Life Insurance Vocabulary Pt. 2

Partial Surrender

life insurance policyholder cashes in part of the cash value. Excess over premiums is taxable. Policy loans are not possible with universal life insurance policies. Instead, policyowners who want to access some of their policy's cash value do so through this withdrawal.

Backdating

Also called saving age. With every year a person waits to buy life insurance, the premium gets a little bit higher. Most insurers allow applicants to backdate a policy application by up to six months. The advantage is that the premium will be slightly lower thereafter. The drawback is that applicants must pay the premium due from the backdated application date to the present. This makes sense, because coverage is made retroactive to the application's backdated effective date. Only the insurer (not the producer!) can authorize the backdating of any policy application.

Annually Renewable Term Life Insurance

(ART), sometimes called yearly renewable term (YRT). ART policies provide coverage for one year, at the end of which the policyowner may renew the contract for another year without having to provide evidence of continued insurability. While the face amount remains the same, premiums increase with each renewal.

The Health Insurance Portability Act of 1966

(HIPAA) imposed strict requirements on those who collect, transfer, and exchange health and medical information about consumers. Insurers are subject to HIPAA's privacy requirements because they collect and use this information from applicants and insureds. The insurer has a duty to notify the applicant of his or her right to privacy and to give the applicant a chance to either consent to the disclosure or to refuse the sharing of this information with other parties.

Reduced Paid-up Insurance Option

(RPU) he lapsed policy's cash value is applied as a single premium to buy a paid-up policy of the same type as the lapsed policy. Key points include: The amount of the paid-up policy's death benefit is dependent on the size of the cash value and the insured's age:The larger the cash value, the larger the paid-up policy's face amount will be.The older the insured, the smaller the paid-up policy's face amount will be. The permanent life coverage is "paid up," which means no further premiums are required. The paid-up policy will build a cash value. The paid-up policy has the features and options of the lapsed policy. If the lapsed policy was a participating policy, the paid-up policy is eligible for policy dividends. A lapsed permanent life policy may be reinstated if the reduced paid-up option was selected.

Inspection Report

(also called a consumer report). Used to help evaluate an applicant's lifestyle and personal habits, these reports are prepared by qualified inspectors who interview friends, neighbors, co-workers, and others known to the applicant. They are most commonly requested for applicants seeking very high amounts of life insurance.

Revocable Beneficiary

(the most common type) has no rights in the policy during the insured's lifetime. A revocable beneficiary has only an expectancy that he or she may receive the death benefit. The policyowner can change a revocable beneficiary at any time through written notification to the insurer.

Grace period

(typically 31 days) for paying the premium after the due date.

Permanent Insurance

A crucial part of every permanent insurance policy is its cash value. With whole life insurance, the cash value grows at a contractually guaranteed rate. This is necessary to support the guaranteed level death benefit and premiums. The cash value is funded by the premium. Permanent life premiums are generally higher than term premiums at any issue age, which is due in part to funding the cash value. The cash value continues to grow throughout the life of the policy, eventually equaling the face amount at policy maturity (age 120* for policies issued since 2009). At maturity, a life insurance policy is said to endow. (*Maturity [endowment] at age 120 is a federal requirement. More on this in the life insurance taxation lesson.) The policyowner owns the cash value and may borrow against it while the policy is in force, though doing so will result in a reduced death benefit if not repaid. If the insured lives to age 120 (policy maturity), the policy face amount is paid to the policyowner since it equals the cash value and there is no more pure insurance protection.

Ordinary Whole Life Insurance

A level-premium policy that provides lifetime protection. (also called straight whole life). With ordinary whole life, benefits and premiums remain level and payable through the insured's entire life (think: whole life). Death benefits remain level, and level premiums are payable until the insured dies or reaches age 120, whichever comes first. Premiums are guaranteed to remain level despite the insured's increased likelihood of death with older age.

Attending Physician's Statement (APS)

A statement usually obtained from the applicant's doctor. Underwriter may need this if they want to know about an applicant's health history.

Trusts

A trust may be designated the beneficiary of a life insurance policy. In this case, a trustee manages the policy proceeds for the trust's beneficiaries.

Temporary Insurance Agreement

An alternative to the binding receipt, this agreement is common with life insurance. To qualify for the temporary coverage, the proposed insured must be able to answer "no" to several medical history questions asking whether the proposed insured has: been admitted to a hospital or had surgery performed or recommended within the previous six months been treated for various named diseases or conditions, and/or ever had a life insurance application modified, declined, or rated The insurance coverage provided under a temporary insurance receipt is term life insurance. Coverage normally ends 90 days following the date of application.

Substandard Risk

Applicants who represent a higher-than-average risk. An applicant can receive this rating for several reasons, including poor health, bad habits, a dangerous job, or a high number of early major illnesses in the family. Applicants with a substandard risk rating pay higher-than-standard premiums.

Preferred Risk

Applicants who represent an especially low risk. Applicants may qualify as a preferred risk if they enjoy excellent health, do not have risky habits, work in a low-risk job, and have no family history of heart disease or cancer.

Paid-up Permanent Insurance

Cash value purchases a single premium policy of the same type but with a reduced face amount.

Extended Term Insurance

Cash value purchases a term life policy of the same face amount providing coverage for a limited time.

Integration

Circulating "cleansed" money back into the financial system.

Agent's Report

Completed by the producer, which tells the underwriters what the producer knows about the applicant. For example, the applicant's personal character, habits, and/or other insurance policies owned. If the new policy is to replace an existing policy, the producer must also provide information about the existing policy.

The National Do Not Call Registry

Contains telephone numbers that consumers have registered to limit the telemarketing calls they receive. The Federal Trade Commission (FTC), Federal Communications Commission (FCC), and state governments regulate and enforce the registry. When a consumer registers a telephone number, businesses have up to 31 days after the date of registration in which to stop calling that number. Certain types of "sales calls" are still permitted. These include calls from businesses that have the consumer's express written permission and calls from businesses with whom the consumer has a business relationship.

Modified Endowment Contract (MEC)

Created with the same tax legislation that stripped endowments of their favorable tax treatment, "modified endowment contract" is a label assigned to any permanent life insurance policy that is paid-up (through high premium payments) in seven years or less. (The target of the legislation was the single premium life insurance policy.) MECs lose some, though not all, of the favorable tax treatment enjoyed by life insurance. MECs are addressed more thoroughly in the life insurance taxation lesson.

Field Underwriting

Determines if an applicant is insurable. It includes requesting information about prospective insureds and helping people fill out applications for coverage. The producer is responsible for collecting the right data to help the insurer decide whether to accept the application. The producer is also responsible for disclosing information to the applicant about the insurer's underwriting and policy issue practices.

Fixed Amount Settlement Option

Distributes the death benefit plus interest through a series of payments to the beneficiary. With this option the policyowner or beneficiary designates the payment amount, which then determines the length of time payments will be made. The larger the payment amount, the shorter the payment period.

Accumulate at Interest Option

Dividends are held in the insurer's general account, where they earn interest. The policyowner can withdraw the accumulated dividends and interest at any time. Note that while policy dividends are generally non-taxable, any interest accrued on dividends left to accumulate with the insurer are taxable as ordinary income in the year earned.

Estates

Estates can be named as beneficiaries. In these cases, the policy proceeds are paid to the executor or administrator of the insured's estate at death.

Death benefit Option 2

Features an increasing death benefit that equals the policy's specified amount plus its cash value. The policy's specified amount is the net amount at risk, which remains level (like a level term policy). As the cash value increases, the death benefit increases by the same amount. If the cash value decreases (through withdrawals), the death benefit decreases by the same amount.

Front-end Load

Fees that come directly from every premium payment. Front-end loads are usually a fixed amount (1 to 3 percent of the premium is common) payable for the life of the policy.

Premium Receipts

Given to the applicant by the producer, these receipts are given only when the applicant submits the first premium payment with the application. They provide interim coverage while the application is being underwritten and before the policy is issued. If a premium deposit is not paid with the application, the policy's effective date is the date the policy is delivered and the initial premium paid. There are two common types of premium receipts: conditional receipt binding receipt (and the closely related temporary insurance agreement)

Conversion Provision

Giving terminated participants the right to convert their group life coverage to an individual policy of equal face amount without having to provide evidence of insurability

Binding Receipt

Guarantees coverage from the time the applicant completes the application, even if the insured is later found to be uninsurable. That means coverage is guaranteed throughout the underwriting period, which can extend for several weeks, until the company rejects the application (or issues a different policy). Binding receipts are rarely permitted with life insurance.

Irrevocable Beneficiary

Has a vested interest in the policy. The policyowner cannot change an irrevocable beneficiary designation without that person's written consent. Furthermore, the policyowner cannot change anything in the policy that affects the rights of the irrevocable beneficiary (e.g., policy loans or assignments) without first getting the beneficiary's consent. Irrevocable beneficiary designations are commonly required in divorce settlements. If an irrevocable beneficiary dies before the insured, the policyowner is then free to name a new beneficiary (as either revocable or irrevocable).

Current Assumption Whole Life Insurance

Have premium rates that can change in response to the insurer's actual mortality, interest, and expense experience. Unlike indeterminate premium whole life, in which premiums can only increase, these policies may experience premium decreases as well as increases. The insurer sets a minimum interest rate to be credited to the policy and a maximum premium rate when the policy is issued: If the insurer's actual experience is better than expected, then premium rates are lowered. If the insurer's actual experience is worse than expected, then premium rates are increased. Only current assumption whole life guarantees a minimum interest rate and cash value. Current assumption whole life policyowners have no control over how or when the premium changes, and the death benefit (face amount) does not vary.

Contract Modifications

Identifies changes that may be made without having to write a new policy: beneficiary changes, if beneficiaries have not been designated "irrevocable" changes to the face amount (if the policy type allows this) changes in the settlement option by which the policy's death benefit is paid out changes in the mode of premium payment (from monthly to quarterly or annually, for example)

Title Page (Specifications Page)

Identifies the insurance company and the insured.

Legal Delivery

If any conditions are attached to delivery of the policy, then this type of delivery is required. This type of delivery of a policy requires personal delivery to the client and an explanation of the conditions to be met.

Per Capita

If someone in a group of individually named beneficiaries dies before the insured, that person's share is divided among the surviving group members. No share of the proceeds is passed down to the deceased beneficiary's heirs (if any).

Per Stripes

If someone in a group of individually named beneficiaries dies before the insured, that person's share passes down to his or her children (if any). If the deceased beneficiary has no heirs, then the share is divided among the surviving group members.

Statement of Continued Good Health

If the initial premium is not paid with the application, then the applicant must sign this statement when the policy is delivered. This assures the insurer that nothing has changed with the applicant's health that would alter the insurer's underwriting decision. If the applicant signs the statement knowing that, in fact, his or her health situation has changed since the application was submitted, the insurer has grounds to rescind the contract if this is later discovered during the policy's contestability period. Key Point

Noncontributory plan

If the premium is paid entirely by the plan sponsor. Retirement plan funded entirely by contributions from the employer. If the plan is noncontributory, 100 percent of eligible group members must be covered.

Retained Asset Account

In place of a lump-sum payment, many life insurance companies will set up this account (also called a beneficiary access account) for beneficiaries who want to control when policy proceeds are distributed. Beneficiaries receive a checkbook they can use to draw down funds from the interest-bearing account. There are no restrictions on the use of this money.

Nonguaranteed Level Premium Term Life Insurance

In which premiums generally start lower than the guaranteed level version but increase over time and may eventually be higher than guaranteed level term.

Convertible Term Life Insurance

Includes a conversion privilege that lets policyowners exchange their term life coverage for a permanent life insurance policy without having to provide evidence of insurability. The new policy's face amount usually matches the expiring term policy's face amount. Typically, the option to convert a term policy to a permanent policy must be exercised at least a year or two before the policy expires.

Variable Life Insurance

Includes an investment feature. combines features of variable life and universal life. Like variable life, VUL policies invest premiums in nonguaranteed subaccounts managed by the insurer in a separate account. Also, like variable life insurance, VUL is considered both a life insurance and securities product. To sell VUL policies, a producer must hold both a state life insurance license and a FINRA securities registration. Like universal life, VUL policies feature premium flexibility. Policyowners can increase or decrease the premium and even stop payments. If the policy's cash value covers the monthly deductions for the cost of insurance and expenses, the policy stays in force. If the cash value is not sufficient to cover the monthly deductions, the policy lapses. VLI policyowners assume the investment risk of policy values allocated to subaccounts. Like all securities, separate account investments are not guaranteed, which means VLI cash values are subject to declines as well as increases.

Equity Index

Indexed universal life insurance ties the interest credited to the contract's cash value to an equity index instead of a rate declared by the insurer. The actual index used in these policies is usually a stock market index like the S&P 500. A few product designs are tied to a bond index. The interest credited to the policy's cash value is based on the percentage change in the associated index during the index period (usually one year but can be longer or shorter).

Policy Delivery

Insurance companies typically send newly issued policies to the producer for delivery to the customer. Direct response insurers send policies directly to the policyowners. Two types of policy delivery are constructive and legal. While delivery by mail is permitted in most states, it is recommended that producers deliver new policies in person because: It is the producer's responsibility to fully explain the policy (including any amendments or riders) and confirm it is what the customer wanted. It is an opportunity to reaffirm the customer's reasons for purchasing the policy (reducing the likelihood of policy cancellation through "buyer's remorse"). It is an opportunity to strengthen the client relationship.

Lapse

Insurance protection/coverage will end.

Multiple Employer Trust (MET)

Is a group of ten or more employers in the same industry who form a trust to provide certain types of benefits for their employees, particularly life insurance. Federal rules require that no single employer contribute more than 10 percent of total funding for the plan purchased by the MET. Each participating employer serves as a trustee of the MET. The trust buys insurance for the benefit of the employees and is the owner of the policy.

Collateral Assignment

Is a temporary assignment that uses the policy as collateral for a loan between the policyowner and the lender. With a collateral assignment, the policyowner does not transfer all rights in the policy, but makes an assignment of the policy's cash value only to the extent necessary to secure the loan. The policyowner retains most rights in the contract and remains responsible for premium payments. However, the policyowner can neither surrender the policy nor take any other action that jeopardizes the rights of the collateral assignee. If the policyowner dies, the assignee is paid, from the death proceeds, the balance of the loan still owed. The rest of the death benefit is paid to the beneficiary. The collateral assignee's rights in the policy end when the loan is paid off.

Multiple Employer Welfare Arrangement (MEWA)

Is an arrangement whereby a group of employers from the same trade or industry join to sponsor a group insurance plan. MEWAs come in two forms: Fully insured: In a fully insured MEWA, two or more employers, usually from the same industry, form an arrangement to sponsor a group insurance plan for the benefit of their employees. The insurer's group insurance rules and requirements apply. Self-insured: MEWAs with at least five employers and 200 employees may self-insure their plan. They must hold a certificate of authority from the state in which they are formed and must submit reports like those required of an insurance company. The MEWA can set the plan requirements (subject to state regulations).

Automatic Premium Loan Provision

Is an optional provision that a life insurance applicant can elect when the policy is purchased or after the policy is issued. There is no charge for this benefit. An APL pays premiums due at the end of a policy's grace period. Its purpose is to prevent a policy from lapsing if the policyowner forgets to pay the premium (or simply can't pay it when due). APL key points include: A premium loan is possible only if the cash value is large enough to cover it. Premium loans become policy loans in all respects (including accruing interest). Insurers may restrict the number of times a premium loan can be taken, either prohibiting consecutive premium loans or limiting the total number available.

Credit Life Insurance

Is designed to cover a borrower for the amount of his or her outstanding loan. If the borrower dies, then the policy pays the policy's death benefit to the creditor. This is usually decreasing term insurance to match the declining loan balance. As the insured's loan balance decreases, so does the coverage. Though credit life insurance may be offered as individual insurance, it is more typically provided through a group policy. Either way, the creditor is the policyowner and the borrower is the insured. State law (which varies among the states) sets the rules for maximum coverage limits that the creditor can offer borrowers. It also prevents creditors from forcing borrowers to buy credit life insurance.

Suicide Provision

Is included in virtually all life insurance policies. It denies payment of the death benefit if, during the first two years following policy issue, the insured commits suicide. After the two-year period passes, death by suicide is covered. If an insured does commit suicide during the two-year exclusion period, the insurance company returns the premiums paid, with interest, to the policyowner (if different from the insured) or the beneficiary (if the insured was the policyowner).

Primary Beneficiary

Is the first person, group of people, or entity in line to receive the death benefit. The primary beneficiary can be: one person (e.g., a spouse or business partner) multiple persons (e.g., individually named children or business partners) a class of people (e.g., all children of the insured)

Contingent (Secondary) Beneficiary

Is the next person (or class) in line to receive the policy proceeds if there is no primary beneficiary.

Increasing Term Life Insurance

Is the opposite of decreasing term. With this type of insurance, the death benefit increases over the term to a preset amount or at a preset rate. The premium normally remains level, though at a higher level than either level term or decreasing term.

Indexed Whole Life Insurance

Keeps pace with inflation by tying its death benefit to a cost-of-living index, most commonly the consumer price index (CPI). Over time, the policy's face amount increases automatically with CPI increases. As the face amount increases, so too does the premium. Insurers offer two pricing methods for the premiums associated with a face amount that increases over time: The premium increases every year to a new fixed amount to provide for the increased coverage. A level premium is set at policy inception and is based on assumptions about expected increases. This premium is higher at the front end but averages out over time. With an indexed policy, the policyowner does not need to prove insurability each time the face amount increases.

Re-Entry Option

Lets the owner renew the policy at current rates that are lower than the guaranteed rates that would be used in a standard renewal. To get the lower re-entry rate, the insured must prove insurability at the time of renewal or at periodic intervals throughout the policy's term. If the insured is found to have become uninsurable, he or she is permitted to renew at the guaranteed attained age rates used with standard policy renewals.

Renewable Term Life Insurance

Lets the policyowner renew coverage for another term without having to provide new evidence of insurability. This means that even those who have become uninsurable are guaranteed the right to renew the policy. Renewable term premiums are higher than nonrenewable term life premiums to account for the guaranteed right to renew even if the insured has become uninsurable. The premium for the renewal coverage is based on the insured's attained age at the time of renewal. As a result, premiums increase with each renewal. Most insurers set upper age limits on renewal of their term policies. For instance, most policies cannot be renewed past age 65 or 70.

Adjustable Life Policy

Lets the policyowner request a change in the premium and, in so doing, change the policy's death benefit and future cash value growth. With adjustable life insurance, a decrease in the premium results in a decrease in the face amount, while an increase in the premium increases the face amount. Changes that increase the face amount will usually require the insured to provide evidence of insurability, but many adjustable life policyowners find this preferable to buying additional policies as their life insurance needs grow. Adjustable life premium changes do not require the insurer's permission, but insurers do require that policyowners formally request the premium change, within limits set forth in the policy. Limits apply to both the amount and the frequency (e.g., once per year, at specified times) of changes.

Businesses

Life insurance is commonly used in business situations, with the business frequently being the beneficiary of a policy on the life of a business owner or a key executive.

Prohibited Policy Provisions

Limit the period for filing a lawsuit against the insurance company to anything less than one year after a triggering event is noted make the settlement of the cash value at maturity less than the sum of the face amount plus dividend additions less any loan amount name the producer as the insured allow the policy to be forfeited if the total owed on a policy loan is less than the loan value of the policy

Charitable Nonprofit Institutions

Naming a church, charity, one's alma mater, or even an NGO (nongovernmental organization, like Doctors Without Borders) as the beneficiary is a common practice.

Delivery Receipt

No matter how the policy is delivered, insurers require that the new policyowner sign this receipt attesting that the policy was received. This receipt starts the "free-look" period (typically ten days) during which the policyowner may review the policy and, if desired, return it for a full refund.

Incontestability period

Not able to cancel policy after two years except for nonpayment of premiums and fraudulent misstatements on the application

Absolute Assignment

Occurs when the policyowner permanently transfers, by gift or sale, all rights in the policy to another person or entity (called the assignee). The assignee becomes the policyowner and assumes full responsibility for policy maintenance, including premium payments. All ownership rights in the policy are transferred to a new owner. is a permanent assignment of the benefit to another party).

Assignment

Policyowners have the right to transfer ownership of a life insurance policy, either permanently or temporarily, through an assignment. Two types are absolute and collateral.

Juvenile Life Insurance

Popularly called jumping juvenile life insurance, it features low premiums and a death benefit that increases when the child becomes an adult with no increase in premium and without requiring evidence of insurability. Juvenile life policies are typically issued with a death benefit that is measured in units, where each unit represents $1,000 of death benefit. At age 21, the value of the unit "jumps up" to a higher value, most commonly five times the original value. The increase in the unit value translates into an increase in the face amount.

Attained-age method

Premiums for the converted policy are based on the insured's age at the time of the conversion. All other factors remaining equal, this means rates will be higher than they were at the original issue age.

Original Age Method

Premiums for the new policy are based on the insured's age when the term policy was originally issued.

Non Fixed Whole Life Products

Premiums, and sometimes the death benefit, could change unexpectedly over time to reflect changing interest rates. Once the insurer changes the premium, policyowners are obligated to pay the new amount. Non-fixed whole life products include: indeterminate premium whole life current assumption whole life interest-sensitive whole life indexed whole life variable life insurance

VLI vs VUL

Premiums—VLI policies have a fixed, set premium payable for the life of the policy. VUL policies generally require a minimum initial premium to cover first-year costs. After that, VUL premiums are flexible. Death benefit—Under a VLI policy, the policyowner's payment of the fixed premium guarantees the policy remains in force and provides a guaranteed minimum death benefit upon the insured's death, regardless of the performance of the separate account to which premiums and cash value are allocated. In contrast, under a VUL policy, the death benefit amount is not guaranteed and may be less than the specified amount. Cash value access—VLI policies allow policyowners to access cash values through policy loans. Like other universal life insurance policies, VUL provides access to the cash value through partial surrenders.

Credit Report

Produced by CRA"S (Credit Reporting Agencies) its A report on a person's creditworthiness that includes identifying information, credit cards, late payments, bankruptcies, and savings balances.

Conditional Receipt

Provides coverage that conditionally begins when the application is signed and any required medical exams are completed. The receipt provides coverage on the condition that underwriting determines the insured to be insurable. While death benefit coverage under a conditional receipt may be provided in the amount applied for, it is not uncommon for insurers to place a maximum limit on conditional receipt death benefit amounts.

Decreasing Term Life Insurance

Provides face amount coverage that decreases over time, eventually reaching zero at the end of the term. Decreasing term premiums remain level for the full coverage term. Because coverage decreases over time, decreasing term premiums are less than level term premiums when the policy is issued. While decreasing term life insurance can generally be converted to a permanent plan for most of the term period, it cannot be renewed.

Limited Payment Whole Life Insurance

Provides level death benefit protection for the insured's whole life with a level premium. The main difference between ordinary whole life and limited payment whole life is the time over which premiums are paid. Limited payment life insurance policy premiums are payable over a shorter time than ordinary life premiums. The trade-off to the shorter premium period is that premiums are higher than they would be with a straight life policy of the same face amount. That is, higher premiums are payable for a shorter period. On the other hand, the higher premiums mean the cash value grows more quickly during the premium-paying period than it would with a straight whole life policy over the same period. Limited payment life insurance premiums can be paid for a specified number of years or to a specified age. A policy with a ten-year premium period is called a ten-pay life policy.

Term Life Insurance

Provides temporary protection for a limited period. The coverage term may be either a certain number of years or to a specified age. Term life is pure insurance protection, with no cash value associated with it. If the insured dies during the coverage term, then the policy's death benefit is payable. If the insured is alive at the end of the coverage term, then the coverage ends, and the policy terminates without value. Because it only offers protection for a limited time, term life is best used for temporary needs or as a stopgap measure until the policyowner can afford permanent life insurance. There are three basic forms of term life insurance: level term decreasing term increasing term

Death benefit Option 1

Resembles the policy structure of a traditional whole life policy. The specified amount generally remains level, the net amount at risk decreases over time, and the policy's cash value is part of the policy's death benefit.

Contributory Plan

Retirement plan funded by contributions from the employer and employee. If a portion of the premium is paid by the group member. If the plan is contributory, at least 75 percent of eligible group members must elect to participate.

Uninsurable Risk

Risk that is unacceptable to insurance carriers because the likelihood of loss is too high. Applicants with a very high substandard risk rating are declined coverage altogether. Only about 2 percent of life insurance applicants are rejected as uninsurable. To be as fair as possible to all applicants, an underwriter's decision to decline an applicant or to apply a substandard rating is usually reviewed by another underwriter.

Traditional Net Cost Method

Shows the net amount to be paid for the pure insurance protection of both policies during the comparison period, without accounting for a policy's cash value and policy dividends.

Graded Premium Whole Life

Starts with an even lower premium, but premiums increase in a series of steps until they, too, become level for the remainder of the premium period. The grade-in period during which premiums increase may range from 10 to 15 years. Feature a lower initial premium than straight whole life of the same face amount, but premiums increase to a higher level after a certain time.

Hazardous Occupations or Hobby Exclusion

excludes a death benefit if the insured dies because of his or her occupation or hobby, as identified in the policy. Alternatively, some policies allow coverage of these risks but charge an additional premium if the insured engages in these activities.

Incontestability Provision

States that after a policy has been in force for a certain period (usually two years) the insurer cannot contest a claim for any reason except for nonpayment of premiums. In other words, the policy becomes incontestable after it has been in effect for two years. Misrepresentations discovered by the insurer within the two-year contestability period may be grounds for voiding the contract if deemed material to the policy. A misrepresentation is material if it affects the decision the insurer would have taken in underwriting the policy.

Consideration Clause

States that the applicant's consideration (one of the three basic elements of a legal contract) consists of both the signed application and payment of the first premium.

USA Patriot Act (2001)

Strengthens federal enforcement in the fight on terror. Among other issues it addresses, the act requires that all financial institutions create, execute, and maintain anti-money laundering (AML) programs.

Facility of Payment Clause

That allows the insurer to pay the death benefit to a person or entity of its choosing. There are three common situations in which the facility of payment clause is applied: The beneficiary died before the policyowner and no contingent beneficiary was named. The intended beneficiary is a minor and no trust or adult guardian is named. The beneficiary is an institution that no longer exists. In these cases, the insurer will look for the nearest blood relative or someone with a valid claim to be the new beneficiary. As a last resort the insurer will pay the proceeds to the insured's estate, and the probate process will ultimately determine who gets the money.

Conversion Privilege

That gives terminating participants—even those who are rated or uninsurable—the right to convert their group life coverage to an individual life insurance policy without having to provide evidence of insurability. Whole life insurance is most commonly used with conversions, though a few insurers let terminating group participants convert to an individual term life policy. Conversions typically must be requested within 31 days following termination or retirement from the group. During this 31-day period, group life coverage continues in effect for the terminated employee.

Reinstatement Provision

That lets the policyowner reactivate a lapsed policy if done within a specified period. This period may be up to five years or longer following the lapse depending on the insurer and state law. To reinstate a lapsed policy, the policyowner must provide all of the following: a written request or application for reinstatement proof of insurability payment of all back premiums plus interest The original issue age is retained in the reinstated policy, and policy premiums remain unchanged from the original premiums. Key Point

Specified Amount

The amount of death benefit a policyowner initially buys in a universal life policy. Usually called face amount in most other life insurance policies.

Fixed Period Option

The death benefit is paid in equal installments over a period selected by the beneficiary or policyowner. Payments consist partly of death benefit proceeds and partly of taxable interest earned on the undistributed funds remaining with the insurer. The length of the period determines the payment amount. The longer the payment period, the smaller the payment amount. Payments can be made monthly, quarterly, semiannually, or annually. If the beneficiary dies before the end of the selected period, payments continue to the contingent beneficiary until the end of the period. The contingent payee can choose to receive a lump-sum equivalent of the remaining payments.

Automatic Option

The extended term insurance option is automatically applied if the owner of a lapsed permanent life policy fails to select a nonforfeiture option.

Premium Reduction Option

The insurance company uses the dividend to reduce the next premium due. For example, if the annual premium was $1,000 and the declared dividend was $250, a policyowner choosing this option would receive a premium notice for $750.

Interest-only Option

The insurer holds the policy proceeds in an interest-bearing account until a future date selected by the beneficiary (or the policyowner), at which point they are paid out, either in a lump sum or under another settlement option. Until then, the insurer distributes just the interest, most commonly in monthly or annual payments. The interest rate used with this option is the higher of a current rate or the guaranteed rate specified in the policy. While life insurance death benefits are generally income tax-free, interest earned on funds retained by the insurer are taxable in the year earned. This applies to all settlement options other than the lump-sum cash payment option (which doesn't involve accrued interest).

Straight Life Income Settlement Option

The least complicated of the life income settlement options. Here, payments last the beneficiary's entire life, and cease at the beneficiary's death. Of all the various types of life income options, the straight life option generally provides the largest payment amount to the payee. That is because payments cease when the payee dies, no matter how soon that may be after payments have begun. The absence of payment guarantees translates into a higher payment amount. Beneficiaries who are concerned by the lack of payment period guarantee may prefer one of the following options, which include payment guarantees.

Net Amount at Risk

The monthly mortality charge reflects the cost of pure insurance coverage

Indeterminate Level Premium Term Life Insurance

The most common form of nonguaranteed level premium term life insurance. The premium can increase or decrease between the initial premium and a maximum limit set by the insurer.

Universal Life Insurance

The most flexible of all types of life insurance. With UL the policyowner can, at any time, within certain limits: increase premiums reduce premiums occasionally skip a premium without the policy lapsing increase the death benefit (subject to evidence of insurability) or decrease it with or without any change in premium

Cash Surrender Option

The policy is surrendered, and the insurer simply pays the cash value to the policyowner in a lump sum. Key points include: When a policy is surrendered, the policy is canceled and the insurer's responsibility under the terms of the contract ends. Most states allow insurers to delay paying the cash surrender value for up to six months, though few companies do this. Surrendered policies cannot be reinstated.

Individuals

The policyowner can name one or several people to be the beneficiary. If more than one beneficiary is named, the policyowner can determine how much each is to receive.

Redetermination

The process insurers use to evaluate their actual experience and to apply the changes to their premium rates.

Tertiary Beneficiary

The third in line to receive the benefits of a life insurance policy. (below secondary)

Modified Premium Whole Life

There is a single increase (typically five years after policy issue) with premiums remaining level thereafter. Feature a lower initial premium than straight whole life of the same face amount, but premiums increase to a higher level after a certain time.

Guaranteed Level Premium Term Life Insurance

These policies guarantee both a level face amount and a level premium for the full coverage term.

Ownership Provision

This life insurance policy provision establishes the rights of the policyowner and the conditions under which those rights can be exercised, including the right to: transfer policy ownership to another person or entity (without regard for insurable interest) assign (pledge) the policy's values as loan collateral select and change modes of premium payment select and change beneficiaries (only if the existing designation is revocable) terminate the policy and elect settlement and nonforfeiture options receive cash values and/or dividends borrow against the cash value

Common Disaster Provision

This provision identifies how the policy's proceeds will be paid if the insured and the primary beneficiary are involved in a common accident and (1) it is not possible to determine who died first or (2) the primary beneficiary survives the insured for just a brief time. The common disaster provision states that the beneficiary is presumed to die before the insured if deaths occur nearly simultaneously from a common accident. It stipulates that if the primary beneficiary does not survive the insured by more than a minimum period (commonly 120 hours, or five days) following a common accident, then proceeds are payable to the contingent beneficiary.

Nonforfeiture Options

Three options available by law to policyowners that enable them to recover a policy's cash-value upon surrender of that policy. (1) Cash Surrender (2) Reduced Paid-Up Insurance (3) Extended Term Insurance

Corridor Requirement

UL policies must have a corridor of pure insurance protection, separating the cash value from the death benefit, so that the policy doesn't mature before age 95. The required corridor amount is expressed as a ratio between the policy's death benefit and cash value for any given age. It steadily decreases as the policy nears maturity. To prevent violating the IRS corridor requirement, UL death benefit Option 1 policies automatically raise the death benefit if necessary to maintain the required minimum amount at risk through policy maturity

Variable Life Insurance Cash Access

VLI policies allow policyowners to access cash values through policy loans. Like other universal life insurance policies, VUL provides access to the cash value through partial surrenders.

Numerical Rating System

Weights are assigned to selected factors that have the greatest impact on the risk. Numerical credits are assigned for favorable factors and numerical debits are assigned for unfavorable factors. Credits are subtracted from the debits, and the result (which may be a negative number, if credits exceed debits) is added to 100. The higher the number, the greater the risk.

Insuring Clause

Which describes the basic agreement between the insured and the insurer, is found on the schedule of benefits page. The insuring clause states the company's promise to pay the policy's face amount (death benefit) to the named beneficiary if the insured dies while the policy is in force.

Free Look Provision

Which gives new policyowners some time (usually ten days) to review the policy and decide whether to keep it. The free-look period begins when the policy is delivered to the owner. Policyowners who are not satisfied for any reason can return the policy for a refund of all amounts paid (including premium deposit and fees). As with all standard policy provisions, the required free-look period may vary by state. Some states require a 30-day free-look period for senior applicants (usually age 65 and older). While 10 days is the standard life insurance free look period, variable life insurance policies usually have a free-look period that is the later of 10 days from policy delivery or 45 days from when the application was completed and signed.

Single Premium Life Insurance Policy

Which is paid up with the payment of a single premium at the time of purchase. Tax law changes in 1988 diminished the appeal of single premium life by designating these policies as modified endowment contracts (MECs) and removing some of the tax advantages normally enjoyed by life insurance. This is covered in a separate lesson on life insurance taxation.

Aviation Exclusion

excludes coverage if the insured was involved in operating an aircraft as a pilot or crew member. It does not apply to passengers on private aircraft or to fare-paying passengers on commercial and charter airlines.

Beneficiary Provision

giving participants the right to designate and change their beneficiary

Spendthrift Clause

Which protects policy death benefits from the claims of the insured's or the beneficiary's creditors. It requires insurers to pay death benefits directly to a beneficiary regardless of any outstanding claims by creditors of the insured or the beneficiary. This provision is usually elected with the insurance application, but some insurers permit policyowners to add it even after policy issue. Note that this clause only protects death benefit proceeds as they are paid from the insurer to the beneficiary. It does not protect proceeds from creditors' claims once the money is in the beneficiary's possession. The spendthrift clause also gives the policyowner the right to stipulate the settlement option that will be used in distributing policy proceeds. When a spendthrift clause is in effect, the beneficiary cannot change the settlement option. Instead, the beneficiary must abide by the settlement option the insured chose.

Surrender Charge

a back end fee charged to the insured when a life policy or annuity is surrendered for its cash value. Policy surrender charges decline over time. For example, the surrender charge may be 10 percent on withdrawals during the first policy year, 9 percent the second year, and so on. While 10 years is common, surrender charges may extend for the first 15 policy years or longer.

MIB Group

a cooperative data exchange formed by North American life and health insurance companies. The MIB maintains a database of confidential medical information on applicants for life and health insurance who have been underwritten by a member insurer and found to have an identified medical impairment. Its purpose is to reduce adverse selection by identifying applicants who have previously applied for insurance and may "shop around" for insurance without fully disclosing pre-existing medical conditions. Member insurers are obligated to report all impairments to the MIB, whether the insurer accepts, rates, or declines the risk. To help protect the confidential nature of the information collected by MIB, impairments are identified as numeric codes, with no personal details. Member insurers do not report their underwriting decision to the MIB. Furthermore, an insurer cannot decline or rate an application based solely on the contents of the MIB report.

Endowments

are a unique form of life insurance that resemble whole life insurance with an early maturity date. A permanent life insurance policy matures, or endows, when its cash value equals its face amount. If the insured is still alive at maturity, the cash value is paid to the policyowner and the coverage terminates.

Judgement Method

as the basis of the risk classification process in the early years of the life insurance industry. Under this underwriting method, clerks reviewed all routine applications. Based on the underwriter's judgment, the risk was approved at standard rates, declined, or rated. This method works best in very simple underwriting cases. It is much less effective in complicated cases. Because of this flaw, insurers developed a numerical rating system of underwriting risks, which is used by most insurers today.

Life income with period certain option

beneficiaries receive benefit payments for life with the guarantee that payments will be made to a contingent beneficiary for a specified term should they die before then. Common term-certain periods are 5, 10, and 20 years, though beneficiaries may request almost any term within limits set by the insurer.

Placement

bringing the illicit cash into the financial system.

Dividend Options

cash payment reduce the premium accumulate at interest buy additional paid-up life insurance buy one-year term insurance Policyowners may change dividend options at any time. (CRABB)

Family Protection Life Insurance Policy

covers an entire family under a single policy. Slightly different variations exist, but a family policy generally provides: whole life insurance coverage on the principal insured convertible term life insurance coverage on the spouse to age 65 convertible term life insurance coverage on each child to age 21

Eligible Group Insurance Sponsors

employer/employee groups association groups labor union groups multiple employer trusts (METs) multiple employer welfare arrangements (MEWAs)

Group Life Standard Policy Provisions

grace period (typically 31 days) for paying the premium after the due date an incontestability after two years except for nonpayment of premiums and fraudulent misstatements on the application an entire contract provision stating that only the application and policy document constitute the policy a provision setting forth conditions, if any, under which the insurer can require an individual participant to provide evidence of insurability a beneficiary provision giving participants the right to designate and change their beneficiary a conversion provision giving terminated participants the right to convert their group life coverage to an individual policy of equal face amount without having to provide evidence of insurability

Interest Sensitive Whole Life Insurance

have premium rates that can change in response to the insurer's actual mortality, interest, and expense experience. Unlike indeterminate premium whole life, in which premiums can only increase, these policies may experience premium decreases as well as increases. The insurer sets a minimum interest rate to be credited to the policy and a maximum premium rate when the policy is issued: If the insurer's actual experience is better than expected, then premium rates are lowered. If the insurer's actual experience is worse than expected, then premium rates are increased. The interest credited to an interest-sensitive whole life policy is not guaranteed, and thus the cash value is not guaranteed. Policyowners do have some control over changes to the premium and face amount. If the insurer's redetermination results in a higher premium, then the policyowner can choose to either accept the higher premium or reduce the face amount of the policy and keep the lower premium

Installment Refund Option

income payments continue to a contingent payee in the same amount as were paid to the primary beneficiary. They continue until total payments made equal the amount placed under the settlement option.

Common Life Insurance Beneficiaries

individuals—The policyowner can name one or several people to be the beneficiary. If more than one beneficiary is named, the policyowner can determine how much each is to receive. businesses—Life insurance is commonly used in business situations, with the business frequently being the beneficiary of a policy on the life of a business owner or a key executive. trusts—A trust may be designated the beneficiary of a life insurance policy. In this case, a trustee manages the policy proceeds for the trust's beneficiaries. charitable nonprofit institutions—Naming a church, charity, one's alma mater, or even an NGO (nongovernmental organization, like Doctors Without Borders) as the beneficiary is a common practice. estates—Estates can be named as beneficiaries. In these cases, the policy proceeds are paid to the executor or administrator of the insured's estate at death.

Joint Life Insurance

insures two people, both of whom must undergo underwriting, under one policy. The policy pays the death benefit to the beneficiary (typically the surviving insured) when the first insured dies. The main appeal of this policy is cost: the premium is less than it would be for two separate policies providing the same death benefit.

Family Income Policy

is a life insurance policy that combines whole life insurance and a decreasing term life insurance rider to provide both a lump-sum death benefit and a stream of income to a date specified in the policy if the insured dies before that date. If the insured (typically the family's main wage earner) dies after the specified date, only the lump-sum death benefit is payable. Decreasing term life is used because the potential income period decreases with each passing year. If the insured is alive at the specified date, which is typically anywhere from 5 to 20 years following policy issue, the term coverage vanishes. The whole life death benefit protection remains in place for the insured's entire life. If the insured dies prior to the specified date (in the example below, before the 20th policy year), the whole life death benefit is paid out at the end of the income period. If death occurs after the specified date, the death benefit is paid out immediately.

Indeterminate Premium Whole Life

is issued with two premium rates: low introductory rate guaranteed maximum rate The policyowner pays a low introductory fixed rate for the first several years, after which the insurer uses its actual mortality, interest, and expense experience to establish a new current premium rate. Premium adjustments may be made as often as once a year, though this varies by insurer. The new rate is guaranteed to never increase beyond a maximum rate specified in the contract.

Target Premium

is the amount at which insurers typically pay full first-year commissions to their producers. It represents a sound middle ground for UL policyowners to follow.

Guideline Premium

is the highest amount that can be paid for that level of death benefit and still permit the policy to meet the IRS' guideline premium test (explained shortly).

Application

is the insurance company's single most important source of information about the proposed insured. It is filled out by the producer and the applicant. Part 1 of the application contains the applicant's personal information, including name, address, date of birth, occupation, and beneficiary information. Part 2 covers the applicant's medical history.

Minimum Premium

is the least amount needed to cover the cost of pure UL insurance and the policy expenses. Funding a UL policy at its minimum level jeopardizes its long-term solvency.

Back-end loaded Policies

more appealing to consumers than front-end loaded policies because surrender charges are in the policyowners' control. They are avoidable by simply not surrendering any part of the policy.

Joint & Survivor Life Income Settlement Option (J&S)

most suitable when there are two primary beneficiaries related in some way to each other (e.g., the insured's son and his wife, or two adult siblings). Under the J&S option, monthly payments are made until the second of the two beneficiaries dies. The most common joint and survivor options are: joint and 100 percent survivor, in which the payment continues unreduced upon the first payee's death joint and two-thirds survivor, in which payments are reduced by one-third upon the first payee's death (with two-thirds continuing to the survivor) joint and one-half survivor, in which payments are reduced by one-half upon the first payee's death

Guidline Premium Test

needed to make sure the policy has not been "overfunded," meaning the policy's cash value has grown too big in relation to its death benefit. A life insurance policy is considered overfunded if it violates the IRS corridor requirement.

Constructive Delivery

occurs when the insurer mails the policy to the producer responsible for delivering the policy to the policyowner with no conditions that must still be met.

Variable Universal Life Insurance (VUL) Death Benefits Options

offer the same Option 1 and Option 2 death benefits as fixed universal life insurance policies. In addition, some VUL policies offer a third option: Option 1: The death benefit is equal to the policy's specified amount and includes a decreasing net amount at risk. Option 2: The death benefit is equal to the sum of the policy's specified amount plus the cash value and includes a level net amount at risk. Option 3: The death benefit is equal to the sum of the policy's specified amount plus the greater of total premiums paid or the actual cash value. This appeals to consumers who are concerned that a drop in market values could mean the cash value is less than the sum of premiums paid. While policyowners can normally change between death benefit Options 1 and 2, they are not permitted to change to or from death benefit Option 3 after the policy is issued.

War Exclusion

or war clause) excludes paying the death benefit if the death was a direct result of war.

fifth dividend option

policy dividends are used to purchase one-year term life insurance. Depending on the specific option selected, the term life face amount may equal the base policy's cash value, or it may equal the full amount that can be purchased with the dividend. If the first option is elected ("equal to cash value", also called a combination dividend option), it is likely there will be some left-over dividend. In that case, the unused dividend can be applied to any of the other four basic dividend options.

Family Maintenance policy

provides both a lump-sum benefit and monthly income that is funded by a term life rider. The chief difference between the two types of coverage involves the length of time the monthly income is provided following the insured's death. If the insured dies before the specified date, the family maintenance policy maintains income for a fixed period of time from the time of death. Because a fixed period of income is provided, level term insurance is used to fund the monthly income benefit.

Life Income with Refund Option

provides income payments for the life of the beneficiary. In this case, if the beneficiary dies before receiving payments equal to the annuity purchase amount, the remainder is paid to a contingent payee in the form of a refund. Refunds are available under either of two options, chosen by the contingent payee: installment refund option cash refund option

anti-money laundering

refers to any activity or strategy used by law enforcement and financial officials to fight money laundering.

Interest-Adjusted Net Cost Method

shows the real cost of owning each policy during the comparison period by accounting for each policy's projected cash value and policy dividends.

Entire Contract Provision

states that the insurance policy and the completed (signed) application make up the entire contract. (A copy of the application is attached to the policy.) It also states that all attached riders are part of the contract. This provision also states that no change or waiver of any policy provision can be made unless it is agreed to and signed by an executive officer of the insurance company.

Four Common Lifetime Income Options (Immediate Annuity)

straight life income life income with period certain life income with refund joint and survivor life income

Endowment Contract

the cash value grows rapidly and the policy matures well before age 120. Popular endowment maturity dates include 10 or 20 years following policy issue, age 21 (college planning), and age 65 (retirement planning). Endowment policy face amounts can be distributed in two ways: as a death benefit payment to the beneficiary if the insured dies before the endowment maturity date as a lump-sum distribution to the policyowner at the endowment maturity date if the insured is alive then.

Extended Term Insurance Option

the cash value provides paid-up term life insurance coverage. Key points include: The term insurance face amount equals the face amount of the surrendered permanent life policy. The coverage period is dependent on the size of the cash value—the larger the cash value, the longer the period. The term coverage is "paid up," which means no further premiums are required. Term life policies are not eligible for policy dividends, even if the lapsed permanent life policy was a participating policy. The extended term option is not available if the lapsed policy was issued on a substandard (rated) basis. A lapsed permanent life policy may be reinstated if the extended term option was selected.

Cash Refund Option

the contingent payee receives a lump-sum payment of any remaining balance.

Paid-Up Additions Option

the dividend buys additional paid-up insurance of the same type as the base policy. The premium rate is based on the insured's attained age at the time of purchase. Upon the insured's death, the total death benefit equals the face amount of the policy plus the face amounts of the paid-up additions. Over time, the cumulative effect of these expanding policy values can greatly enhance the policy's total value—all for the same premium in effect when the policy was issued.

Cash Dividend Option

the policyowner elects to receive the dividend in cash. The insurance company sends a check for the declared dividend on the anniversary date of the policy. Policy dividends received in cash are generally not taxable.

Survivorship Life Insurance

these policies pay the death benefit only upon the second insured's death. As with joint life, survivorship life premiums are lower than they would be for two comparable single-life policies. Also like joint life, survivorship life requires both applicants to undergo underwriting. Survivorship life is especially popular in the estate planning market. Married couples use it to provide money needed when the surviving spouse dies (which is when estate taxes and other estate settlement costs are due). Survivorship life is available as straight whole life, universal life, variable life, and indexed life insurance. Because of the long-term nature of this coverage, term life insurance is not suitable for use with survivorship life.

Guaranteed Rate

typically 3 or 4 percent, is stated in the policy contract. (UL Policy)

Layering

using placed funds as premiums and deposits for more sophisticated financial products that provide liquidity, including permanent life insurance (with its cash value).

Standard Policy Exclusions

war aviation hazardous occupations and hobbies commission of a felony suicide (within first two years only)

Payment of Premiums Provision

which defines: available premium modes (the payment schedule) grace period automatic premium loan whether the premium is fixed or flexible

Current Rate

which is based on current market conditions, is credited if it is greater than the guaranteed rate. (UL Policy)

Level Term Life Insurance

which provides a level death benefit for the duration of the coverage term. The term can be for a certain number of years (5-year term, 10-year term, 20-year term, etc.), or it can be to a specified age (term-to-age-55, term-to-age-65, etc.).