Life Insurance Terminology

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Accidental Death Benefit: A rider to a Life Insurance policy or a separate policy that pays a death benefit to the beneficiary – but only if death occurs as the result of an accident. There can be certain exclusions, as well as time and age limits.

Actuary: A specialist in the mathematics of insurance who calculates rates, reserves, dividends, and other statistics.

Agent: A person licensed to sell insurance by the insurance departments of the states in which he or she operates.

Age-last-birthday: A person’s age as of their last birthday. Used by a few companies to determine premiums for Life Insurance.

Age-nearest-birthday: A person’s age as of their closest birthday. Used by most insurance companies to determine premiums for Life Insurance.

Annuitant:  The party to an annuity policy upon whose life any lifetime payment is based.

Annuity:  A contract issued by a life insurance company designed to accumulate and/or distribute cash during the lifetime of the annuitant, but does not provide death benefits over the value of the underlying fund balance.

Automatic Premium Loan:  A provision selected by the policy owner of Whole Life Insurance that will automatically create a loan against cash values to pay the premium if it has not otherwise been paid prior to the end of the grace period.


Backdate to Save Age: Changing the issue date of a Life Insurance policy in order to save the earlier age – thereby qualifying the applicant for a lower premium. Maximum backdating is set by state insurance commissioners, and is normally six months.

Beneficiary: The person or party named by the owner of a Life Insurance policy to receive the proceeds from said policy.


Captive Agent: A representative of either a single insurer or multiple insurers who is obligated to submit business only to that company – or at the very minimum, to give that company first refusal rights on any sale.

Cash Value: The savings element of a Permanent Life Insurance policy that represents the policyholder’s interest during his or her lifetime.

Claim: A formal request for payment related to an event or situation that is covered under an in-force insurance policy.

Contingent Beneficiary: The person or party designated by the policyholder to receive the proceeds of a Life Insurance policy if the primary beneficiary dies before the policyholder.

Convertible Term Life Insurance: A Term Life Insurance policy that gives the policyholder the right to exchange the policy for a Permanent plan without providing evidence of insurability. Said individual cannot be denied coverage or charged an extra premium for conditions that manifested themselves since the original policy was issued. Certain time and age restrictions will apply.

Coverage: The scope of protection provided by an insurance policy. In Life Insurance, living and death benefits are listed.

Credit Life Insurance: Insurance issued to a lender to cover the life of a borrower for an outstanding loan.


Declined Risk: An applicant for Life Insurance who presents a risk that is considered too great for an insurer to cover.

Death Benefit: The limit of insurance or the amount of benefit that will be paid when the insured dies.

Deferred Annuity:  An annuity whose primary purpose if to accumulate earnings as opposed to paying out an income, although they can ultimately be used for income distribution.

Dividend: The return of a part of the policy’s premium for a policy issued on a participating basis by either a mutual or stock insurance company.


Endow: A Life Insurance policy endows when its cash value equals the death benefit.

Evidence of Insurability: Proof provided by a Life Insurance applicant that he or she is an insurable risk at a particular premium class. This can include a medical exam; medical records; family health history; use of drugs, alcohol and tobacco/nicotine; hazardous occupations and avocations; driving record; financial credibility; justification and criminal activity.


Face Amount: The amount of death benefit payable under a Life Insurance policy.

Field Underwriter: Another term to describe an agent.

First-in-First-Out Taxation:  Tax treatment of life insurance policies (other than Modified Endowment Contracts) when cash value is distributed during the life of the insured.  All basis (cumulative premiums paid) will be recovered before any tax is charged.

Flat Extra:  An extra charge applied to a life insurance policy as a result of adverse risk factors.  A Temporary Flat Extra is an amount charged for a specified number of years and then automatically removed (occasionally used for history of cancer).  A Permanent Flat Extra is typically charged due to an occupational or avocational risk.

Free-Look Provision: An individual Life Insurance policy provision that gives the policyholder a stated time after the policy is received – no less than ten days – during which he or she can cancel the policy and receive a full refund of the initial premium payment.


Grace Period: The length of time (usually 31 days, but often 60 days with Universal Life policies) after a premium is due and unpaid during which the policy remains in force. If a premium is paid during the grace period, the premium is considered to have been paid on time.

Group Life Insurance: Life Insurance where the master policy is issued to a third party such as an employer, and the insured parties are issued certificates of insurance.


Immediate Annuity:  An annuity whose primary purpose is to pay out an income to the beneficiary, either over a stated period of time or for the lifetime of the annuitant.

Incontestability Provision: A Life Insurance provision that limits the time within which the insurance company has the right to void the contract on grounds of material misrepresentation in the application for the policy.

 Indexed Universal Life Insurance:  A Universal Life Insurance policy whose cash value is based on external investment indexes, such as the S & P 500, but with a no loss guarantee if the index selected produces negative results.

Irrevocable Beneficiary: A Life Insurance beneficiary who has a vested interest in the policy proceeds during the insured’s lifetime because the policyholder only has the right to change the beneficiary designation after obtaining said beneficiary’s consent.

Insurability:  A person’s ability to demonstrate that he/she qualifies for life insurance at a premium available from the insurance company.

Insurable Interest: The interest an insurance policyholder has in the risk that is insured. The owner of a Life Insurance policy has an insurable interest in the life of the insured when the policyholder is likely to benefit if the insured continues to live, and is likely to suffer some loss or detriment in the event of the insured’s death.

Internal Rate of Return (IRR): Can refer to either the death benefit or cash value of a Life Insurance policy. It indicates the after-tax interest that would be required to equal the policy’s death benefit or cash value, assuming the premium was applied to an outside investment.


Last-in-First-Out Taxation:  Tax treatment of deferred annuities and Modified Endowment Contracts when cash is distributed to the policy owner.  All payments will be subject to tax as received, until total amount received equals cumulative earnings, at which time the remaining payments will be considered a return of basis.

Licensed Insurer: Indicates that a company is incorporated (or chartered) in another state, but is an admitted insurer for this state to write specific lines of coverage for which it qualifies.

Life and Health Guarantee Association: An organization that operates under the supervision of a state insurance commissioner to protect policyholders, insureds, beneficiaries, and others against losses that result from the financial impairment or insolvency of a life insurer operating in that state.

Limited Pay Whole Life:  A Whole Life Insurance Policy whose premium is paid over a shorter period than for the life of the insured.


Material Misrepresentation: A misrepresentation that would effect the insurance company’s evaluation of an applicant.

Modified Endowment Contract:  MEC is a life insurance policy that does not qualify for the income tax advantageous normally available for cash disbursements during the lifetime of the insured due to excessive premiums being paid within the first 7 policy years.   Taxation rules for Deferred Annuities apply.

Mortality Tables: Charts that show the death rates an insurance company may reasonably anticipate among a particular group of insured lives at certain ages.

Mutual Insurance Companies: Companies with no capital stock that are owned by policyholders.


Paid-Up Additions: An option that allows policyholders to use policy dividends to buy additional insurance on the same plan as the basic policy at a face amount based on the insured’s attained age.

Permanent Life Insurance: Life Insurance that provides coverage throughout the insured’s lifetime and may also include a savings element.

Policy Anniversary: The date on which coverage under a particular insurance policy becomes effective.

Policy Fee: A portion of the premium for Life Insurance that remains constant regardless of the policy’s face amount, reflecting the fixed administrative costs incurred by the insurer. Has the effect of creating a volume discount.

Policy Rider: An amendment to an insurance policy that becomes part of the insurance contract, and either expands or limits the benefits payable under that contract.

Preferred Risk: A proposed insured who presents a a significantly better than average life expectancy and who is charged a lower premium than the standard premium rate.

Preferred-Plus Risk: A proposed insured who presents a better risk than Preferred and is charged a lower premium than that of a Preferred Risk.

Premium: The dollar amount paid for an insurance policy.


Reinsurance: A form of insurance that insurance companies buy for their own protection – a sharing of insurance. An insurer (the ceding company) reduces its possible maximum loss on any one individual by selling a portion of its liability to another insurance company (the reinsurer).

Retention Limit: A specified amount of insurance that a life insurer is willing to carry at its own risk on any one life without transferring some of the risk to a reinsurer.

Rider:  An addition to a basic life insurance policy used to provide an additional  benefit such as Waiver of Premium or Accidental Death Benefit.

Risk Class: A grouping of insureds with a similar level of risk. Typical underwriting classes include Non-Tobacco User Preferred-Plus, Non-Tobacco User Preferred, Non-Tobacco User Standard-Plus, Non-Tobacco User Standard, Tobacco User Preferred, and Tobacco User Standard.


Secondary Guarantees: Guarantees contained in some Universal Life Policies that can create a lifetime death benefit guarantee even if the policy has no cash value, as long as a minimum premium is paid.

Second-To-Die Life Insurance: A Life Insurance policy with two insureds that pays the death benefit only at the death of the second party. Frequently applied to husbands and wives for estate tax liquidity on a Universal Life chassis.

Section 1035 Exchange: This refers to a section of the Internal Revenue Code that allows an owner of a Life Insurance or annuity policy to exchange one contract for another without creating a taxable event. A Life Insurance policy may be exchanged for another Life Insurance policy or for an annuity, but an annuity can only be exchanged for another annuity.

Suicide Provision: A clause in Life Insurance policies that allows an insurer to deny a claim, returning the paid premium, if cause of death within a specified period of time (usually two years) from the issue date of the policy is determined to be the result of suicide.

Surrender Charge: Fee charged against the cash value of an annuity or Life Insurance contract when the policy is surrendered within a specified period of time following issue of the policy. It reflects the expenses that the insurance company incurs by placing the policy in force.

Survivorship Life: Another name for Second-To-Die Life Insurance.


Table Rating:  An extra charge applied to a life insurance policy as a result of adverse medical history of the insured.

Term Life Insurance: Life Insurance that provides protection for a specified period of time. The policies do not build up any non-forfeiture values associated with Permanent Life Insurance.

Twisting:  When an agent causes a policy holder to replace an existing policy with another without appropriately pointing out any disadvantageous of such an action.  Twisting is disallowed by all state insurance commissioners.


Underwriter: An individual trained in evaluating risks and determining rates and coverages for them. Can also be an insurance company.

Underwriting: The process of selecting risks for insurance and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes the rejection of risks that do not qualify.

Universal Life Insurance: An adjustable Life Insurance policy with a flexible premium that can be configured by the policyholder to become Permanent Life Insurance.


Variable Life Insurance: A form of Life Insurance whose cash value – and possibly face value – fluctuates depending on the value of the securities supporting the policy.  The policyholder selects the securities from several made available by the insurer.  Policy may be in the form of Whole Life or Universal Life Insurance.


Waiver of Premium: A provision added at a cost to some insurance policies that enables the insurer to waive the premium following a waiting period after the policyholder becomes disabled – as defined by the contract – with all provisions of the policy continuing during the waiving of said premium.

Whole Life Insurance: Guaranteed Life Insurance with a fixed, guaranteed premium paid for life whose cash value endows at age 100, or at age 120 for more recently issued policies.