The more you know about what you buy, the better decisions you can make. Here are some definitions of some terms we use in the insurance industry that might help you.
Accelerated
Benefits Rider
A life insurance rider that allows for the early payment of
some portion of the policy’s face amount should the insured
suffer from a terminal illness or injury.
Accidental
Death and Dismemberment
Insurance providing payment if the insured’s death results
from an accident or if the insured accidentally severs a limb
above the wrist or ankle joints or totally and irreversibly
loses his or her eyesight.
Accidental
Death Benefit Rider
A life insurance policy rider providing for payment of an
additional benefit related to the face amount of the base
policy when death occurs by accidental means.
Annually
Renewable Term
A form of renewable term insurance that provides coverage
for one year and allows the policy owner to renew his or her
coverage each year, without evidence of insurability. Also
called Yearly Renewable Term (YRT).
Annuitize
The accumulated value of the annuity is converted into a guaranteed
stream of income.
Application
Form supplied by the insurance company, usually filled in
by the agent and medical examiner (if applicable) on the basis
of information received from the applicant. It is signed by
the applicant and is part of the insurance policy if it is
issued. It gives information to the home office underwriting
department so it may consider whether an insurance policy
will be issued and at what premium rate.
Back Dating
The practice of making a policy effective at an earlier date
than the present.
Beneficiary
Person to whom the proceeds of a life policy are payable when
the insured dies. The various types of beneficiaries are:
primary beneficiaries (those first entitled to proceeds);
secondary beneficiaries (those entitled to proceeds if no
primary beneficiary is living when the insured dies); and
tertiary beneficiaries (those entitled to proceeds if no primary
or secondary beneficiaries are alive when the insured dies).
Business
Continuation Plans
Arrangements between business owners that provide that the
shares owned by any one of them who dies shall be sold to
and purchased by the other co-owners or by the business.
Buy-Sell
Agreements
Agreement that a deceased business owner’s interest will be
sold and purchased at a predetermined price or at a price
according to a predetermined formula.
Cash Value
The equity amount or “savings” accumulation in a
whole life policy.
Concealment
Failure of the insured to disclose to the company a fact material
to the acceptance of the risk at the time application is made.
Conditional
Receipt
Given to policy owners when they pay a premium at time of
application. Such receipts bind the insurance company if the
risk is approved as applied for, subject to any other conditions
stated on the receipt.
Contingent
Beneficiary
Person or persons named to receive proceeds in case the original
beneficiary is not alive. Also referred to as secondary or
tertiary beneficiary.
Conversion
Privilege
Allows the policy-owner, before an original insurance policy
expires, to elect to have a new policy issued that will continue
the insurance coverage. Conversion may be effected at attained
age (premiums based on the age attained at time of conversion)
or at original age (premiums based on age at time of original
issue).
Convertible
Term
Contract that may be converted to a permanent form of insurance
without medical examination.
Cross-Purchase
Plan
An agreement that provides that upon a business owner’s death,
surviving owners will purchase the deceased’s interest, often
with funds from life insurance.
Decreasing
Term Insurance
Term life insurance on which the face value slowly decreases
in scheduled steps from the date the policy comes into force
to the date the policy expires, while the premium remains
level. The intervals between decreases are usually monthly
or annually.
Disability
Income Rider
A type of health insurance coverage, it provides for the payment
of regular, periodic income should the insured become disabled
from illness or injury.
Double
Indemnity
A provision in a life insurance policy, subject to specified
conditions and exclusions, under the terms of which double
the face amount of the policy is payable if the death of the
insured is the result of an accident. In general, the conditions
are that the insured’s death occurs prior to a specified age
and results from bodily injury effected solely through external,
violent and accidental means independently and exclusively
of all other cause, within 60 or 90 days after such injury.
Evidence
of Insurability
Any statement or proof of a person’s physical condition, occupation,
etc., affecting acceptance of the applicant for insurance.
Exclusions
Specified hazards listed in a policy for which benefits will
not be paid.
Face Amount
Commonly used to refer to the principal sum involved in the
contract. The actual amount payable may be decreased by loans
or increased by additional benefits payable under specified
conditions or stated in a rider.
Free Look
Provision required in most states whereby policy owners have
either 10 or 20 days to examine their new policies at no obligation.
Grace Period
Period of time after the due date of a premium during which
the policy remains in force without penalty.
Guaranteed
Insurability (Guaranteed Issue)
Arrangement, usually provided by rider, whereby additional
insurance may be purchased at various times without evidence
of insurability.
Guaranty
Association
Established by each state to support insurers and protect
consumers in the case of insurer insolvency, guaranty associations
are funded by insurers through assessments.
Incontestable
Clause
Provides that, for certain reasons such as misstatements on
the application, the company may void a life policy after
it has been in force during the insured’s lifetime, usually
one or two years after issue.
Increasing
Term Insurance
Term life insurance in which the death benefit increases periodically
over the policy’s term. Usually purchased as a cost of living
rider to a whole life policy.
Independent
Agency System
A system for marketing, selling and distributing insurance
in which independent brokers are not affiliated with any one
insurer but represent any number of insurers.
Inspection
Report
Report of an investigator providing facts required for a proper
decision on applications for new insurance and reinstatements.
Insurability
All conditions pertaining to individuals that affect their
health, susceptibility to injury and life expectancy; an individual’s
risk profile.
Insurable
Interest
Requirement of insurance contracts that loss must be sustained
by the applicant upon the death of another and it must be
sufficient to warrant compensation.
Insurance
Social device for minimizing risk of uncertainty regarding
loss by spreading the risk over a large enough number of similar
exposures to predict the individual chance of loss.
Insurer
Party that provides insurance coverage, typically through
a contract of insurance.
Key Employee
Insurance
Protection of a business against financial loss caused by
the death or disablement of a vital member of the company,
usually individuals possessing special managerial or technical
skill or expertise. Also called key executive insurance.
Lapse
Termination of a policy upon the policy owner’s failure to
pay the premium within the grace period.
Level Term
Insurance
Term coverage on which the face value and premiums remain
unchanged from the date the policy comes into force to the
date the policy expires.
Medical
Examination
Usually conducted by a licensed physician; the medical report
is part of the application, becomes part of the policy contract
and is attached to the policy. A “non-medical” is
a short-form medical report filled out by the agent. Various
company rules, such as amount of insurance applied for or
already in force; applicant’s age, sex, past physical history;
data revealed by inspection report, etc., determine whether
the examination will be “medical” or “non-medical.”
Medical
A document completed by a physician or another approved examiner
and submitted to an insurer to supply medical evidence of
insurability (or lack of insurability) or in relation to a
claim.
Misrepresentation
Act of making, issuing, circulating or causing to be issued
or circulated an estimate, an illustration, a circular or
a statement of any kind that does not represent the correct
policy terms, dividends or share of surplus or the name or
title for any policy or class of policies that does not in
fact reflect its true nature.
Mortality
The relative incidence of death within a given group.
Mortgage
Insurance
A basic use for life insurance, so-called because many family
heads purchase insurance for specifically paying off any mortgage
balance outstanding at their death. The insurance generally
is made payable to a family beneficiary instead of to the
mortgage holder.
Non-Medical
Insurance
Issued on a regular basis without requiring a regular medical
examination. In passing on the risk, the company relies on
the applicant’s answers to questions regarding his or her
physical condition and on personal references or inspection
reports.
Offer and
Acceptance
The offer may be made by the applicant by signing the application,
paying the first premium and, if necessary, submitting to
physical examination. Policy issuance, as applied for, constitutes
acceptance by the company. Or the offer may be made by the
company when no premium payment is submitted with the application.
Premium payment on the offered policy then constitutes acceptance
by the applicant.
Other Insured
Rider
A term rider covering a family member other than the insured
that is attached to the base policy covering the insured.
Preferred
Risk
A risk whose physical condition, occupation, mode of living
and other characteristics indicate a prospect for longevity
superior to that of the average longevity of unimpaired lives
of the same age. (See standard risk.)
Premium
The periodic payment required to keep and insurance policy
in force.
Primary
Beneficiary
In life insurance, the beneficiary designated by the insured
as the first to receive policy benefits.
Proceeds
Net amount of money payable by the company at the insured’s
death or at policy maturity.
Rate-Up
in Age
System of rating substandard risks that involves assuming
the insured to be older than he or she really is and charging
a correspondingly higher premium.
Rebating
Returning part of the commission or giving anything else of
value to the insured as an inducement to buy the policy. It
is illegal and cause for license revocation in most states.
In some states, it is an offense by both the agent and the
person receiving the rebate.
Re-entry
Option
An option in a renewable term life policy under which the
policyowner is guaranteed, at the end of the term, to be able
to renew his or her coverage without evidence of insurability,
at a premium rate specified in the policy.
Reinstatement
Putting a lapsed policy back in force by producing satisfactory
evidence of insurability and paying any past-due premiums
required.
Renewable
Term
Some term policies provide that they may be renewed on the
same plan for one or more years without medical examination
but with rates based on the insured’s attained age.
Replacement
Act of replacing one life insurance policy with another; may
be done legally under certain conditions. (See twisting.)
Representation
Statements made by applicants on their applications for insurance
that they represent as being substantially true to the best
of their knowledge and belief but that are not warranted as
exact in every detail.
Rider
Strictly speaking, a rider adds something to a policy. However,
the term is used loosely to refer to any supplemental agreement
attached to and made a part of the policy, whether the policy’s
conditions are expanded and additional coverages added, or
a coverage or condition is waived.
Risk Selection
The method a home office underwriter uses to choose applicants
that the insurance company will accept. The underwriter must
determine whether risks are standard, substandard or preferred
and set the premium rates accordingly.
Salary
Continuation Plan
An arrangement whereby an income, usually related to an employee’s
salary, is continued upon his or her death; often paid to
the employee’s beneficiary.
Secondary
Beneficiary An alternate beneficiary designated to
receive payment, usually in the event the original beneficiary
predeceases the insured.
Section
1035 Exchanges
Certain life insurance policy or annuity exchanges that are
considered, according to Internal Revenue Code section 1035,
to be tax-free.
Standard
Risk
Person who, according to a company’s underwriting standards,
is entitled to insurance protection without extra rating or
special restrictions.
Stock Redemption
Plan
An agreement under which a closely held corporation purchases
a deceased stockholder’s interest.
Sub-Standard
Risk
Person who is considered an under-average or impaired insurance
risk because of physical condition, family or personal history
of disease, occupation, residence in unhealthy climate or
dangerous habits.
Suicide
Clause
Most life insurance policies provide that if the insured commits
suicide within a specified period, usually two years, after
the issue date, the company’s liability will be limited to
a return of premiums paid.
Term Insurance
Protection during limited number of years; expiring without
value if the insured survives the stated period, which may
be one or more years but usually is five to twenty years,
because such periods usually cover the needs for temporary
protection.
Term of
Policy
Period for which the policy runs. In life insurance, this
is to the end of the term period for term insurance.
Tertiary
Beneficiary
In life insurance, a beneficiary designated as third in line
to receive the proceeds or benefits if the primary and secondary
beneficiaries do not survive the insured.
Third-Party
Owner
A policyowner who is not the prospective insured.
Twisting
Practice of inducing a policyowner in one company to lapse,
forfeit or surrender a life insurance policy for the purpose
of taking out a policy in another company. Generally classified
as a misdemeanor, subject to fine, revocation of license and
sometimes imprisonment.
Underwriter
Company receiving premiums and accepting responsibility for
fulfilling the policy contract. Also, company employee who
decides whether the company should assume a particular risk;
or the agent who sells the policy.
Uniform
Simultaneous Death Act
Model law that states when an insured and beneficiary die
at the same time, it is presumed that the insured survived
the beneficiary.
Unilateral
A distinguishing characteristic of a life insurance contract
in that it is only the insurance company that pledges anything.
The policyowner does not even promise to pay premiums; therefore,
it is really a one-sided contract favoring the policyowner.
Uninsurable
Risk
One not acceptable for insurance due to excessive risk.
Universal
Life
Flexible premium, two-part contract containing renewable term
insurance and a cash value account that generally earns interest
at a higher rate than a traditional policy. The interest rate
varies. Premiums are deposited in the cash value accounts
after the company deducts its fee and a monthly cost for the
term coverage.
Waiver
of Premium
Rider or provision included in most life insurance policies
exempting the insured from paying premiums after he or she
has been disabled for a specified period of time, usually
six months.