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. Underwriting is a vital function in the life insurance process.
Accelerated Benefits Rider:
A living benefit or provision in a life insurance policy that allows a specified percentage of the death benefit to be paid prior to the insured’s death, if they are diagnosed with a terminal illness and given a life expectancy of 12 months or less.
The process of issuing rates and designing life insurance products according to sound statistics and guidelines; it involves not only using mortality tables, and other medical references, but looks at the company’s reserve liabilities, and accesses financial, moral and medical risks. In designing permanent life insurance products, actuaries must look at nonforfeiture values, surrender, and loan values.
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 rates, and forecasted cost.
Advanced Underwriting Department:
A section of the insurer’s underwriting division that assists agents with specific products, areas, and cases. They often work with agents in estate planning, large cases, and business cases for both annuity and life insurance sales.
This is the tendency of people with greater health risks to apply for and keep life and health insurance coverage.
Many life insurance companies use a person’s nearest birthday as their age for insurance purposes; however, most of these insurers do allow backdating.
Ages below and above which an insurance company will not accept applications or renew policies.
The person applying for the insurance policy; often they are not the insured or policyowner. They provide the personal information for the application.
The written form or electronic form designed and provided by the insurer that is completed by an individual applying for insurance coverage, or an agent, broker, or representative of the life insurance company. It requests information about the insured and policyowner. Usually health questions and medical exams will be a part of the application process. By law the application is part of the life insurance contract and should be attached to the policy.
This is a person or entity that gains certain rights to an insurance policy by absolute or collateral assignment.
The age an insured has reached on a specific date. This is usually the age used in term life insurance conversions.
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 (APL):
A feature attached to a permanent life insurance policy which states that the insurer will automatically pay an overdue premium for the policyowner by making a loan against the policy’s available cash value. Note that many insurers limit the number of times that policies can APL without the policyowner’s verbal or written permission.
This is the practice by which life insurance companies make the effective date of a life insurance policy earlier than the date that application was made for the plan. Most insurers will allow up to six months of backdating.
The person, persons (beneficiaries), or entity designated to receive all or a portion of the death proceeds of the insurance policy. Most of the highly rated insurance companies allow for more than one primary beneficiary, and 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.’
This is a person who submits a claim to an insurer for a benefit due.
The Commissioners Standard Ordinary Mortality (CSO) Table was constructed by the Society of Actuaries (SOA) to provide a minimum standard for the valuation of standard ordinary life insurance. They are also used to calculate the minimum nonforfeiture values of ordinary or whole life insurance policies.
The time during which an insurer has the right to cancel, rescind, or contest an insurance contract if the application was made fraudulently or contains material misrepresentation. It is a specific period of time, usually two 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 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.
This typically is used to describe the face amount of a policy. However, the actual coverage amount can be less than the face amount when policy loans and premiums are due.
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.
A certified copy of the death certificate, the document that attests to the death of a person, is needed in order to make a claim on a life insurance policy.
This is a request for payment of death benefit proceeds filed with the insurer. Life insurance companies typically require and provide their own claim forms.
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 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.
A benefit or provision added to an insurance policy which limits or enlarges the total benefits. Many endorsements or riders come at an extra cost.
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.
This is the amount of insurance shown on the policy information page. It is usually the initial death benefit applied for and issued.
This involves an agreement between life insurance companies where individual risks are shared by insurers through reinsurance; where one insurer offers to others a portion of the policy risk and they have the option to accept; i.e. they retain the ‘faculty’ to accept or reject each risk offered. Many policies are not declined and many insureds receive better ratings because of this process.
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.
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.
Underwriters evaluate hazardous occupations, life styles and activities.
This is the rate class or health risk assigned to the insured during the underwriting process.
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.
This term is used to describe the active status of an insurance policy. The policy is ‘in force’ when sufficient premiums have been received by the insurer.
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 a risk where the loss is important, calculable, and accidental or natural.
This is the person whose life is covered under the life insurance contract.
This is the date that the policy is issued; it is often the effective date.
A lapse or lapsed policy is an insurance policy that has been terminated after the grace period because of nonpayment of premiums. Additionally, variable life and universal life insurance policies can lapse due to lack of cash value caused by underfunding premiums and losses in the accumulation accounts.
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.
A portion of insurance rates or premiums are often loaded to cover the insurer’s expenses, profit, and cost for extra risk.
Medical exams vary according to the different insurance companies. They are conducted by licensed paramedical professionals and at times by medical doctors. The medical exam can include health questions, measuring height and weight, EKG or ECG test, taking your pulse, and even taking blood and/or urine samples. Additionally, many of the following are often involved in each underwriting case: A1C blood test (diabetics); Albumin (protein in the blood); ALT, AST and SGOT (liver function tests); Cholesterol Ratio; Bun to Creatinine ratio (kidney function); Fructosamine and Glucose test (Blood sugar and diabetics); Hepatitis testing; HIV/AIDS testing; HDL and LDL testing; and triglycerides test (heart and liver function).
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.
Misstatement of age or sex clause:
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.
This involves conditions or activities that increase the standard loss or risk associated with insurance coverage.
A statistical table that shows the number of persons living or dying at specified ages; it often displays the number, rate, and percentage of deaths for various causes.
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.
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.
Notice of Cancellation:
Before the lapse of a policy, most insurers will send the policyowner a notice of cancellation to their last known address.
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.
Preferred is an underwriting rating class better than standard non-smoker. Many insurers offer more than one preferred class. This rating is issued on preferred risk where physical condition, occupation, and activities of the insured indicate a longer lifespan than that of the average or standard non-smoker.
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, or annually.
Premium payments can usually be made based on various periods of times or modes, such as monthly, quarterly, semi-annually, or annually.
This is a person who is to be covered by a life insurance policy that has been applied for, but not issued.
This is the price charged for each unit (per $ 1,000; etc.) of insurance coverage.
This is the rate or health class assigned to the insured during the underwriting process. They include such rating as Standard smoker and Standard nonsmoker.
A policy is considered ‘rated’ when issued at a higher-than-standard premium rate.
This is a clause in the life insurance policy that allows the owner of a lapsed policy to right to put the policy back in force under limited conditions. There is a time limit to apply for reinstatement, often it is up to several years.
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 the life insurance company assuming a portion of the risk from another insurer’s policy.
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.
This is the amount of the policy face amount or risk which the ceding insurer keeps on its books during the process of reinsurance.
Risk is the possibility of loss.
It is a coordinated method or program established by insurers for identifying, measuring, choosing, and managing risk.
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.
This is a person who is considered an impaired insurance risk because of physical condition, family history of disease, occupation, or other relative information.
A provision or endorsement in a life insurance policy stating that if the insured commits suicide within a specified period of time, typically two or three years from the issue date, the insurer only reimburse the premiums that were paid.
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. As pertaining to life insurance, underwriting is the function of evaluating a person according to set guidelines and determining their insurability and appropriate health or rate class. One of the most important sources of information about those applicants comes from the Medical Information Bureau.
These are guidelines or standards set by a life insurance company for its underwriting department to follow when determining the insureds risk classification and available amount of coverage. Typically, insurers give their agents or brokers underwriting manuals explaining possible classification for various risks, and requirements for various actions.
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.
Other terms are also available from the American Council of Life Insurers at www.acli.com. Many of the definitions were learned through the Chartered Life Underwriter (CLU) curriculum of the American College for insurance professionals.