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Life Insurance Glossary


Understanding life insurance terms before you buy is important. The life insurance glossary will help you ensure you buy the right life insurance coverage to help protect your family.

A

Accelerated Death Benefit: An optional provision in a life insurance policy that allows a specified percentage of the death benefit to be paid prior to the insured's death, if a doctor certifies that the insured's life expectancy is limited (usually 12 months or less).

Accidental Death Benefit: A benefit from a life insurance policy that is paid when an insured's death is the direct result of an accident and has occurred within a certain period of time following the accident.

Accumulation Value: The cash accumulation component of an annuity or universal life insurance policy. The accumulati on value reflects premiums received, withdrawals made, expenses charged, cost of insurance deducted and interest credited.

Age at Issue: The insured's age at the time coverage takes effect. Insurance plans typically define issue age as either the age at the insured's last birthday or nearest birthday.

Assignment: The act of transferring all or part of one's rights and benefits in a life insurance or annuity contract from an assignor (typically the policy owner) to an assignee.

Attained Age (age last birthday): A method for determining the age of a proposed insured for premium calculations. This method uses the proposed insured's actual age in years. For example, a person who is 51 years and 5 months would be classified as a 51 year old, as would a person who is 51 years and 7 months.

Automatic Increase Rider: An optional benefit in a universal life contract that provides scheduled increases in the face amount based on a designated percentage that begins in a designated policy year. This option must be applied for at the time you originally purchase the policy.

Automatic Premium Loan Provision: If invoked, an option that allows the insurer to automatically borrow money from a policy's cash or accumulation value to pay any premiums in default at the end of a grace period in order to keep a policy from lapsing.

B

Bailout Provision: A provision in some annuity contracts whereby, if the interest rate being credited to the annuity fund ever falls below a specified rate, the policyholder may withdraw the initial premium amount paid without a surrender charge.

Bank Draft: An arrangement where a policyowner allows a bank to withdraw money from his or her account on a scheduled basis and transfer the money to an insurance company to be applied as payment to a policy. Also known as an Electronic Funds Transfer.

Beneficiary: The individual or entity designated to receive the death benefits from a life insurance policy or annuity contract.

Beneficiary (Contingent): The individual(s) designated to receive a death benefit in the event the primary beneficiary(ies) is/are no longer living at the time the insured or annuitant dies.

Beneficiary (Primary): The beneficiary(ies) designated by the owner as their first choice to receive policy proceeds when the insured or annuitant dies.

Broker: An individual who acts as an intermediary between a buyer and seller, usually charging a commission. Also, the insurance sales representative who, on behalf of his or her clients, solicits insurance and generally sells various kinds of insurance from several different companies.

Broker Dealer: A business entity licensed and registered with the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD). A broker dealer has the legal right to offer securities products to the public. An agent selling variable life, variable annuity products and related securities, such as mutual funds, must be registered with a broker dealer.

Buy-Sell Agreement: An agreement in which either a business or its surviving shareholder owners (or both) will purchase the shares or interests owned by a deceased or retiring shareholder owner at a value or formula previously agreed upon and stipulated in the agreement by the parties.

C

Cash Surrender Value: The amount available to a policyowner when a life insurance policy is terminated for a reason other than the insured's death. The cash surrender value is determined by the value of the account less any policy debt and applicable surrender charges.

Cash Value: The net internal cash accumulation within a traditional life insurance policy.

Children's Term Rider (Children's Insurance Benefit): An optional policy rider that provides level term insurance on children of the primary insured.

Collateral Assignment: The act of transferring certain rights in a life or annuity policy to another party as security for a debt, usually a temporary assignment. Under a collateral assignment, the creditor is entitled to be reimbursed only to the extent that "his interest may appear," (i.e., policy proceeds will be payable only for the amount owed by the policyowner to the creditor at that time. Any death benefit or cash surrender in excess of the debt owed by the policyowner to the creditor is paid to the policy's beneficiary.) A collateral assignment may also place restrictions or limitations on policy loans.

Contestable Clause (Incontestable Clause): A provision in a life insurance contract that states the time (called the contestable period) during which the policy may be contested or voided by the insurer based on misrepresentations contained in the application or medical examination. By law, the maximum contestable period is two years.

Contract (Policy): The basic written agreement between the insurer and the policyowner.

Conversion: A policy may contain a provision providing that under certain circumstances the policy may be exchanged for another life insurance contract, typically without further underwriting requirements. For instance, term insurance can be converted to whole life or, in some cases, another form of permanent insurance.

Convertible: A term used to describe a policy that contains a conversion provision.

Cost of Insurance: A universal life or variable universal life contract provision; the "cost of insurance" is the amount deducted monthly from the accumulation value to cover the pure insurance protection provided by the policy. The amount deducted is calculated based on a number of factors such as age, rating and net amount at risk.

D

Date of Issue: The effective date of the policy as issued by the insurer.

Death Benefit: The amount paid to the beneficiary upon the death of the insured regardless of cause.

Death Claim: The notification to an insurance company of the insured's death and request for payment of policy proceeds according to the terms of the policy.

Deferred Annuity: An annuity in which periodic benefit payments do not begin until after a specified number of years or the annuitant reaches a specific age.

Dividend: The amount of an insurer's surplus that is available for distribution to the owners of participating policies. The dividend results from actual mortality, interest and expenses that were more favorable than expected when premiums were set.

E

Electronic Funds Transfer: An arrangement where a policyowner allows a bank to withdraw money from his or her account on a scheduled basis and transfer the money to an insurance company to be applied as payment to a policy. Also known as a Bank Draft.

Endow: The point in time when a life insurance policy's cash value equals the face amount.

Evidence of Insurability: Proof of a person's physical condition, occupation, or other factors, utilized by an insurance company to determine the acceptability of the applicant for insurance.

Excess Interest: The difference (always positive) between the rate of interest an insurer actually pays and the guaranteed amount to be paid.

Expected Return: The amount expected to be received by an annuitant under an annuity contract, based on the periodic payment and the annuitant's life expectancy or the guaranteed number of payments, as calculated when benefits begin. The expected return is utilized to calculate federal income tax of interest received in each annuity payment.

Expense Charge: A monthly charge paid to an insurance company based on various characteristics of the insured, such as age. Charges are defined for a specified period of time as provided in the contract.

F

Face Amount: The amount stated on the insurance policy that will be paid in the event of the death of the insured or at the policy's maturity, whichever occurs first. The face amount does not include additional amounts which may be payable under accidental death or other special provisions or amounts acquired through the application of policy dividends, if any.

Fixed Amount Periodic Payment: Payments made in a specified amount that will completely exhaust a principal sum over a specified time period.

Fixed Annuity: An annuity that guarantees a minimum rate of interest during any accumulation period and provides a guaranteed periodic payment at annuitization.

Flexible Premium Deferred Annuity: An annuity that allows additional payments after the initial funding with annuitization beginning after a specified number of years.

Free-Look Provision: A provision in a life insurance policy or annuity that gives the policyowner a stated amount of time to review a new policy after issuance and receipt. The policy can be returned and voided within this time frame for a refund of all premiums paid; for life insurance policies, cancellation of coverage is effective from date of issue.

G

Grace Period: As provided for under a contract, the period of time, usually 30 or 31 days, after the premium due date during which time the policyowner can pay the premium and bring the life insurance policy current to keep it in force.

Guaranteed Insurability Option: A rider to a life insurance policy that gives the policyowner the right to purchase additional insurance of the same type as provided in the original policy on the insured. The additional insurance amount, based on terms outlined in the rider, can be purchased at specified ages and face amounts without providing new evidence of insurability.

I

Immediate Annuity: An annuity that begins payments within 12 months of the purchase date. An immediate annuity usually makes a payment at the end of each period of payment. The interval may be monthly, quarterly, semiannually or annually.

Individual Retirement Annuity (IRA): An annuity, available as a retirement account, to someone who is employed. IRAs receive favorable tax status under Section 408 of the Internal Revenue Code. IRAs are sometimes referred to as Individual Retirement Accounts.

Insurable Interest: A reasonable economic expectation held by an individual or entity in the continuance of another person's life, or a reasonable expectation of economic loss by an individual or entity resulting from a person's death. The beneficiary must have a reasonable expectation of economic loss by an individual or entity resulting from a person's death. If there is no insurable interest, a policy cannot be written.

Insured: The person whose life is covered by an insurance policy.

Interest Rate (Current): This is the current interest rate credited to the policy or contract.

Interest Rate (Guaranteed): The guaranteed minimum annual interest rate used in calculating items such as policy reserves from year to year. Also the guaranteed factor used to calculate interest payable on proceeds held under a settlement option. This term also refers to the minimum rate credited each year to any cash values.

J

Joint Annuity (Joint Life Annuity): An annuity payable to two or more annuitants until one of the two annuitants dies. The joint annuity may provide for continuation of payment or a reduced payment during the life of the surviving annuitant.

L

Lapse: The termination of an insurance policy resulting from nonpayment of premiums or, in the case of variable life and universal life policies, the depletion of cash value below the amount needed to keep the policy in force. Under certain circumstances, coverage might continue under a settlement option.

Life Annuity: An annuity that pays a fixed income during the annuitant's lifetime. Payments cease at the annuitant's death, even if the annuity has not yet returned an amount equal to the premiums paid.

Life Expectancy: The average number of years a person is expected to live. Life expectancy is projected from a mortality table and is used to calculate benefit payouts.

Lifetime Income with Period Certain: Income paid for the life of the annuitant, guaranteeing payment for a certain number of years if the annuitant does not survive. In the event the annuitant dies within the certain period, the beneficiary receives benefits for the remainder of the designated period.

Loan: A sum granted by a life insurance company to the owner of a life insurance policy, secured by the policy's cash surrender value.

Loan (Outstanding): The total amount of policy loans, including both principal and interest accrued.

Loan Provision: A contract provision that grants the owner of a life insurance policy the right to take a loan from the insurance company secured by the policy's cash surrender value.

M

Maturity Date: For life insurance policies, the maturity date is the end of the contract term.

Medical Information Bureau (MIB): An independent entity that collects and stores medical data on life and health insurance applicants. The information is exchanged among member insurance companies upon written authorization of the insured. Its purpose is to guard against fraud and concealment by helping insurers discover pertinent, yet undisclosed, health facts.

Misstatement of Age: The act of giving the wrong age for oneself on an insurance application or for a beneficiary who is to receive benefits on a basis involving a life contingency. In most life policies, the contract sets forth the action to be taken if a misstatement of age is discovered after the policy is issued. Typically, the Face Amount is adjusted to reflect the amount that would have been purchased if the correct age had been used on an issue date.

Monthly Anniversary: The same day as the policy date for each succeeding month.

N

Net Amount at Risk: The difference between the face amount of a life insurance contract and the policy's accumulation or cash value.

Net Cash Surrender Value: The cash surrender value less any outstanding loans or surrender charges.

Nonforfeiture Values: The values or benefits in a life insurance policy that the policyowner does not forfeit, even if he or she chooses to discontinue payment of premiums. They usually include cash value, reduced paid-up insurance and extended term insurance values.

O

Other Insured Rider: An optional policy rider that provides convertible term insurance to a spouse or an immediate family member of the primary insured.

Owner (Policyowner): An individual or entity that owns an insurance policy. The owner might be the insured on the policy, the beneficiary or another party. Generally, the policyowner pays the policy's premium and is the only one to make changes to a policy, such as to change the beneficiary, withdraw cash values, or make loans on the policy.

P

Participating Policy: A life insurance contract in which the policy can be created with a dividend payable from the life insurance company's surplus (profits). Other policy provisions are substantially similar to whole life insurance. Dividend payments are not guaranteed and will depend on whether the insurance company declares a dividend.

Payee: The person named to receive annuity payments from an annuity contract.

Payor: The person making premium payments on a policy contract. If the payor is not also the owner, he or she may not be entitled to exercise the rights and provisions of the contract.

Period-Certain Annuity: An annuity with a predetermined guaranteed number of payments, at equal intervals, made over a specified period. The payments are payable whether or not the annuitant dies prior to the end of the stipulated period.

Planned Periodic Payment: The premium designated at the time of application as the amount planned to be paid at specific intervals until the maturity date.

Contract (Policy): The basic written agreement between the insurer and the policyowner. The policy, together with the application and all endorsements and attached papers, constitutes the entire contract of insurance.

Policy Anniversary: An anniversary of the policy issue date.

Policy Date: The date on which coverage becomes effective, as shown on the policy date page.

Policy Year: The year commencing with the policy date and ending on the day before the first policy anniversary, or any following year commencing with a policy anniversary and ending on the day before the next policy anniversary.

Policy/Contract Owner (Owner): An individual or entity that owns an insurance or annuity policy. The policy/contract owner may be the insured or the beneficiary. The policyowner pays the premium and is typically the only individual or entity who has the right to make changes to a policy, such as to change the beneficiary, withdraw cash values, or make loans on the policy. He or she may, or may not, also be the insured on the policy. Such rights may be limited in the event the policy has a collateral assignment.

Premium: Payments to the insurance company to purchase an insurance policy in order to keep it in force.

Premium Mode: The frequency with which the payments are made, as selected by the policyowner. Typical premium modes available are annual, semiannual, quarterly or monthly.

Primary Insured Rider: An optional policy rider that provides level term insurance on the primary insured. When the Primary Insured Rider is combined with base coverage, it can reduce premium costs for the amount of coverage as compared to the cost of a permanent plan of the same face amount. For the same premium, it can improve policy performance on universal life or variable life insurance policies.

R

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

Reinstatement Provision: A policy provision defining a life insurance policyowner's right to reinstate a lapsed policy within a certain time after lapse, as well as the conditions necessary for reinstatement, which may include evidence of insurability and/or payment of back premiums and interest. The right is usually forfeited once a policy has been surrendered for its cash value.

Rider: A written agreement attached to an insurance policy or annuity contract that limits or expands the policy's terms of coverage that usually requires additional premium. Examples of riders include:

  • Accelerated Death Benefit: An optional provision in a life insurance policy that provides for a specified percentage of the death benefit to be paid prior to the insured's death in the event a doctor certifies that the insured's life expectancy is limited (usually 12 months or less).
  • Accidental Death Benefit: A benefit that provides coverage for loss of life due to an accident that was the direct cause of death and for a death that results within a certain period of time following the accident.
  • Automatic Increase Rider: An optional policy rider in a universal life contract that provides scheduled increases in face amount based on a designated percentage, beginning in a designated policy year. This option must be applied for at the time of issue of the base policy.
  • Children's Term Rider (or Children's Insurance Benefit): An optional policy rider that provides level term insurance on children of the primary insured.
  • Guaranteed Insurability Option: An amendment to a life insurance policy that gives the policyowner the right to purchase additional insurance of the same type as provided in the original policy. The additional insurance amount, based on terms outlined in the contract, can be purchased at specified ages and rates without providing new evidence of insurability.
  • Other Insured Rider: An optional policy rider that provides convertible term insurance for a spouse or immediate family member of the primary insured.
  • Primary Insured Rider: An optional policy rider that provides level term insurance on the primary insured. When the Primary Insured Rider is combined with base coverage, it can reduce premium costs for the amount of coverage as compared to the cost of a permanent plan of the same face amount. For the same premium, it can improve policy performance on universal life or variable life insurance policies.
  • Waiver of Monthly Deduction: An optional life insurance policy rider that waives the monthly Cost of Insurance charges on a universal life or variable universal life policy for the length of a qualified disability as outlined in the policy contract.
  • Waiver of Specified Premium: An optional life insurance policy rider that waives a specified premium on a traditional product for the length of a qualified disability as outlined in the policy contract.

S

Single Premium Deferred Annuity: An annuity purchased with a single, lump-sum payment that earns interest for a period of years before the payment period begins, and which is taxed only when distributions are taken.

Suicide Provision: A life insurance policy provision whereby 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; instead, liability is limited to a return of premiums paid.

Surrender: The policyowner's right to terminate policy coverage in exchange for the policy's cash surrender value or other equivalent nonforfeiture values.

Surrender Charge: As provided in the contract provisions of a life insurance policy or annuity contract, surrender charges are charges an insurance company may deduct if the insured surrenders a life insurance policy or annuity for the cash or accumulation value. Companies may also deduct this charge if the insured borrows money on his or her policy, if the policy lapses for nonpayment, or if the policyowner elects to decrease the face amount of the policy.

T

Term Insurance: A type of insurance that covers the insured for a specified period of time (term) and not for his or her entire life. The policy pays a death benefit only if the insured dies during the term and if the policy has not lapsed for nonpayment of the premiums due.

U

Underwriting: The application process is generally referred to as underwriting. Underwriting involves the collection and analysis of the proposed insured's information, which ultimately results in an offer of coverage made by the insurance company. This information, at a minimum, will include completing an application and taking an insurance exam (paid for by the insurance company), which includes medical history questions, blood and urine specimen, blood pressure and pulse readings, and height and weight check. Additional information, such as telephone interviews, financial reports, or medical records from your physicians, could also be requested. This process normally takes between four and eight weeks.

Universal Life: A flexible-premium, current-assumption, adjustable death benefit policy. Similar to traditional life insurance policies, universal life pays a death benefit and accumulates cash value; however, unlike traditional life insurance products, a universal life policy allows the policyowner to adjust the death benefit and to vary the amount and/or frequency of premium payments.

V

Valuation Date: A date in which the New York Stock Exchange is open for business when a value or credit is given for funds.

Valuation Period: A period in which unit values are determined for each variable investment division at the end of each business day. A business day is any day that the company and the New York Stock Exchange are open for business.

Variable Universal Life: A universal life insurance policy that provides flexible premiums and death benefits, as well as the opportunity to build cash value in separate investment accounts. The cash surrender value is not guaranteed, but will fluctuate with the market value of the separate account investment portfolio. The policyowner bears the risk of poor fund performance.

W

Waiver of Monthly Deduction: An optional life insurance policy rider that waives the monthly Cost of Insurance charges on a universal life or variable universal life policy for the length of a qualified disability as outlined in the policy/contract.

Waiver of Specified Premium: An optional life insurance policy rider that waives a specified premium on a traditional product for the length of a qualified disability as outlined in the policy/contract.

Whole Life Insurance: A plan of insurance that covers the insured for life, with level premiums payable for his or her entire lifetime

 


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