Glossary of Terms

Accelerated Benefits/Living Benefits Riders: These riders let policyholders, which may be terminally ill or critically ill, draw upon a percentage of the face value of their life insurance policies. Conditions under which this option can be exercised and the amount available to the policyholder can vary with each insurance company.

Accidental Death Benefit: An extra feature of a life insurance policy that provides an additional benefit if the insured dies in an accident. Because the face amount of the policy is often doubled under this proportion.

Accumulation Period: The period of time in a deferred annuity during which the purchase price is deposited with the insurer and accumulated at interest. It ends with the start of the liquidation period.

Activities of Daily Living (ADL's): Activities such as eating, bathing, and dressing. The inability to perform a specified number of these activities triggers eligibility for benefits in a long-term care insurance contract.

Actual Cash Value: A process for valuing property loss. Usually it is defined as replacement cost less depreciation but in some states is defined as fair market value.

Adverse Selection: Selection against the insurance company. It is the tendency for those who know that they are highly vulnerable to specific pure risks to be most likely to acquire and to retain insurance to cover that loss.

Agent: Consumers' primary link to an insurance company. Agents work with consumers to assess their needs and plan for long-term financial stability. Agents may also be referred to as insurance advisors, financial advisors, financial representatives, associates, life underwriters, and field underwriters.

Annual Exclusion: The amount of a gift exempt from federal transfer taxation. Currently it is $10,000 annually for gifts to any one person. This can be increased to $20,000 if the donor is married and the donor's spouse elects to split the gift on a timely filed gift tax return.

Annuity: A financial contract that provides continuing income, typically for retirement.

Annuitization: The conversion of an accumulated sum of money into benefit-paying status as an annuity.

Application for insurance: A form that furnishes the insurance company with necessary information on the applicant's age, sex, address, occupation, earnings, height, weight, medical history and other facts. The company uses this information to determine whether or not to insure the applicant.

Automatic Premium Loan Option: An option associated with a cash value life insurance policy whereby, if a renewal premium is not paid by the end of the grace period, the insurer creates a loan against the cash value in the amount of the unpaid premium.

Basis Point: One one-hundredth of a percentage point (for example, a rise in yield from 6 percent to 6 3/4 percent is a gain of 75 basis points)

Binder: A written or oral agreement between an agent and an applicant for insurance whereby the principal-insurer is committed to provide the desired insurance, at least on a temporary basis

Buy-sell Agreement: A contract binding the owner of a business interest to sell the business interest for a specified or determinable price at his or her death or disability and a designated purchaser to buy at that time.

Cancelable: A contract in which the insurance company reserves the right to terminate the coverage at any time (and perhaps for any reason) during the term of coverage by providing notice to the insured.

Capital Needs Analysis: A system for determining how much life insurance a client needs if the principal sum is to be preserved in the process of meeting the financial objectives for his or her survivors.

Cash Value: The savings element that builds up in a permanent life insurance policy, an endowment policy, or an annuity contract.

Chartered Life Underwriter (CLU): An individual who has attained a high degree of technical competency in the fields of life and health insurance and who is expected to abide by a code of ethics. Must have minimum of three years of experience in life or health insurance sales and have passed ten professional examinations administered by The American College.

COBRA: A provision of the Consolidated Omnibus Budget Reconciliation Act of 1985 that requires group health plans to allow employees and certain beneficiaries to elect that their current health insurance coverage be extended at groups rates for up to 36 months, following a qualifying event that results in the loss of coverage. The provision applies only to employers with 20 or more employees. In addition, a person electing COBRA continuation can be required to pay a premium equal to as much as 102 percent of the cost to the employee benefit plan for the period of coverage for a similarly situated active employee to whom a qualifying event has not occurred.

Coinsurance: The percentage of covered expenses under a major medical plan that is paid once a deductible is satisfied. The most common coinsurance is 80 percent. A provision whereby a property owner must share in a loss if the amount of insurance carried is less than a specified percentage of value. A reinsurance arrangement in which a primary life insurance company cedes a specified percentage of the face amount of a policy or block or policies to a reinsurer.

Comparative Negligence: The legal principle whereby an injured party can recover a portion of the damage for his or her injuries if he or she were also negligent. In some jurisdictions, a plaintiff can recover only if his or her negligence is less (or not more) than the defendant's negligence.

Conditional Receipt: A receipt given to an applicant of life insurance in exchange for the payment of the first premium in which the insurer, through its agent, specifies that the coverage will be effective as of the date of the receipt, subject to the condition that the proposed insured later be found to have been insurable as of the date the receipt was issued.

Contestability Period: Usually a specific time frame, commonly two years, during which the insurer may deny coverage, void a contract or question the validity of a claim.

Contingent Beneficiary: The person designated to receive the death proceeds of a life insurance policy if the primary beneficiary predeceases the insured.

Contingent Liability: Legal liability that arises because of work performed by an independent contractor, such as a subcontract of a business.

Cross-purchase Agreement: A business buy-sell agreement in which the surviving co-owners will be the purchasers of the business interest of a deceased owner.

Conversion: A provision in a group benefit plan that gives an employee whose coverage ceases the right to convert to an individual insurance policy without providing evidence of insurability. The conversion policy may or may not be identical to the prior group coverage.

Convertibility: A feature in term life insurance that allows the insured to replace the term coverage with permanent individual life insurance without having to show evidence of insurability. In group insurance, the right is available only at certain times, including termination of the insured from the group or from an eligible class within the group.

Coordination of benefits: Coordination of benefits prevents duplication or overlapping for the same expense when a policyholder owns two or more group policies. This allows one insurance carrier to be aware of any other insurance coverage the policyholder may have. The two companies determine which company has the primary responsibility to pay and which company has the secondary responsibility after the benefits from the primary insurer are exhausted.

Co-insurance: A provision of a medical expense insurance policy that requires the insured to pay a percentage of all eligible medical expenses, in excess of the deductible, that result from sickness or injury.

Deductible: The amount a policyholder must pay before insurance covers any expenses. The insurance program pays benefits only for losses over the amount stated in the deductible provision.

Deferred Annuity: A financial product that allows you to accumulate money on a tax-deferred basis, when purchased from an insurance company, that can subsequently be paid out as income or taken in a lump sum.

Dependent: Most commonly defined under a group medical expense plan to include an employee's spouse who is not legally separated from the employee and any other unmarried dependent children (including stepchildren and adopted children) under age 19 or, if full time students, age 23.

Disability Insurance: Health insurance designed to provide financial payments to replace an insured's income if he/she is unable to work due to an illness or injury.

Dividend Options: A set of provisions in a participating life insurance policy that describe how the policyowner can use the dividends, usually to reduce the premium payment, to buy additional paid-up permanent insurance, to accumulate at interest, to buy term insurance, or to make the policy a paid-up policy at an earlier age than originally planned.

Dollar-cost averaging: A formula plan for timing of investment transactions, in which a fixed dollar amount is invested in a security in each period; a passive buy-and-hold strategy in which the amount of periodic investment is held constant.

Elimination period or waiting period: The time a policyholder must be insured under the policy before he/she is eligible for benefits.

Endorsement: A provision added to a property or liability insurance policy, sometimes for an extra premium charge, by which the scope of the policy's coverage is clarified, restricted, or enlarged.

Endowment: A type of life insurance policy that pays the face amount if the insured dies during a specific period of time and also pays the face amount if he or she lives to end of that period.

Errors and Omissions Insurance: A type of professional liability for those in occupations such as real estate appraising and accounting, where the professional's acts or omissions are unlikely to result in bodily injury.

Exclusions: This term refers to losses or risks that a policy does not cover.

Exclusion Ratio: The ratio used to determine the portion of the benefit payment from an annuity that is tax free as a return of the investment in the contract. It is the ratio of the total amount invested to the total amount expected to be received.

Extended Care Facility: A skilled nursing home o rehabilitation center equipped to provide full nursing care that has a transfer agreement with a hospital.

Face amount: The amount stated on the policy that will be paid at death or maturity. It does not include additional amounts payable under accidental death or other special provisions, or acquired through the use of policy dividends.

Fifth Dividend Option: A provision in cash value life insurance whereby dividends can be used to purchase increasing term insurance.

Fixed Annuity: An annuity that provides a stated dollar benefit, regardless of the insurer's investment return.

Free-look period: Time during which the policyholder may return the policy if he/she is not completely satisfied and receive a complete refund. The customary length of time for a "free look" is 30 days for policies purchased through the mail and 10 days for those purchased from an agent.

General Agent: In the legal sense, an agent who has the authority to bind the insurance company on a risk. In life insurance marketing, the term refers to an entrepreneur who is granted a franchise by an insurer to build an agency force for the marketing of the insurer's products in a given geographic area.

Grace Period: An additional period of time, usually 31 days, granted in some types of insurance for the policyowner to pay the premium after it has become due. During the grace period, the coverage remains in force.

Guaranteed Renewable: A policy that is renewable at the policyholder's option and cannot be terminated by the insurance company.

Health Maintenance Organization (HMO): A managed system of health care that provides a comprehensive array of medical services on a prepaid basis to voluntarily enrolled persons living within a specific geographic region. HMO's both finance health care and deliver health services. There is an emphasis on preventive care as well as cost control.

Health Savings Accounts (HSAs): An HSA is a tax-exempt trust or custodial account established for the purpose of paying medical expenses in conjunction with a high-deductible health plan. The HSA cannot stand alone — it can only be combined with a high deductible health insurance plan. A number of the rules that apply to HSAs are similar to rules that apply to individual retirement arrangements (IRAs).

Hold-Harmless Agreement: An agreement in which one party, such as a tenant, accepts the responsibility of another party, such as a landlord, for losses that would otherwise fall on that other party.

Hospital Indemnity Insurance: A medical expense policy that pays a fixed dollar amount for each day a person is hospitalized, regardless of other insurance.

Implied Warranty: An obligation imposed by law on the manufacturer or distributor of products.

Inflation Guard Endorsements: A homeowners endorsement that provides an automatic increase for property coverages. The policyowner selects the annual percentage rate.

Insurable Interest: A right or relationship with regard to the subject matter of an insurance contract such that the insured will suffer financial loss from damage, loss, or destruction to that subject matter.

Joint-and-Last-Survivor Annuity: An annuity whose benefit payments continue until the last death among specified lives.

Joint-Life Policy: A type of life insurance policy covering two or more persons in which the proceeds are payable on the death of the first one to die.

Life Annuity Certain: A life annuity that provides a guaranteed minimum number of benefit payments whether the annuitant live or dies. It is a combination of an annuity certain and a pure deferred life annuity.

Liquidity: The ability to convert an investment asset into cash quickly without loss of value.

Long-Term Care Insurance: A form of health insurance that usually provides coverage for custodial care, intermediate care, and skilled-nursing care. Benefits may also be available for home health care, adult day care, and assisted living. Benefits are usually limited to a specified dollar amount per day.

Loss Ratio Method of RateMaking: A method in which the actual loss ratio is compared to the desired or expected loss ratio to determine the change needed in an existing insurance rate.

Major Medical Insurance: A medical insurance plan designed to provide substantial protection against catastrophic medical expenses. There are a few exclusions and limitations, but deductibles and coinsurance are commonly used.

Managed Care: A process to deliver cost-effective health care without sacrificing quality or access. Common characteristics include controlled access to providers, comprehensive case management, preventive care, risk taking, and high-quality care.

Marital Deduction: An unlimited amount that can be taken as a deduction against the federal gift and estate tax for transfers to the donor's spouse.

Medicaid: A joint federal and state program to provide medical expense benefits for certain classes of low-income individuals and families.

Medical Savings Account: An alternative to first-dollar coverage under a medical expense plan. An employee is given medical expense coverage that has a high deductible, and money is deposited into the medical spending account so that the employee can pay for expenses below the deductible amount. Any monies not used at the end of the year are paid to the employee.

Medicare: The health insurance portion of the Social Security program that is available to persons age 65 or older and limited categories of persons under age 65.

Medigap Policy: An individual health insurance contract that covers certain expenses not covered by Medicare. These expenses include such items as deductibles, copayments, and noncovered services like prescription drugs.

Net Payment Cost Index: A method of estimating the net cost of life insurance on a time-value-adjusted basis if the policy's death benefit is paid at the end of a specified time period.

No-Fault: A modification of the traditional tort liability system that provides first-party benefits to injured persons and imposes some restrictions on their rights to sue negligent parties.

Noncancelable: An insurance contract in which the insured has the right to renew the coverage at each policy anniversary date, usually up to some stated age, and the coverage may not be terminated by the insurer during the term of coverage. Also the rates for the coverage are guaranteed in the contract, though they are not necessarily level.

Nonforfeiture Value: The savings element in permanent life insurance policies. Also sometimes called the cash value.

Nonparticipating Policy: A type of insurance policy on which no dividends are paid to the policyowner, but it has a fixed premium that is often lower than that of a participating policy.

Option Renewable Policy: The company may or may not renew the policy at each premium due date. The policy cannot be cancelled between such dates.

Participating Party: A life insurance policy that distributes company surplus funds to policyholders as dividends.

Permanent life insurance policy: Type of life insurance (other than term insurance) that accrues cash value and is designed for long-term, or permanent, needs of a policyholder. Includes whole, universal and variable life, among others.

Personal Property Floater: A policy to provide "all-risks" coverage for unscheduled personal property on a world-wide basis.

Policyowner: The person or organization that owns an insurance policy. The policyowner generally has the right to change, renew, or cancel the policy and the obligation to comply with policy conditions, such as premium payments.

Preexisting Condition: An illness or condition of health that originated prior to the issuing of the policy.

Preferred Provider Organization (PPO): A group of health care providers that contracts with employers, insurance companies, union trust funds, third-party administrators, or others to provide medical care services at a reduced fee. PPOs can be organized by the providers themselves or by organizations such as insurance companies, the Blues, or groups of employers.

Premium: The price charged for a period of coverage provided by an insurance policy and found by multiplying the rate by the number of units of coverage.

Presumed Negligence: Negligence that can be assumed from the facts of certain situations. It can occur if (1) the action would not normally cause injury without negligence, (2) the action is within the control of the party to be held liable, and (3) the party to be held liable has superior knowledge of the cause of the accident or the injured party is unable to prove negligence.

Primary Beneficiary: The beneficiary in a life insurance policy who is first entitled to receive the policy proceeds upon the insured's death.

Primary Insurance Amount (PIA): The amount a worker will receive under Social Security if he or she retires at age 65 or becomes disabled. It is also the amount on which all other Social Security income benefits are based.

Real Property: Land and anything that is growing on it, erected on it, or affixed to it, and the bundle of rights inherent in the ownership.

Rehabilitation Benefit: A benefit under workers' compensation laws or disability income plans that provides rehabilitative services for disabled workers. Benefit may be given for medical rehabilitation and for vocational rehabilitation, including training, counseling, and job placement.

Replacement: The replacing of one life insurance policy with another. To prevent financial harm to the policyowner, agents and insurers must follow prescribed procedures.

Rider: The term used in life insurance in place of the term endorsement.

Settlement Options: The ways that policyholders or beneficiaries may choose to have benefits paid other than a lump sum.

Split-Dollar Life Insurance: A plan under which two parties, usually an employer and an insured employee, share the premium costs, death proceeds, and perhaps cash value of a life insurance policy pursuant to a prearranged agreement.

Stock Insurance Company: A company in which the legal ownership and control is vested in the stockholders.

Stock Life Insurance Company: A life insurance company owned by stockholders who elect a board to direct the company's management. Stock companies, in general, issue nonparticipating insurance, but may also issue participating insurance.

Stop-Loss Limit: The maximum amount of out-of-pocket medical expenses that a covered person must pay in a given period (usually one year). After this limit is reached, future copayments and deductibles are waived for the remainder of the period.

Subrogation: A process by which an insurer takes over the legal rights its insured has against a responsible third party.

Suicide Clause: A life insurance policy provision that specifies that if the insured, whether sane or insane, commits suicide during the first one or 2 years of the policy, the insurer will be liable only for a return of the premium.

Surgical Schedule: A list of the cash amounts that will be paid for various types of surgery with the amount payable generally based upon the seriousness of the operations.

Term Insurance: Life insurance written for a specific time period and payable only if the policyholder dies within that time period.

Time limit on certain defenses: This clause in an insurance policy is required under state law. After two years, misstatements on the application, (except fraudulent ones), can not be used to void the policy or deny a claim. At the end of the two-year period, a claim may not be denied on the grounds that a disease or physical condition, not specifically excluded by name, had existed before the policy went into effect.

Title Insurance: Protection for the purchaser of real estate against defects in title that occurred prior to the effective date of coverage but are discovered after the effective date.

Umbrella Liability Insurance: A personal or business liability policy that provides high limits for a broad range of liability situations. The policyowner is required to have underlying liability coverage of specific amounts. Claims not covered by the underlying insurance are subject to a self-insured retention.

Uninsured Motorist Coverage: An automobile insurance coverage that enables an insured to collect from his or her own insurance company for bodily injuries (and property damage in a few states) that are caused by a legally liable, but uninsured driver.

Universal life insurance: A flexible life insurance policy allowing the policyholder to change the death benefit from time to time, and vary the amount or time of a premium payment.

Variable Annuity: An annuity contract in which the amount of each periodic income payment may fluctuate. The fluctuation may be related to securities market values, a cost of living index, or some other variable factor.

Variable life insurance: Life insurance under which the benefits vary, but never below a guaranteed minimum benefit, based on the value of assets behind the contract at the time the benefit is paid.

Variable Universal Life Insurance: A type of life insurance policy that combines the premium flexibility features of universal life insurance with the policyowner--directed investment aspects of variable life insurance.

Whole Life: Life insurance coverage that remains in force during the insured's entire lifetime, provided premiums are paid as specified in the policy.