Risk and Insurance Chapter 11

Universal life insurance

A flexible-premium whole life policy that provides lifetime protection under a contract that separates the protection and saving components. The contract is an interest-sensitive product that unbundles the protection, saving, and expense components

Capital retention approach

A method used to estimate the amount of life insurance to own. Under this method, the insurance proceeds are retained and are not liquidated

Indexed universal life insurance

A variation of universal life insurance with certain key characteristics: there is a minimum interest rate guarantee, additional interest is credited to the policy based on the investment gains of a specific stock market index, and a formula determines the mount of enhanced (additional) interest credited to the policy

Single-premium whole life insurance

A whole life policy that provides lifetime protection with a single premium payment

Cash-surrender value

Amount payable to the owner of a cash-value life insurance policy if he or she decides the insurance is no longer wanted. Calculated separately from the legal reserve

Net amount at risk

Concept associated with a level premium life insurance policy. Calculated as the difference between the face amount of the policy and the legal reserve

Human life value

For purposes of life insurance, the present value of the family's share of the deceased breadwinner's future earnings

Preferred risk

Individuals whose mortality experience is expected to be better than average

Legal reserve

Liability item on a life insurer's balance sheet representing the redundant or excessive premiums paid under the level-premium method during the early years. Assets must be accumulated to offset the legal reserve liability. Purpose of the legal reserve is to provide lifetime protection

Savings bank life insurance

Life insurance originally sold by mutual savings banks in Massachusetts, New York, and Connecticut. Now sold in other states as well

Variable life insurance

Life insurance policy in which the death benefit and cash surrender values vary according to the investment experience of a separate account maintained by the insurer

Group life insurance

Life insurance provided on a number of persons in a single master contract. Physical examinations are not required, and certificates of insurance are issued to members of the group as evidence of insurance

Needs approach

Method for estimating amount of life insurance appropriate for a family by analyzing various family needs that must be met if the family head should die and converting them into specific amounts of life insurance. Financial assets are considered in determining the amount of life insurance needed

Current assumption whole life insurance

Nonparticipating whole life policy in which the cash values are based on the insurer's current mortality, investment, and expense experience. An accumulation account is credited with a current interest rate that changes over time. Also called interest-sensitive whole life insurance

Readjustment period

One or two year period immediately following the breadwinner's death during which time the family should receive approximately the same amount of income it received while the breadwinner was alive

Dependency period

Period of time following the readjustment period during which the surviving spouse's children are under eighteen and, therefore, dependent on the parent

Variable universal life insurance

Similar to universal life insurance with certain exceptions. Cash values can be invested in a wide variety of investments; there is no minimum interest rate guarantee; and the investment risk falls entirely on the policy holder

Blackout period

The period during which Social Security benefits are not paid to a surviving spouse - between the time the youngest child reaches 16 and the surviving spouse's 60th birthday

Industrial (home service) life insurance

Type of life insurance in which policies are sold in small amounts and the premiums are collected weekly or monthly by a debit agent at the policyholder's home

Endowment insurance

Type of life insurance that pays the face amount of insurance to the beneficiary if the insured dies within a specified period or to the policyholder if the insured survives to the end of the period

Term insurance

Type of life insurance that provides temporary protection for a specified number of years with no savings element. It is usually renewable and convertible

Ordinary life insurance

Type of whole life insurance providing protection throughout the insured's lifetime and for which premiums are paid throughout the insured's lifetime

Limited-payment policy

Type of whole life insurance providing protection throughout the insured's lifetime and for which relatively high premiums are paid only for a limited period

Modified life policy

Whole life policy for which premiums are reduced for the first 3 to 5 years and are higher thereafter