AFE 1 Glossary Words
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maximum stated proportion of annuity cash value that can be withdrawn without incurring a surrender charge, such as 10%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