Life Insurance Glossary

By Compuquotes Team on April 19th, 2010

Accidental death & dismemberment insurance: Also known as AD&D, this type of coverage pays a benefit upon the loss of life or limb(s) in an accident. Many insurers provide AD&D coverage as a rider on a primary life insurance policy. Otherwise, consumers can purchase standalone AD&D policies with clearly defined payout tables.

Agent: The person or organization that is allowed to sell life insurance on behalf of an insurance company.

Annual renewable term life: Term life insurance that is renewable each year for a fixed period of time, usually 5, 10, 15, 20, or 30 years. The annual premium increases each year, based on the risk of the benefit being paid. In the earliest years, the premium is usually very affordable, but by the end of the term, it may become financially unviable.

Annuity: This investment tool converts an initial deposit into a long-term schedule of paid disbursements with interest. Some policyholders prefer to structure benefit payouts to minor children as annuities to guarantee a stable cash stream over decades.

Beneficiary: The person or party named by the policyholder to receive the insurance policy benefit.

Binder: A temporary agreement providing insurance coverage until a life insurance policy can be issued.

Broker: A licensed organization or person that acts as an intermediary between the customer and insurance company. Brokers typically search for coverage that is appropriate for their clients, and work on commission.

Cancellation: The loss of your insurance coverage during a policy.

Cash surrender value: The cash amount due to a policy owner who is surrendering a life insurance policy.

Cash value: The savings portion of a permanent life insurance policy, which is funded through premium payments and interest. Cash value is available as a loan or for withdrawal before it becomes payable by death or maturity. Any unpaid loans taken against cash value are deducted from the death benefit, and withdrawals are subject to surrender charges.

Claim: A request for payment related to an event that is covered under the terms of an in-force insurance policy.

Claimant: Either the insured individual or the insurer who asserts a right of recovery.

Contestability clause: Language in a life insurance policy that allows the insurer to review a deceased policyholder's medical records for evidence that may invalidate a claim. Insurance policies more commonly contain "incontestability clauses" that prevent deeper reviews after a fixed period of time, usually two years.

Convertible term insurance: A term insurance policy that gives the policyowner the right to convert the policy into whole life insurance without providing evidence of insurability.

Corporate owned life insurance (COLI): Employers often underwrite life insurance policies for key employees, especially company officials. COLI benefits help cover the cost of recruiting and retraining replacements for core personnel. Under IRS rules, employers must notify employees of their intent to purchase COLI policies.

Death benefit: The amount of money an insurer pays to beneficiaries upon the death of an insured. Some policies call this a "survivor's benefit." The policyholder can specify whether a death benefit should be paid as a single cash sum or as an annuity distributed over time.

Decline: When an insurance company refuses to provide insurance coverage.

Dividend: A return of part of the premium on participating insurance policies that reflects the difference between the premium changed and the combination of the cost of insurance, fees, and investments. Dividends are typically not taxable because they are considered a refund for a portion of the premiums paid. Term life insurance does not pay dividends.

Endorsement: A provision added to an insurance policy that alters the policy's coverage or terms. Typically, riders or endorsements add additional benefits and are accompanied by a corresponding premium increase or change (see also rider).

Estate tax: State and/or federal tax paid by heirs on inherited cash and property above a mandated exclusion limit. Spouses remain exempt from estate tax, and careful estate planning can help consumers minimize tax obligations after their deaths.

Exclusion: A provision listed in the insurance policy that eliminates coverage for certain risks, people, property classes, or locations.

Face Amount: The actual monetary amount stated in the policy that is to be paid to the beneficiary when the insured person passes away.

Fiduciary: In the context of life insurance, a fiduciary is an individual or entity authorized to hold assets in trust on behalf of another person. Fiduciaries are legally bound to make sound financial decisions on behalf of the named beneficiary, and not to profit for themselves.

Flat extra: Some insurers charge an extra, flat rate premium to offset risk on certain policies. For instance, smoking, participating in extreme sports, or engaging in hazardous employment can all trigger flat extra premiums.

Free look law: Most states provide consumers with a brief window of time in which they can cancel a new life insurance policy and receive a full refund. Many states limit this penalty-free window to ten days, but free-look periods may be as long as 30 days.

Grace period: Insurers often accept late premium payments without penalty or cancellation for a brief period after the due date; typically fifteen calendar days.

Group life insurance: Employers and other large organizations often qualify for group pricing on life insurance policies. Insurers make risk assessment on a membership pool, or group, making it easier for relatively high-risk individuals to find affordable policies.

Guaranteed insurability: An option for a policyholder to purchase addition life insurance, sometime in the future as specified in the policy, without having to provide evidence of insurability.

Guaranteed-issue life: Life insurance policies offered to the general public without a medical exam.

Impaired risk: Brokers and agents specializing in impaired risk policies help find affordable life insurance for consumers with specific risk factors, such as illness, obesity, or hazardous occupations.

Insurability: The potential for a consumer to qualify for a life insurance policy.

Insured: The person or policyholder whose life is covered by a life insurance policy, also the policyowner or policyholder.

Insurer: The insurance company.

Irrevocable trust: A financial vehicle into which a grantor places assets, removing the value of those assets from a grantor's taxable estate. Only the beneficiary may alter the structure or the contents of the trust, making this arrangement attractive for charitable donations during estate planning.

Issue age: A policyholder's age at the time a life insurance policy is issued, often used to calculate the premiums for life insurance.

Key person life/key man life: Life insurance purchased by a company on the life of a key employee. Most often used for senior executives or when an employee's death results in significant financial loss for a business.

Lapse: The termination of an insurance policy, most often because of non-payment of the policy premium.

Level term life insurance: A version of term life insurance where the premium is guaranteed to remain the same for a certain period of time--often 10, 15, 20 or 30 years. The longer the level term, the more expensive the premiums because the older age of the insured and the longer coverage period are averaged into the overall premium.

Life Settlement: The sale of a life insurance policy to a third party. The insured receives a one-time payment from the sale. Then, the third party becomes the beneficiary on the policy and assumes all premium payments.

Limit: The maximum amount of insurance that a whole life insurance policy pays.

Medical exam: A general health physical required by a company to determine insurance eligibility or establish premium rates.

MIB Group: A membership corporation comprised of approximately 470 insurance companies from the United States and Canada. MIB Group provides its members with fraud protection and other services.

Mutual company: A company owned by its customers.

No-exam life insurance: Life insurance policies that do not require a medical exam to determine insurability.

Non-participating policy: A life insurance policy that does not pay dividends to policyholders.

Paid-up insurance option: Life insurance option that allows policyholders to use the net cash value of their policy to make future premium payments.

Participating policy: A life insurance policy that pays dividends to policyholders. Participating policies generally have higher premiums than non-participating policies.

Permanent life insurance: Any life insurance policy that does not have a pre-determined expiration date. Permanent life insurance usually combines insurance with a savings element and may be referred to as universal or whole life insurance.

Persistency: The percentage of an insurance company's written policies that have not lapsed. Generally, this figure is used as a benchmark to measure the financial stability of an insurer.

Policy: A written contract that states the terms of insurance between the insured and the insurer.

Policyowner: The person who owns the life insurance policy. Usually this is the insured person, but it may also be a relative of the insured, a partnership, or a corporation.

Preferred risk: An insurance group that is significantly less likely to file an insurance claim than other groups of policyholders. Individuals classed as preferred risk often have reduced premium amounts.

Premium: The cost of an insurance policy. Premiums are most often assessed on an annual, semiannual or quarterly basis.

Quote: An estimated cost of insurance based on information you provide to the insurance company. Quotes for life insurance, or any other type of insurance, should be provided free of charge.

Renewable term life: At term life insurance policy that provides the policyholder the right to continue insurance coverage at the end of the specified term without presenting evidence of insurability. However, renewed policies usually have higher premiums based on the insured's attained age.

Rider: A provision added to an insurance policy that alters the policy's coverage or terms. Typically, riders or endorsements add additional benefits and are accompanied by a corresponding premium increase or change (see also endorsement).

Simplified issue life: Also known as no-exam life insurance, no-medical life insurance, and no-physical life insurance, simplified issue life insurance is a policy issued without a medical exam using a faster, streamlined application process. Typically, these life policies are more expensive and have lower face amounts.

Smoking rate: The rate charged to life insurance customers who smoke or use nicotine. It is higher than the rate charged to nonsmokers because studies show smokers live 13-14 fewer years than nonsmokers, which means many smokers won't pay into a life insurance policy as long as the average nonsmoker. The rates vary by company, as do the rates for life insurance policy holders who chew tobacco or smoke cigars.

Standard risk: The classification of a life insurance policy applicant who fits the physical, occupational and other standards under which most of a company's policies are issued. A more favorable applicant might be considered a "preferred risk," while a less favorable applicant might be considered "rated" or "substandard" or rejected for coverage altogether.

Stranger owned life insurance (STOLI): When a person takes out a life insurance policy and then sells it to an investor, who takes over premium payments and collects the death benefit when the policy holder passes away.

Substandard risk: The classification of a life insurance policy applicant who falls below the requirements for the standard risk. Substandard risk applicants usually pay a higher premium based on the probability of a shorter life span than a standard risk applicant.

Suicide clause: A policy provision that reduces or voids a life insurance death benefit if the insured commits suicide within a specified period of time after the policy is in effect. The time varies, but it's usually one or two years. After the specified period has passed, the insurance company must pay the claim even if the insured commits suicide.

Surrender: To voluntarily cancel or terminate a policy for its cash value or other non-forfeiture options.

Surrender fee: The amount charged a policyholder for the early withdrawal of funds from a life insurance policy or annuity.

Surrender value: The amount an insurer pays the policyholder if the insured voluntarily terminates a life insurance policy before its maturity or before the insured event occurs. This amount applies to the savings portion of whole life insurance policies.

Survivorship life insurance: A single policy covering two individuals that doesn't pay a death benefit until the second of the two people die. Most policies cover married couples.

Table rating: Refers to the extra premium charged to life insurance applicants who don't qualified for favorable basic health classes because of health issues. The applicants are typically charged an additional 25 percent for every step they climb on the table rating ladder. For instance, an obese person with other health issues might earn a table 2 rating and be charged 50 percent more than the standard rate.

Underwriting: The process by which a life insurance company identifies and classifies the risk represented by a proposed insured person. If the proposed applicant's risk is acceptable, the underwriting process also determines the appropriate premium rate to be charged.

Waiting period: A period of time outlined in the policy that must pass before insurance coverage begins.

Waiver of premium: A rider in an insurance policy that waives premium payments if a policyholder becomes seriously ill or disabled, typically for a specified period of time such as six months. An upfront charge for this provision is usually levied, and the waiver may only be available to healthy policyholders below a certain age.

Whole Life Insurance: A type of permanent life insurance that can provide lifetime protection with a level premium, guaranteed death benefit, and guaranteed cash value. Premiums must be paid for as long as the policy is in force. Most whole life insurance policies are eligible to receive dividends, if declared and paid. Dividends can be used to reduce or eliminate out-of-pocket premium payments.

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