Life Insurance Glossary

Life Insurance Glossary

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Accelerated benefits: Benefits available in some life insurance policies before death, usually triggered by long-term, catastrophic or terminal illness. Also known as living benefits.

Accidental death benefits: A provision added to a life insurance policy for payment of an additional benefit in case of death that results from an accident. This provision is often called "double indemnity."

Accumulation period: The time during which a person pays money into an annuity contract and builds up a fund to provide a deferred annuity.

Actuary: Someone professionally trained in the technical aspects of insurance and related fields, particularly in the mathematics of insurance (the calculation of premiums, reserves and other values).

Adjustable life insurance: A type of insurance that allows the policyholder to change the plan of insurance, raise or lower the face amount of the policy, increase or decrease the premium and lengthen or shorten the protection period.

Agent: An authorized representative of an insurance company who sells and services insurance contracts

Annuitant: The person entitled to receive annuity payments or who now receives them.

Annuity: A contract that provides for a series of payments, usually at regular intervals, for the duration of life.

Annuity certain: A contract that provides an income for a specified number of years, regardless of life or death.

Annuity consideration: The payment, or one of the regular periodic payments, an annuitant makes for an annuity.

Application: A statement of information made by someone applying for life insurance. The information gathered helps the life insurance company assess whether the risk presented by the applicant is acceptable.

Assignment: The legal transfer of one person's interest in an insurance policy to another person.

Automatic premium loan: A provision in a life insurance policy that any premium not paid by the end of the grace period (usually 31 days) is automatically paid by a policy loan if there is sufficient cash value.

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Beneficiary: The person or financial instrument (for example, a trust fund), named in the policy as the recipient of insurance money in the event of the policyholder's death.

Broker: A sales and service representative who handles insurance for clients, generally selling insurance of various kinds and for several companies.

Business life insurance: Life insurance purchased by a business enterprise on the life of a member of the firm. It is often bought by partnerships to protect the surviving partners against loss caused by the death of a partner, or by a corporation to reimburse it for loss caused by the death of a key employee.(Also known as key person insurance.)

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Cash value: The amount available in cash upon surrender of a policy before it becomes payable upon death or maturity.

Certificate: A statement issued to individuals insured under a group policy, setting forth the essential provisions relating to their coverage.

Claim: Notification to an insurance company that payment of an amount is due under the terms of the policy.

Combination plans: Life insurance policies that combine features of term and whole life policies.

Convertible term insurance: Term insurance that offers the policyholder the option of exchanging it for a permanent plan of insurance without evidence of insurability.

Cost index: A way to compare the costs of similar plans of life insurance. A policy with a smaller index number is generally a better buy than a comparable policy with a larger index number.

Cost-of-Living rider: An option that permits the policyholder to purchase increasing term insurance coverage. The death proceeds increase by a stated amount each year to coincide with an estimated increase in the cost of living.

Credit life insurance: Term life insurance issued through a lender or lending agency to cover payment of a loan, installment purchase or other obligation, in case of death.

Current assumption whole life insurance: A variation of universal life insurance, this product involves fixed premiums and fixed death benefits. Its cash value growth depends on market conditions. If they are favorable and if premiums paid in the policy's first year are large enough, premiums for one or more years may be reduced to zero.

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Declination: The rejection by a life insurance company of an application for life insurance, usually for reasons of health or occupation.

Deferred annuity: Annuity payments that will begin at some future date.

Deferred group annuity: A type of group annuity providing for the purchase each year of a paid up deferred annuity for each member of the group, the total amount received by the member at retirement being the sum of these deferred annuities.

Deposit administration group annuity:A type of group annuity providing for the accumulation of contributions in an undivided fund out of which annuities are purchased as the members of the group retire.

Deposit term insurance: A form of term insurance, not really involving a "deposit," in which the first-year premium is larger than subsequent premiums. Typically, a partial endowment is paid at the end of the term period. In many cases the partial endowment can be applied toward the purchase of a new term policy or, perhaps, a whole life policy.

Disability benefit: A feature added to some life insurance policies providing for waiver of premium, and sometimes payment of monthly income, if the policyholder becomes totally and permanently disabled.

Dividend: An amount of money returned to the holder of a participating policy. The money is a partial refund of the premium paid. It results from actual mortality, interest and expenses that were more favorable than expected when the premiums were set.

Dividend addition: An amount of paid up insurance purchased with a policy dividend and added to the face amount of the policy.

Dual life insurance: Another name for second-to-die insurance.

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Endowment: Life insurance payable to the policyholder if living, on the maturity date stated in the policy, or to a beneficiary if the insured dies before that date.

Expectation of life: See life expectancy.

Extended term insurance: A form of insurance available as a nonforfeiture option. It provides the original amount of insurance for a limited period of time.

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Face amount: The amount stated on the face of the insurance policy that will be paid in case of death or at maturity. It does not include dividend additions or additional amounts payable under accidental death or other special provisions.

Family policy: A life insurance policy providing insurance on all or several family members in one contract, generally whole life insurance on the principal breadwinner and small amounts of term insurance on the other spouse and children, including those born after the policy is issued.

Flexible premium deferred annuity: An annuity contract that permits varying premium payments from year to year and is often used for individual retirement accounts.

Flexible premium policy or annuity:A life insurance policy or annuity under which the policyholder or contract holder may vary the amounts or timing of premium payments.

Flexible premium variable life insurance: A life insurance policy that combines the premium flexibility feature of universal life insurance with the equity-based benefit feature of variable life insurance.

Fraternal life insurance: Life insurance provided by fraternal orders or societies to their members.

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Grace period: A period (usually 31 days) following each premium due date, other than the first due date, during which an overdue premium may be paid. All provisions of the policy remain in force throughout this period.

Group annuity: A pension plan providing annuities at retirement to a group of people under a master contract. It is usually issued to an employer for the benefit of employees. The individual members of the group hold certificates as evidence of their annuities.

Group life insurance: Life insurance that usually does not require medical examinations, on a group of people under a master policy. It is typically issued to an employer for the benefit of employees, or to members of an association, for example, a professional membership group. The individual members of the group hold certificates as evidence of their insurance.

Guaranteed insurability: An option that permits the policyholder to buy additional stated amounts of life insurance at stated times in the future without evidence of insurability.

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Individual policy pension trust: A type of pension plan, frequently used for small groups, administered by trustees who are authorized to purchase individual level premium policies or annuity contracts for each member of the plan. The policies usually provide both life insurance and retirement benefits.

Individual retirement account (IRA): An account set up by an individual that in some cases allows contributions to be deducted from income and permits earnings on contributions to accumulate tax-deferred until retirement, regardless of whether the contributions are deductible. Under the 1986 tax law, only those who do not participate in a pension plan at work or who do participate and meet certain income guidelines can make tax-deductible contributions to an IRA. All others can make contributions to an IRA on a non-deductible basis.

Industrial life insurance: Life insurance issued in small amounts, usually less than $1,000, with premiums payable on a weekly or monthly basis. The premiums are generally collected at the home by an agent of the company. Sometimes referred to as debit insurance.

Insurability: Acceptability to the company of an applicant for insurance.

Insurance examiner: The representative of a state insurance department assigned to participate in the official audit and examination of the affairs of an insurance company.

Insured: The person on whose life the policy is issued.

- K -

Keogh plan: A type of tax-favored retirement plan for self-employed people.

- L -

Lapsed policy: A policy terminated at the end of the grace period because of non-payment of premiums.

Legal reserve life insurance company: A life insurance company operating under state insurance laws specifying the minimum basis for the reserves the company must maintain on its policies.

Level premium insurance: Insurance for which the cost is distributed evenly over the premium payment period. The premium remains the same from year to year and is more than the actual cost of protection in the earlier years of the policy and less than the actual cost in the later years. The excess paid in the early years builds up a reserve to cover the higher cost in the later years.

Life annuity: A contract that provides an income for life.

Life expectancy: The average number of years of life remaining for a group of people of a given age according to a particular mortality table.

Life insurance in force: The sum of the face amounts, plus dividend additions, of life insurance policies outstanding at a given time. Additional amounts payable under accidental death or other special provisions are not included.

Limited payment life insurance: Whole life insurance on which premiums are payable for a specified number of years or until death, if death occurs before the end of the specified period.

Living benefits: Another name for accelerated death benefits.

Load: Any sales fees or charges paid in purchasing an annuity contract.

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Master policy: A policy that is issued to an employer or trustee, establishing a group insurance plan for designated members of an eligible group.

Modified life insurance: A type of whole life policy with a premium that is relatively low in the first several years but that increases in later years.

Mortality table: A statistical table showing the death rate (probability of death) at each age.

Mutual life insurance company: A life insurance company owned by policyholders who share in the company's surplus earnings.

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Nonforfeiture option: One of the choices available if the policyholder discontinues payments on a policy with a cash value. This may be taken in cash as extended term insurance or as reduced paid-up insurance.

Nonforfeiture values: The value of the policy if canceled, either in cash or in another form of insurance. Also available to the policyholder if required premium payments are not paid.

Non-medical limit: The maximum face value of a policy that a given company will issue without the applicant taking a medical examination.

Non-participating insurance: Insurance on which no dividends are paid.

Non-participating policy: A life insurance policy in which the company does not distribute to policyholders any part of its surplus. Note that premiums for non-participating policies are usually lower than for comparable participating policies. Note also that some non-participating policies have both a maximum premium and a current lower premium. The current premium reflects anticipated experience that is more favorable than the company is willing to guarantee, and it may be changed from time to time for the entire block of business to which the policy belongs.

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Ordinary life insurance: Life insurance usually issued in amounts of $1,000 or more with premiums payable on an annual, semi-annual, quarterly or monthly basis.

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Paid-up insurance: Insurance on which all required premiums have been paid.

Participating insurance: Insurance on which the policyholder is entitled to share in the surplus earnings of the company through policy dividends that reflect the difference between the premium charged and the cost to the company of providing the insurance.

Payout period: The period during which you receive the income from your annuity contract.

Permanent life insurance: A phrase used to cover any form of life insurance except term; generally insurance that accrues cash value, such as whole life or endowment.

Policy: The printed document issued to the policyholder by the company stating the terms of the insurance contract.

Policy loan: Under an insurance policy, the amount that can be borrowed at a specified rate of interest from the issuing company by the policyholder, who uses the value of the policy as collateral for the loan. In the event the policyholder dies with the debt partially or fully unpaid, the insurance company deducts the amount borrowed, plus any accumulated interest, from the amount payable.

Policy reserves: The measure of the funds that a life insurance company holds specifically for fulfillment of its policy obligations. Reserves are required by law to be calculated so that, together with future premium payments and anticipated interest earnings, they will enable the company to pay all future claims.

Policyholder: The person who owns a life insurance policy. This is usually the insured person, but it may also be a relative of the insured, a partnership or a corporation.

Premium: The payment, or one of the regular periodic payments, that a policyholder makes to own an insurance policy.

Premium loan: A policy loan made for the purpose of paying premiums.

Principal: The amount you pay into your annuity contract as distinguished from the interest that is credited to it.

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Qualified annuity: An annuity that is sold as part of a tax-qualified Keogh plan or company pension plan.

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Rated policy: Sometimes called an "extra-risk" policy, an insurance policy issued at a higher-than-standard premium rate to cover the extra risk where, for example, an insured has impaired health or a hazardous occupation.

Reduced paid-up insurance: A form of insurance available as a nonforfeiture option. It provides for continuation of the original insurance plan but for a reduced amount.

Reinstatement: The restoration of a lapsed policy to full force and effect. The company requires evidence of insurability and payment of past due premiums plus interest.

Renewable term insurance: Term insurance providing the right to renew at the end of the term for another term or terms, without evidence of insurability. The premium rates increase at each renewal as the age of the insured increases.

Reserve: The amount required to be carried as a liability in the financial statement of an insurer to provide for future commitments under policies outstanding.

Rider: An amendment to an insurance policy that modifies the policy by expanding or restricting its benefits or excluding certain conditions from coverage.

Risk classification: The process by which a company decides how its premium rates for life insurance should differ according to the risk characteristics of individuals insured (for example, age, occupation, sex, state of health) and then applies the resulting rules to individual applications. (See underwriting.)

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Second-to-die life insurance: A form of insurance, traditionally used as an estate planning tool, that pays a death benefit only upon the death of the insured who survives the longest. Its main purpose is to pay estate taxes upon the death of the second insured. Because it is based on joint life expectancy, its premium is less than the total premiums for individual policies on the same lives. This type of insurance is available in many forms, including policies with interest rate features and flexible premiums.

Separate account: An asset account established by a life insurance company separate from other funds, used primarily for pension plans and variable life products. This arrangement permits wider latitude in the choice of investments, particularly in equities.

Settlement options: One of several ways, other than immediate payment in a lump sum, in which the insured or beneficiary may choose to have policy proceeds paid.

Single-premium whole life insurance: A whole life policy that provides protection for the duration of the insured's life in exchange for the payment of the total premium in one lump sum at the time of application.

Stock life insurance company: A life insurance company owned by stockholders who share in the company's surplus earnings.

Straight life annuity: An annuity whose periodic payments stop when the annuitant dies.

Straight life insurance: Whole life insurance on which premiums are payable for life.

Supplementary contract: An agreement between a life insurance company and a policyholder or beneficiary by which the company retains the cash sum payable under an insurance policy and makes payments in accordance with the settlement option chosen.

Survivorship insurance: Another name for second-to-die insurance.

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Term insurance: A plan of insurance that covers the insured for only a certain period of time (term), not for his or her entire life. The policy pays death benefits only if the insured dies during the term.

Term rider: Term insurance that is added to a whole life policy at the time of purchase or that may be added in the future.

- U -

Underwriting: The process of classifying applicants for insurance by identifying such characteristics as age, sex, health, occupation and hobbies. People with similar characteristics are grouped together and are charged a premium based on the group's level of risk. The process includes rejection of unacceptable risks.

Universal life insurance: A flexible premium life insurance policy under which the policyholder may change the death benefit from time to time (with satisfactory evidence of insurability for increases) and vary the amount or timing of premium payments. Premiums (less expense charges) are credited to a policy account from which mortality charges are deducted and to which interest is credited at varying rates.

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Variable annuity: An annuity contract under which the monthly payments will vary because they are linked to the values of investments, such as common stocks. This contrasts with the fixed dollar annuity, which guarantees a fixed amount monthly.

Variable life insurance: Life insurance under which the benefits relate to the value of assets behind the contract at the time the benefit is paid. The assets fluctuate according to the investment experience of funds managed by the life insurance company. Premium payments may be fixed as to timing and amount (scheduled premium variable life) or subject to change by the policyholder (flexible premium variable life). Because variable life policies have investment features, life insurance agents selling these policies must be registered representatives of a broker-dealer licensed by the National Association of Securities Dealers and registered with the Securities and Exchange Commission.

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Waiver of premium: A provision that sets certain conditions under which an insurance policy will be kept in full force by the company without the payment of premiums. It is used most frequently for those policyholders who become totally and permanently disabled but may be available in certain other cases.

Whole life insurance: A plan of insurance for life, with premiums payable for a person's entire life.