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Life Insurance Terms Glossary

Agent: a representative from an insurance company who is state licensed to negotiate and solicit contracts of insurance in order to provide a service to a policyholder on behalf of the insurer. The agent may be independent and thereby representative for a variety of insurance companies, or they may be a direct writer, in which case they will represent and sell policies for a single company.

Annuity: a contract that provides for a regular income, usually over the period of a lifetime.

Annuity Certain: a contract which provides for a regular income over a specific number of years, irrespective of life or death.

Application: a statement provided by an individual who is making an application for life insurance. This statement aids the insurance company to assess the level of risk. The application statement is utilized by the insurance company in order to decide upon the applicant’s premium rates and underwriting classification.

Beneficiary: the individual who is named within the policy to receive any insurance proceeds upon the death of the insured party. The beneficiary can be named at the sole discretion of the insured party.

Bonus Rate Annuity: the credit to an annuity of one percent of interest during the initial year that the annuity is in force. This additional credit is above the interest rate which is credited at the beginning of the second year of the annuity and in subsequent years whereby the annuity still remains in force. The bonus annuity is paid within the initial year in an attempt to attract new policyholders.

Cash Surrender Value: the cash sum available to the policy owner upon voluntary termination of said policy prior to it becoming payable either through maturity or death. This cash value is the amount stated within the policy schedule, minus a particular surrender value as well as any interest and/ or outstanding loans.

Direct Response: insurance which is sold to the insured party by an insurance company either through an employee, over the counter, or by mail.

Disclosure Statement: the New York Department of Financial Services Regulations requires a comparison form to be provided to every applicant who is considering the replacement of a life insurance policy with another.

Dividend: the return of part of a premium provided upon participating insurance policies in order to reflect the variation between the charged premium and the level of mortality, investment, and expense. Dividends are non-taxable distributions because these are considered as a proportional refund of the premium paid.

Evidence of Insurability: a statement of account whereby the insurance company can base a decision upon an individual’s level of risk in terms of offering life insurance.

Expense: an insurance policy’s share of a company’s operating costs and fees for such expenditures as medical examinations, underwriting, inspection reports, commissions, agency expenses, advertising, salaries, premium taxes, rent, etc. These costs are vital to ascertain in order to determine premium rates and dividends.

Face Amount: the stated amount on the face of the policy which is to be paid in the event of either death of the policy holder, or maturity of the policy. This does not include a variety of additional sums which are payable upon accidental death or any of the other special provisions stated in the policy terms. Nor does it include income that is acquired via the application of policy dividends.

Free Look Provision: a pre-determined time, which is usually between 10 and 30 days, for an insured party to examine the policy. Should they be dissatisfied, they are at liberty to return the policy to the insurer for a full refund.

Insurable Interest: for individuals who are related by blood, have a substantial interest which has been established through love, and also with respect to any other person, the insurable interest is a lawful and economic interest for seeing the continuation of the life of the insured party. An insurable interest is a statutory requirement when the purchase of life insurance is being made on another person.

Lapse Rate: the lapse rate affects the cost of insurance policies. The lapse rate is the rate of life insurance policy termination due to lack of premium payments. If a policy lapses prior to enough premiums being made to cover the initial expenses of a policy, the company must ensure that this loss is made up by adding on costs that the remaining policyholders must cover.

Life Expectancy: with respect to a given mortality table, life expectancy is the probability that an individual will live to a certain age. This is where the pure cost calculations of life insurance and annuities begin, and that cost is then reflected within the basic premium.

Misstatement of Age: misstatement of age is where an applicant has falsified their date of birth within the insurance policy application. Should it be discovered that the age provided is false, the correct age is then assigned and the coverage is adjusted in order to reflect this in terms of the premium paid.

Mortality: the incidence or frequency of death at a particular age.

Non-forfeiture: on premiums that have a cash value, this is one of the choices that are available to the current policy holder. The options are to take the value of the policy in cash, to change the policy to a reduced paid-up insurance, or to invest in extended term insurance instead.

Non-participating: a type of life insurance policy whereby the policy owners are not privy to the distribution of any of a policy’s surplus.

Participating Policy: a type of life insurance policy whereby the company’s board of directors determines what part of the surplus income should be distributed among insurance policy owners at the conclusion of the business year. In essence, this distribution acts to reduce the premium paid by the policy holders.

Policy: a legal document which is printed and issued to the owner of the insurance policy stating the terms of the contract.

Policy Proceeds: the amount paid to a policy owner at death, or upon maturity or surrender of the policy.

Policy Owner: usually, the policy owner is the owner of the life insurance policy, who is the insured person. However, occasionally it can be a corporation, a partnership, or a relative of the insured individual.

Premium: either a single payment or periodic payments that an insurance policy holder agrees to make towards his or her policy. The premium may be paid as a single payment or as a series of payments (monthly, quarterly, bi-annually, or annually) depending on the policy terms. The premium charged is in reflection of expectation of loss, profit contingencies, and expenses.

Rating: ratings make a basis for any additional charges to standard premium rates because the insured individual is classified as higher risk than normal which tends to result from either a hazardous occupation or impaired health.

Reduced Paid-up Insurance: this is a type of insurance which is optional in the form of non-forfeiture. Reduced paid-up insurance allows for a continuation of the commencing insurance plan, although there are no further premiums offered, and the cost of the premium is reduced.

Reinstatement: the restoration of a policy that has lapsed to the original status of premium payments. The policy holder must pay all previously unpaid premiums and any policy loans, while also providing satisfactory evidence of his or her current insurability.

Rider: an insurance policy endorsement which modifies certain provisions and clauses within the policy whereby coverage is included or excluded.

Risk Classification: dependent on a variety of risk factors of insured individuals (for example, occupation, age, state of health, sex), risk classification is the process whereby an insurance company makes a decision on how their premium rates will differ. After which, this classification is applied to individual life insurance applications.

Settlement Options: the variety of ways that an insurance policyholder or beneficiary might choose to receive their policy benefits (besides immediate cash payment). The options generally will include the following:

  • Fixed Amount Option: benefits paid upon death by way of fixed installments until the interest earned and proceeds terminate.
  • Interest Option: a death benefit which is left on deposit with the insurance company and attracts interest. Earnings from which are paid annually to the beneficiary.
  • Life Income Option: the life income option is a death benefit along with interest which is paid via a life annuity. For as long as the beneficiary lives (or regardless if the beneficiary lives, depending on the terms), income is paid under a straight life income option with period certain option.
  • Fixed Period Option: a death benefit which is left on deposit with the insurance company. The death benefit with all interest is paid out in equal amounts over a selected period of time.

Standard Risk: standard risk is where an individual’s classification when making an application for life insurance fits the general standards, such as occupational and physical, upon which normal insurance premium rates are based.

Substandard Risk: substandard risk applies to an individual’s classification when making an application for a life insurance policy, however, their application does not meet with the requirements which are in place for standard risk. Such an individual must pay an additional premium in order to cover the probability that they will have a shortened life span in comparison to standard risk policy holders.

Supplementary Contract: an agreement held between a policy holder or beneficiary and a life insurance company where the company withholds either part of or the whole of a sash sum payable within the terms of the insurance policy. The company do however make payment depending on the terms of the chosen settlement option.

Underwriter: the professional who is responsible for reviewing insurance applications. The underwriter makes a final decision as to whether the applicant is acceptable, and also about the premium rate to offer.

Underwriting: the process undertaken by a life insurance company whereby they determine whether an application for life insurance is acceptable. If it is, the underwriting process is also used to assess the correct premium charges.