Terms Definitions
401 K Plan
A qualified retirement plan in which the
employee can set aside a portion of their income
with pre-tax dollars
Absolute Assignment v. Collateral
Absolute: A permanent and irrevocable transfer
of rights and/or benefits by the policyowner.
Collateral: A temporary and/or revocable transfer
of benefits by the policyowner.
Accelerated Death Benefit
Policy provision that allows full or partial
payment of the policy's death benefit before the
insured's death if he/she is terminally ill.
Accidental Death Benefit
An extra cost rider that requires the insurance
company to pay an additional benefit in the event
that the insured dies within 90 days of an
accident as a direct result of the accident.
Accumulate at Interest
The Dividend Option where the policyowner
leaves the dividends with the insurer to invest
and earn interest.
Since the insurer created all the documents of
the contract, any ambiguities in the contract will
be settled in favor of the insured. Since the
insurer wrote the contract they are stuck with it.
Adverse Selection
The tendency for less favorable risks to seek or
continue insurance to a greater extent than more
favorable risks.
Agency Agreement or Agency Contract
A legal document containing the terms of the
agreement between the agent and the insurance
company. It clearly defines what an agent can
and cannot do, and how he/she will be
Agent Authorities
Expressed: Power or authority specifically
granted in writing to an agent by the insurance
company in their Agency Agreement. Apparent:
Power or authority that the public reasonably
assumes an agent has based upon his/her
actions. Implied: Power or authority that is not
expressly granted by the company but that an
agent can assume or that are implied he/she has
in order to transact insurance business.
Anyone who sells or aids in the selling of
insurance. Legally represents the company.
Agent's Report
A written report from the agent submitted to the
insurer along with the application disclosing what
the agent knows, observed, or learned about the
proposed insured's risks.
Unequal exchange of value. One party may
obtain a far greater value than the other under
the contract.
Annual Renewable Term
A Term Life Insurance contract which gives the
policyowner the option to renew the policy each
year without showing proof of insurability.
Premiums increase at each renewal.
The person that buys an annuity; may or may not
be an annuity's policyowner.
A contract/policy that guarantees to pay income
for a specified period of time or for the life of the
annuitant. Designed to prevent people from
outliving their savings.
Authorization of an agent/producer by an insurer
to represent the company.
Blackout Period
The period of time between the youngest child
turning 16 and the widow(er) reaching retirement
age during which no Social Security Survivor
Benefits are paid to the surviving spouse
Buy-Sell Agreement
Business use of Life Insurance where partners in
a business buy life insurance on each other.
They agree that when one of them dies the
survivors have the right to purchase the
deceased partner's share of the business. The
death benefit from the insurance is used to
finance the purchase.
Cash Nonforfeiture Option
Policyowner receives a lump-sum payment of
the current cash value of the policy upon
surrender of the policy. The policy cannot be
Cash Settlement Option
Upon maturity of an insurance policy the
beneficiary receives a lump-sum payment of the
entire policy proceeds due.
Cash Value
That part of an insurance policy that is the equity
amount legally available to the policyowner. The
cash value accumulates throughout the duration
of the policy. Also known as living benefit or
policy savings.
Public official in charge of the state's department
of insurance. Charged with regulating the
insurance industry in his/her state by enforcing
the insurance laws.
Certain conditions must be met in order for policy
to pay-out.
Conditional Receipt
An interim insuring agreement under which the
insurance company agrees to start coverage on
the later of either the date of application or the
date of the medical exam IF the proposed
insured is found to be insurable on that date.
A necessary element of a contract; something of
value exchanged for the transfer of risk.
Insured's consideration is payment of premiums
and truthful statements on the application.
Insurer's consideration is promises contained in
the contract.
Contingent Beneficiary
An alternate beneficiary designated to receive
the policy proceeds in the event that the primary
beneficiary dies before the insured.
Contributory Plan v. Noncontributory Plan
Contributory: Group insurance plan under which
the employees contribute to the payment of
premiums. Noncontributory: A group insurance
plan in which the employer pays all the
premiums for the policy.
Convertible Term
Term insurance that specifically permits
"conversion" of the policy into permanent
protection without proof of insurability.
Decreasing Term
Term life insurance in which the face amount of
the policy decreases over time in scheduled
steps. Most often used to cover a debt obligation
Distributions paid out by insurance companies.
Stock insurers pay dividends (portion of profit) to
stockholders and they are taxable. Mutual
insurers pay dividends (return of unneeded
premiums) to policyowners and they are not
taxable. Dividends are never guaranteed.
Equity Indexed Annuity
The annuity that has a guaranteed minimum
interest rate and allows the annuitant to invest
money in an index (i.e.: S&P 500). The
investments grow as the index grows.
Legally preventing someone from asserting or reasserting
a known right that they have previously
Extended Term Insurance
Nonforfeiture option where cash value is used to
make a single premium payment on a Term
Insurance Policy of the same face amount as the
original policy. Original policy can be reinstated.
Not available on rated policies.
Face Amount
Amount payable in the event of death of the
insured. Also called face value, death benefit,
policy proceeds, coverage, stated amount,
indemnity amount or proceeds to the beneficiary.
Facultative Reinsurance v. Treaty
Facultative: Transferring risk from one insurance
company to another on a policy-by-policy basis.
Treaty: Transferring risk from one insurance
company to another under a blanket agreement
Fair Credit Reporting Act
A federal law that protects consumers in regard
to their credit history. Establishes guidelines for
how companies can access consumers' credit
reports and what types of disclosures and
notifications are required
Financial Needs Approach
In determining how much life insurance is
needed the needs of the surviving family are the
focus. Using needs analysis worksheets, an
amount is determined to meet the needs of the
surviving family regardless of the earnings of the
Fixed Amount Annuity
A Life Annuity that guarantees a fixed dollar
payment at regular intervals during the lifetime of
the annuitant.
Fixed Amount Settlement Option
Upon maturity of an insurance policy the
beneficiary receives periodic payments of a set
dollar amount from the policy proceeds.
Fixed Period Settlement Option
Upon maturity of an insurance policy, the
beneficiary receives income from the policy
proceeds for a stated period of time.
Free Look Provision
A policy provision required by state law that
establishes a set number of days (usually 10) for
the policyowner to review a newly issued policy.
The policyowner may return the policy to the
insurer during this time for any reason and
receive a 100% refund. Also known as refund
provision, unconditional refund provision, return
provision, exchange provision, or right to
General Account v. Separate Account
General Account: Contains the regulated, or
guaranteed, funds of an insurance company.
Separate Account: Contains the investments of
an insurance company. These investments have
no guaranteed rate of return and are regulated
by the SEC and NASD.
Grace Period
A prescribed period of time during which the
policy stays in force without the payment of
premiums. Mandated by state law and is usually
30 or 31 days.
Graded Premium Policy
Premiums for the policy increase regularly for 5
to 20 years and then level off. Death benefit
remains level.
Group Insurance
An insurance policy that covers multiple people
(who have a common interest). A Master Policy
is issued to the policyowner and individual
insureds receive Certificates of Insurance.
Guaranteed Insurability Rider
Optional rider that enables the policyowner to
purchase additional amounts of coverage at predetermined
times without proof of insurability.
Guaranty Association
A state mandated association of all insurance
companies designed to protect consumers from
impaired or insolvent companies.
Anything that increases the likelihood that a loss
will occur (Faulty wiring).
Human Life Value Approach
In determining how much life insurance is
needed the worker's annual earnings are
multiplied by the number of years remaining until
he/she retires. From the resulting figure taxes
and expenses are subtracted.
Immediate Annuity v. Deferred Annuity
Immediate: A Life Annuity contract where the
first pay-out is made within 12 months after it is
purchased. Can only be purchased with a single
premium/lump-sum payment. Deferred: A Life
Annuity contract where the first pay-out is made
12 months after it is purchased. Can be
purchased with either a single premium or with
continuous premium payments
Incontestable Clause
A state mandated provision that limits the
amount of time that an insurer can rescind a
policy or contest a claim due to
misrepresentation or concealment
To make financially whole again; restore to the
condition enjoyed before a loss was suffered; to
replace what was lost. Insurance is not
designed for parties to profit from a loss
Individual Retirement Account (IRA)
A qualified retirement plan for any individual with
earned income.
Insurable Interest
A financial interest in the life of another person.
In a position to loose something of value if the
insured should die.
The insurance company; underwrites the policy
and assumes the risk.
Insuring Clause
The heart of an insurance policy. It contains the
company's promise to the policyowner and
describes the coverage provided and the policy
Interest Settlement Option
Upon maturity of an insurance policy the
beneficiary receives periodic payments of the
interest earned from the company's investment
of the policy proceed.
Joint and Survivor Annuity
An annuity that makes payments to two or more
annuitants throughout their lifetimes. Payments
normally reduce at the death of each annuitant
and stop altogether upon the death of the last
Keogh Plan (HR10)
A qualified retirement plan for self-employed
people and their eligible employees.
Contributions are tax deductible and interest
earned is deferred until withdrawn
Lapsed Policy
A policy that is no longer in force due to unpaid
premiums. Also known as forfeit, surrender,
cancel or terminate.
Law of Agency
The actions of an agent/producer within the
scope of the authority granted to him/her by the
insurer become the actions of the company
Law of Large Numbers
States that larger numbers of similar risks
grouped together become more accurately
Level Term Insurance
Term insurance where the face value of policy
remains the same from the date the policy is
issued until the date the policy expires.
Documentation issued by a state's department of
insurance to an individual verifying that he/she is
qualified to engage in the insurance business.
Life Annuity With Period Certain
A Life Annuity that guarantees to provide income
payments for a minimum period of time or life.
Payments will continue to a beneficiary should
the annuitant die during the specified period.
Life Annuity/Straight Life Annuity
Upon maturity of an Annuity Contract the
annuitant elects to receive fixed periodic
payments for the rest of his/her life
Life Income Settlement Option
Upon maturity of an insurance policy, the policy
proceeds are used to purchase an immediate
Life Annuity payable in periodic payments to the
beneficiary for the rest of his/her life.
Medical Information Bureau
An organization that stores information from
insurance companies and makes it available to
other companies during the underwriting
process. Its purpose is to help prevent fraud and
concealment by insurance applicants
Modified Endowment Contract (MEC)
Any cash value policy that builds cash value
faster than a Seven-Pay Whole Life Contract and
therefore loses the tax advantages of life
Modified Life Policy
Whole Life Insurance with reduced premiums
during the initial years and higher premiums
during later years. Can be structured as Term
insurance during the initial years and changing to
Whole Life in the later years.
Nonforfeiture Options
Three options available by law to policyowners
that enable them to recover a policy's cash-value
upon surrender of that policy. (1) Cash (2)
Reduced Paid-Up Insurance (3) Extended Term
Non-qualified Retirement Plan
A retirement plan that does not qualify for special
tax treatment by the IRS.
Participating Company
Also known as a Mutual Company. Returns
unused premium in the form of a policy dividend
to the policy owners.
Payor Rider
Optional rider that costs extra and will pay the
premiums of a Juvenile Policy if the owner dies
or becomes disabled
The cause of a loss (Fire)
Policy Loan Provision
Describes the conditions by which a policyowner
can borrow from the policy's cash value.
Policy Owner
The person in an insurance contract that has all
the rights contained in the policy; designated on
the application and may or may not be the
Policy Payment Methods
Continuous Premium: Insurance or an annuity that is paid
for continuously throughout the duration of the policy.
Requires the smallest payments amounts and grows cash
value the slowest. Limited Pay: Insurance or an annuity
that is paid for over a specified period of time after which
no further premium payments are required during the
duration of the policy. Known as Life Paid Up or x-Pay Life
policies. Single Premium: Insurance or an annuity that is
paid for with a single lump-sum payment. No further
premium payments are required during the duration of the
policy. Requires the largest payment amount of any type
of policy. Grows cash value the fastest.
Proof of Insurability
A statement about or evidence of a person's
physical and/or mental health, personal
character, occupation, living habits, etc. Used by
the insurance company in assessing whether to
accept the person's risk.
Qualified Retirement Plan
A retirement plan that meets certain federal
requirements and therefore qualifies for special
tax treatment. Plans must be (1) for the
exclusive benefit of employees, (2) in writing, (3)
nondiscriminatory, (4) either defined benefits or
defined contributions, and (5) permanent.
Anything of value given by an agent to a client as
an inducement to buy insurance.
Reduced Paid-up Insurance
Nonforfeiture option where cash value is used to
make a single premium payment to purchase as
much of the same type of insurance as possible.
Face amount of the new policy would be less
than the original policy but no further premium
payments would be necessary. Policy can be
Reinstatement Clause
Contained in the policy this clause described
how a policy can be restored to its original
condition. It states the conditions, period of time
and necessary steps to reinstate a policy.
The sharing of risk between insurance
companies. One insurance company sells part
of its risk to another insurance company.
Renewable Term
Term insurance where at the end of the specified
term the policyowner has the right to continue
the policy for another term without proof of
insurability. Premiums will be determined by the
new attained age.
The exchange of one policy for another.
Replacement regulations must be followed
Statements made by an applicant or an insured
that are true to the best of his or her knowledge
and belief.
Revocable Beneficiary v. Irrevocable
Revocable: A beneficiary named by the policy
owner that can be changed by the policyowner at
his/her discretion. Irrevocable: A beneficiary
named by the policy owner that can not be
changed by the policyowner at his/her discretion.
Changing this beneficiary requires the
permission of the beneficiary.
Optional coverages that can be added to policies
that provide additional benefits or protections.
Vary from policy to policy and company to
company. Also known as addendums, additions,
amendments, or additional policy benefits.
Risk Classifications
Standard Risk: A normal or average risk; no
special conditions are required in the policy.
Substandard Risk: A high risk; requires special
conditions to be included in the policy or issued a
rated policy. Preferred Risk: Less risky than the
normal or average risk. Usually issued policies
on a discounted basis.
Roth IRA
A non-tax deductible individual retirement
account which grows tax free after 5 years.
Settlement Options
The five ways that the proceeds of a policy can
be paid upon maturity. (1) Cash (2) Interest Only
(3) Fixed Period (4) Fixed Amount (5) Life
Speculative Risk
The possibility of experiencing either a loss or a
gain. Gambling is an example of speculative
Spendthrift Clause
State legislation that protects the rights of
policyowners and beneficiaries from creditors.
Death benefits cannot be attached by creditors
of the policyowner
Stock Insurer
An insurance company publicly owned and
controlled by its stockholders who elect a board
of directors to manage it.
Tax Sheltered Annuity (403B)
qualified retirement program for employees of
non-profit organizations. Contributions are made
through a salary reduction program.
Third Party Ownership
When a person(s) other than the insured
purchases the insurance policy.
Knowingly making misleading statements or
making fraudulent comparisons in order to
induce a client to drop a policy with an existing
insurer and start a new one with a different
The process by which an insurer evaluates,
classifies and ultimately either accepts or rejects
Uniform Simultaneous Death Act
It directs that in life insurance if the insured and
the primary beneficiary die at the same time the
policy benefits are payable as if the insured
outlived the beneficiary.
One-sided promise. Only one party makes a
legally enforceable promise. The insurance
company promises to pay the policy proceeds at
some future date or event.
Universal Life Insurance (UL)
An "interest sensitive" flexible premium life
insurance policy. A combination of ART and
cash value. Has two death benefit options (A &
B) and develops cash value.
Variable Annuity
The product is invested in a separate account
and has no guaranteed rate of growth. The
annuity promises to pay a fixed number of
annuity units to the annuitant for the rest of
his/her life. The value of the annuity units varies
depending on the performance of the
investments of the separate account.
Variable Life Insurance (VL)
Whole Life Insurance with fixed premiums. Cash
value is invested in "separate accounts". A
minimum death benefit is guaranteed but could
increase if the investments do well.
Variable Universal Life Insurance (VUL)
A Life Insurance policy that combines the
flexibility of Universal Life with the investment of
the cash values in separate accounts from
Variable Life.
Waiver of Premium Rider
Optional rider that requires an insurer to assume
payment of premiums should the insured
become totally disabled for six months for the
duration of the disability.
Statements made that are guaranteed to be
absolutely true. Statements made by the insurer
must be warranties.
Whole Life Insurance
Type of insurance where level coverage lasts
until death or age 100 and then the policy
matures and pays out either the face amount or
the cash value. Also known as straight life,
ordinary life, fixed, rigid or permanent
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