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Glossary of Terms

Click on a letter below to bring up an alphabetized list of important life insurance terms and concepts and their definitions.

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

Absolute Assignment The transfer of all ownership rights of a life insurance policy. The assignee becomes the new owner of the policy.

Accelerated Death Benefit A benefit that allows the policy owner to receive a portion of the policy's death benefit before the insured's death if the insured is diagnosed with a terminal illness and certain conditions are met.

Accidental Death Benefit A policy benefit that provides a death benefit payable in addition to the policy's basic death benefit when the insured's death is caused by an accident.

Administrative Fee Usually a fixed-dollar amount per year, used to pay for record keeping and policy reports.

Anniversary Refers to the date, one year or more, following the effective date of the contract.

Annual Policy Statement Individual statements, providing specific policy information and values, which are sent to policyowners of permanent life insurance, on each policy anniversary.

Annuitant The person whose lifetime is used to determine the amount of benefits payable under an annuity contract.

Annuitize To begin a series of payments from an annuity by exchanging the accumulated cash value or premium for payments. An amount and payout schedule is selected and accumulated capital is paid to the owner or annuitant (depending on contract language) or, in some cases, to a beneficiary. This term also refers to the settlement of a life insurance policy under the contract's annuity options.

Annuity Contract A contract under which an insurer promises to make a series of periodic payments to a named individual in exchange for a premium or a series of premiums.

Annuity Date The date on which an insurer begins to make periodic income payments under an annuity contract.

Annuity Period The time span between each of the periodic payments made under an annuity contract.

Applicant The person applying for the insurance policy. The applicant is not necessarily the owner or the insured.

Application A form which must be completed by an individual who is requesting that life insurance or an annuity be issued. The applicant provides personal information and the underwriter uses the information to determine the appropriate classification and rate for the proposed insured of a life insurance policy.

Assignee The person who gains certain rights to an insurance policy under an absolute or collateral assignment.

Assignment An agreement to transfer some or all ownership rights in a particular property (i.e. life insurance policy) to another party.

Attained Age The age an insured has reached (attained) on a specific date.

Automatic Premium Loan (APL) A permanent life insurance policy non-forfeiture option which states that the insurer will automatically pay an overdue premium for the policy owner by making a loan against the policy's cash value as long as the cash value equals or exceeds the amount of the premium due.

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B

Beneficiary An individual designated to receive the proceeds of an insurance policy, retirement account, trust, or other asset.

Business Continuation Insurance Policy An insurance policy designed to enable a business owner(s) to provide for the business' continued operation if the owner or another key person dies.

Buy-Sell Agreement An agreement for transfer (sale) of business ownership to the remaining owners (partners, stockholders, etc.) at the death, disability, or retirement of an owner. The transaction may be funded through life insurance and disability insurance policies, typically carried on the lives of each individual owner. The policies may be owned by a business entity or an individual.

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C

Cash Payment Nonforfeiture Option A nonforfeiture option that permits the owner of a permanent life insurance policy to discontinue premium payments and surrender the policy in exchange for a lump-sum payment of the policy's cash surrender value.

Cash Surrender Value The cash surrender value pertains to permanent life insurance. It is equal to the cash value less any loan balance and, if applicable, surrender charge.

Cash Value The amount of cash available to the owner when a permanent life insurance policy is surrendered to the life insurance company. Most of the cash value is also available to policyowners in the form of policy loans.

Certificate Holder An individual who is insured under a group insurance contract and who has received a certificate of insurance.

Certificate of Insurance A document provided to each group insured that describes the coverage provided by the group insurance contract and the insured's rights under the contract.

Change of Beneficiary Provision A policy provision that allows the owner of the insurance policy to change the beneficiary whenever desired, unless the beneficiary has been designated as irrevocable. If a beneficiary is designated as irrevocable, the owner must obtain the beneficiary's written permission before a change could take place.

Children's Insurance Rider A supplemental life insurance policy benefit that provides term life insurance coverage on the insured's children.

Claim A request for payment of the benefit due under the terms of an insurance policy.

Collateral Assignment The temporary assignment of the monetary value of a life insurance policy as security for the repayment of a loan. The assignee's rights to the proceeds are superior to the rights of the original policyowner and beneficiary, to the extent of the obligation owed to the assignee.

Contestability Period The time period during which the insurer is not obligated to pay a claim, because of material misrepresentations found in the application (usually two years). A policy becomes incontestable when the contestability period is over.

Contingent Beneficiary The person or entity designated to receive the proceeds of a life insurance policy following the insured's death if the primary beneficiary dies before the insured.

Conversion Privilege A term life insurance policy provision that allows the policyowner to change the term policy to a permanent life policy without providing evidence of insurability. A group life policy may also contain a conversion feature that allows a group insured whose coverage terminates for certain reasons to convert the group insurance coverage to an individual policy of insurance without presenting evidence of insurability.

Credit Life Life insurance issued for use in debtor/creditor transactions to cover the debt, should the debtor die or become disabled. Generally, the debtor pays premiums to the insurer and purchases the coverage as part of a loan transaction.

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D

Death Benefit The policy proceeds, or benefit, that is promised to the designated beneficiary of a life insurance policy upon the insured individual's death.

Decreasing Term Life Insurance Term life insurance that provides a policy benefit that decreases in amount over the term of the policy.

Deferred Annuity An annuity under which the periodic income payments are scheduled to begin more than one annuity period after the purchase date of the annuity.

DEFRA Section 7702 of the Internal Revenue Code. The difference between an insurance policy's face amount and the policy's cash value, which amount is used to determine whether the policy qualifies as a life insurance policy rather than an investment product under federal tax laws.

Disability Waiver of Premium An optional policy benefit that waives the payment of all premiums that come due during the total disability of the insured.

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E

Electronic Funds Transfer (EFT) A method of premium payment in which a policyowner authorizes the bank to pay premiums automatically on premium due dates.

Endow When an insurance policy's guaranteed cash value equals the initial death benefit it is said to “endow” or mature. With a Whole Life contract, that point occurs at the insured's age 100.

Evidence of Insurability Proof that a person is an insurable risk.

Excess Interest In Universal Life, or other permanent policies, the amount of interest credited to a policy in excess of what the guaranteed rate would have provided. For example, if the guaranteed rate is 3% and the total rate credited is 5%, the excess interest portion is 2%.

Exclusion An insurance policy provision that describes circumstances or events, such as an act of war, under which the insurer will not pay the benefit following an otherwise covered loss.

Expiration Date The date on which the insurance policy ceases to provide a benefit for the insured.

Extended Term Insurance Nonforfeiture Option A non-forfeiture option that allows the owner of a permanent life insurance policy to discontinue premium payments and to use the policy's net cash value as a single premium to purchase term insurance for the full coverage amount provided under the original policy for as long as a term period as the net cash value can provide.

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F

Face Amount The amount of the policy benefit of a life insurance policy.

Fixed Annuity An annuity contract under which the insurer guarantees that (1) the contract's accumulation value will experience no loss of principal and will earn at least a minimum guaranteed interest rate and (2) the periodic income payments will not fall below a stated minimum amount.

Free Look The time period after the policy's delivery during which the insured can cancel the policy and receive a full refund of premiums paid. The policy is then void from the beginning.

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G

Grace Period A specified length of time within which a renewal premium that is due may be paid without loss of coverage.

Group Insurance A policy issued to insure a specific group of people, and must provide coverage to all people in the group who qualify on a class basis, regardless of individual considerations. The insurance company may refuse to renew a group policy.

Group Policyholder The person or organization that decides what types of group insurance coverage to purchase for a specific group, negotiates the terms of the group insurance contract, and purchases the group insurance coverage.

Guaranteed Cash Value The minimum values guaranteed by the policy that will be available upon surrender of the policy, assuming all required or illustrated premiums have been paid to the date of surrender.

Guaranteed Insurability Benefit A supplemental life insurance policy benefit that gives the policyowner the right to purchase additional insurance of the same type as the basic life insurance policy, for an additional premium amount, on specified option dates during the life of the policy without supplying evidence of the insured's insurability.

Guideline Level Premium In Universal Life policies, it is the maximum premium that can be paid into the policy annually without violating IRS regulations on the required amount of pure life insurance protection.

Guideline Single Premium In Universal Life policies, it is the maximum premium that can be paid into the policy at one time without violating IRS regulations on the required amount of pure life insurance protection.

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I

Illustration A proposal showing a product's non-guaranteed and / or guaranteed future payments, cash values, and death benefits. Non­guaranteed values are based on the company's current rates of interest, mortality, and expenses. The illustration is simply an example of how the policy might perform under one specific set of assumptions. It is neither an estimate nor guarantee of future results. While illustrations may be helpful in showing how a policy might perform, they are not a prediction of policy performance.

Immediate Annuity An annuity that provides periodic income payments that generally are scheduled to begin one annuity period after the date the contract is issued.

Incontestability Provision A life insurance and annuity policy provision which states that after the policy has been in force for a specified period of time (usually two years), the company cannot rescind or deny a claim based on a material misrepresentation in the application.

Individual Insurance Policy A policy that is issued to insure the life of a named person.

Insurability Those qualifications of age, health, occupation, etc., which enable the applicant to meet the requirements of an insurance company for the issuance of insurance.

Insurable Interest The interest a policyowner has in the risk that is insured. A policyowner has an insurable risk if she is likely to suffer a loss at the death of the proposed insured. For the policy to be issued, both the owner and beneficiary must have an insurable interest in the insured.

Insurance A system whereby individuals and companies concerned about the potential for loss pay premiums to an insurance company, which, in turn, will reimburse those individuals and companies in the event the loss occurs.

Insured The person whose life is covered by the insurance policy.

Interest Rate The rate of interest credited on a policy's cash or account value. The stated rate includes the policy's guaranteed interest rate and the excess interest currently being paid by the insurance company. The declared rate may be net of any expenses or taxes that the company deducts from its gross rate of return.

Irrevocable Beneficiary A beneficiary who has a vested interest in the policy proceeds even during the insured's lifetime because the policyowner has the right to change the beneficiary designation only after obtaining the beneficiary's consent.

Issue Date The date the policy is issued. Often it is the same as the effective date of coverage of the life of the insured.

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K

Key Person Life Insurance Life insurance that a business purchases on the life of a person whose continued participation in the business is necessary to its success and whose death would cause financial loss to the business.

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L

Lapse The effect on an insurance policy if a renewal premium has not been paid by the end of the grace period. The policy will either terminate without value or fall under one of the non-forfeiture options. On Universal Life contracts, termination of the policy is caused by insufficient value in the policy to pay the next month's mortality and expense charge.

Level Premium A premium amount that remains the same, not increasing with the insured's age, throughout all the premium payment years of the policy or during the period premiums are guaranteed to remain the same.

Level Term Life Insurance A product of term life insurance that provides a policy benefit that remains the same over the term of the policy.

Life Expectancy The average number of years of life remaining for a number of people of a given age according to a given mortality table.

Life Annuity An annuity that provides periodic benefit payments for at least the lifetime of a named individual.

Life Insurance Policy An insurance contract under which the insurer promises to pay a benefit upon the death of a named person.

Living Benefits Benefits available to owners of life insurance contracts while the insured is still living. This term may refer to the availability of policy loans and collateral assignments, but it is sometimes used to refer to advances on policy proceeds taken in the case of terminal illness.

Loan A loan the policyowner receives from the insurer using the cash value of a life insurance policy as security. If the insured dies when there is an outstanding loan balance, the amount of the loan and any unpaid interest will be deducted from the death benefit payable.

Loan Value The amount that can be borrowed from the insurance company, using the policy cash value as collateral.

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M

Material Misrepresentation A statement made by the applicant or proposed insured in the policy's application which is not factually correct. If the truth had been disclosed, the insurer would not have issued the policy or would have issued it without additional benefits or at a higher premium. A material misrepresentation gives the insurer grounds to avoid the insurance contract.

Maturity Date The date on which the insurer will pay the face amount of the life policy to the owner if the insured is still living.

Medical Examination A medical history and exam completed by a doctor that an insurance company may require of the applicant during the underwriting process.

Misstatement of age or sex provision A life insurance and annuity policy provision that describes the action the insurer will take to adjust the amount of the policy benefit in the event that the age or sex of the insured or annuitant is incorrectly stated.

Modified Coverage Policy A whole life insurance policy under which the amount of insurance decreases by specific percentages or amounts either when the insured reaches certain stated ages or at the end of stated time periods.

Modified Endowment Contract (MEC) Life insurance policies deemed “investment-oriented” under TAMRA '88. Distributions (loans or surrenders) taken from these policies while the insured is living are taxed as gain-out-first rather than tax basis-out-first. Also, distributions taken before age 59 ½ are subject to an additional 10% surcharge tax on any gains. Death benefits are treated the same as non-MEC contracts.

Monthly Deductions Reference to the charges deducted monthly from the account value on a Universal Life policy. The charges consist mainly of mortality and expense costs, and premiums for riders and supplementary benefits.

Mortality The frequency of deaths in among a specific population.

Mortality Charge The cost of the insurance protection (death benefit minus cash value) on a life product. On an illustration, mortality charges referred to as “current” are not guaranteed. Those stated as “maximum” are the policy guarantees. The mortality charge is similar to a one-year term rate and increases with the insured's attained age. Commonly associated with Universal Life, the mortality charge is multiplied by the net amount-at-risk to determine the cost of providing insurance protection.

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N

Net cash surrender value The amount the owner of a cash value life insurance policy will receive upon surrendering the policy. The value is calculated by adjusting the amount of the cash surrender value for amounts such as paid-up additions, advance premium payments, and policy loans.

Non-Forfeiture Options Options available to the owner of a life insurance policy that builds cash value if the policy lapses. These options typically include, Automatic Premium Loan (APL), Extended Term, Reduced Paid Up and Cash Surrender Value.

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P

Paid-up additions option benefit A policy benefit that allows the owner of a whole life insurance policy to purchase single-premium paid-up additions to the policy on stated dates in the future without providing evidence of the insured's insurability.

Paid-up Policy A life insurance policy that requires no further premium payments but continues to provide coverage.

Paramed Exam A physical examination the insurer may require of applicants during the underwriting process. It is generally not as thorough as a full medical examination. It is usually performed by nurses, rather than doctors.

Payout Options The choices a contract owner has as to how the insurer will distribute annuity benefits during the payout period.

Payout Period The period during which an insurer makes periodic income payments under an annuity contract.

Period Certain The stated period of time that the insurer will make periodic income payments for a period certain annuity.

Period Certain Annuity An annuity that is payable for a stated period of time regardless of whether the annuitant lives or dies.

Permanent Life Insurance Life insurance that provides coverage throughout the insured's lifetime and also builds cash value, such as a whole life or universal life policy.

Policy A written document that sets forth the terms of the agreement between the insurance company and the owner of the policy.

Policy Benefit A stated amount of money an insurance company agrees to pay under an insurance policy when a specific loss occurs.

Policy Date The date that the insurance becomes effective; that is, when the insurer becomes liable to pay benefits provided under the terms of the policy.

Policy Fee A flat charge for policy administration expenses, usually included in the premium.

Policy Loan A loan from the insurer to the policyowner secured by the policy's cash value. Loan interest, which may be set at a fixed or variable rate, must be paid or accumulated on the loan.

Policy Term The specified period of time for which a term life insurance policy provides coverage.

Policyowner The individual or business who owns an insurance policy and who has all contractual rights. The policyowner is not necessarily the same person as the insured or the payor.

Preferred Risk A proposed insured who presents a significantly less-than-average likelihood of loss.

Premium A specified amount of money an insurer charges in exchange for its agreement to pay a policy benefit when a specific loss occurs.

Premium Mode The frequency of premium payments. For most policies, the mode may be annual, semi-annual, quarterly, or monthly.

Primary Beneficiary The person who, upon the insured's death, has the first right to receive insurance proceeds.

Proceeds The net amount of money payable under the terms of a life insurance policy upon the insured's death or maturity.

Proposed Insured The person named in a life insurance application as the person whose life is to be covered by the insurance, if the application is approved.

Provision A statement or clause, found in an insurance policy, to establish some term of the policy.

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R

Rate Class Insurance companies use many factors to place the insured into one of several classifications. These factors involve aspects of the insured's health history, occupation, and lifestyle. The rate class then determines the life insurance premium. Examples of rates classes include, super preferred non-nicotine, preferred non-nicotine, standard non-nicotine, standard nicotine, preferred nicotine.

Rated Policy A policy issued at a higher than standard premium rate to offset the risk of insuring an individual whose health (or some other risk factor) disqualifies the individual for standard or preferred rates.

Reduced Paid-Up Insurance Nonforfeiture Option A non-forfeiture option that permits the owner of a cash value life insurance policy to discontinue premium payments and use the policy's net cash surrender value as a net single premium to purchase paid-up life insurance of the same product as the original policy.

Reinstatement The process by which an insurer puts back into force (1) a life insurance policy that was terminated because of nonpayment of renewal premiums or (2) an individual life insurance policy that has been continued under the extended term or reduced paid-up insurance nonforfeiture option.

Renewable term insurance policy A term life insurance policy that gives the policyowner the option to continue coverage for an additional policy term.

Replacement The act of terminating a life insurance policy and replacing it with another policy.

Revocable beneficiary A beneficiary who has no right to the policy proceeds during the insured's lifetime because the policyowner has the unrestricted right to change the beneficiary designation during the insured's lifetime.

Rider An amendment to an insurance policy that becomes a part of the insurance contract that either expands or limits the benefits otherwise payable.

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S

Scheduled Premiums Refers to planned premiums that are scheduled at the time of issue.

Settlement Options Alternative methods for the distribution of the policy's proceeds that the owner or beneficiary of a life insurance policy can elect; choices include lump sum, specified number of years, or life-long payment plans.

Simplified Underwriting An underwriting process that applies a less strict analysis of risk factors. Participants in group products may qualify for this abbreviated form of underwriting.

Single Premium A single premium payment required to cover the entire cost of a life insurance policy or an annuity contract.

Single-premium annuity An annuity that is purchased by the payment of a single, lump sum amount.

Single-premium deferred annuity (SPDA) contract A deferred annuity that is purchased with a lump-sum premium payment on the date the contract is issued.

Single-premium immediate annuity (SPIA) contract An immediate annuity that is purchased with a lump-sum premium payment on the date the contract is issued.

Standard Risk A proposed insured who has a likelihood of loss that is not significantly greater than average.

Substandard Risk A proposed insured who has a significantly greater-than-average likelihood of loss but is still found to be insurable.

Suicide Clause A policy provision that excludes suicide as a covered risk for a specified period, usually two years, following the date the policy is issued. If the insured dies by suicide within the exclusion period, the amount payable is limited to the total premiums paid less any policy loans.

Surrender Cancellation of the policy, which involves returning the policy to the issuing company.

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T

Tele-Interview A telephone interview with an applicant or a proposed insured. The purpose of the tele-interview is to gather information for a life insurance application.

Ten Thirty-Five (1035) Exchange An Internal Revenue Code provision which allows the tax-free exchange of one life insurance policy for another. The exchange is not taxable and the tax cost basis of the old policy is carried over to the new one. However, the exchanged policies must be similar products and the insured and owner may not change.

Tax Deferral Postponement of the payment of income taxes until some point in the future. Generally, the cash value growth inside life insurance is eligible for deferral, unless the amount of cash received through surrender exceeds the policy's tax basis. Any additional surrenders beyond the basis must be reported as taxable income. Taxes may be deferred on annuity contracts until the owner takes distribution of the cash benefits.

Term Conversion A provision that during a specified period of time a term life policy can be converted to a permanent policy for the equivalent amount of coverage, without the insured having to provide evidence of insurability.

Term Insurance Insurance that provides a policy benefit if the insured dies during a specified period of time (term). A term life policy does not build cash value. Premiums increase each year, or, in the case of level premium renewable term, at the end of the period (10, 15, 20, 25, or 30 years). Level premium decreasing term has a level premium, but the insurance benefit decreases on each policy anniversary. Since term insurance can become quite expensive at older ages, it is often used to cover protection needs of a shorter duration or to cover a specific need such as an outstanding loan balance. It may be convertible to some form of permanent life insurance.

Temporary Insurance Agreement (TIA) The Temporary Insurance Agreement (TIA) provides the proposed insured with temporary coverage from the time the application is signed (with a limited coverage amount up to and including $1,000,000) until the policy is issued. The TIA is available when the initial premium is obtained with an electronic funds transfer (EFT) or credit card and is processed upon issue.

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U

Underwriting The process of identifying and classifying the degree of risk of the proposed insured for the purpose of issuing insurance.

Underwriting Guidelines General rules of risk selection established by an insurer.

Universal Life Insurance A form of cash value life insurance that is characterized by its flexible premiums, its flexible face amount , and its unbundling of the pricing factors.

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W

Whole Life Insurance Life insurance that builds cash value and provides life-time coverage at a level premium rate that does not increase as the insured ages.

Withdrawal Charge A charge imposed on the owner of a deferred annuity contract when the owner withdraws more than a stated percentage of the annuity's accumulation value in one year.

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Y

Yearly Renewable Term (YRT) A term life insurance policy that provides coverage for one year and gives the policyowner the right to renew the coverage. Premiums increase annually and provide a level death benefit.