life policy on which an agent can receive the maximum commission rate and which the insurer may believe provides reasonable policy funding

rating agency capital

amount of surplus capital required to receive the quality rating an insurer desires from a rating agency

contributed surplus

amount paid for shares in excess of their par value

capitation fee

amount paid per person or family by a health maintenance organization to a physician and hospital in return for the provision of health care services to that person or family

cash surrender value

amount payable to the policyowner on a voluntary policy termination, ignoring policy loans, and less any surrender charges. also called the surrender value and sometimes the cash value, especially if the policy has no identifiable surrender charges

market value

amount that an asset would realize in a current market sale

mortality margins

amounts added to underlying mortality rates to develop actual mortality charges under a policy

index-linked interest

amounts credited to an equity index annuity based on the performance of a specified equity index

dividends actually paid

amounts paid in the past under a particular participating policy or policy forms.

buyer ignorance

an asymmetric information problem in which the seller knows more than the buyer about the seller's situation and can use that fact to the buyer's detriment. also called lemons problem

actuarial opinion

annual certification required of an insurer's appointed actuary by state insurance laws as to whether reserves and related actuarial items are computer appropriately, are based on assumptions that satisfy contractual provisions, are consistent with prior reported amounts, and comply with applicable state laws

fixed annuity

annuity contract that credits investment returns based indirectly on the performance of the insurer's general account investments or directly on changes in a specified inflation or equity index, subject to a guaranteed minimum crediting rate

variable annuity

annuity whose cash values and benefit payments vary directly with the investment performance of assets held in one or more separate accounts. also called unit linked annuity

annuity due

annuity whose payments are made at the beginning of each period

life annuity

any annuity whose payments are contingent on whether the annuitant is alive

tontine

any arrangement under which amounts are paid into a fund by participants who receive payments from the fund only for as long as they live, with a portion of the forfeited funds of deceased participants being used to augment payments to survivors

closely held business

any business typically owned and managed by a small number of investors, often family members, and whose ownership interest has no ready market

commercial insurance

any insurance designed for organizations, such as businesses, commercial life, health, and retirement insurance coverages are more commonly referred to as group insurance in the US

bankruptcy

application of bankruptcy laws to a debtor who may or may not be insolvent

contagion

arises when financial distress in one unit of a financial services conglomerate becomes a source of distress throughout the group. also called financial infection

executive bonus plan

arrangement under which an employer pays premiums on a life insurance policy for a selected executive who owns the policy. also called section 162 plan.

option buy/sell agreement

arrangement under which an owner of an interest in a business obligates his or her estate to sell and another party has the option but not obligation to purchase that interest on the owner's death

entity buy/sell agreement

arrangement under which an owner of an interest in a business obligates his or her estate to sell and the business entity obligates itself to purchase that interest on the owner's death

gross purchase buy/sell agreement

arrangement under which each owner of an interest in a business obligates his or her estate to sell and the other owners are obligated to purchase any owner's interest at his or her death

group term carve out

arrangement under which older, higher-paid employees are "carved out" of a group plan and provided with cash value life insurance

split dollar life insurance

arrangement under which one party, commonly an employer, pays portions of the premiums of a life insurance policy insuring another party, commonly an employee, with policy benefits and premium payments shared between the two policies

wait-and-see buy/sell agreement

arrangement under which shareholders and the corporation postpone the decision between a cross purchase and stock redemption agreement until the death of a stockholder

unfunded nonqualified retirement plan

arrangement under which the employer does not formally earmark assets to fund the plan; the employee must rely exclusively on the employer's unsecured promise to make payments

funded nonqualified retirement plan

arrangement under which the employer establishes and maintains assets in an escrow account or trust fund as security for its promise to make future payments to one or more employees

one-way buy/sell agreement

arrangement under which the sole owner o a business obligates his or her estate to sell and another party is obligated to purchase the owner's interest on his or her death

due diligence

as applied to variable products and other securities, process by which a broker/dealer ensures that an investment is as represented

financially impaired insurer

as defined by AM Best, insurer for which its ability to conduct normal operations is impaired, capital and surplus have been determined to be insufficient to meet legal requirements, and/or financial condition has triggered regulatory concern

consumer report

as defined by the U.S. Fair Credit Reporting Act, a written, oral, or other communication of any information by a consumer reporting agency that has a bearing on the consumer's creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living, and that is used or expected to be used in whole or in part to establish eligibility for credit, personal insurance, employment, or certain other purposes

flexible spending account

as part of an employer-sponsored cafeteria plan, permits accumulation of pretax salary reductions for reimbursement of a variety of participant health care, dependent care, and other benefits

admitted asset

asset recognized and accepted on the annual statement of an insurer for the purpose of satisfying an insurer's statutory solvency requirements

deferred acquisition costs

asset under generally accepted accounting principles representing that portion of first year policy expenses incurred by an insurer not charged against income in that year and amortized, usually over the premium paying period, via a charge to income in those later years

capital allocation

asset-liability risk management practice of attributing operational and risk capital to specified projects for risk management and performance measurement purposes

asset-liability matching

asset-liability risk management practice of designing insurance policies and managing liability-matched asset portfolios to interact in a way that protects an insurer's surplus capital position under changing economic conditions and customer behavior

agency problem

asymmetric information problem in which the incentives and interest of one party (the agent) differ from those of the party that it represents (the principals)

moral hazard

asymmetric information problem resulting from the presence of insurance causing a change the loss prevention behavior- called ex ante moral hazard - or loss minimization behavior - called ex post moral hazard - of the insured

long term care insurance rider

attachment to a life insurance policy that promises to pay up to a specified (e.g. 2%) of the policy's face amount monthly if the insured is unable to perform specified activities of daily living because of accident, illness, or frailty, subject often to a maximum monthly payment amount.

warranty

attestation that a statement is absolutely and literally true

insurance density

average annual per capita direct premium written within a market

custodial care

basic non-skilled care excluded from Medicare, typically in the form of assistance with the activities of daily living and commonly covered by long term care insurance policies

consanguinity

blood relationship

long term care

broad range of supportive medical, personal, and social services needed by individuals who are unable to meet their basic living needs for an extended period of time because of accident, illness, or frailty

corporation

business entity legally separate and distinct from its owners and characterized by owners' limited liability for corporate obligations, ability to transfer owners' interests by the sale of their stock, and owners' deaths having no effect legally on its continued existence

individual intermediary

business person who sells insurance products on an interpersonal level and is compensated by commission for each policy sold. also called producers

price taker

buyers and sellers that cannot influence the price of a product; trait of a perfectly competitive market

exempt property

by law, property excluded from the claims of creditors

policy loan provision

cash value life insurance policy provision requiring the insurer to make requested loans to policyowners on the sole security of the policy's cash value

automatic premium loan provision

cash value life insurance policy provision, usually at the policyowner's option, stating that the amount of a premium due and unpaid will be advanced automatically as a loan against the policy at the end of the grace period if the policy has sufficient net cash surrender value

underwriting risk

category of risk specified by the International Actuarial Association/Association Actuarielle Internationale, possibility of inadequate pricing arising from assumptions made with respect to claims and expenses and to policyowner behavior such as persistency and loan activity

operational risk

category of risk specified by the International Actuarial Association/Association Actuarielle Internationale, possibility of internal or external failure of people, processes, or system to function as intended

credit risk

category of risk specified by the International Actuarial Association/Association Actuarielle Internationale, possibility that obligations due a life insurer may not be paid as due, the most important of which are bond defaults and reinsurer insolvency

retrocession

ceding of an assuming company's reinsurance to another assuming company

commutative

characteristic of contracts involving an approximately equal exchange of value between contracting parties

unilateral

characteristic of insurance contracts providing that only on party, the insurer, gives a legally enforceable promise

aleatory

characteristic of insurance contracts providing that outcomes are governed by chance and that one party may realized more than the other

conditional

characteristic of insurance contracts providing that the insurer's obligation to pay a claim depends upon the performance of certain acts by the owner or beneficiary such as payment of premiums and furnishing proof of death

adhesion

characteristic of personal insurance contracts providing that their terms and provisions are fixed by one party (the insurers), and with minor exceptions, must be accepted or rejected word for word by the other party (the prospective policyowner)

closely held corporation

closely held business whose shares of stock are not listed on any organized exchange. also called close corporation and closed corporation

independent property/casualty agent

commissioned agent whose primary business is the sale of property and casualty insurance for several insurers, may also sell life insurance products to property/casualty customers

multiple-line exclusive a gent

commissioned exclusive agent who sells the life and health and property and casualty insurance products of a single group of affiliated insurers

value solve measure

comparison method commonly used to discern differences in the illustrated performance of life insurance policies, which solves for one element (e.g. premiums, death benefits, or cash values) by setting the remaining elements to identical values

override commission

compensation paid to a general agency based on an agency's first-year and renewal premiums

legal capacity

competency of an individual or business entity to enter an enforceable contract

liquidation

complete and final termination of an insolvent insurer's operations under provisions of state insurance law that permit the insurance regulator under court approval to entirely dispose of all assets and liabilities in accordance with state law

absolute assignment

complete transfer by a policyowner of all rights in a policy to another person or entity

numeric summary

component of the basic illustration required by the NAIC Life Insurance Policy Illustration Model Regulation to be provided to prospective policyowners which is a one-page synopsis of illustrated policy values for at least policy years five, ten, and twenty and at age 70 if applicable, based on guaranteed policy elements, current nonguaranteed elements, and a midpoint set of assumptions

narrative summary

component of the basic illustration required by the NAIC Life Insurance Policy Illustration Model Regulation to be provided to prospective policyowners, which contains information about the illustrated policy including descriptions of its benefits and mechanics, available riders and options, and identification and descriptions of column headings ad key terms used in the illustrations

tabular detail

component of the basic illustration required by the NAIC Life Insurance Policy Illustration Model Regulation to be provided to prospective policyowners, which includes policy values on a guaranteed and nonguaranteed basis for at least each policy year from one to 10 years and for every fifth year thereafter, ending at the policy's terminal age. also called ledge pages.

law of mortality

concept first put forward by Benjamin Gompertz in 1825 that the death rate increases exponentially with age, as the body at first slowly then more rapidly deteriorates or fails.

decreasing returns to scale

condition associated with the size of a firm in which further growth diminishes firm efficiency, i.e. average costs increase

increasing returns to scale

condition associated with the size of a firm in which further growth increases from efficiency, i.e. average costs decrease

constant returns to scale

condition associated with the size of a firm in which further growth neither adds to nor detracts from the firm efficiency; i.e. average costs are constant

minimum efficient scale

condition at which a firm's long-run average costs are at a minimum, with further growth yielding no additional efficiencies thus exhibiting decreasing returns to scale

survivorship clause

condition elected by the owner of a life insurance policy under which the beneficiary must survive the insured by a fixed period, such as 60 days, after the insured's death to be entitled to the proceeds. also called a time clause

lingering implied authority

condition existing when a customer has no reason to believe that an agency relationship has ended

economies of scope

condition in which a firm's average production costs decline as it produces a greater number of different products or services

positive externality

condition in which a firm's or individual's activities carry benefits for others without their having to pay for them

negative externality

condition in which a firm's or individual's activities impose costs on others without their being compensated

product homogeneity

condition in which competing products are perfect substitutes in the minds of buyers

product differentiation

condition occurring because product quality, service, location, reputation, or other attributes of one firm's products are preferred by some buyers over rivals' products

intestate

condition of dying without a valid will or having made a complete disposition or property and debt

future interest

condition such that a person has possession and enjoyment of property only in the future

natural monopoly

condition that exists when efficiency increases (i.e. average costs decrease) over an industry's entire relevant output range and fixed costs are high and cannot be recouped on exit

surrender gain

condition that occurs when a life insurance policy is surrendered and its asset share is greater than its cash surrender value

surplus strain

condition that occurs when a life insurance policy is surrendered and its asset share is less than its cash surrender value

endow

condition under which a maturity value becomes payable under a life insurance policy upon the insured surviving to a specified date or number of years

paid-up

condition under which a policy is guaranteed to remain in effect with no further premium payments due, in accordance with the terms of the contract

substantial risk of forfeiture

condition under which deferred income is not considered constructively received because either 1. it is subject to the claims of the employer's creditors or 2. if the employee's rights are nonforfeitable, the deferred compensation agreement was entered into before the compensation was earned and the employer's promise to pay is unsecured

escheat

condition under which unclaimed property passes to the state

exhaustive

condition wherein events under consideration cover all possibilities, e.g. a person will either live or die during a given year

mutually exclusive

condition wherein the occurrence of one event precludes the possibility of the occurrence of another

investigative consumer report

consumer report in which information on a consumer's character, general reputation, personal characteristics, or mode of living is obtained from personal interviews with the consumer's neighbors, friends or associates

Gompertz-Makeham law of mortality

contemporary version of the law of mortality that holds that death rates can be considered to be the sum of the traditional age-dependent exponential component (Gompertz part) and a component that works independent of age (Makeham part) that takes into consideration life shortening situations such as poor sanitation, malnourishment, and poor health or health care

nonqualified deferred compensation plan

contractual arrangement between an employer and an employee under which compensation for services rendered to an organization is postponed, usually until retirement

administrative services only

contractual arrangement under which an employer-sponsor of a self-funded benefit plan purchases specific administrative services from an insurer or other entity

cost accounting

convention employed to make discrete expenses analyses across different product lines, services, and operations

demutualization

conversion of a mutual insurance company to a stock insurance company or upstream holding company

life insurance company

corporation authorized under the law of its sovereign state to sell products that involve life and/or health contingencies

holding company

corporation that owns the outstanding stock of other companies and usually does not produce goods or services itself

coinsurance with funds withheld

cosinurance under which the ceding company retains premiums normally paid to the assuming company, while assuming company keeps the allowances normally paid to the ceding company

surrender cost index

cost comparison method required by the NAIC Life Insurance Disclosure Model Regulation intended to inform a prospective life insurance buyer of the estimated average annual net cost per $1000 of insurance over selective time periods (ordinarily 10 and 20 years) taking into consideration the policy's premiums, illustrated dividends or other nonguaranteed policy values (if any), and cash surrender values and adjusting these values for the time value of money

net payment cost index

cost comparison method required by the NAIC Life Insurance Disclosure Model Regulation intended to inform a prospective life insurance buyer of the estimated average annual net payment or outlay per $1000 of insurance over selected time periods (ordinarily 10 and 20 years) taking into consideration only the policy's premiums and illustrated dividends, if any, and adjusting them for the time value of money

yearly rate of return

cost comparison method that derives year-by-year measure for the implicit rate of return on the savings component of a cash value policy

yearly price per $1000 of protection

cost comparison method that derives year-by-year measures for a policy's implicit mortality charges per $1000 of net amount at risk

equal outlay method

cost comparison method that involves observing differences in resulting cash surrender values or side fund accumulations for two or more policies by setting cash outlays and initial death benefits to the same level for all policies

surrender value internal rate of return

cost comparison method that solves for the interest rate that causes accumulated scheduled premiums (net of dividends, appropriate) at selected policy durations to equal that duration's cash surrender value

comparative interest rate

cost comparison method used for comparing a term life insurance policy with a cash value life insurance policy that solves for the interest rate that causes the accumulated value of the annual differences in policy premiums (the side fund) to be equal to the higher premium policy's cash surrender value at the end of the period of analysis after setting cash outlays and death benefits to the same levels for both policies. Also called Linton yield

cash accumulation method

cost comparison method used for comparing a term life insurance policy with a cash value life insurance policy, involves observing difference in resulting cash surrender values or side fund accumulations for the policies after setting cash outlays and death benefits to the same levels for all policies

operating expenses

costs incurred by an insurer in normal business operations, other than investment operations, usually recorded as acquisition, development, maintenance, and overhead expenses

investment expenses

costs of making, processing, and protecting an insurer's investments

guideline premium test

creator of the guideline level premium and the guideline single premium as defined in the Internal Revenue Code Section 7702. One of the two prongs of the guideline premium/cash value corridor method of qualification used for determining whether a life insurance policy qualifies for favorable tax treatment

referral

customer of an individual intermediary arising from the recommendation of another person that the customer establish a relationship with the intermediary

policy date

date appearing on an insurance policy that often determines period of suicide exclusion and period of incontestability.

trigger point

date designated in a formal buy/sell agreement at which a disabled owner's business interest must be purchased

Accidental

death that requires both the cause and result of the death being accidental

family income policy/rider

decreasing term policy or rider that pays a death benefit to the beneficiary (usually the surviving spouse) as a monthly income until the beneficiary attains a certain age or for a set period of from 10 to 20 years from the date of policy issuance

payor benefit

decreasing term rider insuring the life of the premium payor under a policy insuring the life of a juvenile, which pays a death benefit earmarked to cover policy premiums remaining until the juvenile attains a certain age

intentionally defective irrevocable trust

deferred sale arrangement between a grantor and an irrevocable trust that allows the grantor to make transfers or appreciated income producing property to junior generations free of gift tax. also called an intentionally defective grantor trust

permanent disability

defined under a disability income policy and waiver of premium features/riders as any total disability lasting longer than the waiting period specified in the policy, often six months

institutional intermediary

deposit taking, investment intermediary, and other financial firm that sells insurers' products

adjusted premium method

descriptor indicating derivation of minimum nonforfeiture values

standard nonforfeiture value method

descriptor indicating that nonforfeiture values are higher than required minimums because of the use of nonforfeiture factors

utilization review

determination of the medical necessity of procedures and treatments, including precertification and discharge planning. also termed utilization managements

seven-pay test

determines whether a life insurance policy is modified endowment contract, which it is if cumulative amounts paid under the contract at any time during the first seven contract years 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 of the same type, using certain required assumptions

volatility

deviation of actual from average returns

amortized value

difference between a bond's acquisition cost and per value, increased or decreased in successive stages over time until that value equals the bond's par value at maturity

interest margin

difference between the insurer's actual investment return and its interest crediting rate. also called investment margin and spread

net amount at risk

difference between the policy death benefit and the cash value or policy reserve

net interest margin

difference between the return earned on investments and the interest credited on customer savings

surplus capital

difference between the values of an insurer's assets and liabilities as defined by a particular accounting convention

direct response

distribution channel that serves purchasers directly without the initial intervention of an individual or institutional intermediary

independent distribution channel

distribution system not owned or directed by the insurer and that relies on individual producers, usually called brokers, who are independent salespersons who are not required to sell insurance exclusively or primarily for a single insurer or affiliated group of insurers. also called non-agency building system

postmortem dividend

divisible surplus payable on the death of an insured in an amount in proportion to the part of the policy year of death for which premiums have been paid or as a one-time distribution of surplus, mainly on term insurance, in lieu of dividends on each policy anniversary while the insured was living

policy summary

document required to be provided to prospective life insurance buyers by the NAIC Life INsurance Disclosure Model Regulation, intended to help prospective purchasers understand the specific policy being considered for purchase and which contains illustrated and guaranteed policy values along with other policy information

asset liquidation phase

economically nonproductive postretirement years of life during which assets are liquidated

variable life insurance

either bundled or unbundled life insurance under which the policyowner allocates premium payments to separate accounts offered by the insurer, with the cash values and usually death benefits directly determined by the investment performance of the assets held in these accounts, which are separate from the insurer's general account assets. also called unit linked life insurance.

pension maximization strategy

election by a retiree of a single life income option in lieu of a joint and survivor life income option, using the income difference to purchase life insurance on the annuitant's life for the benefit of the survivor

annuitization

election to liquidate as an annuity accumulated savings from a fixed or variable annuity or other savings media

enhanced cash value rider

eliminates or reduces surrender charges applicable to qualified policies during the first few policy years

budget accounting

employed by management for future expense planning purposes in both an operation or short-term context and a strategic context lasting five years or more

contributory plan

employee benefit plan in which both the employer and employees make contributions toward plan costs

noncontributory plan

employee benefit plan in which only the employer makes contributions towards plan costs

self funded plan

employee benefit plan under which large employers pay claims in cash as they arise with no funding via commercial insurance. also called self insured plan

cafeteria plans

employer-sponsored benefits plans under which participants may select from a variety of benefits based on an employer-provided budget

retirement income insurance

endowment insurance commonly used in insured pension plans under which the amount payable at death is the greater of the face amount or the cash value

stock redemption buy/sell agreement

entity buy/sell agreement under which the corporation is to purchase a deceased owner's shares

fraternal benefit society

entity organized under specific state laws, which operates under a lodge system through which social and insurance benefits are provided to members and their family members

high-water mark method

equity index annuity indexing method that determines index linked interest by retrospectively selecting the highest index value recorded at a specified date, usually policy anniversaries

annual reset method

equity index annuity indexing method that determines index-linked interest annually by comparing the index value at the end of the contract year with the value at the beginning of the contract year

point-to-point method

equity index annuity indexing method that is based on the simple difference in the index value at the beginning and end of the index term

capital stock and surplus

excess of assets over liabilities

attained-age conversion

exercise of a conversion feature with the premium cost of insurance for the new policy based on the insured's attained age as of the date of the conversion, being the same as that which the company offers to new insureds who qualify as standard

original-age conversion

exercise of a term life policy's conversion feature via a retroactive conversion, with the whole life or other cash value policy bearing the original issue date and premium rate that would have been paid the cash value policy been taken out originally instead of a term policy

administrative fee

expense charge assessed periodically against an unbundled policy's account value, stated as a flat dollar amount such as $10, a charge per $1,000 of death benefit such as $.10 and/or sometimes as a percentage of the account value

front-end load

explicit amount deducted from premium payments to cover some or all of an insurer's expenses, taxes, contingencies, and sometimes profits

repudiation

express act of voiding a contract

continuing care center

facility providing a range of sensitive living arrangements and services that reflect each person's level of needed care and assistance under which individuals purchase for an initial, large single amount plus monthly payments, the right to live and receive support from the center. not commonly covered by long term care insurance policies. also called life-care center

automatic increase benefit

feature of some disability income policies and riders providing for scheduled increases in the monthly benefit amount, typically in each of five consecutive years at a fixed rate (3.g. 5% or so) with annual premium increases at attained age rates for the portion of increased benefit

cost of living adjustment

feature of some disability income policies providing for adjustments of benefits each year during a long term claim to reflect changes in the cost of living from the time that the claim began

guarantee of future insurability

feature of some disability income policies typically available for an additional premium guaranteeing that an insured can purchase additional disability income insurance in future years without having to provide evidence of insurability. also called future increase option

catch-up provision

feature under a no lapse guarantee universal life policy that permits payment of additional premiums to restore the guarantee if the minimum premium requirement was not met

reset provision

feature under a no lapse guarantee universal life policy that permits the guaranteed duration or the amount of guaranteed coverage to be reset based on future adjusted specified premiums

Form 8-K

filing required by the US Securities and Exchange Commission between filings of its 10-K an 10-! if significant material events occur, such as the sale of an affiliated or change of independent auditors or CEO

cash refund annuity

fixed life annuity that promises a single sum payment to a beneficiary on the annuitant's death, equal to the difference, if any, between the annuity purchase price and the simple sum of previously made payments

installment refund annuity

fixed life annuity that promises continuation of income payments to a beneficiary on the annuitant's death, until total payments equal the annuity purchase price

single premium deferred annuity

fixed or variable annuity contract purchased with a single premium, whose benefit payments are deferred until annuitization following the accumulation period

single premium immediate annuity

fixed or variable annuity contract purchased with a single premium, whose benefit payments commence on period (e.g. one month) later

flexible premium deferred annuity

fixed or variable annuity contract purchased with owner-determined periodic premiums, whose benefit payments are deferred until annuitization following the accumulation period

index term

for an equity index annuity, the specified period of time over which the performance of the equity index and the annuity guarantee determine the amounts credited to the account value

limited liability company

form of business combining features of partnerships and corporations, whos governance and owners' rights are defined more by the operating agreement of its members than by statute, featuring limited liability and flexibility in the tax status of participants

insurability conditional premium receipt

formal acknowledgement that the applicant has tendered the first policy premium and that provides insurance coverage from the later of the application date or physical exam date, provided the proposed insured is found insurable on a basis at least as favorable as that shown in the insurance application

binding premium receipt

formal acknowledgement that the applicant has tendered the first policy premium and which provides insurance coverage from the application date

approval conditional premium receipt

formal acknowledgement that the applicant has tendered the first policy premium and which provides insurance coverage only after the application has been approved by the insurer

financial capital

funds provided to companies by investors either directly or through retained earnings, which are necessary to finance the production of goods and services

individual health insurance

generic term to describe any arrangement in which health-related coverage is provided to a specific individual under a policy issued to individuals (and sometimes covering multiple family members

taxable gift

gift of more than the annual exclusion amount made to any one person during a calendar year

charitable split-interest gift

gift shared by charitable and non-charitable beneficiaries according to the wishes of the donor

misrepresentation

giving of false information

public good

good or service exhibiting a free rider problem or an extensive positive externality

regulation

government agency's interpretation for proper implementation of a law

net cash surrender value

gross cash value less surrender charges and the value of any outstanding loans plus the cash value of any paid up additional insurance dividends held on deposit

income replacement ratio

gross earned income after retirement divided by gross income before retirement

insurance pool

grouping together of similar exposure units. also called risk pool and risk class.

overloan protection rider

guarantees that a policy will not lapse if policy loans equal or exceed the policy account value

extended care benefits

health care benefits paid for active nursing and other skilled care when required in an extended care facility or at home

health maintenance organization

health care financing and delivery corporation that contracts with physicians, hospitals, and other providers to provide services to beneficiaries rather than to provide cash reimbursement

preferred provider organization

health care intermediary between sponsors and physicians and other health care providers who agree to provide services at discounted rates

medical expense insurance

health insurance that indemnifies the insured for costs incurred because of sickness or injury. also called health insurance.

disability income insurance

health insurance that pays a stated, usually monthly benefit, if illness or injury prevents the insured from working

independent practice association

health maintenance organization that relies on non-exclusive contracts with independent providers for health care services for all its members

high deductible health plan

health plan carrying an annual deductible of at least specified amount ($1,250 for individual, $2,500 for a family as of 2014) and providing for a maximum out-of-pocket expenditure of a specified amount ($5,350 for an individual, $12,700 for a family as of 2014) health savings accounts are often combined with these plans

substandard

higher-than-average mortality or morbidity risk classifications

skilled nursing care

highest level, 24 hour nursing care ordered by a physician and provided by a registered nurse, lice3nsed practical nurse, or licensed therapist. commonly covered by long term care policies.

risk discount rate

hurdle rate sometimes selected for application to the policy account in the accumulated book profits model, which is the rate that market investments of comparable risk command

point-of-service preferred provider organization

hybrid preferred provider organization under which beneficiaries typically are treated by an in-network primary care physician who may make referrals to in-network or out-of-network specialists as the beneficiary chooses

good faith and fair dealing

implied covenant or duty that requires insurers to make prompt and full settlement with insureds and beneficiaries and to consider the insured's interest in settling claims

mudarabah

in Islam, form of partnership for which one party provides the funds while another provides the expertise and management

takaful

in Islam, type of solidarity or mutual fund separate from the management operation, which relies on a pact among participants to guarantee each other

without bonus

in UK and Commonwealth terminology, a nonparticipating policy

with bonus

in UK and Commonwealth terminology, a participating policy

terminal bonus

in UK and Commonwealth terminology, the payment of a supplemental bonus on policy maturity as an endowment or death benefit, the intent of which is to allow the policyowner or beneficiary to share more equitably in the favorable operations of the insurer. also called a capital bonus

reversionary bonus

in UK and Commonwealth terminology, the use of divisible surplus (bonus) to increase a policy's face amount (sum assured) and its surrender value

domestic insurer

in US terminology, an insurance company domiciled (incorporated) in the state in which it is licensed to do business

alien insurer

in US terminology, and insurance company organized in another country

closed block

in a demutualization, a specified group of policies with participation rights protected by the allocation of specific investment, expense and mortality results to such policies

beneficiary

in an insurance context, person or entity entitled to insurance death or health benefits in the event of a policy claim

perfectly competitive market

in economic theory, one with no imperfections and, therefore, in which societal welfare is maximized

capital

in general finance, financial wealth used to start and/or maintain a business

expense margin

in insurance policy pricing, amounts added to anticipated expenses and taxes intended to provide for contingencies, profits, surplus accumulations, and to cover losses associated with early policy lapses. also called safety margin

exposure unit

in insurance practice and theory, a person, place, or thing exposed to the possibility of loss or other insured event

numerical rating system

in life insurance underwriting, process under which an insurance company relies on a system of debits and credits representing adverse and positive expected marginal mortality rates to derive an expected mortality classification for a proposed insured

judgment method

in life insurance underwriting, process under which an insurance company relies on the combined judgment of underwriting, medical and actuarial personnel to make underwriting decisions

insolvency

inability to pay one's debts

material misrepresentation

inaccurate statement by a proposed insured or applicant that induces an insurer to issue a policy on more favorable terms or at a more favorable price than would have been the situation had the insurer possessed the accurate information

inflation protection

included in some long term care insurance policies for an additional premium, coverage designed to ensure that the benefit amount more or less increases with the cost of living

constructive receipt

income deemed received by a taxpayer irrespective of whether it is taken in cash

investment capital

income from financial and real assets

return-of-premium feature/rider

increasing term insurance provision or rider stipulating that, if the insured dies within a set number of years (e.g. 20 years) from the policy issue date, the death benefit will be augmented by an amount equal to the sum of all premiums paid to that point

personal-producing general agent

independent commissioned insurance producer who generally works alone, is not housed in one of an insurer's field offices, engages primarily in the sales of new policies, holds contracts with several insurers, and usually focuses on personal production as opposed to the recruitment and management of career agents

broker

independent salesperson who does not sell exclusively or primarily for a single insurer or group of insurers. also called a producer

general agency

individual business managed by a general agent who recruits, trains, houses, and supervises individual intermediaries

hospital confinement indemnity

individual health insurance policy that pays a fixed sum for each day of hospital confinement

specified disease insurance policy

individual health insurance policy that pays up to substantial maximum solely for the treatment of a disease named in the policy, including most typically cancer and heart disease. also sometimes called dread disease insurance policy

administrator

individual or institution responsible for the administration of an estate of a person who dies without a valid will

executor

individual or institution responsible for the execution of a will's provisions and the administration of the estate

career agent

individual producer engaged full time in the sale of insurance exclusively or primarily for a single insurer or affiliated group of insurers. also called captive agent, exclusive agent, and tied agent

Roth Individual Retirement Account

individual retirement account for which contributions are not deductible but whose investment returns and distributions are received tax free, subject to limitations

managing general agent

individual, partnership, or corporation that holds at least one direct brokerage contract with a life insurance company registered to do business in Canada

ordinary insurance

individually issued life, health, and retirement coverages, other than industrial insurance

private placement life insurance

individually tailored variable life insurance designed specifically for and available only to qualified investors and not subject to Securities and Exchange Commission registration requirements

inspection report

industry term for a consumer report used by underwriters and prepared by an inspection company, which is intended to verify and/or supplement mainly nonmedical information provided by a proposed insured and/or applicant

inspection company

industry term for a consumer reporting agency, which is an organization that collects and sells information about individuals' employment history, driving record, financial situation, creditworthiness, character, personal characteristics, mode of living, and other possibly relevant personally identifiable information

bond dedication

informal allocation of the cash flows from a portfolio of bonds to the cash flows of a prescribed set of liabilities

application

instrument by which an applicant provides answers to insurer's questions used to determine proposed insured's insurability. applicant's offer to an insurer for insurance

assessment basis

insurance contracts that permit insureds (members) to b assessed retrospectively as claims occur to provide promised benefit payments. in the passed, used by fraternal organizations whose contributions were not scaled according to the age or insurability of members thus resulting in adverse selection

reinsurance

insurance for insurers written by an assuming company to hedge a direct insurer's portfolio of underwriting or financial risks

participating

insurance policies that are entitled to receive dividends declared by the insurer. also called with bonus policies

nonparticipating

insurance policies that are not entitled to receive dividends declared by an insurer. also called without bonus policies

annuity contract

insurance policy that promises to make a series or payments through systematic liquidation of principal and interest and possibly benefit of survivorship for a fixed period or over an annuitant's lifetime

net rates

insurance rates calculated to recognize the probability of the insured event, the time value of money, and the benefits promised, with no allowance for loading

direct insurance

insurance sold to the public as opposed to reinsurance

nonlife insurance

insurance that involves other than life or health contingencies; ordinarily insurance against property and liability losses. also called property/casualty insurance and general insurance

retrocessionaire

insurer or reinsurer accepting a retrocession

direct writing insurer

insurer that sells direct insurance. also called primary insurer

professional reinsurer

insurer that specializes in writing reinsurance

summary of operations

insurer's income statement providing a summary of income and its disposition

brokerage representative

insurer's salesperson who appointments brokers and promotes their efforts to sell the insurer's products. also known as a brokerage supervisor or brokerage general agent

group sales representative

insurer's salesperson who generates personal group insurance sales or promotes commissioned sales by others or both

affiliated distribution channel

insurer-owned or direct system composed of individual intermediaries, called variously captive agents, career agents, exclusive agents, and tied agents, who are engaged full time in the sale of insurance exclusively or primarily for a single insurer of affiliated group of insurers. Also called agency-building system

inside interest buildup

interest credit to cash values under tax-qualified life insurance policies that is not subject to current taxation

compound interest

interest credited on both the principal amount and the interest credited thereon

simple interest

interest credited or paid on the original or unpaid principal balance amount only and not on the interest itself

present interest

interest in property such that an individual has immediate possession and enjoyment of property

guaranteed investment contract

investment instrument offered by life insurers that promises to credit a specified interest rate for a specified period much like a certificate of deposit at a bank

wealth replacement trust

irrevocable life insurance trust designed to provide a death benefit for beneficiaries roughly equivalent in value to property transferred by the donor/grantor to a charitable remainder trust or others

spousal lifetime access trust

irrevocable life insurance trust that can preserve the favorable estate tax treatment of insurance death proceeds while allowing indirect access to policy cash values

charitable remainder trust

irrevocable trust funded with a split-interest gift by a grantor, which 1. pays an income to a named non-charitable beneficiary for life or a specified term of up to 20 years and 2. at the end of the term, pays the remaining assets to the charitable beneficiary

crummey trust

irrevocable, living trust in which gifts to the trust qualify as present interest gifts and thus the annual gift exclusion, by providing trust beneficiaries a reasonable opportunity to demand distribution of amounts contributed. also referred to as a crummy provision or a crummy power (within an irrevocable trust)

tenancy by the entirety

joint interest property between spouses in which a decedent's interest passes automatically to the surviving spouse

joint tenancy with right of survivorship

joint interest property in which a decedent's interest passes automatically to survivor owners

tenancy in common

joint interest property in which each person owns his or her share outright, which share passes to the person's heirs.

community property

joint interest property under which all property acquired during marriage is joint property of the spouses

Trust

legal arrangement whereby one party transfers property to another who holds legal title and manages the trust property for the benefit of others as a fiduciary

doctrine of substantial compliance

legal concept that a change of beneficiary will have been deemed effectuated even if the policyowner did not follow prescribed procedure if he or she did all that he or she could to effect the change but factors beyond his or her control precluded such

will

legal declaration of an individual's wishes as to the disposition of his or her property on death

contra proferentum

legal doctrine emanating from the notion that insurance policies are contracts of adhesion, and, therefore, any ambiguities in contract language are construed strictly in favor of the party not drafting the contract (policyowner and/or insured). corollary is that a contract will be construed precisely as written, in the absence of any ambiguity

advance directive

legal document that provides one's family and physicians with written instructions regarding one's preferences regarding medical treatment in the face of serious medical conditions

vesting

legal event that perfects ownership rights by an employee in retirement account balances or benefits contributed by or promised by an employer on the employee's behalf by making them nonforfeitable. vesting may occur at any time according to the retirement plan provisions, but must occur no later than dates specified in the Employee Retirement Income Security Act. Employee contributions are never forfeitable

regulatory capital

legally required amount of reserves and risk-based capital and the implicit premium income necessary to fund the reserves

directive

legislations adopted by the European Parliament instructing member states to enact laws or regulations consistent with the legislation to ensure harmonization of law and regulation throughout the union

policy reserves

liabilities representing the present amount that, with future premiums and interest earned, is expected to cover future benefit payments under existing policies

credit life and health insurance

life and health insurance provided through financial institutions to cover debtors' obligations if they die or become disabled

proprietary life and health insurance

life and health insurance targeted and priced for a specific market and available to be sold exclusively by a cohesive group of agents

immediate life annuity

life annuity for which payments are made at the end of the first and succeeding periods

deferred life annuity

life annuity for which payments begin more than one period hence

whole life annuity

life annuity payable for as long as the annuitant lives

temporary life annuity

life annuity payable for the lesser of a set number of years or until the annuitant dies

single life annuity

life annuity whose payments are determined with reference to one annuitant only

combination plan

life insurance or annuity contract that includes a long term care insurance rider commonly providing for an acceleration of the policy's death benefit payment in the form of monthly payments for qualified expenses

ownership provision

life insurance policy provision stating that the policyowner can exercise all rights under the policy, unless a beneficiary is named irrevocably

beneficiary clause

life insurance policy provision stating that the policyowner may have policy death proceeds paid to whomever and in whatever form desired, subject to contract terms and naming or referring to the designated person or entity entitled to receive death benefits

conversion feature

life insurance policy provision that affords the owner of a term policy the option of exchanging the policy for a cash value insurance policy of a form currently being issued by the insurer, without having to provide evidence of insurability

catastrophic illness coverage

life insurance policy provision that promises to pay up to a specified percentage (e.g. from 25 to 100%) of the policy's fade amount if the insured has been diagnosed as having on of several listed catastrophic illnesses, often subject to an overall maximum payment (e.g. $250K) also called dread disease coverage

guaranteed insurability option

life insurance policy rider that grants the insured the right to purchase additional life insurance at specified future periods and on the occurrence of specified events (e.g. marriage) without having to provide evidence of insurability. also called additional or guaranteed purchase option

unbundled policy

life insurance policy that discloses to the policyowner the portions of his or her premium that are allocated to specific policy elements: the internal insurance charges, cash values, and loadings for the insurer's expenses, taxes, profits, and contingencies

bundled policy

life insurance policy that does not disclose to the policyowner the portions of his or her premiums that are allocated to specific policy elements: the cost of the internal insurance charges, interest crediting rates, and loadings for expenses, taxes, profits, and contingencies

cash value

life insurance policy's internal savings before deduction of any surrender charges or policy loans. also called the policy value, account value, and accumulated value, especially with unbundled policies, and the gross cash value

key person insurance

life insurance purchased to indemnify a business for a decrease in earnings brought about by the death of a key person. also called key employee and key man insurance

endowment insurance

life insurance that makes two mutually exclusive promises: to pay a stated benefit if the insured dies during or survives the policy term

second-to-die life insurance

life insurance that promises to pay the face amount on the death of the second (or last) insured to die. also called survivorship life insurance and last-to-die life insurance

component risk

life insurer risk associated with its internal operations, in constrast to those stemming from external social, competitive e economic and other factors

nonmedical insurance

life or health insurance that can be written without a medical or paramedical examination, although medical questions usually are included in the application and the insurer reserves the right to request an examination

contingent deferred annuity

life-insurer-issued guaranteed lifetime withdrawal benefit attached to a mutual fund or management investment account. also called stand alone living benefit

simple probability

likelihood of the occurrence of an event calculated by dividing the number of events satisfying a stipulated condition (e.g. death) by the total number of events or exposures (e.g. lives)

compound probability

likelihood of the occurrence of two independent events calculated by taking the product of the simple probability of the occurrence of each event

general account

location of assets that support guaranteed interest-crediting contractual obligations, such as those arising from traditional and many contemporary life insurance policies, including whole life and universal life

change in reserves

marginal amount allocated each period to a life insurer's reserves (whether SAP, GAAP, or economic)

economies of scale

marginal cost savings associated with the size of a firm in which output increases at a rate faster than attendant increases in production costs, holding product mix constant, i.e. average costs decrease

monopolistic competition

market condition under which a large number of firms produce similar but not identical products, which gives the firms an element of market power in the short run

market power

market failure in which one or a few sellers or buyers has the power to influence the price of a product or service. conditions giving rise to market power include 1. barriers to entry or exit 2. economies of scale or scope, and 3. product differentiation/price discrimination

primary life insurance market

market in which new life insurance policies are bought and sold

secondary life insurance market

market n which existing life insurance policies are bought and sold

market imperfection

market-based (as opposed to governmental) deviation from the conditions for perfect competition, which leads to an inefficient allocation of resources. also called market failure

value at risk

maximum acceptable loss associated with an asset or liability or portfolio of assets and liabilities over a specified time period with a specified probability or confidence level

first year expense allowance

maximum allowance permitted under the Standard Nonforfeiture Law to derive the adjusted premium, defined as the sum of 1. 1% of the average amount of life insurance over a policy's first 10 years (or $10 per $1000) and 2. the lesser of 125% of the nonforfeiture net level premium or $40 per $1000

return on equity

measure of insurer profitability calculated as the ratio of profits to surplus generated for a product for a set period of time

return on assets

measure of insurer profitability calculated as the ratio of profits to the assets that result from a product for a set period of time

return on investment

measure of insurer profitability calculated as the ratio of the present value of profits to the initial surplus employed to support the product for a set period of time

internal rate of return

measure of insurer profitability derived as that rate of interest that causes the present value of positive and negative cash flows to be zero

unit cost

measure of operating expenses allocated to some measured unit, such as face amount per thousand

profit account

mechanism for capturing accumulated book profits under the accumulated book profits model

comprehensive medical insurance

medical expense benefit coverage of a wide range of medical care charges with few internal limits and a high overall maximum benefit

surgical expense benefits

medical expense benefits for surgery paid either 1. in accordance with a schedule particular to the insurer or plan, which states amounts payable per procedure or 2. on a usual and customary basis

hospital expenses benefits

medical expense benefits paid in connection with use by a consumer of hospital services, usually distinguished between 1. room and board charges which cover the daily room charge, meals, and routine nursing care and 2. other hospital services that include charges for medical testing related to the hospitalization, operating room charges, and ambulance services

medical information bureau

membership-sponsored corporation that collects personally identifiable information from and supplies such information to its members about individuals who have applied for life or health insurance from them and who have certain medical and other conditions that might affect their insurability.

experience rating

method of adjusting charges under an employee benefit plan by considering past financial results of the group

three factor contribution formula

method of implementing the contribution principle of surplus distribution which recognizes that surplus derives from three main sources or factors which are 1. gains from investment earnings; i.e. actual investment returns that exceed the policy guaranteed crediting rate, 2. gains from loadings; i.e. actual expenses that are less than those implicit in policy pricing, and 3. gains from mortality; i.e. actual mortality experience that is more favorable than that implicit in policy pricing

capital liquidation approach

method of life insurance need determination that derives a life insurance amount by assuming that both the life insurance death benefit (capital) and interest earned thereon are liquidated to meet an income objective

capital retention approach

method of life insurance need determination that derives a life insurance amount by assuming that interest earned on the life insurance death benefit (capital) alone will be used to meet an income objective, with the insurance death benefit retained and ultimately transferred to heirs when its income-producing role has been fulfilled

flat extra premium method

method used in rating substandard risks in life insurance under which a constant extra premium is charged to provide for expected additional mortality

hurdle rate

minimum acceptable investment return an insurer expects from a product line

age of majority

minimum age at which a person can enter into a contract, typically 18 in the US

initial capital and paid-in surplus

minimum amount required by a state to establish a domestic insurer

commissioner's reserve valuation method

modified reserve method permitted under statutory accounting principles that allows deferred reserve funding by dividing policies into two groups 1. those for which the net level premium for the second and subsequent policy years do not exceed the corresponding modified net premium for a 20 payment whole insurance policy, in which case the full preliminary term method is applied and 2. those with higher premiums, in which case the additional amount for expenses is limited to that amount permitted under the full preliminary term method for a 20 payment whole life policy

select mortality table

mortality table showing probabilities of death by age, duration of insurance for newly insured lives only, and other possible criteria such as sex of insureds

select and ultimate mortality table

mortality table that shows probabilities of death by both age and duration of insurance

composite mortality table

mortality table whose death rates include experience from both smokers and nonsmokers

static mortality table

mortality table whose probabilities of death do not change as a function of the calendar year

mortality table with projection

mortality table whose yearly probabilities of death decrease with each calendar year, often using projection factors

multiple table extra method

most common method used to classify substandard life insurance risks, it divides them into groups according to their numerical ratings for which additional charges or premiums are levied

separate account

mutual fund-type account maintained by a life insurer to receive premiums and other payments from its contract holders who bear 100% of the investment risk

linton yield

named after M.A. Linton of the Provident Mutual Life Insurance Company, who devised it. comparative interest rate

intermediate nursing care

non-continuous skilled nursing care, commonly covered by long term care insurance policies

profit-sharing plan

noncontributory qualified defined contribution retirement plan that does not require but allows annual contributions by the employer

employee stock ownership plan

noncontributory qualified defined contribution retirement plan that permits shares of the employer-sponsor stock to be contributed to the plan and assets of the plan to be invested in the stock of the employer-sponsor

guaranteed-cost, nonparticipating life insurance

nonparticipating life insurance under which all policy elements are guaranteed and fixed at policy issuance

catastrophic reinsurance

nonproportional reinsurance designed to protect a ceding company against adverse results occurring from a specific event that affects multiple policies simultaneously

spread loss reinsurance

nonproportional reinsurance designed to smooth claim volatility experience of a ceding company

death benefit only plan

nonqualified deferred compensation arrangement that promises to pay an income benefit to a named person on the employee's death

supplemental executive retirement plan

nonqualified retirement plan providing retirement benefits to selected employees only

public interest theory of regulation

normative economic theory holding that government regulation should be practiced in the public interest, correcting market imperfections and promoting allocative efficiency and social welfare

life cycle hypothesis

normative explanation of consumer financial behavior proposing that individuals can be expected o maintain a more or less constant or increasing level of consumption over their lifetimes. earned income will be low in the beginning and end stages of life and high during the middle stages of life.

price discrimination

offering of identical products at different prices to different groups of customers

branch office

office owned and operated by an insurer and its general manager that recruits, trains, houses, and supervises individual producers

inter vivos trust

one created during life. also called living trust

Section 2503 (b) and (c) trusts

one established for the benefit of a minor, which, by meeting certain requirements, permits a gift of a future interest to qualify for the annual exclusion

limited partnership

one 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

lapse-supported policy

one in which later policy values rely on gains from policy lapses and surrenders to support those values

general partnership

one in which partners are actively involved in the management of the firm and fully liable for partnership obligations

irrevocable trust

one in which the grantor permanently relinquishes ownership and control of donated property

cash value accumulation test

one method of qualification under Internal Revenue Code section 7702to be met by a life insurance policy for favorable income tax treatment; the policy's cash surrender value cannot at any time exceed the net single premium that would be required to fund future contract benefits provided under the policy. Typically used with bundled whole life policies

guideline single premium limitations

one of the two guideline premium limitations of the guideline premium/cash value corridor test that is met by a life insurance policy if cumulative premiums paid under the contract do not at any time exceed the gross single premium that would be3 required to fund future insurance benefits provided under a contract at the insured's attained age and based on certain required assumptions

guideline level premium limitation

one of the two guideline premium limitations of the guideline premium/cash value corridor test that is met by a life insurance policy if cumulative premiums paid under the contract do not at any time exceed the level annual premium payable at least to age 95 that would be required to fund future insurance benefits under a contract at the insured's attained age and based on curtained required assumptions

guideline premium/cash value accumulation test

one of two tests under Internal Revenue Code Section 7702 used for determining whether life insurance policies qualify for favorable tax treatment; a two-pronged test that provides 1. cumulative premiums paid under a contract may not at any time exceed the grater of a guideline single premium or a guideline level premium and 2. the cash value may not exceed the cash value corridor limitation

ambulatory instrument

one taking effect only at death

revocable trust

one that may be altered or terminated by the grantor and ownership of the corpus regained

revocable beneficiary designation

one that may be changed by the policyowner without the beneficiary's consent

secular trust

one under which trust assets are not subject to the claims of the employer's general creditors

rabbi trust

one under which trust assets remain subject to the claims of the employer's general creditors if the employer becomes insolvent, but, in the absence of such claims, trust assets must be used solely to provide promised deferred compensation benefits

staff model health maintenance organization

one with its own health care providers

retained asset account

option granted beneficiaries to have death benefit payments retained in an interest bearing account on which drafts may be written

put

option to sell

war exclusion

optional clause within a life insurance policy that excludes claims arising from or while the insured is serving in the armed forces

suicide clause

optional life insurance policy provision that excludes payment of claims if the cause of the insured's death is suicide occurring within the first two policy years

supplemental illustration

optional tabulation under the NAIC Life Insurance Policy Illustration Model Regulation that may be provided to prospective policyowners, which is intended to augment the data and information contained in the basic illustration

monthly debit ordinary insurance

ordinary insurance in the $5,000 to $25,000 range whose premiums can be collected by the agent

third party marketer

organization that specializes in the distrubition of insurance products in a banking system; may provide sales staff or support a bank's affiliation with a more traditional agency

tail risk

outlier risk associated with low frequency/high severity losses

chose in action

ownership right in personal property that is evidenced by a legal right; e.g. an insurance policy, rather than the possession of something tangible

chose in possession

ownership right in tangible personal property

property

ownership rights of possession, control, and disposition in property, which can be real property (ownership rights associated with land and objects permanently attached to land) or personal property (ownership rights in movable property or choses in action)

minimum premium plan

partially self funded medical expense plan that has premium tax savings as the primary objective under which the employer deposits funds into a bank account to cover employee claims, with an insurer paying claims first from this account then from its own resources after a set limit

indemnity

payment of an amount not greater than that which would be necessary to place the insured in the same pre-loss financial position

interpleaders

payment of disputed insurance policy proceeds to a court for it to decide the rightful recipient

price elasticity

percentage change in demand for a good or service resulting from a given percentage change in price

persistency

percentage of a block of life insurance policies not terminated by lapse or surrender during a given time period

probationary period

period of time (usually one to six months) after being hired when the employee becomes eligible to participate in an employee benefit plan

net level premium

periodic premium equivalent to the net single premium, annualized over a specified premium payment period derived by dividing the net single premium by the present value of a life annuity due for the premium payment period

health savings account

permits individuals to accumulate pretax contributions to pay qualified medical expenses associated with a high deductible health plan

illustration actuary

person designated by an insurer's board of directors to make annual certifications to the insurance regulator and the insurer's board of directors that the insurer's illustration practices comply with the requirements of the NAIC Life Insurance Policy Illustration Model Regulation, including that nonguaranteed values within basic illustrations rely on a disciplined current scale

appointed actuary

person designated by an insurer's board of directors to render the actuarial opinion required by state insurance law

testator

person making a will

applicant

person or entity applying for a life or health insurance policy

trustee

person or institution receiving legal title to and managing the property of a trust

annuitant

person whose lifetime is used to measure the length of time that benefits are payable under a life annuity. sometimes used also to mean the recipient of annuity payments

centers of influence

persons who have an opportunity to recommend agents because of their status in a community or their role as an advisor, such as an attorney or accountant

cash value life insurance

policies that combine term insurance and internal savings- called the cash value - within the same contract' that is, they accumulate funds that are available to the policyowner. also sometimes called permanent life insurance

loading charge

policy element within an unbundled policy designed to cover some or all of an insurer's future expenses, taxes, profits (or surplus accumulations_, and contingencies. Also called expense charge, fee, and policy load

exclusion rider

policy endorsement excluding from coverage any loss arising from the peril named in the rider

aviation exclusion

policy provision occasionally included in life insurance policies insuring pilots that excludes coverage if the insured dies in an aviation accident

assignment provision

policy provision stating that the policyowner has the right to transfer ownership of the policy and advising that the insurer need not recognize a transfer unless the insurer is notified of it

stranger-originated life insurance

policy purchased with the intent at inception that it will be sold in the secondary life insurance market to those with no insurable interest, almost always involving material misrepresentations. also called stranger0owned life insurance, investor-owned life insurance, and spinlife

net level premium reserve

policy reserve established for certain life insurance policies in recognition that early net level premiums are intended to prefund future insurance charges, derived for any policy year as the present expected value of future benefits less the present expected value of future premiums

Net GAAP Reserves

policy reserves reduced by deferred acquisition costs under generally accepted accounting principles; similar to modified statutory reserves with both reflecting the need to ease surplus strain

term life insurance

policy that pays a prescribed death benefit if the insured dies during the policy term, which is a specified number of years, such as 10 or 20 years, or to a specified age, such as 85

nonguaranteed renewable health insurance

policy under which the insurer may unilaterally refuse to renew it, sometimes subject to restrictions

run

policyowners or depositors demanding their money at once. can lead to systemic risk

long straddle

position established by an options speculator through the simultaneous purchase of a put and a call on the same asset

investment asset risk

possibility of poor relative investment performance

health risk

possibility that an individual loses his or her ability to work or incurs medical expense because of illness or injury

care risk

possibility that an individual will be unable to care for him or herself due to a physical or mental impairment

inflation risk

possibility that an individual's cost of living will exceed that anticipated

wage risk

possibility that an individual's earnings from employment decline by more than expected

default risk

possibility that an insurer will become insolvent and unable to perform its contractual obligations. also called ruin risk

morbidity risk

possibility that injury, illness, or incapacity creates unacceptable financial consequences for an individual

basis risk

possibility that offsetting investments in a hedging strategy will not experience precisely identical inverse price changes because the notional amount or timing of cash flows of risk management assets are not precisely matched to the assets or liabilities hedged

reinvestment risk

possibility that policyowners will repay loans and increase flexible premiums when interest rates fall; occurs when insurers' interest crediting rates are higher than those policyowners otherwise generally would earn

asset-liability risk

possibility that the same external factors can affect the value of assets and liabilities simultaneously and disproportionately, the most important of which is a change in market interest rates

savings risk

possibility that unexpected expense, a lack of planning, or carelessness impedes or interrupts an individual's planned conversion of human capital to investment capital

systemic risk

possibility that, because of linkages and interdependences, the difficulties of a financial system or market, as opposed to those of individual institutions, have significant adverse effects elsewhere within an economy

rebating

practice by an agent (or insurer) of giving something of value (e.g. a portion of the agent's commission) not specified in the insurance contract to an applicant in return for the purchase of a policy

twisting

practice by an agent of inducing policyowner through misrepresentation to replace an existing life insurance policy with another one

backdating

practice of establishing a policy date before the application date to enable premiums or COI charges to be based on an earlier age of the proposed insured

valuation

practice of estimating future revenues, expenses, and reserves; central to reporting of both solvency and profitability

buy/sell agreement

pre-death arrangement for the disposition of a business ownership interest on the death of its owner. also called business continuation agreement

contribution principle

precept holding that divisible surplus should be distributed under participating policies in the same proportions as the policies are considered to have contributed to surplus

direct premiums

premiums written on direct insurance

asset accumulation phase

preretirement economically productive years of life when both financial and real assets are acquired

net single premium

present value of future benefits promised under a life insurance policy

market consistent embedded value

present value of future profits attributable to in-force business and the value of surplus, based on market-derived asset and liability values (as opposed to statutory values)

transfer pricing

pricing of goods and services between related parties

single market

principal existential purpose of the European Union, with the objective of presenting the union as a common entity externally and to maintaining nondiscriminatory relations between its members. characterized by the free circulation of goods, capital, people, and services within the union

dividend

pro-rata share of divisible surplus paid by an insurer to the owner of a participating policy. also called a bonus

underwriting

process by which an insurer decides whether to issue insurance and on what terms and at what price

intermediation

process of policyowners marking payments to an insurer for investment, ordinarily in the form of premiums, policy loan interest payments, or policy loan repayments

asset-liability risk management

process of preserving or enhancing a life insurer's surplus capital position as asset and liability values change in response to changing economic conditions and customer behavior

due care

process suggesting that those offering life insurance advice conduct their business affairs with diligence, prudence, and competence, such that recommended insurance is suitable for the individual's circumstances, reasonably expected to offer good value, and procured from insurers that are financially sound

reinsurer

professional reinsurer or a direct writing insurer that writes reinsurance

risk-adjusted return on capital

project's net economic income divided by its economic investment

pure endowment

promise to pay a maturity amount if the insured is living at the end of a specified period, with nothing paid in case of prior death or surrender

duration matched

property of a portfolio such that changes in asset values will be exactly offset by changes in liability values when market interest rates change

materiality

property of information or of a representation that has a natural tendency to influence or be capable of influencing the decision of a decision maker to which it was addressed. in an insurance context, quality of concealed or misrepresented information such that an insurer would have refused to issue requested insurance, charged a higher premium, or issued a more limited policy had it known the truth.

joint interest property

property owned jointly by two persons

yearly renewable term reinsurance

proportional reinsurance under which the assuming company assumes the reinsured policy's net amount at risk in excess of the ceding company's retention, with premium rates varying by the age, sex, rating, and other underwriting factors.

modified coinsurance

proportional reinsurance under which the ceding company pays the assuming company a proportionate part of the gross premium, as under the conventional coinsurance plan, but at year's end, the reinsurer pays to the ceding company a reserve adjustment equal to the net increase in the reserve during the year, less one year's interest on the total reserve held at the beginning of the year

quota share

proportional reinsurance whereby premium share is adjusted to reflect the direct writer's expenses

excess of retention

proportional reinsurance whereby specified amounts of claims are shared between ceding and assuming companies

audit and control procedures

protocols designed to limit the risk associated with mistakes, fraud, and other irregularities in the process of reporting and managing assets and liabilities

adult day care

provides assistance with the activities of daily living and allows socialization in a long term care facility or community program facility. commonly covered by long term care insurance policies up to a percentage (e.g. 50%) of the full nursing home benefit

assisted living facility

provides supervision, assistance, and limited health services to relatively health senior citizens as an alternative to nursing home care. commonly covered by long term care insurance policies up to a percentage (e.g. 50%) of the full nursing home benefit

basket clause

provision in state insurance law that permits insurers to invest a limited percentage (e.g. 10%) of its assets in any lawful investment. also called leeway clause

rehabilitation

provision in state insurance law that permits the insurance regulator to seek court approval to become an insurer's receiver and be granted title to its assets and the authority to carry on its business until the insurer either is returned to private management after the grounds for issuing the order have been removed or is liquidated

corrective order

provision in state insurance law that permits the insurance regulator to seek court approval to required an insurer to 1. obtain state approval before undertaking certain transactions 2. limit or cease its new business writings 3 infuse capital and/or 4. cease certain business practices

policy value provision

provision of nonparticipating life insurance policies that contain nonguaranteed policy elements, which explains the nature of the policy's nonguaranteed elements and the determination of cost of insurance charges ,loading charges, and interest crediting rates, with guaranteed maximum charges and, for non-variable contracts, the guaranteed minimum interest crediting rate. also called account value provision

continuation ride

provision of or a rider attached to a life insurance policy that promises to provide long term care benefit payments for a specified period after benefit payments under the provision or rider would otherwise be exhausted. also called extension of benefits rider

waiver of premium feature/rider

provision of or a rider attached to an insurance policy providing disability income coverage earmarked to pay ("waive") 1. premiums otherwise due under fixed-premium products or 2. premiums of a specified amount (often called waiver of a specified premium rider) or the monthly cost of insurance and expense charges (often call waived of monthly charges rider) under flexible-premium policies. also called premium waiver feature/rider

consideration clause

provision summarizing the factors that led the insurer to agree to issue a requested policy, ordinarily a simple statement that the applicant has completed an application and paid a premium in exchange for the company's promise to provide insurance

settlement options

provision under a life insurance policy that grants policyowners and beneficiaries the right to elect to have death and usually surrender value proceeds paid under modes of settlement other than a lump cash sum, including 1. interest option under which proceeds remain with the company and only the earned interest is paid to the beneficiary 2. fixed period option under which proceeds are systematically liquidated as an annuity certain over a defined period of months or years 3. fixed amount option under which proceeds are systematically liquidated as an annuity certain via fixed, periodic amounts, and 4. life income options under which death proceeds are systematically liquidated as a pure life annuity, life annuity with refund feature, or life annuity with period certain, based on a single life or joint and survivor life configuration.

retroactive bonus

provision under some cash value policies providing that, after a predefined time period (e.g. 10 years), a bonus interest rate will be retroactively applied to policy cash values for all previous periods

prospective bonus

provision under some cash value policies providing that, after a predefined time period, future interest crediting rates will be augmented by a bonus rate

spendthrift trust clause

provision within a trust or life insurance settlement option stating that the beneficiary has no power to assign, transfer, or otherwise encumber installment payments to which he or she is entitled

residual disability benefit

provision within some disability income insurance policies providing for a reduced monthly benefit in proportion to the insured's loss of income resulting from disability when he or she has returned to work at reduced earnings

rehabilitation benefit

provision within some disability income insurance policies that generally allows a specific sum (e.g. 12 times the monthly benefit) to cover costs not paid by other insurance or public funding if the insured enrolls in a formal retraining program that will help him or her return to work

non-disabling injury benefit

provision within some disability income insurance policies that will pay up to a specific sum (e.g. one quarter of the monthly benefit_ to reimburse the insured for medical expenses incurred to treatment of an injury that did not result in total disability

transplant benefit

provision within some disability income insurance policies that, if the insured is totally disabled because of the transplant of an organ from his or her body to the body of another individual, the insurer will deem him or her to be totally disabled as result of sickness

coordination of benefits

provision within some health benefit plans and insurance policies setting forth guidelines to determine the order in which two insurers covering the same claim will pay

reentry feature

provision within some term life policies that allows for the payments of premiums lower than guaranteed renewal premiums and sometimes lower than indeterminate renewal premiums if the insured can demonstrate that he or she meets continuing insurability criteria

insurable interest

public policy and legal requirement that an applicant (of sometimes beneficiary) possess a lawful and substantial economic interest in the continue life, health, or bodily safety of the insured person or, for persons closely related by blood or law, a substantial interest engendered by love and affection

401(k) plan

qualified defined contribution retirement plan permitting employees to defer some of their compensation on a pretax basis; plans may also allow employers to make qualified matching contributions

health reimbursement account

qualified, noncontributory employer-sponsored arrangement under which employer contributions may be used as tax-free reimbursements to employees for incurred qualified medical expenses and reimbursed under the employer's specified standard plan, up to specified maximums

exclusion ratio

ratio of the investment in an annuity contract to the expected return under the contract, which determines the proportion of each annuity payment excluded from taxable income

partial disability benefit

reduced disability income benefit payable if an insured has returned to work on a limited basis after a period of compensable totally disability, commonly equal to 50 percent of the monthly total disability benefit, payable for up to six months

conditional tail expectation

refinement of value at risk that takes the average of the worst cases occurring outside the group specified by the value at risk probability or confidence level. deisgned to capture the expected value of a loss, given a loss; i.e. the occurrence of an event with the probability less than the confidence level. also called tail VaR

facultative reinsurance

reinsurance on a policy-by-policy basis under which applications received by a primary insurer are submitted to an assuming company that chooses whether to accept the risk based on its own underwriting standards

financial reinsurance

reinsurance transacted primarily to achieve financial goals, such as capital management, tax planning, or the financing of acquisitions

proportional reinsurance

reinsurance under which the assuming and ceding company share risk on a per policy basis

automatic reinsurance

reinsurance under which the direct writing company must transfer an amount in excess of its retention of each applicable insurance policy to the assuming company immediately upon payment of a direct premium and the issuance of the policy, and the reinsurer must accept transfers that fall within the scope of the agreement. also called treaty reinsurance

nonproportional reinsurance

reinsure under which risk is shared on aggregate losses attributable to a specified group of policies and not to individual policies

assuming company

reinsurer or direct writing insurer that sells reinsurance

independent

relationship between random variables (e.g. exposure units) such that the occurrence of an event affecting one has no affect on the other variables

income elasticity of insurance premiums

relative change in insurance premiums written for a given change in national income

agent's report

report providing supplementary information about a prosed insured and/or applicant and his or her relationship to the agent, which is prepared by the agent and submitted to the underwriter in connection with a life or health insurance application

annual report

required by the NAIC Life Insurance Policy Illustration Model Regulation to be provided annual on policies designated by the insurer as ones for which illustrations are used, shows the financial status and relevant transactions that took place under the policy during the preceding policy year. Also called annual statement

basic illustration

required in a specified format by the NAIC Life Insurance Policy Illustration Model Regulation to be provided to applicants on policies designated by the insurer as those for which illustrations are used, includes a narrative summary, a numeric summary, and tabular detail

entire contract clause

required life insurance policy provision stating that the policy itself and the application, if a copy is attached to the policy, along with amendments and riders, constitute the entire contract between the parties

reinstatement clause

required life insurance policy provision stating that the policyholder has the right to reinstate a lapsed policy under certain conditions, the two most important or which are furnishing evidence of insurability and paying past due premiums or charges

incontestable clause

required life insurance policy provision stating that the validity of an insurance contract cannot be contested after it has been in forced for a period of time, commonly two years

premium provision

required life insurance policy provision stating that, for fixed-premium policies, premiums are due and payable as indicated elsewhere in the policy, and, for flexible premium policies, that premiums may be paid at any time, subject to insurer minimums and tax-constrained maximums. the provision also may state that premiums can be paid monthly, quarterly, semi-annually, or annual by check, automatic draft, or electronic funds transfer.

misstatement of age provision

required life insurance policy provision stipulating that, if the insured's age is found to have been misstated, adjustment will be made in policy values to reflect the true age

right-of-return policy provision

required life insurance policy provision that affords its policyowner an unconditional right to return a policy to the insurer within a certain number of days of its receipt, such as 10, and to receive a refund of all premiums paid. also called a free look provision

delay clause

required life insurance policy provision that grants the insurer the right to defer cash surrender value payments, withdrawals, and the granting of policy loans (except for purposes of paying premiums) for up to six months following the request

grace period provision

required life insurance policy provision that prevents its termination and requires the insurer to accept premium payments for a certain period (usually 30 or 31 days) after a premium due date or if the policy has insufficient account value to permit it to continue in force

nonforfeiture options

required options usually stated within the nonforfeiture provision, which are activated automatically on policy lapse or can be elected by the policyowner who chooses to terminate his or her policy. the three options ordinarily provided are 1. cash - the policy's net cash surrender value is paid in cash (e.g. check) to the owner, 2. reduced paid up insurance - the policy's net cash surrender value is applied as a net single premium to purchase a reduced amount of paid up insurance of the same type as the basic policy and 3 extended term insurance - the policy's net cash surrender value is applied as a net single premium to purchase paid up term insurance for the policy face amount less policy loans for whatever duration that value will carry the policy

nonforfeiture provision

required provision of cash value life insurance policies stating the nonforfeiture options available if the policy is terminated or lapses and giving the mortality table, rate of interest, and method used in calculating the valuation of those options

participation provision

required provision of participating life insurance policies stating that the policy is eligible to participate in any divisible surplus. also called distributable surplus provision

retaliatory tax law

requires out-of-state insurers to pay the higher of the tax due using their home state's and the host state's laws

qualified plan

retirement plan that satisfies the requirements of the US Employee Retirement Income Security Act and Internal Revenue Code. The main requirements are 1. the plan must be written, legally binding, and communicated to participants in accordance with regulations 2. participants' benefits must vest according to schedules specifying participants' lengths of service and 3. plans must not discriminate in favor of highly compensated employees

defined contribution pension plan

retirement plan under which contributions to be made on behalf of each participant are specified. benefits are distributed in cash to the participant at retirement (or applied to an employer-sponsored postretirement option).

defined benefit pension plan

retirement plan under which income benefits to be received by each participant are specified. contribution requirements are implicit and vary according to plan investment performance and employee eligibility

participation

retrospective allocation to policyowners of favorable experience that develops when mortality, investment, and expense assumptions used to calculate premiums is more than sufficient to provide policy benefits

capital cost

return required by those who provide financial capital plus the cost of hedging

no lapse guarantee

rider attached to or provision of some universal life policies under which the insurer guarantees that the policy will not lapse for a stipulated period of time or for life if at least a minimum continuation premium is paid. sometimes called guaranteed minimum death benefit rider if coverage is guaranteed for less than the whole of life

guaranteed minimum income benefit

rider offered under a variable annuity contract promising a minimum amount of retirement income based on assumptions in effect at purchase

guaranteed minimum accumulation benefit

rider offered under a variable annuity contract promising that the cash value will not be less than the simple sum of premiums paid

term blending

rider providing term life insurance that replaces portions of a cash value policy's death benefit. also called blending

accidental death benefit

rider to or a provision of a life insurance policy and sometimes other policies that promises to pay a specified additional death benefit if the insured dies as a result of an accident. Often called double indemnity when the additional benefit is twice the face amount of the base policy

renewable

right of the policyowner to continue an insurance policy for one or more specified periods merely by paying the billed premium. for life insurance, the premium ordinarily increases at each renewal

general power of appointment

right to dispose of property not owned by the person holding the power, including giving it to him or herself

special power of appointment

right to dispose of property to anyone except the person holding the power

hedge capital

risk management asset cash flow that substitutes for and complements surplus capital

law of large numbers

rule or theorem that holds that, as the number of units or trials becomes large, 1. the variation of actual from probable experience decreases and 2. each additional unit lowers the variation in outcome, cetris paribus

pooling of resources

rule that, the larger the number of fairly priced exposure units in an insurance pool, the greater the likelihood that the insurer's premium receipts and investment income will be sufficient to pay all claims that arise during the coverage period, ceteris paribus

life settlement

sale of an existing life insurance policy in the secondary life insurance market. also called viatical.

securitization

selling of asset-backed bonds that will be repaid regularly from the cash flows of specified assets backing the securities

block of policies

set of all policies issued by an insurer under the same schedules of policy elements and on the same policy form

corporate governance

set of factors that affect the direction, administration, and control of a corporation, with particular application to the nature and extent of accountability of management

underwriting guidelines

set of recommended courses of action that underwriters generally follow in underwriting

regulatory arbitrage

shifting of activities within a financial group to take advantage of different regulatory approaches in different financial sectors; e/g/ insurance and banking

dividend illustration

shows dividends that would be paid in the future under a policy if the investment, mortality, and loading factors implicit in the currently payable dividends were to remain unchanged in the future

asset share model

simulation of anticipated operating experience from a block of policies, using the best estimates of what the individual factors will be for each future policy year

structured settlement annuity

single premium deferred annuity contract issued by a life insurer on behalf of a defendant under which the plaintiff (the injured party) in a personal injury lawsuit receives periodic payments rather than a lump sum payment

longevity annuity

single premium deferred annuity contract that guarantees future income payments based on current rates, typically commencing a decade or more into the future and providing no death benefit or surrender value during the accumulation period. also called deferred income annuity

certificate of annuity

single premium deferred fixed annuity that guarantees an interest rate for a set period of time, typically three to 10 years, but with no withdrawals permitted during the accumulation period

market value adjusted annuity

single premium deferred fixed annuity that permits contract owners to lock in a guaranteed interest rate over a specified maturity period, typically from three to ten years. also called a market value annuity

conflict of interest

situation in which an individual or corporation has an interest in promoting one product or service over another that does not necessarily align with the customer's interest; can arisewhen a financial institution offers multiple financial services and promotes proprietary products of subsidiaries through formal or informal coercion

asymmetric information problems

situation in which one party to a transaction has relevant information that the other does not have an can take advantage of that fact to the first party's benefit and the other party's detriment

home health care

skilled nursing care, physical therapy, related professional services, and/or personal services such as assistance with the activities of daily living, with care provided in the patient's home or community, typically on a part-time basis. commonly covered by long term care insurance policies up to a percentage (e.g. 50%) of the full nursing home benefit

issue date

sometimes included within life insurance contracts to indicate the date of policy issuance, with contestable and suicide periods sometimes running from this date

hospice care

special care and emotional support for persons diagnosed with terminal illness and imminent death, provided in a facility or in the person's home. commonly covered by long term care insurance policies up to a percentage (e.g. 50%) of the full nursing home benefit

credit insurance

special class of life and health insurance that pays off a debtor's outstanding loan balance if he or she dies or becomes disabled during the loan term

deductible

specified incurred amount of loss to be paid by the insured before any costs are paid by an employee benefit plan or insurer

interest rate cap

specified interest rate of an interest option above which an interest rate index results in payment to its holder

interest rate floor

specified interest rate of an interest option below which an interest rate index results in payment to its holder

out-of-pocket maximum

specified maximum incurred amount of medical expenses )generally total expenses less deductibles and coinsurance paid by the participant) that is to be paid by the insured

minimum continuation premium

specified minimum premium amount that must be paid under a universal life policy for its no lapse guarantee to remain in effect

endorsement approach

split dollar life insurance plan under which insurance on the employee's life is applied for and owner by the employer, which is primarily responsible for premium payments

collateral assignment approach

split dollar life insurance plan under which the insured employee applies for the policy and is primarily responsible for premium payments, with the policy collaterally assigned to the employer to secure amounts it advanced to the employee for premiums

actuarial equity

state achieved when each participant in an insurance pool pays an actuarially fair price

intestate succession statute

state law that determines the identity of heirs and their shares of distributed property of a person who dies intestate

representation

statement made to induce an insurer to accept a risk

insurance code

statutory law that specified the scope and standards that govern the administration of the jursidiction's insurance law and related requirements, procedures, standards, and enforcement mechanisms

dynamic financial analysis

stochastic-based projection of an insurance company's cash flows and financial condition over time, taking account of a full range of economic scenarios, asset and liability cash flows, the interrelationships of the cash flowers, and the factors that affect cash flows individually and collectively

hedging

strategy of acquiring securities whose gains and losses offset losses and gains in other securities or portfolios of securities, often achieved through the purchase of derivatives

buy term and invest the difference

strategy under which an individual who has sufficient funds to purchase cash value life insurance instead purchases a lower-premium term policy and separately invests the difference between the two policies' premiums

economic wealth

sum of human and investment capital at any point in life

face amount

sum of money that a life insurance policy promises to pay on the death of the insured. also called the sum assured and the death benefit

financial questionnaire

supplement to a life insurance application that elicits additional financial information about and from a proposed insured or applicant who applies for a comparatively large amount of insurance

aviation questionnaire

supplement to a life or health insurance application that elicits additional aviation information from a proposed insured who engages in commercial, private, or military aviation activities.

social insurance supplement

supplemental disability income insurance benefit that approximates the amount an insured might reasonably expect to receive in Social Security disability benefits but which is payable only if the insured meets the policies definition of total disability and does not qualify for any social insurance disability income benefit. also called social insurance substitute

terminal dividend

supplemental dividend payable when a policy terminates by death or surrender, the purpose of which is to return to terminating policyowners or beneficiaries part of the general surplus to which they have contributed or adjusting for a guaranteed cash value less than the asset share

target SERP

supplemental executive retirement plan intended to replace retirement benefits lost by ERISA imposed limits and to counteract the bias in Social Security retirement benefits that favors low income workers

excess SERP

supplemental executive retirement plan providing a benefit amount equal to the difference between 1. the amount that would have been paid to the executive under the employer's qualified retirement benefit formula ignoring any ERISA-imposed limits and 2. the actual retirement benefit payable to the executive under the qualified retirement plan and Social Security

unassigned surplus

surplus amounts not earmarked for special purposes. also called free capital.

contingency risk

system devised by US actuaries and used by them and insurance regulators to classify the risks faced by insurers, to include the following categories: C-1, or asset risk that arises from the possibility of defaults and changed in market values of investments; C-2 or pricing risk that arises from the possibility of inadequate risk and expense charges; C-3 or non-market interest rate risk that arises from the correlation of asset and liability cash flows; and C-4 or miscellaneous business risks that are not easily amenable to actuarial prediction.

home service distribution system

system of commissioned exclusive agents who are assigned a geographic territory. also known as the combination distribution system or debit distribution system.

churning

systematic and indiscriminate replacement of existing life insurance policies

morbidity table

tabulation showing periodic probabilities and durations of incapacity, sickness, or injury by age (or age brackets) and often by other factors, such as smoking status

mortality table

tabulation showing yearly probabilities of death by age and usually other variables such as sex and smoking status

basic mortality table

tabulation that displays yearly probabilities of death drawn from records of the actual experience of the population from which the data were drawn

valuation mortality table

tabulation that displays yearly probabilities of death used in the calculation of minimum reserves and cash surrender values; usually contains margins

marketing program

tactical plan that deals primarily with the product, price, distribution, and promotion strategies that a company will follow to reach its target markets and to satisfy their needs

individual retirement account

tax-advantaged retirement plan available for individuals. contributions are tax deductible only for those not participating in any other qualified pension, profit sharing, or Keogh plan

investment generation method

technique by which an insurer determines the interest crediting rate applicable to blocks of policies by allocating segmented investment portfolios to the blocks of policies, based on timing of investment acquisitions

portfolio average method

technique by which an insurer determines the interest crediting rate applicable to policies based on the investment return of its entire general account investment portfolio

monte carlo method

technique of applying randomly selected values to variables in a deterministic cash flow model that is repeated thousands of times to produce a range of possible results and their probabilities

cash matching

technique wherein a portfolio is constructed whose interest and principal payment exactly match a set of liability cash flows

collateral assignment

temporary transfer by a policyowner of partial rights in a policy to another person or entity, commonly to secure a loan to the policyowner

respite care

temporary, short term placement of an individual needing long term care in a long term care facility for purposes of providing temporary relief for family members providing care in the individual's home or having someone stay with the individual in his or her home temporarily. commonly covered by long term care insurance policies up to a percentage (e..g. 50%) of the full nursing home benefit.

adverse selection spiral

tendency of insureds who are charged premiums sufficiently greater than the actuarially fair price to withdraw from the insurance pool thereby precipitating premium increases for the remaining insureds, from among whom still more withdrawals occur, etc. leading to a continuing spiral of withdrawals and premiums increases that can result in the pool collapsing.

adverse selection

tendency of self selected insurance applicants to exhibit average claims experience greater than that of an otherwise identical randomly selected group of exposure unites, representing an asymmetric information problems resulting from the fact that the customer knows more than the seller about the customer's situation and can use that fact to the seller's detriment. also called antiselection

cost-of-living-adjustment rider

term insurance rider that automatically increases a policy's death benefit each year in accordance with increases in inflation as measured by a national cost-of-living index, such as the Consumer Price Index in the US

mortgage protection term

term life insurance whose face amount decreases to match the projected decreases in the principal amount owed under a mortgage loan

decreasing term life insurance

term life insurance whose face amount decreases with policy duration

yearly renewable term

term life insurance whose premiums increase yearly. also called annual renewable term

modified endowment insurance

term used outside the US describing endowment insurance that provides periodic payments of a set percentage of the insured amount over the policy term, as well as a maturity amount.

estate conservation

term used to described the use of life insurance death proceeds to cover some or all of one's estate obligations, the most relevant of which typically are estate taxes. Also referred to as providing estate liquidity

lapse

termination of a life insurance policy and the insurer's obligations after expiration of its grace period for failure to pay a premium necessary to maintain it in full effect

expire

termination of an insurance policy without maturity value at the end of its specified contractual duration

legislative history

testimony and documents considered by the US Congress during its deliberations in enacting a law

nondiversifiable risk

that applicable to an entire market or class of assets or liabilities, which cannot be reduced by diversification. also called systematic risk

actual authority

that authority granted to an agent by a principal in specific language or terms. also called express authority

implied authority

that authority implicitly possessed by an agent associated with common duties, such as the cashier's authority to take payment for merchandise at a checkout counter

diversifiable risk

that particular to a given company, usually measured by its beta. also called unsystematic risk and specific risk

dividend surplus

that portion of an insurer's surplus that its board of directors decides to share with owners of its participating policies

index account

that portion of the equity indexed universal life policy or annuity account value for which the crediting rate is determined by changes in an equity index

operating capital

that required to meet expenses, fund required reserves, and pay expected claims

disciplined current scale

that schedule of current nonguaranteed values shown in a basic illustration for which each set of implicit assumptions is based on the insurer's actual recent current, determinable, and creditible experience

exempt income

that which is excluded from taxable income based on its character or the status of the recipient

probate property

that which passes by will or state intestacy laws

complete financial market

theoretical market construct in which users and providers of funds have complete information about each other, borrowing/lending functions are frictionless, and monitoring is costless

product life cycle

theoretical marketing construct that describes the approximate key turning points and stages in the life of a product from introduction to decline. the four stages of the product life cycle are introduction, growth, maturity, and decline

indirect expenses

those expenses attributable to general insurer operations that cannot be directly attributed to a specific product line

direct expenses

those expenses directly attributable to a specified product (e.g. agent's commission)_

guaranteed policy elements

those policy components that are fixed and guaranteed and that the insurer may not change, commonly including mortality and loading charges, interest crediting rate, premiums and death benefits

nonguaranteed policy elements

those policy elements that are not guaranteed and that the insurer may increase or decrease as long as policy guarantees are respected, commonly including mortality and loading charges, interest crediting rate, dividends, and sometimes the policy premium. also called current assumptions

non-admitted assets

those that may not be counted in meeting an insurer's statutory solvency requirements

necessaries

those things reasonably necessary for the condition in life of a minor, including necessities, such as food, clothing, and shelter but also items appropriate for the minor's social position and financial status

emancipation

time at which a young person leaves the family and its authority

Accumulation period

time before annuity benefits commence and during which cash values accumulate and one or more premiums are paid

liquidation period

time during which annuity benefits are paid

effective date

time insurance protection begins

assumption reinsurance

total transfer of assets, liabilities, and risk from one insurer to another under which the assuming company legally replaces the ceding company in transactions on sections or books of business, and issues assuming certificates to affected policyholders

rollover

transfer of funds from on qualified retirement plan to another

subrogation

transfer of one party's legal rights against a third party to another

group insurance

type of commercial insurance in which a group of persons who usually have a business or professional relationship to the contract owner are provided coverage under a single master contract

business overhead expense insurance

type of disability income insurance that covers the monthly expenses of a business owner or professional in private practice if he or she is disabled. also called overhead expense insurance

ratchet guaranteed minimum death benefit

type of guaranteed minimum death benefit under which a new minimum death benefit is set periodically or set to equal premiums paid accumulated at a stated interest rate, but never an amount less than the highest previously calculated amount

long term care insurance

type of health insurance that pays a stated, usually monthly, benefit if incapacity of the insured prohibits him or her from engaging in specified activities of daily living

externality

type of market failure in which a firm's production or an individual's consumption has direct and uncompensated effects on others

free rider problem

type of market failure in which goods or services supplied to one person are available to others at no extra cost

industrial life and health insurance

type of personal insurance in which policies of modest benefit amounts are sold to individuals of low to modest incomes and whose premiums are collected weekly or monthly at the insured's residence or place of employment. also called debit insurance.

cascading failure

type of systemic risk in which the failure of one financial institution is the cause of the failure of others, with the result that harm occurs elsewhere within the economy

ordinary life insurance

type of whole life insurance with uniform premiums payable for the entirety of the insured's life. also called level-premium whole life

limited-payment whole life insurance

type of whole life insurance with uniform premiums payable over some period shorter than the insured's entire possible lifetime, such as to age 65, after which the policy guarantees that no further premiums will be due

whole life insurance

typically a bundled life insurance policy characterized by6 fixed death benefits and fixed uniform premiums designed to enable the policy to remain in effect for the entirety of the insured's life

conversation

typically a customer service function undertaken to minimize policy lapses and surrenders

adjusted premium

un der the Standard Non-forfeiture Law, the level premium necessary to pay guaranteed policy benefits (the net level premiums) plus the level equivalent of a defined special first year expense allowance

universal life insurance

unbundled life insurance policy characterized by flexible premium payments and adjustable death benefits whose cash values and coverage period depend on the premiums paid into it

current assumption policy

unbundled life insurance policy containing nonguaranteed policy elements

current assumption whole life insurance

unbundled, nonparticipating whole life insurance with nonguaranteed elements. also called interest sensitive whole life and fixed premium universal life

qualified purchaser

under Securities and Exchange Commission requirements, individual or family organization with net investments of $5million or more

eligibility period

under a contributory employee benefit plan, the period of time that an employee is given during which he or she is entitled to apply for insurance without submitting evidence of insurability

total disability

under a disability income policy and waiver of premium features/riders, the inability of the insured, because of illness or injury, to perform either 1. the duties of his or her own occupation or 2. the duties of any occupation for which he or she is reasonably suited by reason of education, training, or experience, with the two definitions sometimes combined to provide that the first definition applies for the first few (e.g. two) years of disability, with the second definition applying thereafter

benefit base balance

under a guaranteed lifetime withdrawal benefit, the benefit base after reduction due to withdrawals

guaranteed minimum withdrawal benefit based

under a guaranteed lifetime withdrawal benefit, the total amount available for withdrawal, determined as the sum of premiums paid of the sum of premiums paid and a stated interest rate to the date of determination (sometimes termed premium roll up) or periodically based on the cash value at specified contract anniversary dates (sometimes termed account value step up_ until the date of determination

split option

under a survivorship policy, option to divide the policy into two individual policies of the same generic type as the survivorship policy, one on the life of each insurance life, under specified circumstances such as divorce

assumed interest rate

under a variable annuity during annuitization, the interest rate that, if earned uniformly throughout the liquidation period, would produce level annuity benefit payments. also called the benchmark rate or target return.

guaranteed lifetime withdrawal benefit

under a variable or fixed annuity, promise of a lifetime minimum income benefit if the cash value is exhausted due to withdrawals or investment losses, while providing access to a substantial part of the cash value throughout the deferral and life income benefit period

guaranteed minimum withdrawal benefit

under a variable or fixed annuity, promise of a minimum income benefit for a stated period or amount if the cash value is exhausted due to withdrawals or investment losses, while providing complete access to a substantial part of the cash value throughout the deferral and income benefit period

group deferred annuity

under an employer-sponsored pension plan, the purchase by the employer of units of single premium deferred annuities to provide specified amounts of life income to be paid to participants at retirement

index performance rate

under an equity indexed universal life policy or annuity, he change in the index's market value, typically excluding dividend income

index crediting rate

under an equity indexed universal life policy or annuity, the crediting rate applied to the index account, which is the growth rate adjusted to take account of the segment growth floor and growth cap

growth rate

under an equity indexed universal life policy or annuity, the product of the index performance rate and the participation rate

participation rate

under an equity indexed universal life policy or annuity, the proportion of the index performance rate that is counted in deriving the growth rate

segment term

under an equity indexed universal life policy, the specified duration associated with each new transfer of funds into the index account, often from one to three years in length

growth cap

under an equity-indexed universal life policy or annuity, the maximum possible interest crediting rate

growth floor

under an equity-indexed universal life policy or annuity, the minimum interest crediting rate

portability

under federal estate tax law, allows any unused exemption amount following the death of a spouse to be added to the exemption amount of the surviving spouse on his or her death

allowable deduction

under federal estate tax law, items that qualify for deductibility from the gross estate to derive the taxable estate, which include funeral and administrative expenses, debts of the decedent, as well as bequests to charities and the surviving spouse

generation skipping transfer tax

under federal law, tax levied when a property interest is transferred to persons who are two or more generations younger than the transferor

fair market value

under federal tax law applicable to gifts of life insurance and annuities, the approach used to place a value on a gifted policy

replacement cost

under federal tax law applicable to gifts of paid up insurance, its fair market value deemed to equal the single premium that an insurance company would charge for a comparable contract issued at the insured's/annuitant's attained age

qualified family-owned business interest

under federal tax law, any trade or business with its principal place of business in the US, which is owned at least 50% by one family, 70% by two families, or 90% by three families provided the decedent's family owned at least 30%

gift splitting

under federal tax law, condition under which a spouse joins in making a gift

estate tax credit

under federal tax law, credit allowed against the tentative federal estate tax for the lesser of death-related taxes paid to a state or a maximum permitted federal credit

adjusted gross estate

under federal tax law, gross estate less allowable deductions except bequests to the surviving spouse and to charities

skip person

under federal tax law, heir beyond those of the immediately following generation

federal estate taxes owed

under federal tax law, net amount owed to the government after applying applicable credits against the tentative federal estate tax

alternative valuation date

under federal tax law, option to use the fair market value of the estate property at a date six months after death

taxable estate

under federal tax law, portion of estate on which taxes are computer, derived by subtracting allowable deductions from the gross estate

tentative federal estate tax

under federal tax law, product of the appropriate tax rate and the tentative tax base; estate tax before application of credits

qualified terminable interest property

under federal tax law, property qualifying for the martial deduction but for which the surviving spouse's interest terminate on death

tentative tax base

under federal tax law, sum of adjusted taxable gifts and the adjusted gross estate

gift tax marital deduction

under federal tax law, the value of property gifted to a surviving spouse that is exempt from gift taxation and from filing a federal gift tax return

marital deduction

under federal tax law, the value of property left to a surviving spouse, which may be deducted from the gross estate in determining the taxable estate

adjusted taxable gifts

under federal tax law, those made after 1976, net of annual exclusions taken, for which a gift tax return was filed and which are not otherwise included in the decedent's gross estate

gross estate

under federal tax law, value of all property and interest in property owned or controlled by at a deceased person

unified credit

under federal tax law; tax credit that can be applied to offset estate and gift taxes; for deaths occurring in 2014, the credit is $2,081,800

accumulation period provision

under medical expense benefits, specified period of time during which multiple claims may be accumulated to satisfy the deductible and coinsurance provisions

gross proceeds

under the Internal Revenue Code, amounts paid on life insurance policy surrender, including the cash value of any paid up additions and the value of dividends accumulated at interest

cost recovery rule

under the Internal Revenue Code, general rule for taxation of lump sum cash surrender value payments under life insurance and annuity policies under which the amount included in the policyowner's gross income is the excess of gross proceeds over the cost basis

employer owned life insurance

under the Internal Revenue Code, life insurance on an employee's life payable to his or her employer; unless certain conditions are met, benefits in excess of the employer's basis are taxable as ordinary income

authorized control level

under the state-mandated risk-based capital system, the minimum amount of total adjusted capital that must be held to avoid possible regulatory intervention, its value is derived by a formula intended to reflect the insurer's particular contingency risks

issue and participation limit

underwriting limitation imposed by insurers as to the maximum amount of disability income coverage that they will issue to an applicant, such that the total of all monthly benefits does not exceed 85% or so of earned income for insureds with low incomes, grading downward to 65% or less for those with the highest incomes

risk capital

unencumbered funds set aside to pay unexpected claims and benefits, which are expected to remain idle and is necessary to provide confidence to policyowners and their advocates (regulators and rating agencies) that an insurer will remain solvent under reasonably extreme circumstances

sole proprietorship

unincorporated business owned by an individual who usually also manages it

death benefit provision

universal life policy provision that sets out the various death benefit options and explains the method of determining the policy death benefit

accumulation universal life

universal life policy that emphasizes cash value accumulation but requires higher premiums per $1,000 of face amount

death benefit universal life

universal life policy that emphasizes death benefits and provides for very low premiums per $1000 of face amount by typically also offers low cash value accumulation and/or has heavy surrender charges. also called protection universal life

equity indexed universal life

universal life policy under which the owner elects the proportion of account value to be allocated to the insurer's fixed, general account0based interest crediting rate and to an indexed account whose crediting rate is tied directly to some external index, such as the Stand and Poor's 500 index. Also called indexed universal life.

expected return

used for determining the income tax treatment of payout annuities, the amount of the annuity payment multiplied by prescribed expected return multiples for life annuities or by the number of payments for annuities certain

shadow account

used for ensuring that a no lapse guarantee is in effect; derived from a modified universal life account value calculation using a set of guaranteed policy elements different from the set applicable to the regular account value calculation

pooled rates

used for small group cases, method of rating under which a uniform rate is applied to all groups; no experience rating

deficiency reserve

used in the past in the US, a supplemental reserve required to be maintained if a policy's gross premiums were less than valuation net premiums

mean reserve

value for a mid-year policy reserve, equal to the arithmetic average of the initial reserve and the terminal reserve for the year of valuation.

initial reserve

value of a policy reserve at the beginning of a policy year, equal t the terminal reserve for the preceding year increased by the net level annual premium for that policy year

terminal reserve

value of a policy reserve at the end of a policy year, equal to the present value of future expected benefits less the present value of future expected premiums

principal amount

value of original investment. also called principal

actuarially fair price

value of the ex ante expected loss of each participant in an insurance pool that is paid to the pool

annual exclusion

value of yearly gifting exempt from gift taxation and from filing a federal gift tax return

admitted value

value recorded on an insurer's balance sheet for its admitted assets

surrender value solve

value solve measure that solves for the cash surrender value that a particular premium and death benefit amount, pattern, and duration will develop

death benefit solve

value solve measure that solves for the death benefit that a particular premium amount, pattern, and duration and, if applicable, attainment of a target cash surrender value by a specified policy year will support

premium solve

value solve measure that solves for the premium necessary to support a particular death benefit amount, pattern and duration and, if applicable, attainment of a target cash surrender value by a specified policy year

present value

value today of a future payment or payments discounted for interest

projection factors

values applied to static mortality tables to account for estimated future changes in death probabilities

variable universal life

variable life insurance configured as a universal life policy with its transparency, premium flexibility, and death benefit adjustability. also called flexible premium variable life and unit linked life insurance.

reasonable expectations doctrine

viewed by many legal authorities as an extension of the contra proferentum doctrine, requires that the objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts be honored even if policy provisions negated those expectations

special surplus funds

voluntarily earmarked surplus designated to meet general contingencies

partnership

voluntary association of two or more individuals or entities for the purpose of conducting a business for profit as co-owners

surrender

voluntary termination of a life insurance policy by its owner for its cash surrender value

accredited investor

wealthy investor who meets requirements of the Securities and Exchange Commission as to minimum net worth (in excess of $1M) or annual income (in excess of $200K)

duration

weighted average time to maturity of a fixed income asset or liability or portfolio of fixed income assets or liabilities

ruin

when total insured losses exceed total premiums and investment returns received by an insurance pool

preneed funeral insurance

whole life insurance that pays death proceeds specified by the details of the goods and services to be delivered by a funeral provider

graded premium whole life insurance

whole life insurance under which initial premiums are substantially (e.g. 50%) less than those of a comparable ordinary life policy and which increase annually for a period of from five to 20 years and remain level thereafter

modified life insurance

whole life insurance under which premiums are less than those of a comparable ordinary life policy during the first three to five policy years then somewhat higher thereafter

indexed whole life insurance

whole life insurance under which the face amount increases with increases in the inflation rate as measured by some national price index such as the CPI in the US

guaranteed lifetime withdrawal benefit base

with a guaranteed lifetime withdrawal benefit provision or rider, the amount which together with a distribution factor determines the annual guaranteed withdrawal amount

guaranteed withdrawal amount

with a guaranteed lifetime withdrawal benefit provision or rider, the dollar amount of guaranteed withdrawals determined by multiplying the guaranteed lifetime withdrawal benefit base by the distribution factor for the age and sex of the annuitant

inactive guaranteed living withdrawal benefit phase

with a guaranteed lifetime withdrawal benefit provision or rider, the initial period of the annuity deferral stage preceding the withdrawal benefit determination period when no fees are charged for the benefit provision or rider and the account accumulates as with any deferred EIA or variable annuity

gainful occupation

with disability income insurance, clause that deems an insured to be totally disabled if he or she cannot perform the major duties of any gainful occupation for which he or she is reasonably suited because of education, training, or experience

own occupation

with disability income insurance, clause that deems an insured to be totally disabled if he or she cannot perform the major duties of his or her regular occupation, which is the one in which the insured was engaged at the time disability began

presumptive disability

with disability income insurance, clause that deems an insured to be totally disabled if sickness or injury results in the loss of sight in both eyes, the hearing of both ears, the power of speech, or the use of any two limbs, irrespective of whether the insured can work

preexisting condition

with disability income insurance, exclusion of benefits, commonly during the first two policy years, for any loss that results from a condition that the insured misrepresented or failed to disclose in the insurance application

recurrent periods of disability

with disability income insurance, provision that a new period of total disability will be considered to be one continuous period of disability unless each period is separated by a recovery of six months or more

sickness

with disability income insurance, sickness or disease that first manifests itself while the policy is in force

elimination period

with disability income insurance, the length of time at the start of disability during which no benefits are paid. also called a waiting period

benefit period

with disability income insurance, the longest period of time for which benefits will be paid, usually the same for sickness and injury and generally available for durations of two or five years or to age 65

guaranteed withdrawal phase

with guaranteed lifetime withdrawal benefit provision or rider, the phase of the liquidation period when the account value has been depleted and the guaranteed withdrawal amount is paid by the insurer

basis

with regard to life insurance and annuities income taxation, the sum of premiums and other contributions paid into a contract, reduced by the amount of refunds, dividends, cash surrenders, and other withdrawals that were not included in taxable income. in the case of an annuity, may be further reduced by a prescribed proportion if the payout includes a refund feature. also called cost basis, investment in the contract, and tax basis

supplier induced demand

with regard to paying for health care services, the incentive of reimburseable providers to recommend and perform more health services than they would in the absence of insurance.

fiduciary

with regard to trusts, standard of care requiring a trustee to act solely in the beneficiary's interest

expectancy interest

with revocable life insurance beneficiaries, an expectation of receiving policy death proceeds but with no current vested interest or rights prior to claim maturity

disintermediation

withdrawal of funds from a financial intermediary for purposes of investing elsewhere, commonly for a higher expected return

concealment

withholding of information

subrogation provision

within comprehensive medical plans, provision that gives the employer or insurer that pays a claim the rights that a covered employee or insured might have against a third party

retrospective premium arrangement

within employee benefit plans, type of experience rating providing for lower initial premiums than normal but with the insurer reserving the right to collect additional premiums at the end of the contract period to cover unexpected claims and expenses

nonparticipating provisions

within nonparticipating life insurance policies, provision stating that the policy is not eligible to participate in any divisible surplus and/or that the policy does not pay dividends

total adjusted capital

within the state-mandated risk-based capital system, value equal to statutory capita, paid-in surplus, Asset Valuation Reserve, and, in the case of mutual companies, 50% of any declared and unpaid dividend.

certificate of participation

written evidence of an employee's participation in a group deferred annuity plan, which provides details of plan benefits


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