Glossary of Life Insurance Terms

  • Annuity. A contract that provides a periodic income at regular intervals, usually for life.
  • Annuity Certain. A contract that provides an income for a specified number of years, regardless of life or death.
  • Application. A statement of information made by a person applying for life insurance. It helps the life insurance company assess the acceptability of risk. Statement made in the application are used to decide on an applicant's underwriting classification and premium rates.
  • Beneficiary. The person named in the policy to receive the insurance proceeds at the death of the insured. Anyone can be named as a beneficiary.
  • Bonus Rate Annuity. An extra percent of interest credited to an annuity during the first year that it is in force. The extra amount is above the interest rate to be credited beginning the second year and the remaining years that the annuity is in force. The extra rate is paid in the first year in an effort to attract new policyholders.
  • Cash Surrender Value. The amount available in cash upon voluntary termination of a policy by its owner before it becomes payable by death or maturity. The amount is the cash value stated in the policy minus a surrender charge and any outstanding loans and any interest thereon.
  • Credit Life.  The policy is usually sold as a group policy to creditors (like banks, finance companies, etc.) and pay the creditor the outstanding balance of a debt when the borrower dies. A creditor may require you to obtain credit life insurance coverage under their group policy as a condition of giving you a loan or selling you goods on credit.
  • Direct Response. Insurance sold directly to the insured by an insurance company through its own employees by mail or over the counter.
  • Dividend. A return of part of the premium on participating insurance to reflect the difference between the premium charged and the combination of actual mortality, expense and investment experience. Dividends are not considered to be taxable distributions because they are interpreted as a refund of a portion of the premium paid.
  • Evidence of Insurability. A statement or proof of your health, finances or job, which helps the insurer decide if you are an acceptable risk for life insurance.
  • Expense. Your policy's share of the company's operating costs-fees for medical examinations and inspection reports, underwriting, printing costs, commissions, advertising, agency expenses, premium taxes, salaries, rent, etc. Such costs are important in determining dividends and premium rates.
  • Face Amount. The amount stated on the face of the policy that will be paid in case of death or at the maturity of the policy. It does not include additional amounts payable under accidental death or other special provisions, or acquired through the application of policy dividends.
  • Free Look Provision. A certain amount of time provided (usually between 10-30 days) to an insured in order to examine the insurance policy and if not satisfied, to return it to the company for a full refund.
  • Insurable Interest. For persons related by blood, a substantial interest established through love and affection, and for all other persons, a lawful and substantial economic interest in having the life of the insured continue. An insurable interest is required when purchasing life insurance on another person.
  • Joint Life Insurance. Joint Life Insurance provides coverage for two or more persons with the death benefit payable at the first death. Premiums are significantly higher than for policies that insure one person, since the probability of having to pay a death claim is higher.
  • Joint Life and Survivor Insurance.  Provides coverage of two or more persons with the death benefit payable at the death of the last of the insureds. Premiums are significantly lower under joint life and survivor insurance than for policies that insure only one person, since the probability of having to pay a death claim is lower.
  • Lapse Rate. The rate at which life insurance policies terminate because of failure to pay the premiums. When policies are lapsed before enough premium payments are made to cover early policy expenses, the company must make up this loss from remaining policyholders. Therefore, the lapse rate will affect the cost of the policy.
  • Life Expectancy. The probability of an individual living to a certain age according to a particular mortality table. This is the beginning point in calculating the pure cost of life insurance and annuities and is reflected in the basic premium.
  • Misstatement of Age. The falsification of the applicant's birth date on the application for insurance. When discovered, the coverage will be adjusted to reflect the correct age according to the premium paid in.
  • Mortality. The incidence of death at each attained age; frequency of death.
  • Non-Forfeiture. One of the choices available if the policyowner discontinues premium payments on a policy with a cash value. Options available are to take the cash value in cash or to use it to purchase extended term insurance or reduced paid-up insurance.
  • Non-Participating. A life insurance policy in which the company does not distribute to policyowners any part of its surplus.
  • Participating Policy. A life insurance policy under which the company agrees to distribute to policyowners the part of its surplus that its Board of Directors determines is not needed at the end of the business year. The distribution serves to reduce the premium the policyowners had paid.
  • Permanent Insurance. While term insurance provides coverage for a specified term, permanent insurance provides coverage throughout a lifetime.  The life insurance company invests premiums, and the policyholder can "cash out" the policy for the cash value. Types of permanent insurance include:
  • Non-Participating Whole Life.   Provides a level premium and face amount during your entire life. The advantages of such a policy are its fixed costs and generally low out-of-pocket premium payments. The disadvantage is that it pays no dividends.
  • Participating Whole Life.  Pays dividends that represent the favorable experience of the company and result from excess investment earnings, favorable mortality and expense savings. Dividends can be paid in cash, used to reduce premiums, left to accumulate at interest or used to purchase paid-up additional insurance. Dividends are not guaranteed.
  • Indeterminate Premium Whole Life.  Similar to a non-participating whole life plan of insurance except that it provides for adjustable premiums. The company will charge a "current" premium based on its current estimate of investment earnings, mortality, and expense costs. If these estimates change in later years, the company will adjust the premium accordingly but never above the maximum guaranteed premium stated in the policy.
  • Economic Whole Life.  Provides for a basic amount of participating whole life insurance with an additional supplemental coverage provided through the use of dividends. This additional insurance usually is a combination of decreasing term insurance and paid-up dividend additions. Eventually, the dividend additions should equal the original amount of supplemental coverage. However, because dividends may not be sufficient to purchase enough paid up additions at a future date, it is possible that at some future time there could be a substantial decrease in the amount of supplemental insurance coverage.
  • Limited Payment Whole Life.  Provides lifetime protection but requires only a limited number of premium payments. Because the premiums are paid over a shorter span of time, the premium payments will be higher than under the whole life plan.
  • Single Premium Whole Life.   One large premium payment fully pays for the policy and no further premiums are required.  Offers tax-deferred treatment for increases to the policy cash value.  Many such policies have substantial surrender charges if you want to cash in the policy during the first few years, and you will incur taxes if you surrender the policy.  
  • Universal Life.  The insurer credits premiums to your cash value account, then deducts from that account for the insurer's expenses and for the cost of insurance protection ("mortality deduction charge," which will increase as you get older).  The balance of the cash value account accumulates at an interest rate that cannot go below a promised minimum.  Policy guaranty a maximum subtraction for the mortality charge and some specify a maximum subtraction for expenses. Some policies are set up to pay the beneficiary only the face amount of the policy while others are set up to pay the face amount plus the cash value account balance.
  • Excess Interest Whole Life.  Premium levels are fixed.  Any excess interest or better-than-expected life insurance experience improves the cash value of the policy.  
  • Current Assumption Whole Life.  The insurer determines the amount of premium to be paid, based on its current estimate of future investment earnings and mortality experience.  The insurer may reevaluate its original estimates and increase or decrease premiums.  If premiums are increased, some policies allow you to decrease the face amount of coverage so you can pay a lower premium.  You can borrow against the cash value of the policy.  
  • Single Premium Whole Life. Determine a single premium payment amount based on interest rate assumptions.  You may be required to make subsequent premium payments if interest rates drop.  
  • Pre-need Insurance.  Small face-amount policies typically purchased to pay burial expenses of the insured. This coverage often carries a higher premium per $1,000 of coverage than larger-size policies.
  • Policy. The printed legal document stating the terms of insurance contract that is issued to the policyowner by the company.
  • Policy Proceeds. The amount actually paid on a life insurance policy at death or when the policyowner receives payment at surrender or maturity.
  • Policyowner. 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 periodic payments, a policyowner agrees to make for an insurance policy. Depending on the terms of the policy, the premium may be paid in one payment or a series of regular payments, e.g., annually, semi-annually, quarterly or monthly. The premium charged reflects the expectation of loss, expenses and profit contingencies.
  • Rating. The basis for an additional charge to the standard premium because the person insured is classified as a greater than normal risk usually resulting from impaired health or a hazardous occupation.
  • Reduced Paid-up Insurance. A form of insurance available as a non-forfeiture option. It provides for continuation of the original insurance plan, but for a reduced amount, without further premiums.
  • Reinstatement. Restoring a lapsed policy to its original premium paying status, upon payment by the policyowner, with interest, of all unpaid premiums and policy loans, and presentation of satisfactory evidence of insurability by the insured.
  • Rider. An endorsement to an insurance policy that modifies clauses and provisions of the policy, including or excluding 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 (e.g., age, occupation, sex, state of health) and then applies the resulting rules to individual applications.
  • Settlement Options. The several ways, other than immediate payment in cash, in which a policyholder or beneficiary may choose to have policy benefits paid. These options typically include the following:
  • Interest Option. Death benefit left on deposit at interest with the insurance company with earnings paid to the beneficiary annually.
  • Fixed Amount Option. Death benefit paid in a series of fixed amount installments until the proceeds and interest earned terminate.
  • Fixed Period Option. Death benefit left on deposit with the insurance company with the death benefit plus interest paid out in equal payments for the period of time selected.
  • Life Income Option. Death benefit plus interest paid through a life annuity. Income continues under a straight life income option for as long as the beneficiary lives or whether or not the beneficiary lives, under a life income with period certain option.
  • Standard Risk. The classification of a person applying for a life insurance policy who fits the physical, occupational and other standards on which the normal premium rates are based.
  • Substandard Risk. The classification of a person applying for a life insurance policy who does not meet the requirements set for the standard risk. An additional premium is charged on substandard risks to provide for the probability that such a person will have a shorter life span than a standard risk.
  • Supplementary Contract. An agreement between a life insurance company and a policyowner or beneficiary in which the company retains at least part of the cash sum payable under an insurance policy and makes payment in accordance with the settlement option chosen.
  • Term Insurance. A type of life insurance policy that provides protection for a specified period of time.  If you die during the term period, the company will pay the face amount of the policy to your beneficiary.  If you live beyond the term period, no benefit is payable. Term life insurance policies have no savings element or cash value.  Types of term insurance include:
  • Renewable Term.  Provide you the right to renew for another period when a term ends, regardless of your health.  With each new term, the premium increases.
  • Convertible Term.  Permit you to exchange a term policy for a permanent policy during a conversion period.  If you convert the policy within the conversion period, you do not have to provide health information about yourself.  
  • Level Term.  The face amount of the policy remains the same during the policy term.
  • Decreasing Term. The face amount reduces over the period (but the premium remains the same each year).  An example is mortgage protection, with a face amount that decreases with the balance of the mortgage.
  • Adjustable Premium. Allows an insurer to charge a lower initial premium and to adjust premiums in the future up to the guaranteed maximum premium stated in the policy.
  • Underwriter. The person who reviews the application for insurance and decides if the applicant is acceptable and at what premium rate.
  • Underwriting. The process by which a life insurance company determines whether it can accept an application for life insurance, and if so, on what basis so that the proper premium is charged.
  • Variable Life.  You purchase a certain number of units of insurance, you allocate your premiums among various investment pools (stocks, bonds, money market accounts, etc.), and the value of each unit of insurance you hold varies based on investment results.  

Source: State of New York Department of Financial Services Life Insurance Resource Center (http://www.dfs.ny.gov/consumer/cli_basic.htm)

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