This glossary or dictionary of life insurance terms has been provided as a basic resource to help you recognize and better understand common words and phrases used in the life insurance industry. Because certain terms are more complex than others, a subsection or more detailed definition of these underlined words is available by clicking on them.
Accelerated Benefits Rider:
Also called Living Benefits or Accelerated Death Benefit; it is a life insurance rider or policy benefit that gives you access to a portion or percentage of the policy’s eligible death benefit during the insured’s lifetime if they are diagnosed with a terminal illness and given a life expectancy of 12 months or less. This benefit can vary with each insurance company and in different states according to their insurance laws.
Accelerated Death Benefit: See Accelerated Benefits Rider or click on Accelerated Death Benefit for more information.
Accidental Death and Dismemberment:
Benefit providing a payment if the insured’s death resulted from an accident; or if the insured suffers the loss of a limb (usually above the wrist or ankle), or if the insured permanently loses their eyesight. This benefit usually has age limit restrictions and may cite specific exclusions.
Benefit providing a payment if the insured’s death resulted from an accident. It is often called Double Indemnity or the double indemnity clause because many insurers pay two times or double the face amount of the life insurance policy if the death was caused by an accident and this rider had been purchased.
It is the time or period in a deferred annuity during which funds are accumulated at interest with the insurance company to reach the amount necessary to provide the benefits promised for a specific future date. This period or phase is followed by the Liquidation Period.
An actuary or team of actuaries examines, researches, and calculates life insurance premium rates, financial reserves, dividends, and other important statistics. These mathematicians who are vital in the design life insurance products look at mortality tables, interest rate, as well as current and forecasted cost.
Adjustable Life Insurance:
An adjustable life policy gives the policyowner the right to make changes in the policy’s face amount. The changes are usually allowed at specified intervals or ages. These benefits are not available in term policies or most whole life plans. Additionally, there are usually restrictions on both the minimum and maximum available face amounts. Most changes in this plan can be made without evidence of insurability; however, many insurers do require additional underwriting and or medical exams if the insured wants to increase the face amount.
An agent is the person or representative of the agency or company who sells and can service insurance policies.
An amendment is a change or modification to the policy. An amendment could be as simple as a question not originally answered on the application, which was answered in a follow up conversation; and because the application must be attached to life insurance policies, the answer to the missed question is attached to the policy as an amendment. An amendment could also be adding riders or changing beneficiaries or face amounts in an existing policy.
Annual Renewable Term (ART) or Yearly Renewable Term (YRT) is life insurance that provides protection for a period of one year and then permits the policyowner to renew the policy for successive periods of one year without having to prove insurability. As with most term plans the policy automatically renews at the increased rate and continues until a specified age of the insured as long as the premiums are being paid.
The person or insured whose life determines the duration of benefit payments in an annuity.
It is an agreement by the insurer to make periodic payments which begin at a specified or contingent date and continue for a fixed period or for the duration of the life or lives of the annuitant(s).
This is the person or entity that applies for the insurance coverage.
Application for insurance:
The application in its simplest state is a request or offer to buy life insurance from the company to whom you are submitting the statements of information. The application provides the insurer and their underwriter with the proposed insured’s age, sex, occupation, and other relevant health, financial, and personal information. According to law the application becomes part of the contract and is to be attached to the policy. To receive more information go to the section called Understanding Life Insurance or to the article: The Life Insurance Application.
Life insurance companies want to know the assets of the insured especially in cases involving requests for large death benefits. Financial assets include all property, real (such as real estate) and personal (such as money or mutual funds), own by the insured. Normally, in the application, the insurer will simply ask for the ‘current net worth’ of the insured.
Assignment or an assignment ‘provision’ is included in most policies. This provision allows or gives the owner of the policy the legal right to transfer or assign the policy or any interest in it to an assignee. The assignment must be in writing, often on the insurer’s assignment form, and it must be given to the insurer. The owner retains the rights of ownership that were not assigned.
Many term insurance policies have conversion provisions which allow the insured to convert to permanent insurance within a certain period of time without health questions or exams; the policyowner can usually convert from their original age, and pay additional premiums, or convert at their ‘attained age,’ the age in which they exercise the conversion option.
Attending Physician’s Statement:
The attending physician statement (APS) is a report or records by a physician, clinic, hospital, or medical facility that is or has treated the proposed insured. The APS is one of the most used sources of medical information. APS records ordered by an insurer are paid for by the insurance company.
Automatic Premium Loan Option:
APL is an option in a whole life or universal life policy where, if a renewal premium is not paid by the end of the grace period, the insurer automatically takes a loan from the policy’s cash value to pay the premium, usually based on the set premium mode (monthly, semi-annual, annual, etc.), so the policy does not lapse.
Backdating is the act of dating the policy a certain prior date, usually back up to a limited time such as six months, in order to save age or receive a younger age.
The person, persons (beneficiaries), or entity designated to receive all or a portion of the death proceeds of the insurance policy. Most credible insurance companies allow for more than one primary beneficiary; and most insurers also allow for second beneficiaries or contingent beneficiaries. Beneficiaries do not have to be specifically named; for example they can be listed as ‘children of the insured.’ For more information see the article entitled Beneficiaries.
A person or marketing intermediary between the insurer and policyowner; they represent the policyowner and not the insurance company.
The category of insurance used by corporations and other organizations, including Key-Employee, Buy-Sell, and Business Overhead plans.
A contract binding the owner or an owner of a business to sell at their death or disability, and a designated buyer(s) to buy at that time, a specified portion or percentage of that business for a specified or determinable price.
This is an agent or representative of an insurer or group of insurers who is obligated to submit business to that company. Many captive agents are allowed to sale through other insurers under certain circumstances, such as when the proposed insured receives a high rating, or when the insurer does not offer the type of policy requested.
Cash Value is a permanent life insurance policy can refer to the guaranteed cash value, the total cash value, or the net or Cash Surrender Value. It is the savings element that builds up in permanent life insurance plans and annuity contracts. Every permanent life insurance policy, endowment plan, and annuity contract comes with a minimum guaranteed interest rate which is the basis for cash value.
Cash Surrender Value:
This is the amount payable to a permanent life insurance policyowner upon surrender of their policy. It is equal to the total cash value minus any policy loans and accrued policy loan interest.
It is a receipt given to an applicant of life insurance in exchange for the first premium payment by which the insurer, through its agent or representative, specifies that ‘temporary coverage’ will be effective as of the date of the receipt, subject to certain conditions and exclusions. The conditions includes the fact that the insured was insurable at the time the application was taken and the receipt was signed; and the exclusions usually includes a ‘maximum amount of coverage’ such as $ 1,000,000, and can include a maximum period such as 90 days.
The Contestable Period or Contestability Period is a specific time from the Date of Issue of the policy, usually 2 years, during which the insurer may question the validity of the contract. Omitting a material fact, making a material misstatement, such as not disclosing a material health fact can cause the contract to be void. A mistake of age, or checking the wrong gender, or misspelling words, is not a material fact or cause for contesting a policy.
The contingent beneficiary or ‘secondary beneficiary’ is the person or entity designated to receive the death benefit in the event that the primary beneficiaries predecease or die at the same time (or within a certain number of days) as the insured.
The conversion provision or ‘conversion privilege’ is the contractual right in term life insurance policies that allows or gives the policyowner the privilege of converting the policy without proof of insurability from term insurance to a new policy, usually only a permanent life insurance plan offered by the insurer. The new policy will be based on the insured’s original or attained age.
Credit Life Insurance:
This is term life insurance issued by a lender or creditor to cover payment of a loan or other financial obligation. These plans are normally simplified or guaranteed issued and thus often limited in face amount and almost always standard or sub-standard in rating usually making them more expensive than other term life insurance.
Date of Issue:
This is the actual date that the life insurance policy was issued. This may differ from the ‘effective policy date,’ such as in the case of backdating, or from the date of the conditional receipt.
It is the dollar amount that will be paid in the event of the death of the insured.
These are factual statements that are a part of the insurance policy and that identify the parties to the life insurance policy, and other specific information about the insurance being provided; for example the face amount.
It is the rejection of an application by the insurer, typically due to the applicant’s health, occupation, or hazardous lifestyle.
It is term life insurance where the face amount decreases by a specific schedule and where the premium remains level.
It is an annuity contract that has benefit payouts which begin at a future date.
It is a physical or mental condition that makes an insured person incapable of working or performing daily required functions. Most insurers offer a waiver of premium rider which allows premiums to stop during an insured’s disability.
In life insurance it is the return of a portion of premiums received by mutual or stock issuers to certain participating permanent life insurance policies.
These are provisions that describe how the policyowner can use or receive dividends, such as to buy additional paid-up permanent insurance, to buy term insurance, or to receive in cash.
Double Indemnity: see Accidental Death Benefit.
It is a provision added to the insurance contract.
It is a form of life insurance that pays the face amount if the insured dies during a specific time period or it pays the face amount if the insured lives to the end of the specified contract period (maturity date); for example a 20 year endowment.
In financial terms, a business entity includes corporations (profit and non-profit), partnerships, limited liability companies, trusts, charitable organizations, and other business operations.
Errors and Omissions Insurance:
It includes profession liability insurance for insurance agents and brokers.
Evidence of Insurability:
Evidence of Insurability (EOI) or proof of good health, is required by life insurance companies. It includes statements of the insured’s health, as well as Attending Physician Statements and medical examinations.
These are conditions that are not covered by the insurance contract.
It is the dollar amount stated on the face or policy information page of a life insurance policy that is paid upon the death of the insured or maturity of the contract. This amount does not include benefits such as dividend additions, accumulated interest above the guarantee interest rate or accidental death benefits.
Flat Extra Premium:
It is an extra charge per $ 1,000 of life insurance due to a significant substandard rating regardless of the age of the insured.
The Free Look provision or ‘Right to Examine Policy’ provision is a clause in the life insurance policy that gives the policyowner a specified period of time, usually within 10 days after the delivery of the policy, to examine the agreement and if the policyowner is not satisfied they can by writing make a request for the full refund of all premiums paid. Many companies which send policies through the mail allow for a 30 day free-look period.
Nearly all life and health insurance companies have a Grace Period clause. This is an additional period of time, usually 31 days from the due date for payment of every premium after the initial premium. All insurance coverage remains in force during this period. If the premium is not paid by the end of the grace period, the policy will lapse.
Life insurance on a group of people, usually issued to an employer for the benefit of employees. Each employee or group member under coverage is issued a certificate as evidence of their insurance. Group life insurance usually has simplified underwriting or is guaranteed issued.
This type of life insurance is typically issued based only on the age of the insured without any health questions or exams. However, it is almost always issued at standard or substandard rates to members of a large company or organization. If you are looking at guaranteed issued decreasing term insurance be sure to understand at what age your coverage ends.
This is a policy provision which guarantees the policyowner the right to renew coverage at every policy anniversary date, usually up to a certain age, such as 90. The company cannot cancel the contract except for nonpayment of premiums; however, the insurer can raise rates up to the guaranteed maximum rates.
Incident of Ownership:
It is an element of ownership, degree of control, or the retention of any rights of ownership over a life insurance policy. This is usually examined when addressing estate taxation or conservation, as well as in certain business plans such as deferred compensation plans.
The incontestable clause, also called ‘contestable period,’ is a provision that specifies that, except for nonpayment of premiums, the insurer will not contest the policy after it has been in force for a given length of time; typically 2 years from the date of issue. However, if the applicant committed fraud or gross misrepresentation in the application process, the insurer can contest the policy according to the contract laws of the state in which the policy was purchased.
As relating to life insurance insurable interest is a reasonable expectation of pecuniary (financial) benefit from the continued life of another. It implies that the life insurance policy is being obtained in good faith and because there will be a financial loss due to the death of the insured.
This is the person whose life is covered under the life insurance contract.
This is the company with whom a contract of insurance is made. The insurer underwrites and assumes the risk of the policy.
Joint Life Insurance:
The Joint Life or ‘first-to-die’ plan is a life insurance policy covering two or more persons in which the death benefit or proceeds of the policy are payable on the death of the first one to die.
Key Employee Life Insurance:
Key Employee Insurance is life insurance purchased on an employee whose skills, client base, or other attributes make them a valuable asset to the business. A loss in a key employee may result in the loss of business income. Key employee plans can be purchased for the benefit of the company or the key employee.
A lapse or lapsed policy is an insurance policy that has been terminated after the grace period because of nonpayment of premiums.
Level Term Life Insurance:
This is a term life insurance policy that has level premiums for a specific duration, for example Five Year Level Term, Ten Year Level Term, 15, 20, etc. If the insured’s age is not beyond the maximum age of the policy, at the end of the specified period the policy will renew at an increased premium. See the article on Term Insurance from more information.
This is a contract between the issuer and policyowner that provides for payment of benefits at the insured’s death or at a specified date if the insured is still living.
Life Settlement Option:
The life insurance settlement option or life income option, sometimes included as a nonforfeiture option, is an option in which the proceeds are distributed over the lifetime of the recipient.
Medical Information Bureau:
According to their website at the Medical Information Bureau (MIB): “MIB is the life and health insurance industry’s most trusted resource for risk information and analytical services… Our services are the cornerstone of sound and equitable underwriting of life, health, disability income, critical illness, and long-term care insurance…” The MIB Group is a membership corporation owned by over 450 member insurance companies in the United States and Canada. It gathers and maintains medical information disclosed by applicants.
It is a false and material statement made by an applicant for insurance; it can become the basis for the insurer to make the contract voidable.
Misstatement of age or sex (gender):
This is a provision that specifies that if the insured’s age or sex has been misstated, the proceeds payable under the policy will be what the premiums paid would have purchased at the correct age and gender.
Modified Premium Life Insurance:
This is a whole life insurance policy in which the premiums are lowered or raised for a specific period of time.
Mutual Insurance Company:
It is a life insurance company that does not have shares of stock or stockholders, and which is owned by certain classes of policyholders. Mutual companies typically issue participating insurance with dividends and their policy owners elect its board of directors.
National Association of Insurance Commissioners:
The NAIC is an association of state insurance commissioners who seek uniformity of insurance regulation, monitor the solvency of insurance companies, and develop model laws for state legislatures.
No-lapse Guaranteed Benefit Rider:
This is an additional cost rider, sometimes called ‘lapse protection,’ offered with certain universal life insurance policies that guarantee that as long as premiums are paid according to the contract that the policy will never lapse even if the cash value of the policy falls to zero.
These are a set of ‘options upon lapse’ regarding how the policyowner can use the policy’s cash value, such as to ‘surrender for cash,’ buy ‘paid-up whole life insurance,’ or buy extended term insurance. If a policy with cash lapses, after a certain date, usually 60 days, unless the policyowner requests differently it’s available cash is usually automatically used to purchase extended term insurance.
This type of life insurance policy does not pay dividends to the policyowner.
Notice of Cancellation:
Before the lapse of a policy, most insurers will send the policyowner a notice of cancellation to their last known address.
Ordinary Life Insurance:
It is a policy, usually with level premiums, that remains in force for the insured’s lifetime; it is more commonly called whole life insurance.
The additional amounts of permanent life insurance purchased on a single-premium basis through the use of dividends.
This is a type of policy that pays dividends to the policyowner.
Permanent or cash value life insurance policies are designed to build up a savings fund within the policy with a portion of the premiums that are above those required for administrated cost and the cost of insurance.
The policy is a written contract by the insurance company (insurer), sometimes represented by a certificate, which in consideration of premiums, engages to indemnify against the loss of the insured. It includes all declarations, clauses, riders, endorsements, amendments, provisions, and papers (application) attached.
The policy date is the date from which the contracts premiums are calculated and become due. It is often the effective date (the date the policy is delivered and the first premium is paid). If no date was requested by the applicant and no temporary coverage was given, the date the policy was issued will be the Policy Date. Policy anniversaries are determined by this date.
A life insurance illustration is a portrayal and explanation of how the policy will work. It shows premiums, death benefits, and cash values both guaranteed and projected or scheduled for a number of years, generally until the insured’s age at the last year of the contract (term contracts), or age 100 (permanent contracts).
This is the person or entity that owns the life insurance policy. The policyowner generally has the legal and contractual right to make changes, renew, or cancel the policy according to the specification of the policy or state insurance laws.
Preferred is an underwriting rating class better than standard non-smoker. Many insurers offer more than one preferred class.
Premium is the price charged for a period of coverage of the insurance policy. It is based on the rate times the face amount of coverage, and is usually offered as monthly bank draft, quarterly, semi-annual, and annually.
This is the first beneficiary, or class of beneficiaries, who is entitled to receive the policy proceeds upon the insured’s death. For more information, see the article on Beneficiaries.
Protection Against Creditors:
This is a general provision in many life insurance contracts that states that payments made under the policy are, to the extent the law allows, exempt from the claims or levies of any creditors.
In life insurance, provisions are terms or clauses listed in a section(s) of the contract that provide and explain certain terms of the agreement; for example, ‘policy date,’ ‘assignment,’ or ‘payments to company.’
This is the price charged for each unit (per $ 1,000; etc.) of insurance coverage.
A policy is considered ‘rated’ when issued at a higher-than-standard premium rate.
This involves the restoration of a lapsed policy. If the policy has been lapsed for more than a certain period of time, such as 60 days, the insurance company will likely require a statement of health for purposes of evidence of insurability. If the insurer agrees to reinstate the policy it will require past-due premiums.
This is an arrangement in which the insurance company transfers some or all of the risk to another insurance company (reinsurer). Through reinsurance a sub-standard insured often receives a better rating.
This is term insurance that can be renewed at an increased premium at the end of the term for a set number of successive terms without evidence of insurability.
This is the replacing of an existing life insurance policy for another. Because of excessive replacing of life insurance policies in the 1980s and 1990s the state insurance departments of most states have adopted specific regulations that must be followed when a replacement is being considered.
The reserve or legal reserve is an amount that must be maintained by an insurance company to meet future claims and obligations.
A rider is an amendment or specific endorsement added to an insurance policy, often for an extra premium charge for that benefit, and which clarifies, expands, or restricts the policy’s scope of coverage. For more information go to the sections Term Insurance Riders, Whole Life Riders, and Universal Life Riders.
Second-to-die policy: see Survivorship Life Policy.
Simplified Issue Life Insurance:
This is a type of life insurance that is issued based on a few health questions and no medical exams.
This is a plan in which two or more parties, typically an employer and an insured employee, share the premium cost, death proceeds, and benefits of the policy as disclosed in a prearranged written agreement.
This is a person, which based on underwriting, is given an average likelihood of loss, and thus is not charged an extra rating. Typically insurers have standard and standard non-smoker ratings.
Stock Insurance Company:
This is an incorporated insurer with capital contributed by stockholders.
This is a person who is considered an impaired insurance risk because of physical condition, family history of disease, occupation, or other relative information.
The suicide clause, sometimes listed as ‘suicide of the insured’ or ‘suicide exclusion,’ is a provision provided by most life insurance companies that states that whether sane or insane, within a specific time period – typically 1 to 3 years – from the date of issue the policy will not pay upon death by suicide, except for the refund of premiums received.
Survivorship Life Policy:
Survivorship or Second-to-die life insurance policies cover the lives of two or more persons and the proceeds are not paid out until the death of the last person to die. These policies are less expensive than individual plans and are primarily used in Estate Planning.
This is the level renewal premium that the insurer suggests be paid for a universal life insurance policy. It is generally greater that the available minimum premium.
Term Life Insurance:
Term Life Insurance provides protection for a specified term or period of time. The policy is issued at a lower cost than permanent insurance because the policy is based on the pure protection cost without cash or nonforfeiture values. Term policy premiums will vary depending on their guaranteed level period.
Some insurers offer an unemployment rider (UR) in which for an additional cost the insurer will waive premiums for up to a certain period of time, such as one year, in the event that the primary insured becomes unemployed.
This is a person trained in evaluating and determining insurance rates.
The Underwriting Process involves a selection and classification of applicants from a large pooling source. One of the most important sources of information about those applicants comes from the Medical Information Bureau.
Universal Life Insurance:
Universal life insurance is a type of permanent life insurance that allows for flexible premiums and which shifts some of the investment risk to the policy-owner. The first universal life policy was issued in 1979 by E. F. Hutton.
Variable Life Insurance:
This is a type of permanent life insurance in which the policyowner chooses from various investments choices and thus bears the investment risk.
This is a universal life plan that combines the flexibility of premium with the investment choices of the variable life insurance plans. At least two risks are assumed by the policyowner; the investment risk, and the risk of the policy lapsing if it is continually minimum funded while required premiums increase with age and if the policy investments suffers long periods of losses.
Waiver of Premium:
The waiver of premium or disability waiver of premium (WP) is a rider or provision which for an additional cost guarantees that the insurer will waive the premiums if the insured suffers total disability and is disabled for at least a certain period of time such as ‘six months in a row.’ The rider provides a definition of ‘total disability’ and states requirements such as ‘proof of total disability,’ and exclusions such as no credit of premiums if the insured is age 65 or older.
Whole Life Insurance:
This is the most common form of permanent life insurance. Typical premiums remain level over the life of the insured, and cash values are guaranteed at a specific rate of interest with a tax-deferred status. It is also called ordinary life insurance. In addition to the guaranteed cash value nearly every highly rated insurer issues a dividend or additional return to the policyholder.
Yearly Renewable Term Insurance:
This is a term insurance policy that provides coverage for a one year level premium and then is renewable for a stated number of years. The premium increases at each renewal date. It is also called increasing premium term.
Other terms are also available from the American Council of Life Insurers at www.acli.com; or through sources such as A. M. Best’s Insurance Resources at www.ambest.com. Some of the above definitions were gained through sources such as Black’s Law Dictionary. Many of the definitions were learned through the Chartered Life Underwriter (CLU) curriculum of the American College for insurance professionals.