Glossary of Life Insurance Terms

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ABSOLUTE ASSIGNMENT: A transfer of a policy through which the policyowner shifts full and absolute control and all policy rights to the assignee. See also: assignment; collateral assignment.

ABSOLUTE OWNERSHIP: All legal rights and control of the incidents of ownership (e.g., selection of beneficiaries, settlement options, etc.) in a policy, without limitation, qualification, or restriction, are held by the policyowner.

ACCELERATED OPTION:  Accumulated dividends and cash value are used to pay-up a life insurance policy sooner than scheduled.

ACCIDENTAL DEATH BENEFIT: An optional provision that provides an additional payment for loss of life due to an accident that was the direct cause of death. If the additional amount equals the face amount of the policy, this provision is frequently called a “double indemnity” provision. Some companies issue “ADB” in multiples of two or three times the face amount. See also: double indemnity.

ACCOUNT: The individual cash-value investment funds in a variable life insurance product. Also the cash-value accumulation account of universal or current assumption policies.

ACCUMULATED DIVIDENDS: Dividends left with the insurer to accumulate at interest. These dividends are generally income tax-free but the interest is taxable as earned.

ACTUARIAL ASSUMPTIONS: An insurer, in establishing premium rates, scheduling policy cash values, and projecting future dividends must make certain estimates. The most important assumptions are based on probabilities of death using large numbers of insureds (so-called mortality assumptions) and assumptions about interest and capital gains as well as sales commissions and other expenses.

ACTUARIAL COST: Projected cost as ascertained through assumptions and reduced to present values.

ACTUARIAL EQUIVALENT:  Mathematically equivalent from an actuarial cost standpoint. For any type of life insurance policy or annuity issued by an insurer there are (theoretically at least) actuarial equivalent (i.e., mathematically equal) policies or annuities with different features or terms. For example, for any particular level premium whole life policy with a given premium level there is some (higher) level of premium that will make a 10-pay life policy its actuarial equivalent.

ACTUARIAL PRESENT VALUE: The present worth of an amount or

stream of payments receivable in the future, where each future amount is discounted at an assumed rate of interest and adjusted for the probability that it will in fact be received.

ACTUARY: A professional highly educated in a number of fields such as mathematics, statistics, and accounting. An actuary must have superior knowledge as to the underlying principles of life insurance and their mirror image, annuities. Actuaries are responsible for creating new life insurance products and their pricing, value, and profit structures.

ADDITIONAL DEATH BENEFIT: See also: accidental death benefit; double indemnity.

ADDITIONAL PREMIUM: The amount of gross premium in excess of the recommended or “target premium” for the policy in universal and variable universal life policies.

ADDITIONAL PROVISIONS: Each life insurance contract contains “insuring” and “benefit” provisions as well as “uniform” provisions that define and limit coverage. Additional (general) provisions are often inserted into a contract to add to the protections, options, or flexibility of the policyowner.

ADHESION: There is no true bargaining or “meeting of the minds” in a life insurance contract. Bluntly, a policyowner can “take it or leave it” but may not bargain for specific terms or conditions. In other words, the party who buys life insurance must adhere to an established, pre-existing standard contract and its terms. The law provides special protection to one forced to accept a contract of adhesion and, other things being equal, will interpret the terms of such a document in favor of the policyowner rather than the insurer.

ADJUSTABLE DEATH BENEFIT: Certain life insur­ance products allow the policyowner to increase or decrease the face amount (within limits and often only with evidence of insurability). For instance, univer­sal and adjustable life policyowners can increase or decrease the amount of death benefit payable by adjust­ing the level of their premium payments.

ADJUSTABLE  LIFE INSURANCE:  Many of the most attractive features of both term and whole life are contained in this highly flexible type of coverage. Premiums, death benefits, duration of coverage, and cash value levels can all be adjusted (both upward and downward within limits) by the policyowner to meet changing needs and circumstances.

ADJUSTABLE PREMIUM: Term applicable to policies where the company has the contractual right to modify or change premium payments under certain specified conditions or to policies where the policyowner has the right to change scheduled premiums in universal or adjustable life.

ADJUSTED GROSS ESTATE: The adjusted gross estate is the gross estate less debts, funeral costs, and administrative expenses. This adjusted gross estate is the starting point for the balance of the· federal estate tax computation and serves planners as a rough approximation of the before-death tax amount of assets that heirs might receive.

ADJUSTED TAXABLE GIFTS: Sum of taxable por­tion of post-1976 gifts other than those for any reason included in a deceased’s gross estate.

ADMINISTRATOR: The person or persons appointed by the probate (also called Surrogates’ or Orphans’) court to settle the estate of a person who died without a valid will. See also: executor.

ADMITTED ASSETS: In regulating insurers, a state insurance department will carefully examine and document as existing so called “admitted assets,” i.e., all the assets of the insurer countable in ascertaining the insurer’s financial soundness under state law. Such assets generally include all funds, securities, property, equipment, rights of action, or resources of any kind owned by the company or held in trust for others.

ADVANCED LIFE UNDERWRITER: This term refers to the agent marketing products and services where a sophisticated knowledge of law and high degree of creativity is required. Estate and financial planning, retirement planning, business insurance, and employee benefit planning are good examples of the fields in which an advanced life underwriter will work.

ADVANCE PREMIUM: Any premiums paid before their due date.

ADVERSE SELECTION: The tendency of people who are less than standard insurance risks to seek or continue insurance to a greater extent than other individuals. This so-called “selection against the insurer” is a form of stacking the deck and is also found in the tendency of policyowners to take advantage of favorable options in insurance contracts.

AG 38 RESERVE: this is the reserve value used for a UL policy with a no lapse secondary guarantee.

AGE: The age in years of an applicant, insured, or beneficiary. Some companies use the age at the last birthday. Other companies use the age at the nearest birthday (last or next).

AGE AT ISSUE: The age of an insured at the time coverage goes into effect. Some insurers define issue age as the age at the insured’s last birthday. In others, it is defined as the insured’s age at the nearest birthday.

AGE LIMITS: Minimum or maximum age limits for the insuring of new applicants or for the renewal of policies.

AGENCY: The legal relationship empowering one party to act on behalf of another in dealing with third parties. (A life insurance agent does not generally have the authority to bind the insurance company.) The term agency is also defined as a sales office under the direction of either a general agent or a branch manager. A third definition of the term “agency” is an office operated by an independent agent who has an agent’s contract with at least one insurer.

AGENT: A person who solicits insurance or aids in the placing of risks, delivery of policies, or collec­tion of premiums on behalf of an insurer. Typically, a person placing products for a specific insurer is considered the insurer’s agent rather than an agent of the policyowner.

AGENT OF RECORD: Typically, the agent who takes the initial policy application and who is entitled to any and all commissions on the issued insurance contract is considered the agent of record. If an insurer assigns an agent to service its “orphans” (policyowners who no longer have a servicing agent), the newly assigned agent will become the agent of record. Many times an agent will obtain a written authority from a current or prospective policyowner to be the sole party with the right to investigate and negotiate life insurance contracts. If any other agent does sell insurance to the client, the agent of record usually receives a percentage of the commission earned on the new policy. In this later case, the agent of record legally represents the interests of the client.

AGGREGATE MORTALITY TABLE: A mortality table where the mortality rates at any age are based on all insurance in force at that age, without reference to the duration of insurance. See also: select mortality table and ultimate mortality table.

ALEATORY CONTRACT: Where a contract between two parties depends upon an uncertain event and where one party may pay a very small amount and receive a very large amount upon the occurrence or nonoccurrence of the specified event, it is called an aleatory contract. Life insurance is such a contract.

ALTERNATE VALUATION DATE: Typically, for federal estate tax purposes, assets are valued as of the date of decedent’s death. However, the estates personal representative (executor or administrator) may elect to value all property in the estate as of its value six months· from the date of death. If property is sold between the date of death and the date six months after death, that date becomes the alternate valuation date.

AMOUNT AT RISK: The pure insurance element of a life insurance policy. The net amount at risk is equal to the difference between the face value of a policy and its accrued cash value at a given time. The net amount at risk decreases as the cash value increases each year. If the cash value becomes the face value, the policy is said to mature or endow.

ANNUAL PREMIUM: The premium amount required on an annual basis under the contractual requirements of a policy to keep a traditional level premium whole life or term policy in force.

ANNUITY: A systematic liquidation of principal and interest over a specified period. An annuity can be measured by a fixed duration (e.g., 20 years) or by the lifetime of one or more persons. A second definition for the term is the contract providing such an arrangement. An annuity can be commercial (e.g., such as the annuity an individual can purchase from an insurer) or private (e.g., a son can promise to pay his father an income for life that the father can never outlive but that ends at the father’s death).

ANNUITY, CASH REFUND: See: cash refund annuity.

ANNUITY CERTAIN: An annuity that pays a specified amount for a definite and specified period of time, such as five or ten years, with remaining payments going to a designated beneficiary if the annuitant dies before the end of the specified period.

ANNUITY CERTAIN, LIFE: An annuity payable for a specified minimum number of periods or, if longer, for as long as the annuitant lives; a combination of an annuity certain and a life annuity.

ANNUITY, DEFERRED: See: deferred annuity.

ANNUITY DUE: An annuity under which payments will be made at the beginning, rather than at the end, of each period (i.e., monthly, quarterly, yearly, et al.) For contrast, see: immediate annuity.

ANNUITY, FLEXIBLE PREMIUM: See: flexible pre­mium annuity.

ANNUITY, INSTALLMENT DEFERRED: See: install­ment deferred annuity.

ANNUITY, INSTALLMENT REFUND: See: installment refund annuity.

ANNUITY, JOINT AND SURVIVOR: See: joint and survivor annuity.

ANNUITY, LIFE: See: life annuity.

ANNUITY, PRIVATE: See: private annuity.

ANNUITY, REFUND: See: refund annuity.

ANNUITY, SINGLE-PREMIUM DEFERRED: See: single-premium deferred annuity.

ANNUITY, TEMPORARY: See: temporary annuity.

ANNUITY, VARIABLE: See: variable annuity.

ANTI-REBATE LAWS: State laws that prohibit an agent or company from giving part of the premium, or any other valuable consideration, back to the insured as an inducement to purchase life insurance.

APPLICANT: The person(s) or party(ies) applying for and signing the written application for a contract of life insurance either on his or her own life or that of another.

APPLICATION: Awritten form provided by an insurer typically completed by the insurer’s agent and its medi­cal examiner (in most cases) on the basis of information on the physical condition, occupation, and avocation of the proposed insured. The policy application is signed by the applicant (typically, but not always, the insured) and becomes a legal part of the insurance contract. The application is the major source of information for the insurer in deciding whether or not or on what terms and conditions a contract should be issued.

ASSIGN: To transfer a right or risk.

ASSIGNEE: The person or party who receives a transferred right or risk when a life insurance policy is assigned.

ASSIGNMENT: The shift of rights and benefits of a life insurance contract from a policyowner to an assignee.

ASSUMED INTEREST RATE: The rate of interest used by an insurance company to calculate its reserves.

ATTAINED AGE: Most insurers base premium rates on the age an insured has attained as of the application for insurance or its issue date, i.e., the age an insured has reached on a specific date. Generally, this is the age of the proposed insured based on his or her nearest (or, in some cases, last) birthday.

AUTOMATIC PREMIUM LOAN PROVISION: An option that will allow the insurer to automatically borrow money from a policy’s cash value to pay any premium in default at the end of the grace period in order to keep a policy from lapsing.

AVIATION EXCLUSION: A contract provision that excludes from coverage deaths due to airline accidents unless the insured was a passenger on a regularly scheduled commercial airline.

BACK-END LOAD: A load is a charge against policy values for business expenses of the insurer in issuing the contract. These charges can be imposed at the incep­tion of the contract (i.e., a “front-end” load) or at the termination of the contractual relationship (i.e., a “back­ end” load). In the case of most variable, universal, and current-assumption life insurance products, the load is imposed when the policy is surrendered. Back-end loads typically decrease each year and disappear completely after the number of years specified in the contract.

BANDING: Banding refers to the recovery of ongoing administrative and handling costs. Insurers generally “band” premiums by policy size. This is a “cheaper by the dozen” concept in which larger policies are charged a more favorable rate than smaller policies. In other words a \$1,000,000 policy will be charged significantly less per year than ten \$100,000 policies for ongoing administrative and handling costs. Fewer policies are less expensive than more policies of the same aggregate amount. This is one reason why buy-sell policies may be purchased on a stock redemption rather than cross­ purchase basis.

BENEFICIARY: The recipient of life insurance proceeds at the death of the insured is the policy’s beneficiary. A primary beneficiary is first in line to receive that money. A secondary beneficiary is entitled to payment only if no primary beneficiary is alive when the insured dies. Final beneficiaries are those entitled to proceeds if no primary or secondary beneficiaries are alive at the death the insured. These “backup” beneficiaries are often called “alternate” or “contingent” beneficiaries, since 1.their claims are contingent on the deaths of everyone 1. the  higher class of primary beneficiaries.

BINDING RECEIPT: The receipt for payment of the first premium. This assures the applicant that if he or she dies before receiving the policy, the company will pay the death proceeds if the policy is in fact issued or would have been issued) as applied for had death not intervened.

BROKER: A broker differs from an agent since the Broker legally represents the customer rather than the insurer. Brokers may purchase policies on behalf of their clients though almost any insurer.

​​BROKERAGE AGENCY: A life insurance general agency servicing business of agents other than full­-time (career) agents of the company represented by the agency.

BROKER-AGENT: A business entity licensed and registered with the Securities and Exchange Commission (SEC) with the legal right to offer securities products to the public. An agent selling variable life products and related securities (such as mutual funds) must be registered with a broker-dealer.

BUSINESS INSURANCE: Coverage concerned primar­ily with the protection of an insured’s business against the economic loss incurred at the death or disability of a key executives and/or other key employees. Business Insurance is also designed to stabilize and maximize the value of a business by assuring a practical plan for busi­ness owners to be bought out and receive fair value for their interests at the death of one or more of the owners.

BUY-SELL AGREEMENT: An agreement in which either the business or the surviving owners (or both) will purchase the shares owned by a deceased or retir­ing shareholder at a value or formula previously agreed upon by the parties and stipulated in the agreement.

CAPITAL CONSERVATION METHOD: When an indi­vidual’s needs for insurance are ascertained, there are two choices for determining how much income a given amount of capital will produce. One method assumes only income will be used so as to protect (conserve) capital. The capital conservation method, therefore, assumes only the earnings on principal (not the princi­pal itself) will be used to satisfy those needs. The other approach is to annuitize capital (i.e., break down capital and pay out both income and capital to meet needs). This will generally result in a lower amount of capital needed (but at the expense of less future security and inheritance for others). See also: capital need analysis.

CAPITALIZATION OF POLICY LOANS: The process of increasing the policy loan in order to “pay” unpaid loan interest.

CAPITAL NEEDS ANALYSIS: Capital needs analysis (CNA) is an appraisal of needs system popularized by supersalesman Tom Wolf. A client’s financial needs are met through the economic value and income-producing capabilities of current and future assets.

CAPITAL STOCK INSURANCE  COMPANY: An insurance company owned by its stockholders (similar to the ownership of IBM by its shareholders). This form of corporate ownership should be contrasted with a mutual insurance company that is owned by its policyowners and operated solely for their benefit. See also: mutual company.

CAPITAL UTILIZATION METHOD: A life insurance “needs computation” method based on the assumption that both the earnings and principal will be used up over the period during which the income will be needed. This method should be compared and contrasted with the capital conservation method of needs analysis.

CAPTIVE INSURANCE COMPANY: A licensed insur­ance company that is created for the express purpose of writing property and casualty insurance for a specific business or group of businesses.

CASH ACCUMULATION POLICY: A contract that builds significant cash value or equity. Such policies include whole life policies, endowment policies, uni­versal life, and the various variable life products.

CASH REFUND ANNUITY: A cash refund annuity pays a lump-sum cash benefit to a beneficiary if the annuitant dies before a recovery of premiums paid. The lump-sum cash benefit is equal to the difference between the total amount paid by the purchaser over the total annuity payments received before the annuitant’s death.

CASH SURRENDER VALUE: Cash surrender value is the amount available to the policyowner when a life insurance policy is surrendered. It is also the amount upon which a policy loan is based. In the first 8 to 10 years after a policy is issued, the cash value is typically the insurer’s reserve to meet future liabilities reduced by a surrender charge that enables the insurer to recover expenses incurred in setting up the policy. If a policy is surrendered in later years, the cash surrender value usually equals or closely approximates the reserve value of the policy.

CHANGE OF BENEFICIARY PROVISION: A provi­sion that gives a policyowner the right to change the beneficiary at any time he or she chooses (unless an irrevocable beneficiary designation has been made).

CLASSIFIED RISK: Most insureds are classified as “standard” risks.Those who are less likely to die (based on their health) than the standard risk may qualify for “preferred risk” classification,while those who are more likely to die than standard risks their age are called “substandard” risks and pay premiums accordingly. See also: substandard risk.

CLAUSE: A specific provision of a life insurance con­tract (or rider attached to it) dealing with a particular subject in that policy.

COLLATERAL ASSIGNEE: The person or party to whom a collateral assignment is made.

COLLATERAL ASSIGNMENT: When a life insurance contract is transferred to an individual or other party as security for a debt, this usually temporary assignment does not transfer all policy rights. Under a collateral assignment, the creditor is entitled to be reimbursed only to the extent “his interest may appear,” i.e., policy proceeds will be payable only for the amount owed by the policyowner at that time. Any death benefit in excess of the debt owed by the policyowner to the creditor is paid to the policy’s beneficiary. For comparison, see: absolute assignment.

COLLATERAL ASSIGNMENT PLAN: A collateral assignment plan is a variation in a split dollar life insurance arrangement in which the insured initially applies for and owns the policy and names the benefi­ciary but collaterally assigns the policy to the payor of the bulk of the premiums as security for that party’s outlays.

COLLATERAL LOAN: A loan guaranteed by the pledge of the life insurance contract as collateral.

COMMISSION: The percentage of the premium paid to an insurance agent or broker by the insurer as compensation.

COMMISSIONER: Also called superintendent in some states, a commissioner of insurance is the head of a state insurance department who supervises the insurance business in the state and administers insurance laws.

COMMISSIONERS  STANDARD  ORDINARY MORTALITY TABLE (CSO): A standard mortality table approved by the National Association of Insurance Commissioners and used in life insurance rate calculations.

COMMISSIONS, GRADED: This is the typical life insurance commission arrangement in which larger commissions are paid to the agent or broker during the first policy year than in renewal years.

COMMISSIONS, LEVEL: This is a comm1ss1on arrangement in which an agent is paid commissions of equal amounts over several years and is favored in ultra large cases in order to spread out the taxable commissions and thereby reduce taxes paid on the commissions.

COMMUTATION RIGHTS: The right of the beneficiary to receive – in one lump sum – the value of the remaining stream of future payments under a settlement option selected by the insured of a life insurance policy.

COMMUTE: To compute and pay-as of a given date­ the lump-sum actuarial equivalent to a series of future payments that would be due under a life insurance contract.

COMMUTED VALUE: The present (i.e., discounted) actuarial value of a series of installments payable at fixed future dates. The commuted value is ascertained on the basis of an assumed rate of interest and mortality factors (if payments are contingent on the life or lives of one or more individuals).

COMPOUND INTEREST: Interest earned on interest.

CONCEALMENT: Intentional failure of the insured to disclose a material fact to the insurance company at the time application is made.

CONDITIONAL ASSIGNMENT: An assignment , made solely for the purpose of securing a debt. A conditional assignment is typically automatically terminated when the obligation is repaid. See also: assignment.

CONDITIONAL PREMIUM RECEIPT: This is the receipt given to a policy applicant if all or part of the premium is paid at the time of application. This receipt does not provide absolute interim insurance until the company acts on the application. It provides that the insurer will assume the risk of the death or a change in the health of the insured after the date of the application if it later approves the application or, more frequently, if the insured meets with the company’s rules of insurability for the plan applied for as of the date of the application. See also: interim term insurance.

CONSIDERATION: Consideration is an essential ele­ment of a binding contract. In a life insurance contract, the policyowner’s consideration is the first premium payment and the application; the insurance company’s consideration is the promise(s) contained in the contract. Future premiums are not consideration but rather a condition precedent to the insurer’s obligation.

CONTESTABLE CLAUSE: Sometimes called the incon­testable clause. The provision in the insurance contract that states the time (called the contestable period) the insurer has to contest and the grounds under which the policy may be contested or voided by the insurer. By law, the maximum contestable period is two years, but many policies limit the period to one year.

CONTINGENT BENEFICIARY: A contingent ben­eficiary is one who will receive death proceeds if the principal beneficiary predeceases the insured.

CONTRACT OF INSURANCE: A legally binding agreement in which an insurer agrees to pay a death benefit upon the death of the insured in return for the consideration of the policyowner’s payment of an initial premium and the policy application. Once the insurer issues the contract, the policyowner pays premiums as a condition which precedes the insurer’s duty to pay the death benefit upon the demise of the insured. This legally enforceable agreement comprises more than just the policy. The application and any attached supplements, riders, or endorsements form the entire contract.

CONTRACT RATES: Life insurance settlement option rates (i.e., the guaranteed rates at which the policyo­wner’s dollars can be converted into one or more forms of annuity payouts) are listed in the policy. In fact, the insurer may allow the purchase to be made at current rates if those are more favorable to the policyowner but because of increased longevity trends, guaranteed (con­tract) rates are often more favorable than current rates.

CONVERSION: One type of life insurance contract can be exchanged for a different type assuming the contract is “convertible.” For instance, term insurance can be converted to whole life or some other form of permanent insurance. Conversion occurs under a group policy when an insured individual applies for an indi­vidual policy without evidence of insurability within a stipulated period of time before the group insurance coverage terminates.

CONVERSION, ATTAINED AGE: The premiums for the converted policy are based on the insured’s age attained at time of conversion.

CONVERTIBLE: A provision giving the policyowner the right to exchange the policy for another without evidence of insurability.

CONVERTIBLE TERM INSURANCE: A term contract that may be converted to a permanent form of insurance without a medical examination, if conversion is made within a limited period as specified in the contract. The premium is usually based on the attained age of the insured at the time of conversion.

COST OF INSURANCE: In the case of a split dollar arrangement or life insurance in a qualified plan, the value of the pure insurance protection in any year is the difference between the face amount of the policy and its cash value multiplied by a life insurance premium fac­tor provided by the IRS (currently Table 2001; formerly P.S. 58 rates) or, (in certain cases) if lower, the insurer’s rates for individual one-year term policies available to all standard risks (initial issue insurance).

CONTRACT RATES: Life insurance settlement option rates (i.e., the guaranteed rates at which the policyo­wner’s dollars can be converted into one or more forms of annuity payouts) are listed in the policy. In fact, the insurer may allow the purchase to be made at current rates if those are more favorable to the policyowner but because of increased longevity trends, guaranteed (contract) rates are often more favorable than current rates.

CONVERSION: One type of life insurance contract can be exchanged for a different type assuming the contract is “convertible.” For instance, term insurance can be converted to whole life or some other form of permanent insurance. Conversion occurs under a group policy when an insured individual applies for an indi­vidual policy without evidence of insurability within a stipulated period of time before the group insurance coverage terminates.

CONVERSION, ATTAINED AGE: The premiums for the converted policy are based on the insured’s age attained at time of conversion.

CONVERSION, ORIGINAL AGE: Premiums for the converted policy are based on the insured’s original age at issue. The policyowner must pay the difference in premiums, plus interest, for the time the policy has been in force.

CONVERTIBLE: A provision giving the policyowner the right to exchange the policy for another without evidence of insurability.

CONVERTIBLE TERM INSURANCE: A term contract that may be converted to a permanent form of insurance without a medical examination, if conversion is made within a limited period as specified in the contract. The premium is usually based on the attained age of the insured at the time of conversion.

COST OF INSURANCE: In the case of a split dollar arrangement or life insurance in a qualified plan, the value of the pure insurance protection in any year is the difference between the face amount of the policy and its cash value multiplied by a life insurance premium factor provided by the IRS (currently Table 2001; formerly P.S. 58 rates) or, (in certain cases) if lower, the insurer’s rates for individual one-year term policies available to all standard risks (initial issue insurance).

COST OF LIVING ADJUSTMENT (COLA): A rider available with some policies that provide for automatic, periodic increases in benefits based on increases in the consumer price index (CPI) or other index of inflation.

CREDIT LIFE INSURANCE: Apolicy issued on the life of a borrower with the creditor named as beneficiary to cover the repayment of a loan in the event the borrower dies before the loan has been repaid. Usually written using monthly decreasing term based on a relatively small, decreasing balance installment loan.

CROSS PURCHASE: A buy-sell arrangement that provides that in the event of one owner’s death, the surviving shareholders or partners are bound to purchase, and the estate of the deceased is bound to sell, the deceased’s interest in the business. A cross-purchase agreement is often funded with life insurance policies owned by each owner on the life or lives of all other owners.

CRUMMEY POWER: A provision in a trust that gives a beneficiary a limited period of time to demand all or a portion of a gift be made to the trust for. the purpose of converting what would otherwise be a future interest gift (not qualifying for the annual gift tax exclusion) into a present interest gift (that does qualify for the annual gift tax exclusion).

CURRENT-ASSUMPTION POLICY: Current­ assumption policies reflect the insurer’s current interest, mortality, and expense experience directly in cash value credits and charges rather than indirectly through dividends. As a result, actual cash value accumulations are uncertain, although there is a minimum cash value guarantee. The most prevalent type of current-assumption policy is universal life, although it is also sold in fixed-premium modes. Although inaccurate, the term “interest-sensitive” is sometimes used synonymously with “current-assumption.” Current-assumption is actually a broader concept implying direct sensitivity not only to current interest rates but also to mortality and expense experience. Although traditional participating whole life policies may reflect the company’s current performance with respect to investment, mortality, and expenses through its declared dividends, these policies are not classified as current-assumption policies.

CURRENT INTEREST RATE: This is the interest rate credited to current-assumption and universal life products (versus the fixed rate of traditional life insurance policies).

CURRENT VALUE: The fair market value of a security or other property at the present time.   ·

DATE OF MATURITY: The date upon which a life insurance policy endows if the insured is still living.

DATE OF POLICY: The date appearing on the front page of an insurance policy indicating when the policy went into effect.

DEATH BENEFIT: The amount stated in the policy as payable upon the death of the insured.

DEATH CLAIM: When the insured dies, this is the form that must be signed by the policy beneficiary and, along with the death certificate, sent to the insurer to provide proof of the date the insured died and to establish the beneficiary’s right to the policy’s proceeds.

DEFICIENCY RESERVE: For policies with secondary guarantees, in some cases the calculation of minimum reserves is required. Deficiency reserves are the excess of the minimum reserves over the AG 38 basic reserves. The AG38 reserve including the deficiency reserve will be greater than the AG 38 reserve not including the deficiency reserve.

DECLARED INTEREST RATE: In a universal life policy (or in the general account of a variable universal life or interest-sensitive whole life policy), cash values earn a minimum interest rate. However, they will actually be credited with a current rate of return that may be substantially higher. This rate is declared by the insurance company and may be periodically changed.

DECREASING TERM INSURANCE: If the face value of term insurance decreases over time in scheduled increments until the policy expires, the insurance is a form of decreasing term. Typically in such policies, the premium remains level.

DEFAULT: If a policyowner fails to make a premium payment by a policy’s final due date or by the end of its grace period, the policy is in default and will lapse.

DEFERRED ANNUITY: A series of payments that are not begun until the lapse of a specified period of time or until the annuitant reaches a specific age.

DELIVERY OF POLICY: Delivery is, in general and nonlegal terms, the presentation of the policy to the policyowner. Actual delivery is legally determined by the intent of the parties and, therefore, does not neces­sarily require that the policy physically change hands. For instance, a conditional binding receipt (or, at times, verbal acknowledgement) may constitute delivery.

DEPENDENCY PERIOD: In computing life insurance needs, the years when children are dependent upon parents, usually until the youngest is 18 years old, is called the.dependency period.

DEPOSIT TERM LIFE INSURANCE: Deposit term is a form of temporary coverage, normally sold for ten-year terms, with the first-year premium more than twice the amount of the annual premiums paid for the remaining years. This higher first-year premium is called a deposit. If the insured dies, double the deposit is added to the death benefit; if the insured lives, double the deposit lS returned at the end of the term. The insured forfeits the deposit and receives no refund if the policy lapses. A. form of tontine, most states now severely restrict or totally prohibit this type of policy.

DISABILITY PREMIUM WAIVER INSURANCE: This is an important option or rider in a life insurance policy that provides that if an insured becomes totally disabled for six months or longer, no further premiums will be due and the policy will be continued in full force until death or recovery occurs. Upon recovery, the policyo­wner does not have to repay premium payments made by the insurer on behalf of the policyowner during the disability period.

DIVIDEND: When a policy participates in the favorable investment, mortality, and expense experience of the insurer (so called “par” policies), the policyowner receives “dividends” as a refund of an “overcharge” in premiums. For tax and other purposes, these dividends are considered a return of capital rather than a profit payment.

DIVIDEND ADDITIONS: Participating policies provide that their dividends may be used as single premiums to purchase paid-up insurance at the insured’s attained age as additions to the amount of insurance specified on the face of the contract. These additions are purchased at net rates (no commissions or other charges) to the policyowner. See also: paid-up additions.

DIVIDEND CLASS: All policyowners are grouped into categories in which members who bought the same type of contract at the same age are classed. This classification method allows precise determination of l1ow much premium should be returned to each class is a dividend.

DIVIDEND DEPOSITS: Cash dividends and interest arising from the policy left on deposit with the company under the terms of the dividend option.

DIVIDEND, EXTRA: A dividend that is paid in addition to any regular, periodic dividends. See also: dividend.

​​DIVIDEND OPTIONS: The different ways in which the insured, under a participating policy, may elect to receive dividends. The dividend options generally include receiving payments in cash, applying them to reduce premiums, purchasing additional paid-up insurance, having them held by the insurer to earn interest for the policyowner, or purchasing additional term insurance.

DIVISIBLE SURPLUS: The amount of the company’s surplus earnings available for distribution among the policyowners in the form of dividends.

DOUBLE INDEMNITY: A clause in a life insurance contract providing for a double benefit if death occurs under certain circumstances. The most common circumstances that would result in a double benefit is an accidental death.

EARNED PREMIUM: The amount of premium that would compensate the insurance company for its loss experience, expenses, and profit year to date.

ECONOMIC BENEFIT: The economic benefit is, in a split-dollar or other employer-provided insurance plan, the amount that the insured employee or party must report currently as income,

EMERGENCY FUND: When calculating the amount of life insurance needed, the amount figured into the client’s needs that should be kept on hand by survi­vors as a fund for emergencies (similar to the reserve all clients should hold for an emergency such as an accidents or an unexpected but potentially profitable business opportunity). The increasing loan value of a life insurance policy also constitutes, and is often referred to as, an emergency fund for the insured during lifetime.

ENDORSEMENT: A written modification to an insur­ance policy, usually written on the printed policy page. An endorsement may also be in the form of a rider. No endorsement is valid unless signed by an executive officer of the company and attached to and made a part of the policy. See also: rider.

ENDOW: A life insurance policy is said to endow when its cash value equals the face amount. The policyowner then receives, in cash, the face amount.

ENDOWMENT: A life insurance contract that provides for the payment of the face amount at the end of a fixed period, or at a specified age of the insured, or at the death of the insured before the end of the stated period.

EVIDENCE OF INSURABILITY: A statement or proof of a person’s physical condition, occupation, etc., affecting the acceptance of the applicant for insurance.

EXCEPTIONS PROVISION: An insurance policy provision that limits the insurance company’s liability by excluding coverage for certain losses, such as death in an aviation accident other than on a regularly scheduled commercial airline.

EXCESS INITIAL EXPENSES: An insurer’s first-year expenses that exceed first-year expense loading. These are generally a result of higher first-year commission rates and the expense of selection and issue.

EXCESS INTEREST: The positive difference between the rate of interest an insurer guarantees to pay on proceeds left under settlement options and the higher interest actually paid. A second meaning of the term is the difference between the guaranteed rate of return on cash value and the higher, current rate in universal life and other interest-sensitive policies.

EXCLUSION CLAUSE: A policy prov1s1on that excludes certain risks from coverage, such as aviation, war, or pre-existing conditions. See also: exceptions provision.

EXCLUSION RATIO: A fraction used to determine the amount of annual annuity income exempt from federal income tax. The fraction is generally found by dividing the policyowner’s investment in the annuity contract by the expected return.

EXECUTOR: A person appointed in a person’s will to carry out the terms of the will. See also: administrator.

EXPENSE CHARGE: In variable, universal life, and other current-assumption policies, all costs are individu­ally deducted and accounted for within the policies. These expense charges are fixed amounts or percentages deducted from gross premiums paid and cash value, as specified in the policy.

EXPENSE LOADING: The amount added to the premium during the rate-making process to cover the expenses of maintaining the business, commissions, administration, and overhead.

EXPERIENCE: The loss record of a type of insurance written. This record is used in adjusting premium rates and predicting future losses.

EXPERIENCE MODIFICATION: The adjustment of premiums as a result of the application of experience rating; usually expressed as a percentage.

EXTENDED TERM OPTION: A nonforfeiture option that provides that the net cash surrender value of a policy may be used as a net single premium at the attained age of the insured to purchase term insurance at the face amount of the original policy for as long a period as possible.

EXTRA DIVIDEND: A dividend that is paid in addition to regular, periodic dividends.

EXTRA PREMIUM: The amount charged in addition to the regular premium. to cover an extra hazard, special or substandard risk.

EXTRA PROTECTION BENEFIT: An insurance policy provision that provides an extra amount of insurance payable if death occurs during the term of the provision.

FACE AMOUNT: The amount payable in the event of death, as stated on the front page of the policy. The face amount may be decreased by loans or increased by additional benefits payable under specified conditions, or as stated in a rider.

FAIR MARKET VALUE (FMV): The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.

FAMILY INCOME POLICY: A life insurance policy that combines whole life and decreasing term to provide income protection against the premature death of the family breadwinner. If the insured dies within a speci­fied period, the family will receive a stated amount of income from date of death until the end of the period. The face amount of the policy is then paid to the family. For comparison, see: family maintenance policy.

FAMILY INCOME RIDER: Similar to a family income policy except that the decreasing term coverage is written as a rider to a whole life policy rather than as a combination of both coverages.

FAMILY MAINTENANCE POLICY: A life insurance policy combining level term and whole life to provide income protection against the premature death of the family breadwinner. If the insured dies within a specified period (say, 20 years) the family will receive a stated monthly amount from the date of death to 20 years in the future. The face amount of the policy is then paid to the family. For comparison, see: family income policy.

FAMILY POLICY: A policy that combines whole life and convertible term to provide insurance on each family member in units of coverage. Each unit gener­ally consists of \$5,000 of whole life on the wage earner,

\$1,250 of convertible term on the spouse and \$1,000 of convertible term on each child.

FAMILY RIDER: An optional policy supplement attached to the insurance policy issued to the head of a family and insuring other members of the family, generally the spouse and children.

FIFTH DIVIDEND OPTION: Because this option is usually listed after four other possibilities, it is often called the “fifth dividend” option. If selected, each year the insurer will use the prior year’s dividend to purchase (at no commission or expense charge) one-year term insurance up to specified limits (usually no more than the policy’s cash value) with the balance applied toward one or more of the other options. The fifth divi­dend option is useful to maintain level or increasing protection, to keep coverage high even if a policy loan has been taken out, or where the parties are involved in a split dollar arrangement.

FINAL EXPENSES: Costs incurred during a last illness, funeral and burial costs, debts, probate expenses, death taxes and any other taxes or obligations that must be paid in order to settle the estate of a decedent.

FINANCED INSURANCE: The payment of insurance premiums, in whole or in part, with funds obtained by systematic borrowing, usually from the cash value of the contract.

FIRST-YEAR PREMIUM: Insurance premiums that are due during the first policy year, regardless of whether they are paid annually, semiannually, quarterly, monthly, or weekly. Premiums due after the first year are known as renewal premiums.

FIXED-AMOUNT SETTLEMENT OPTION:. A life insurance policy beneficiary can request that proceeds be paid in regular installments of a fixed dollar amount. The number of payment periods is determined by the policy’s face amount, the amount of each payment, and the interest earned. For contrast, see: fixed-period settlement option.

FIXED ANNUITY: An annuity that provides fixed payments during the annuity period. For contrast, see: variable annuity.

FIXED-PERIOD  SETTLEMENT OPTION: A life insurance settlement option in which the number of payments is set by the payee, with the amount of each payment determined by the amount of proceeds. For contrast, see: fixed-amount settlement option.

FLEXIBLE PREMIUM ANNUITY: An annuity that allows the owner of the contract to vary premium payments (within limits) from year to year.

FLEXIBLE PREMIUM VARIABLE LIFE: See: variable universal life.

FRATERNAL INSURANCE: Life or health insurance protection provided by fraternal benefit societies. Before purchasing fraternal insurance, an individual must become a member of the organization.

FRAUD: An act of deceit; misrepresentation of a material fact made knowingly, with the intention of having another person rely on that fact and consequently suffer a financial hardship.

FREE-LOOK PROVISION: A provision in life insurance policies that gives the policyowner a stated amount of time (usually ten days) to review a new policy. It can be returned within this time for a 100% refund of premiums paid, but cancellation of coverage is effective from date of issue.

FRONT-END LOAD: A contract is front-end loaded when certain of the insurer’s expenses are deducted from the gross premium before the remaining net premium goes into the cash value account.

FULL DISCLOSURE: The requirement that prospective purchasers of variable universal life products be fully informed of the charges and costs and provided with all important information about their policies. Also includes the requirement that they are given a current prospectus and that no statements or guarantees are made by the agent regarding cash values or interest rates.

FULLY INSURED PLAN: Pension plans that are funded entirely through individual insurance contracts issued on the lives of participants. The insurance company products provide any pre-retirement death benefits and the entire retirement benefit for the employee.

GENERAL ACCOUNT: Traditionally, the term describing a company’s overall investment portfolio. More recently, it also refers to the separate investment funds upon which the declared rate of return in a universal life policy is based. Also, with variable and variable universal life policies, one of the investment account options that earns a declared rate of return.

GRACE PERIOD: Most life insurance contracts provide that premiums may be paid at any time within a period of generally 30 or 31 days following the premium due date, during which time the policy remains in full force. If death occurs during the grace period, the insurer will pay the face amount less the amount of the earned but unpaid premium (and any outstanding loan). Generally, an insurer will not charge interest on overdue premiums if they are paid before the end of the grace period.

GRADED DEATH BENEFITS: A life insurance policy provision that provides for death benefits that, in the early years of the contract, are less than the face amount of the policy, but that increase with the passage of time.

GRADED PREMIUM LIFE INSURANCE: To make life insurance premiums more affordable (and therefore marketable), some insurers sell a form of modified life insurance that starts with relatively low premiums that increase slowly each year. After a period of years, the premium remains level. The death benefit remains level throughout the term of coverage.

GROSS PREMIUM: This is the premium paid by the policyowner. More technically, the gross premium is the net premium, plus the expense of operation less the interest factor. For contrast, see: net premium.

GROUP LIFE INSURANCE: A form of life insurance covering a group of persons generally having some common interest or activity, such as employees of the same company or members of the same union or association. Most group insurance is issued using yearly renewable terms, without requiring medical examinations.

GROUP ORDINARY LIFE INSURANCE: Level pre­mium ordinary life insurance issued on a group basis.

GUARANTEED CASH VALUE: The guaranteed amount available to the insured on surrender of a policy according to a table of guaranteed values scaled to the number of years in which the policy is in force. In a universal or variable policy, there is no guaranteed cash value.

GUARANTEED COST: This is another term for non­ participating (non par) insurance. Guaranteed cost can also be defined as the maximum costs that can be deducted from cash value under the terms of the policy in universal or variable universal life contracts.

GUARANTEED INSURABILITY RIDER: A rider, now offered on most life insurance policies, that gives the policyowner the right to purchase additional insurance at specified future times without evidence of insur­ability. Rates are generally based on attained age at the time of purchase.

GUARANTEED INTEREST RATE: The minimum annual rate of interest used in calculating policy reserves from year to year, or annual increases in dividend accumulations, or the interest factor in proceeds held under a settlement option, or the amount payable under the interest income option, etc. This term also refers to the minimum rate credited to cash value in interest­ sensitive policies.

GUARANTEED PURCHASE OPTION: See: guaran­teed insurability rider.

HUMAN LIFE VALUE: One method of determining how much insurance a person should own is to measure his or her “human life” value, an estimate of the present value of a person’s remaining economic worth. In general terms, this projects future net after-tax salary and other earnings, reduces them by future expenses, and then discounts these future net values at interest to determine a lump-sum present value.

IMMEDIATE ANNUITY: An annuity contract that pays the annuity at the end of each period of payment. The interval may be monthly, quarterly, semiannually, or annually.

INCIDENTS OF OWNERSHIP: The right to exercise any of the privileges in the.insurance policy (e.g., change the beneficiary, withdraw cash values, make loans on the policy, etc.). Any retention of an incident of ownership will cause federal estate tax inclusion of policy proceeds.

INCONTESTABLE CLAUSE: See: contestable clause.

INCREASING TERM INSURANCE: Term life insur­ance coverage that increases in face value each year (or certain period) from the date of policy issue to the date of expiration. For contrast, see: decreasing term insurance and level term insurance.

INDEXED UNIVERSAL LIFE INSURANCE ANNUITIES: these policies have all the traditional features of regular universal life policies except that, similar to variable universal life, the interest crediting method is based upon the performance of one or more indexes, typically of stocks, such as the S&P 500, the Russell 2000, and other large and small, foreign and domestic, value and growth stock indexes. In contrast with variable universal life, these policies still give poli­cy owners a minimum crediting rate guarantee assuring that they will not lose money in periods when the underlying index values fall. Thus, policyowners can enjoy the upside potential of stock investments when stock values rise, but be protected from losses when stock values fall. Insurance companies offer a similar indexed interest crediting rate design feature with their indexed annuities.

INDETERMINATE PREMIUM: Refers to policies where the actual premium charged may be lower than the guaranteed premium stated in the policy. Policies with indeterminate premiums generally make reference to the guaranteed (or maximum) premium that can be charged, and the current (or lower) premium, based on the current and projected mortality and/or investment experience.

INDIVIDUAL LIFE INSURANCE: Life insurance contract that covers only one insured, but that may sometimes cover several people, such as the members of a family, through the use of riders. The term “individual” is often used to distinguish this type of life insurance from group life insurance.

INDUSTRIAL LIFE INSURANCE: Often called debit or home service insurance, life insurance issued on individual lives from birth to age 70 in small amounts. Weekly or monthly premiums are collected at the indi­vidual’s home by a home service agent. Usually, no medical examination is required.

INITIAL DEATH BENEFIT: In flexible feature life insurance policies, the original face value of the policy; the specified amount.

INITIAL PREMIUM: The first premium, generally payable with the application or upon delivery of the policy.

INITIAL RESERVE: The reserve amount determined at the beginning of the policy year. It equals the preceding years1 ending reserve, plus the annual net premium.

INSTALLMENT DEFERRED ANNUITY: An annuity in which the annuitant pays into the annuity fund over a period of time, after which (usually starting imme­diately) annuity payments begin coming back to the annuitant and continue for life.

INSTALLMENT PREMIUMS: Premiums paid over time rather than as a single premium.

INSTALLMENT REFUND ANNUITY: A life annuity that will continue to make payments to a stipulated beneficiary after the death of the annuitant until the total payments equal the consideration paid to the insurer. For contrast see: cash refund annuity.

INSTALLMENT SETTLEMENT: A series of periodic payments of proceeds instead of payment in a lump­ sum. Any of the income settlement options in a policy. A policy clause allowing the beneficiary to choose to receive proceeds in installments. ·

INSURABILITY: The term insurability encompasses all conditions pertaining to an individual that affect his or her health, susceptibility to injury, as well as life expectancy and other factors considered by the insurer in its underwriting and rating process. If the risk is too high, the insurance company will refuse coverage.

INSURABLE INTEREST: A person who has a reasonable expectation of benefiting from the continuance of another person’s life or of suffering a loss at his or her death is said to have an insurable interest in that life.

INSURANCE RESERVES: The present value of future claims minus the present value of future premiums. Reserves are balance sheet accounts set up by insurers to reflect actual and potential liabilities under outstanding insurance contracts.

INSURED: The individual or group covered by the contract of insurance.

INTENTIONALLY DEFECTIVE GRANTOR TRUST: a trust drafted with an intentional flaw that runs “afoul” of the rules contained in sections 671 through 679 of the internal revenue code with the result that the grantor of the trust is taxed on all trust income, as income tax laws will not recognize that assets have been transferred away from the trust grantor.

INTEREST-ADJUSTED COST METHOD: A method of comparing costs of similar policies by using an index that takes into account the time value of money due at different times through interest adjustments to the annual premiums, dividends, and cash value increases at an assumed interest rate.

INTEREST FACTOR: One of three factors taken into consideration by an insurance company when calculat­ing premium rates. This is an estimate of the overall average interest that will be earned by the insurer on invested premium payments over a long period of time.

INTEREST-ONLY OPTION: A settlement option under which all or part of the proceeds of a policy are left with the insurance company for a definite period at a guaranteed minimum rate of interest. Interest may be paid (usually subject to certain minimums) annually, semiannually, quarterly, or monthly- or, in some cases, may be added to the proceeds left with the insurer.

INTEREST-SENSITIVE WHOLE LIFE: A traditional whole life policy with fixed premiums and traditional nonforfeiture values where interest is credited directly to the cash value at current rates. Often used somewhat erroneously to refer to current-assumption policies. Generally loads, mortality costs, and interest credits are separately stated. The cash value of the policy is the greater of this fund less sur:render charges, and the guaranteed cash values.

INTERIM TERM INSURANCE: Term life insurance issued to an applicant during the period between submis­sion of the application and the time the insurance company either issues a permanent insurance policy or rejects the application. See also: conditional premium receipt.

INTERPOLATED TERMINAL RESERVE: A reserve fund that an insurance company uses to cover its liability in a particular policy. It is used in determining the value of certain life insurance policies for gift tax purposes.

INVESTMENT ACCOUNT: A separately managed cash value investment fund (usually similar to a mutual fund) into which variable and variable universal life insurance policyowners allocate the premiums and cash value. Policies generally have several of these accounts, each with its own investment objective and degree of risk.

INVESTMENT PORTFOLIO: A list detailing the securities owned by a person, business, or mutual fund. Most insurance companies carry a broadly varied investment portfolio. Also refers to the equity-based accounts in variable and other interest-sensitive products.

INVESTMENT YEAR METHOD OF DIVIDEND CALCULATION: Any dividend calculation method that recognizes differences in earned interest rates depending upon the year in which the investment is made. For contrast, see: portfolio method of dividend calculation.

ISSUE: A term applying to the insurer’s approving and forwarding new policies to the agent for delivery to applicants.

ISSUE LIMIT: The maximum amount of coverage a company is willing to extend on a given risk.

JOINT AND SURVIVOR ANNUITY: A life annuity payable over the lives of two or more annuitants that continues to make payments until the death of the last surviving annuitant.

JOINT AND X-PERCENT SURVIVOR ANNUITY: An annuity that pays an income to two individuals. The specified percentage of the joint income continues to the survivor for life if the principal annuitant dies first. If the secondary annuitant dies first, the unreduced joint benefit continues to the principal annuitant for life. In its second-death form, X percent of the joint income is paid to the survivor regardless of which individual dies first. Common percentages are 100% (full), 75% (three­ fourths), 66% (two-thirds), or 50% (one–half).

JOINT AND SURVIVORSHIP OPTION: A contract option that permits policy proceeds to be paid out as a joint and survivor annuity.

JOINT CONTROL: A life insurance policy provision that states that a person, persons, or organization other than the insured, usually the beneficiary, has a joint right with the insured to the exercise of the rights, powers, benefits, privileges, and options of the policy.

JOINT INSURANCE: A life insurance contract covering two or more lives that pays death proceeds and terminates at the first death among the insured lives. Often used to fund cross purchase buy-sell agreements among more than two partners or shareholders.

JOINT LIFE ANNUITY: A life annuity payable to two or more annuitants that continues payments until one of the two annuitants dies.

JUMBO RISK: An insurance contract with exceptionally high limits, such as \$250,000 or more.

JUVENILE INSURANCE: Life insurance policies written on the lives of minors within specified age limits, generally with the parents or grandparents as the poli­cyowners and premium payors.

KEY EMPLOYEE (SOMETIMES CALLED KEY EXECUTIVE OR KEY MAN) INSURANCE: Provides cash to absorb the financial loss caused by the death or disability of a vital individual in a business.

LAPSE: Termination of an insurance policy because of nonpayment of premiums or, in the case of variable and universal life policies, the depletion of cash value below that amount needed to keep the policy in force.

LAST TO DIE INSURANCE: A life insurance contract on two or more persons that pays proceeds only upon the death of the last insured. Also called second-to-die insurance, last survivor insurance, or survivorship life.

LEVEL PREMIUM: A life insurance premium that remains fixed through the life of a policy. It must be large enough so that in early years the insurer will develop a surplus large enough so that in later years – together with interest and future premiums-there will be enough to pay all death claims.

LEVEL TERM INSURANCE: Term life coverage on which the face value remains the same from the date the policy is issued to the date the policy expires. For contrast, see: decreasing term insurance; increasing term insurance.

LIFE ANNUITY: An annuity contract that pays only until the annuitant dies. Payments cease at that time even if the amount paid by the insurer does not equal the total premiums paid by the annuity owner.

LIFE EXPECTANCY: The average remaining term of life for a number of persons of a given age, according to probability statistics of a mortality table.

LIFE INCOME OPTION: One of the settlement options under which the proceeds of a life insurance or annuity policy may be applied to buy an annuity payable to the beneficiary for life.

LIFE INCOME WITH PERIOD CERTAIN OPTION: A life insurance proceeds settlement option that will pay at least a minimum specified number of periodic installments in a guaranteed amount whether the named beneficiary lives or dies.

LIFE PAID-UP AT AGE ():A form of limited payment life insurance that provides protection for the whole of life, with premium payments stopping at the indicated age. For example, if a 45-year old bought a life paid­ up at age 65 policy, premiums would be payable for 20 years and coverage would continue for the insured’s life.

LIFE SETTLEMENTS: This involves the sale, by the policy owner, of his or her life insurance policy to a third party (typically a life settlement company) in exchange for a lump-sum cash payment. Life settlements are generally available for insureds with life expectancies not exceeding fifteen years.

LIMITED-PAYMENT (LIMITED-PAY) POLICY: A life insurance policy that provides for payment of the premium for a period of years less than the period of protection provided under the contract.

LOADING CHARGE: The additional charge for overhead costs added to the net premium. This charge is required by actuarial tables to cover mortality and interest factors.

LOAN: Money loaned at interest by the insurance company to a policyowner on the security of the cash value of his or her policy. See also: automatic premium loan provision; loan value.

LOAN VALUE: A specified amount that can be borrowed from the insurance company by the policyowner, using the cash value of the policy as collateral.

LUMP SUM: Payment of the entire proceeds of a life insurance policy at one time. This is the method of settlement provided by most policies, unless an alternate settlement is elected by the policyowner before the insured’s death or thereafter by the beneficiary before receiving the payment.

MATURE: The time when a policy becomes payable. A whole life policy matures upon the death of the insured or when its cash value equals its face amount (usually at age 100),

MEDICAL INFORMATiON BUREAU (MIB): This is an entity that collects and stores medical data on life and health insurance applicants. The information is exchanged among member insurance companies. Its purpose is to guard against fraud and concealment by helping insurers discover pertinent yet undisclosed

MINIMUM DEPOSIT POLICY: A cash value life insurance policy having a first-year loan value that is available for borrowing immediately upon payment of the first-year premium. These types of contract are much less popular since Congress disallowed the deduction for personal interest.

MINIMUM PREMIUM: A minimum premium is the smallest amount of premium the insurer requires to be paid in the first year of a universal life contract.

MINOR BENEFICIARY: A beneficiary who is under the state’s legal age of majority and, thus, not considered competent to make certain financial transactions on his or her own. A legal guardian must be appointed to accept death benefits on behalf of a minor beneficiary.

MISREPRESENTATION: A false statement as to a past or present material fact made in an application for insurance intended to induce an insurance company to issue a policy it would not otherwise issue, or to rate the policy more favorably than it otherwise would have, or to issue the policy with a larger face amount than it otherwise would have.

MISSTATEMENT OF AGE: Giving the wrong age for oneself in an application for insurance or for a benefi­ciary who is to receive benefits on a basis involving a life contingency. Also, a provision in most life policies setting forth the action to be taken if a misstatement of age is discovered after policy issue.

MODE OF PAYMENT: The frequency with which premiums are paid (e.g., annually, semiannually, etc.)

MODIFIED LIFE: Whole life insurance with reduced premiums payable during the first few years (usually three to five) that are only slightly higher than the rate for term insurance. Thereafter, the annual premiums are higher than that for a comparable whole life policy.

MORAL RISK: Moral condition as reviewed by a study of habits, environment, mode of living, and general reputation that an underwriter must take into consideration in determining whether an applicant for insurance is a standard insurable risk. This information is usually obtained from inspection reports

MORTALITY FACTOR: One of the basic factors needed to calculate basic premium rates. It utilizes mortality tables in attempting to determine the average number of deaths at each specific age that will occur each year.

MORTALITY RISK: The risk of death. The risk carried by a life insurance company and sometimes called the pure insurance risk The degree of risk is the difference between the policy reserve (usually equal to the cash value of a permanent life policy) and the face amount of the policy.

MORTALITY TABLE: A table of the mortality experi­ence of groups of individuals categorized by age and sex that is used to estimate how long a male or female of a given age is expected to live. Some tables are required to be unisex, i.e., those used for actuarial calculations involving qualified pension plans. The mortality table is the primary starting point for calculating the risk factor, which in turn determines the gross premium rate.

MULTIPLE LIFE POLICY: A life insurance policy, taken out on the lives of three to five persons, with benefits payable upon the death of each person, except, generally, the last one to survive. Also called a last­ to-die policy, its most popular use is to fund buy-sell agreements.

MUTUAL COMPANY: A life insurance company that has no capital stock or stockholders. Rather, it is owned by its policyowners and managed by a board of directors chosen by the policyowners. Any earnings in addition to those necessary for the operation of the company and contingency reserves are returned to the policyowners in the form of policy dividends. For contrast, see: stock company.

NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC): An association of state insurance commissioners attempting to solve insur­ance regulatory. problems, create uniform legislation and regulations, and promote life insurance company solvency and responsibility.

NET AMOUNT AT RISK: The difference between the face amount of an insurance contract and the policy’s cash value.

NET COST: A term ordinarily referring to the actual cost of insurance to a policyowner in a mutual company after the policy dividends are deducted from the premiums deposited. Since there are no dividends on nonparticipating policies, the net cost of these policies is equal to the total premiums paid. In determining the true net cost (sometimes called net ledger cost) of a life insurance policy over a period of years, allowance should also be made for the cash surrender value at the end of the given period. See also: net premium.

NET LEVEL PREMIUM: The pure annualized level mortality cost of a life insurance policy from age of entry to maturity date. It is determined by dividing the net single premium for the policy by the present value of an annuity due for the premium-paying period.

NET PREMIUM: This term has several meanings, depending on context: (1) premium paid minus agent’s commission; (2) the original premium minus any returned premium; (3) the net charge for insurance cost only minus expenses or contingencies; or (4) a partici­pating premium minus dividends paid or anticipated.

NEW MONEY INTEREST RATE: See: investment year method of dividend calculation.

NONASSIGNABLE CONTRACT OR POLICY: A policy that the owner cannot legally assign to a third party.

NONCONVERTIBLE TERM INSURANCE: A term policy that may not be converted to a permanent policy.

NONFORFEITURE VALUES: Those values or benefits in a life insurance policy that by law the policyowner does not forfeit, even if he or she chooses to discontinue payment of premiums. It usually includes cash value, loan value, paid-up insurance value, and extended term insurance value.

NONMEDICAL INSURANCE: Life insurance issued on a regular basis without requiring the applicant to submit to a medical examination. The insurer relies on the applicant’s own answers to questions regarding his or her physical condition, and on personal references or inspection reports to decide whether to issue the policy.

NONPARTICIPATING LIFE INSURANCE: So called “non-par” life insurance does not pay policy dividends. The policyowner is not in any way an owner and therefore is not entitled to share in any divisible surplus of the company. Any profits from the excess of the premium over the costs of insurance accrue to the nonpar company’s stockholders, which is fair since they would be the ones to absorb any losses. For contrast, see: participating insurance.

NONRENEWABLE CONTRACT: An agreement or policy written for a specific period and purpose and that does not contain an option to be renewed for succes­sive terms. For contrast, see: renewable and convertible term.

NONTRANSFERABLE: A contract in which the benefits or any of its value cannot be sold, assigned, discounted, or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose, to any person other than the insurance company.

OFFER AND ACCEPTANCE: An offer is made by the life insurance policy applicant when he or she signs the application, submits to a physical examination, and pays the first premium. That offer is accepted by the insurer when the policy is issued and delivered. Sometimes the offer will be deemed to be made by the insurer and acceptance will be by the applicant in the form of a premium payment on the offered contract.

OPTIONAL BENEFIT: An additional benefit offered by the company, which may be included in a policy at the applicant’s request, usually for an additional premium. Waiver of premium, accidental death benefit, and cost­-of-living riders are examples of optional benefits.

OPTIONAL PAID-UP INSURANCE: One of the guar­anteed nonforfeiture options in a policy where the cash value of the policy is used to buy a single premium paid-up insurance at the attained age.

ORDINARY LIFE: Also referred to as straight life and whole life insurance. These three synonymous terms refer to the type of life insurance policy that continues during the whole of the insured’s life, generally with level premiums payable each year until death or until age 100 when the policy endows if the insured is still living.

OVERRIDE: An override is the commission paid to a general agent or manager in addition to the commission paid to the agent or broker who sells the policy.

OWNERSHIP PROVISION: A provision stating who the owner is when the owner is someone other than the insured.

PAID-UP ADDITIONS: A dividend option that allows the policyowner to use policy dividends to purchase paid-up additional insurance on a net single premium basis at the insured’s attained age.

PAID-UP POLICY: A policy on which the policyowner has completed payments, but that has not yet matured. This may be (1) reduced paid-up insurance provided under the nonforfeiture provision, (2) a limited payment policy under which all premiums have been paid, or (3) a policy on which accumulated dividends have been applied to pay the net single premium required to pay up the difference between the policy’s reduced paid-up insurance and its face amount.

PARTIAL WITHDRAWALS (SURRENDERS): The policyowner’s right in universal and variable universal life insurance policies to receive a portion of the accumulated cash value without a policy loan and without terminating the policy. Some insurers also permit surrender of paid-up additions from traditional participating policies without terminating the underlying policy. Partial withdrawals may incur a surrender charge and/ or a processing fee.

PARTICIPATING INSURANCE: An insurance policy, usually issued by mutual companies, that shares a por­tion of the surplus of the company with. policyowners through dividends. The dividends represent the difference between the premiums charged and the actual costs (i.e., claims, expenses, earnings, etc.) experienced during the period for which the premiums were charged. For contrast, see: nonparticipating life insurance.

PAYOR: The person who pays the premiums on a policy. Also, the applicant for a policy insuring the life of a juvenile.

PERC VALUE: PERC, which stands for Premiums plus Earnings les Reasonable Charges, is a newly created formula for determining the income tax value of a policy. There are two different PERC formulas. With respect to a distribution of a life insurance policy from a qualified plan, the PERC formula can take into account an average surrender factor of as much as thirty percent. With respect to the distribution of a policy from an employer to an employee or when determining the cost of permanent benefits for a group life plan, an average surrender factor is not permitted as part of the PERC formula.

PERMANENT INSURANCE: Any form of life insurance in which the insured has the guaranteed right to keep the policy in force as long as he or she pays the premium. Also refers to any life insurance policy that builds cash value. For contrast, see: term insurance.

Persistency: Perhaps the most important objective test of a good insurance agent, persistency is a measure of the number of policies sold that “stay on the books.” This “staying quality” is an indication that the policyowners were satisfied with their contracts, were not oversold, and have found the means and the desire to keep the policies in force over a long period of time. A low persistency (i.e., a high percentage of policies that have lapsed) is an indication that products were not matched with clients’ problems or abilities to pay or that clients did not understand (or were allowed to forget) the importance of the coverage.

PLEDGE: The placing of policy cash values as collateral for a loan.

POLICY: The basic written contract between the insurer and the policyowner. The policy together with the application and all endorsements and attached papers, constitutes the entire contract of insurance. See also: contract of insurance.

POLICY ANNIVERSARY: The anniversary of the date of issue of a policy, as shown in the policy schedule.

POLICY CHANGE PROVISION: A life insurance provision stating that the policyowner has the right to change his or her coverage from a term policy to a permanent, cash value policy, such as whole life, without providing evidence of insurability. To protect the company against adverse selection, evidence of insur­ability is usually required to change coverage from a permanent policy to a term plan.

POLICY DATE: The date on which coverage becomes effective, as shown in the policy.

POLICY FEE: A small annual charge (sometimes a one-time charge) to the policyowner, in addition to the premium, to cover the costs of policy administration (premium collection and tax payments).

POLICYHOLDER: The person or organization having rightful possession of a policy, irrespective of ownership rights or life insured. See also: policyowner.

POLICY LOAN: A loan to the policyowner by the insurer with the cash value of the policy assigned as the only security for the loan.

POLICY MATURITY DATE: The date at which a policy matures if the insured is still alive at that age. At the policy maturity date the cash value is paid to the policy owner in lieu of the death benefit.

POLICYOWNER: The person who has ownership rights in an insurance policy and who may or may not be the insured. See also: policyholder.

POLICY PERIOD: The length of time during which the policy contract provides protection. Also called a policy term.

POLICY PROCEEDS: The amount payable in a single sum (if so elected) to the beneficiary or policyowner under a policy at death, surrender, or maturity. Policy proceeds generally may be applied under the policy’s settlement options to provide income rather than a single lump sum.

PORTFOLIO METHOD OF DIVIDEND CALCULA­TION: The method whereby dividends are calculated based on the average interest rate earned on total portfolio of investments. For contrast, see: investment year method of dividend calculation.

PREFERRED RISK: A person whose physical condition, occupation, mode of living, and other characteristics (including the size of policy to be purchased) indicate an above-average life expectancy and, therefore, who qualifies for a premium rate that is more favorable than that offered to standard risks. For contrast, see: standard risk.

PREFERRED RISK POLICIES: Policies warranting a lower premium charge on the basis of rigid underwriting criteria that indicate better-than-average mortality risk. Certain classes of insureds may be favorably selected, such as business or professional people, for example, where the mortality experience is expected to be better than average. Typically, such policies are of larger than normal size.

PRELIMINARY TERM INSURANCE: Term insurance attached to a newly issued permanent life insurance policy extending term coverage for a preliminary period of one to 11 months, until the permanent insurance becomes effective. The purpose of preliminary term insurance is to provide full life insurance protection immediately, but to delay the start of the larger perma­nent insurance premium and the policy anniversary to a later date.

PREMIUM: The periodic payment required to keep a specific insurance policy in force.

PREMIUM LOAN: Payment of the premium by taking a loan against the cash value of a policy. Frequently referred to as an automatic premium loan, a provision found in many life policies. See also: automatic premium loan provision.

PREMIUM MODE: The frequency with which premium payments are made, as selected by the policyowner. Typical premium modes are annual, semiannual, quarterly, or monthly (or weekly in industrial insurance).

PREMIUM PAYMENT PERIOD: The number of years during which premiums are payable. For example, a 10-pay life policy has a 10-year premium payment period.

PREMIUM REFUND: A life insurance provision or rider that is a form of increasing term insurance. The beneficiary receives an amount equal to the premiums paid to date in addition to the face amount if death occurs during a stipulated period.

PREMIUM RETURN: A return of premium may occur as a result of cancellation, rate adjustment, or calculation that an advance premium is in excess of actual premium.

PRIMARY BENEFICIARY: The beneficiary specifically designated by the insured as the first in priority to receive policy proceeds.

PRIVATE ANNUITY: Annuity issued by an individual or organization other than an insurer or other company regularly engaged in annuity sales.

PROCEEDS: The net amount of money payable by the insurance company at the death of an insured or at the maturity of a policy.

PROHIBITED PROVISIONS: Life insurance policy provisions that are not allowed in the contract under state law, such as a provision eliminating the insured’s right to sue the insurance company.

PROTECTION: A term synonymous with the term “coverage” that denotes the amount of insurance provided by the policy.

PURE ENDOWMENT: A theoretical contract that provides for payment only if a specific person survives to a certain date and not in event of that person’s prior death. It contains no insurance elements and can be viewed mathematically as the actuarial opposite of a term contract, which provides for payment only in event the insured person dies within the term period specified.

RATABLE CHARGE METHOD: A method of accounting for policy cash values, policy loans and premiums. This method calls for amortization of the cost of life insurance on a straight-line basis over the policy life.

RATED: A rated policy is one issued on a substandard risk with higher than standard premiums.

RATING: The premium classification given to a person who applies for life insurance. The term is usually used when an applicant is designated as a substandard risk. A higher premium reflects the increased risk.

REBATING: Generally, the return of part of the agent’s commission to the policy purchaser but it also includes any form of inducement, favor, or advantage to the purchaser of a policy that is not available to all under the standard policy terms. Rebating is prohibited by law in most states. Both the agent and the person accepting the rebate can be punished by fine or imprisonment, and in most states the agent is subject to revocation of license.

REDUCED PAID-UP OPTION: A nonforfeiture option that permits the insured to have the cash surrender value of his or her policy used to purchase a paid-up policy for, generally, a reduced amount of insurance.

RE-ENTRY TERM: Renewable term insurance that will charge lower new-issue term premiums if the insured periodically provides suitable evidence of insurability.

REFUND ANNUITY: An annuity that will make payments after the death of the annuitant to a designated beneficiary, either as a lump-sum or in installments, until the total amount paid equals the total premiums paid for the annuity.

REINSTATEMENT PROVISION: A policy provision defining a policyowner’s right to reinstate a lapsed policy within a reasonable time after lapse, as well as the conditions necessary for reinstatement such as evi­dence of insurability and payment of back premiums and interest. The right is usually forfeited once a policy has been surrendered for its cash value.

RENEWABLE AND CONVERTIBLE TERM: Term life insurance offers the policyowner both the option to renew the coverage at the end of the term period and the option (within the term period) to convert it to a permanent form of insurance.

RENEWAL: Continuance of coverage under an insur­ance policy beyond its original term. Also, the payment of premiums after the first year of a policy or the agent’s commissions on such second and subsequent years’ premiums.

RENEWAL COMMISSION: The commission paid or credited to an agent after the first policy year for premiums received by the company on business written by the agent.

RENEWAL PREMIUM: Any premium due after the first policy year.

REPORTABLE ECONOMIC BENEFIT COST (REB): The term cost of life insurance death benefit protection’ that is provided to a participant in a split dollar arrangement or a qualified plan.

REPRESENTATIONS: Statements made by an appli­cant on the application that the applicant attests are substantially true to the best of his or her knowledge and belief, but which are not warranted as exact in every detail, as compared to warranties. See also: warranties and representations.

REQUIRED PROVISIONS: Certain provisions must be included under state law in an insurance policy. Such provisions include the incontestability clause, misstatement-of-age clause, a provision for a grace period, as well as others mandated by state insurance laws.

RESERVE: The funds held by the company for all poli­cies which, together with future premiums and interest earnings, are sufficient to meet all future claims.

RESERVE BASIS: The mortality and interest rate assumptions used in the computation of premiums and necessary reserves.

RETIREMENT INCOME POLICY: A type of limited­ pay life insurance contract designed to build cash values with the principal objective of funding a desired level of guaranteed monthly income for life, beginning at a certain age, usually 65. Unlike annuities, they also provide a death benefit.

RETROACTIVE CONVERSION: Conversion of a term life insurance policy to a permanent policy with premiums determined as if the permanent policy were issued at the insured’s original issue age rather than at the insured’s attained age at the time of conversion. It usually requires payment of back premiums and interest from the original date of issue.

RETURN OF PREMIUM RIDER: A type of increasing term rider that will pay an amount equal to the sum of all premiums paid to date if the insured dies within a specified term, such as within the first 20 years after policy issue.

RETURN PREMIUM POLICY: A life insurance policy that pays a death benefit equal to the face amount upon maturity plus all or a portion of the premiums paid.

RIDER: An attachment to a life insurance policy that modifies the policy by expanding or restricting benefits or excluding certain conditions of coverage.

RISK FACTOR: One of the three principal factors entering gross premium calculations. It is the estimated mortality costs of a group of policies, based on the mortality tables for life insurance. The factors insurers consider when estimating the chance of loss are age, sex, physical impairments, medical history, habits, occupation, and finances. See also: gross premium.

SCHEDULED PREMIUM: The recommended or ideal premium in variable and universal life policies.

SECONDARY GUARANTEE UNIVERSAL LIFE: Insurers include secondary guarantees in some univer­sal life policies to produce a policy with a guaranteed death benefit for a specified period of time, or even for life, with the lowest possible premiums. These policies are designed for people whose principal objective is to assure a given level of death benefit for a specified period of time, or for life, without the risk that they later may have to pay higher, and unaffordable, premiums to maintain the desired death benefit level. Thus, they are typically most suitable for policyowners who need an assured level of death benefit for estate liquidity purposes and who are unlikely to need lifetime benefits, because the cost of the guarantee comes in the form of much lower cash surrender values over the life of the policy or guarantee period as compared to universal life policies without the guarantee.

SECTION 79 PLAN: Merely a group-term life insur­ance plan but so called because of the favorable taxation under Internal Revenue Code section 79. The employee must report as gross income only the economic benefit (1.e., the Table I cost) of insurance over \$50,000. When properly arranged, the cost of the premiums is also fully deductible by the employer.

SECTION 62 PLAN: A plan that involves the purchase of a life insurance policy on the life of one or more employer-chosen employees. The employer pays premiums on the policy but charges the employee with a bonus in an amount equal to that payment. The employee (or the third party such as an irrevocable trust designated by the employee) purchases and owns the policy and names the beneficiary. The policyowner has all rights in the policy. The corporation never has any right to any part of the policy cash values, dividends, or death benefits and at no time does the corporation own any incident of ownership in the policy.

SECTION 419(E) MEDICAL BENEFIT PLAN: A post­ retirement medical benefits plan that businesses can establish to cover retiree medical expenses.

SELECT MORTALITY TABLE: A mortality table showing better-than-average mortality rates in the initial years after issue as a result of the insurer’s ability to screen out bad risks through its underwriting process.

SEPARATE ACCOUNT: An investment account that is segregated from the general investment portfolio of the insurer. Required by law for assets backing variable products.

SETTLEMENT: A term that is synonymous with the payment of a claim. It implies that both the policyo­wner and the insurance company are satisfied with the amount and the method of payment.

SETTLEMENT DIVIDEND: A special or extra dividend payable at the time of termination of a policy by death, surrender, or maturity. Also called a terminal dividend.

SETTLEMENT OPTIONS: The various methods by which policy proceeds may be paid to the beneficiary. The options include: (1) a lump-sum cash payment; (2) leaving proceeds with the insurer at interest; (3) installment payments for a fixed period; (4) installment payments for life; and (5) installment payments of a fixed income as long as proceeds and interest will last.

SINGLE-PREMIUM DEFERRED ANNUITY: Annuity purchased with one premium, well in advance of the time the income period is to begin.

SINGLE-PREMIUM POLICY: A policy that is paid-up with one premium.    ·

SPENDTHRIFT PROVISION: A policy provision to shelter policy proceeds, to the extent permitted by law, from the claims of creditors of a beneficiary or contingent beneficiary or to any legal process against any beneficiary or contingent beneficiary.

SPLIT-DOLLAR INSURANCE: An arrangement between two parties (often employer and employee) where there is a sharing or splitting of premiums, cash values, dividends, and/or death benefits.

STANDARD POLICY: A policy issued with standard provisions and at standard rates; not rated or with special restrictions.

STANDARD RISK: A person who meets the insurer’s underwriting criteria for standard policies. For contrast, see: rated; substandard risk.

STATUTORY RESERVE: This is the reserve value reported in an insurance company’s statutory financial statement filed with the state insurance department. The primary difference between this and the tax reserve is the interest rate used. In a low interest rate environment, there may be very little practical difference between the tax and the statutory reserves.

STOCK COMPANY: A company that is owned and controlled by stockholders rather than policyowners. See also: mutual company.

STRAIGHT LIFE POLICY: See: ordinary life. For contrast, see: limited-payment policy.

STRAIGHT TERM: A basic form of term life insurance, written for a specific number of years, having a level premium and automatically terminating at the end of the period.

SUBSTANDARD INSURANCE: Life insurance issued at premium rates higher than standard, to applicants who are rated or substandard risks. For contrast, see: standard policy.

SUBSTANDARD RISK: A person whose mortality risk is greater than average for his or her age. Substandard rating factors include various medical conditions such as diabetes, hypertension, and heart ailments; high risk occupations such as airline pilots, race car drivers, min­ ers, and high-altitude construction workers; high risk avocations or hobbies such as scuba diving or skydiving; detrimental habits or addictions such as smoking, a history of drug use or alcohol abuse; and possible moral turpitude as evidenced by excessive gambling, crimi­nal convictions, and bankruptcy. Substandard risks, if covered at all, are usually charged additional premium.

SUICIDE PROVISION: Life insurance policies include a provision that if the insured commits suicide within a specified period, usually one or two years after date of issue, the company is not liable to pay the face amount of coverage. Generally, liability is limited to a return of premiums paid.

SUPPLEMENTAL TERM INSURANCE: A supple­mental agreement or rider available in some policies, providing for the payment of an additional specified sum in event the insured dies during the given term period. In general, any coverage purchased in addition to ongoing, base plans.

SURPLUS ACCOUNT: The difference between a company’s assets and liabilities. Net surplus includes contingency reserves and unassigned funds, while gross surplus also includes surplus assigned for distribution as dividends.

SURRENDER: The policyowner’s return of a policy to the insurance company in exchange for the policy’s cash surrender value or other equivalent nonforfeiture values. See also: nonforfeiture values.

SURRENDER CHARGE: In a variable or universal life policy, a special charge that is levied on the available cash value to reimburse the insurer for the unrecovered costs of issuing the policy.

SURRENDER DIVIDEND: See: terminal dividend.

SURRENDERED POLICY: A life insurance policy that has been returned to the insurance company and terminated, generally under the nonforfeiture provisions of the policy after surrender values have become available.

SUSPENSION POINT: In some cash value policy illustrations the projected point in time that premium payments will be suspended and, based on the premium amount, current policy charges, and assumed rate of return, no further premiums are anticipated to be needed.

SUSPENDED PREMIUM: A feature in some cash value policy illustrations whereby the premium, based on current policy charges and assumed rate of return, is projected to end after a specified period of time and no further premiums are anticipated to be needed.

TARGET PREMIUM: The suggested or recommended annual premium for a universal life policy that will maintain the plan of insurance if the actual interest, mortality, and expense experience matches the underlying assumptions used to compute the premium.

TAX RESERVE: This is the reserve value used in the determination of an insurance company’s federal income tax.

TEMPORARY LEVEL EXTRA PREMIUMS: A type of rating most frequently used with physical impairments where the risk is considered to be a temporary nature.

TEMPORARY ANNUITY: A life annuity that termi­nates at the earlier of the end of a stipulated period or the death of the annuitant.

TERM CONTRACT OR POLICY: See: term insurance.

TERMINAL DIVIDEND: Dividends that may be payable upon termination of a policy at death, maturity, or surrender for its cash value, usually after the policy has been in force for at least a specified number of years.

TERMINATION: Refers to a policy’s becoming of no effect. No more premiums are payable on the policy after termination, and it no longer has any value. Termination can occur in a number of ways, including failure to pay premiums as required or surrendering the policy for its cash value.

TERM INSURANCE: Life insurance protection that expires after a specified term without any residual value if the insured survives the stated period. The protection period may be as short as 30 days (as in temporary insurance agreements) or as long as 20 years or more. For contrast, see: whole life insurance.

TERM INSURANCE RIDER: A form providing term life insurance that is attached to a permanent life insur­ance policy, with the purpose of increasing the total amount of protection during the term period.

TERM OF POLICY: The period for which a policy is in force. This is to the end of the term period for term insurance, the maturity date for endowments, and to the insured’s death (or, usually, age 100) for whole life policies.

TERM TO AGE: A form of long-term life insurance continuing to the designated age of the policyowner. If the insured survives the term, there is no residual value as would be the case with a cash-value policy that endows if the insured survives the term of coverage.

THIRD PARTY OWNERSHIP: an arrangement in which the life insurance policy is owned by an entity other than the insured or the beneficiary. This technique is often used in ILITs where the trust is the third party.

TONTINE: A type of insurance policy whereby a group of policyowners share various advantages on such terms that upon the death or default of any policy owner in the group, his or her advantages are distributed among the remaining policyowners on the expiration of an agreed period. See with respect to: deposit term.

TRADITIONAL  NET COST COMPARISON METHOD: A method of determining policy cost over a stipulated period by adding a policy’s premiums and subtracting dividends and the cash value at the end of the stipulated period.

TRADITIONAL PRODUCT: A life insurance product with fixed premiums, death benefit, and cash value growth. For contrast, see: universal life; variable life.

ULTIMATE MORTALITY TABLE: A mortality table based on average life insurance experience after the period when the benefit of favorable “selection” attribut­able to the insurer’s underwriting process has worn off.

UNBUNDLED FEES: Refers to the legal requirement that variable, universal, and other current-assumption life insurance policy costs and deductions be clearly stated and explained.

UNDERWRITER: Technically, the person who writes his or her name under an insurance agreement, accepting all or part of the risk. Often refers to the home office employee who reviews the facts about the risk, accepts or declines the risk, and assigns the rate – the home office underwriter. Also, us;ed in reference to the agent offering the insurance, since the agent does exercise underwriting discretion in selecting the risks (prospects) he or she contacts.

UNEARNED PREMIUM: The portion of the premium applicable to the unexpired or unused part of the period for which the premium has been charged. Thus, in the case of an annual premium, at the end of the third month of the premium period, three-fourths of the premium is unearned.

UNIFORM POLICY PROVISION: A provision that is required by state statute to be in all insurance contracts of a given type; generally taken from or patterned after the model provisions provided by the National Association of Insurance Commissioners (NAIC).

UNIFORM SIMULTANEOUS DEATH ACT: This law states that, when an insured and beneficiary die at the same time, or when they die together and it cannot be determined who died first, it is presumed that the insured survived the beneficiary. The insurance company then pays the proceeds to the next beneficiary in line, the secondary or contingent beneficiary, or to the insured’s estate if the policyowner has not named a secondary beneficiary.

UNILATERAL CONTRACT: A contract in which only one party pledges anything. A life insurance is a unilateral contract since only the insurance company can be sued for breach of contract.

UNIVERSAL LIFE: A flexible-premium, current­ assumption, adjustable-death-benefit policy. Similar to traditional policies, universal life pays a death benefit and accumulates cash value. Unlike traditional products, universal life completely separates the protection element from the accumulation element of the policy.

VARIABLE ANNUITY: An annuity that invests the contract holder’s funds in security-type investments and that does not guarantee the level of payments. Instead, payments may fluctuate up and down in relation to the earnings and market value of the assets in a separate account. Thus, the investment risk is assumed by the contract holder.

VARIABLE ANNUITY ACCUMULATION UNIT: A unit similar to a share in a mutual fund that represents a share of a contract owner’s ownership in the separate account backing the contract during the years prior to the annuity starting date. The value of the unit fluctu­ates in relation to changes in the market prices of the separate variable annuity portfolio securities owned by the insurance company and with investment income earned on these securities.

VARIABLE DEATH BENEFIT: A death benefit option in most variable life policies. The death benefit varies based on a formula relating the cash value to the death benefit. The death benefit is also variable in variable universal life policies under option B (or II) which pays a pure level death benefit plus the cash value at the time of the insured’s death.

VARIABLE LIFE INSURANCE: Life insurance that provides a guaranteed minimum death benefit, but the actual benefit paid may be more, depending on the fluctuating market value of investments in the separate account backing the contract at the time of the insured’s death. The cash surrender value generally fluctuates with the market value of the investment portfolio.

VARIABLE UNIVERSAL LIFE: The generic name for a flexible-premium universal life insurance policy, distinguished by a flexible premium and separate cash value investment accounts.

VIATICAL SETTLEMENT: This settlement involves the sale, by the policy owner, of his or her life insurance policy to a third party (typically a viatical settlement company) in exchange for a lump-sum cash payment. The insured (viator) typically has a life expectancy of less than two years due to a life-threatening disease or terminal illness.

WAIVER OF PREMIUM PROVISION: See: disability premium waiver insurance.

WAIVER  OF PREMIUM  WITH  DISABILITY INCOME RIDER: A life insurance rider that not only waives the premiums but also pays a specified monthly income if the insured becomes totally and permanently disabled.

WAR CLAUSE: A clause in an insurance contract limiting the insurance company’s liability for specified loss caused by war.

WARRANTIES AND REPRESENTATIONS: Almost every state provides that all statements made by a life insurance policy applicant, whether in the application blank or to the medical examiner, are considered, in the absence of fraud, to be representations and not warranties. The distinction is crucial since a warranty must be literally true. Even a small breach of warranty, even if by error, could be sufficient to render the policy void, whether the matter warranted is material or not and whether or not it had contributed to the loss. See also: representations.

WHOLE LIFE INSURANCE: A form of life insurance offering protection for the whole of life, proceeds being payable at death. Premiums may be paid under a continuous premium arrangement or on a limited payment basis for virtually any desired period of years (e.g., 1, 10, 20, 30, or to ages 60 or 65). See also: ordinary life.

YEARLY RENEWABLE TERM INSURANCE: A1-year term insurance contract that may be renewed each year at, generally, successively higher premiums corresponding to the insured’s attained age with no evidence of insurability. The right of renewal may extend to ten years or more or to an age such as 60 or 65. See: renewable and convertible term.

ENDNOTES

1. The authors highly recommend Ingrisano and Ingrisano, The Insurance Dictionary, 3rd ed. (Longman Financial Services Publishing). Their text, which was extremely useful in the creation of this glossary, contains an extensive and highly practical list of almost every technical term commonly used in life insurance parlance and should be considered essential for the life insurance professional.