Below is a Life Insurance terms glossary. Feel free to use it to help you understand life insurance and how it works. By becoming more familiar with some of these terms you’ll be better able to make an informed decision when deciding to purchase life insurance.
A specialist in the mathematics of insurance who calculates rates, reserves, dividends and other statistics. (Americanism: In most other countries the individual is known as “mathematician.”)
Assets permitted by state law to be included in an insurance company’s annual statement. These assets are an important factor when regulators measure insurance company solvency. They include mortgages, stocks, bonds and real estate.
An individual who sells and services insurance policies in either of two classifications:
- Independent agent represents at least two insurance companies and (at least in theory) services clients by searching the market for the most advantageous price for the most coverage. The agent’s commission is a percentage of each premium paid and includes a fee for servicing the
- Direct or career agent represents only one company and sells only its policies. This agent is paid on a commission basis in much the same manner as the independent agent.
The tendency of individuals who believe they have a greater than average likelihood of loss to seek insurance protection to a greater extent than do those who believe they have an average or a less than average likelihood of loss.
Assets refer to “all the available properties of every kind or possession of an insurance company that might be used to pay its debts.” There are three classifications of assets: invested assets, all other assets, and total admitted assets. Invested assets refer to things such as bonds, stocks, cash and income-producing real estate. All other assets refer to nonincome producing possessions such as the building the company occupies, office furniture, and debts owed, usually in the form of deferred and unpaid premiums. Total admitted assets refer to everything a company owns. All other plus invested assets equals total admitted assets. By law, some states don’t permit insurance companies to claim certain goods and possessions, such as deferred and unpaid premiums, in the all other assets category, declaring them “nonadmissable.”
An insured’s age at a particular time. For example, many term life insurance policies allow an insured to convert to permanent insurance without a physical examination at the insured’s then attained age. Upon conversion, the premium usually rises to reflect the insured’s attained age and diminished life expectancy.
Authorized Control Level Risked Based Capital
An insurance company’s theoretical capital amount and surplus that it should maintain.
An accounting term referring to a listing of a company’s assets, liabilities and surplus as of a specific date.
The person or party named by the owner of a life insurance policy to receive the policy benefit.
An insurance salesperson that searches the marketplace in the interest of clients, not insurance companies.
Independent insurance salesperson who represents particular insurers but also might function as a broker by searching the entire insurance market to place an applicant’s coverage to maximize protection and minimize cost. This person may be licensed as an agent and a broker.
Equity of shareholders of a stock insurance company. The company’s capital and surplus are measured by the difference between its assets minus its liabilities. This value protects the interests of the company’s policyowners in the event it develops financial problems; the policyowners’ benefits are thus protected by the insurance company’s capital. Shareholders’ interest is second to that of policyowners.
Some life insurance policies, usually permanent types like whole life, universal life or variable universal life insurance, can accumulate money in a cash value account. In addition to paying for insurance coverage, a portion of your premium goes toward a cash value account that grows tax-deferred over time.
A formal request for payment related to an event or situation that is covered under an in-force insurance policy.
Fee paid to an agent or insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer and the marketing methods.
The party designated to receive proceeds of a life insurance policy following the insured’s death if the primary beneficiary predeceased the insured.
Convertible Term Insurance Policy
A term life insurance policy that gives the policy owner the right to convert the policy to a permanent plan of insurance.
The scope of protection provided under an insurance policy. In life insurance, living and death benefits are listed.
Term life insurance coverage that can be converted into permanent insurance regardless of an insured’s physical condition and without a medical examination. The individual cannot be denied coverage or charged an additional premium for any health problems.
The limit of insurance or the amount of benefit that will be paid in the event of the death of a covered person.
Evidence of Insurability
Proof that a person is an insurable risk.
The ratio of underwriting expenses (including commissions) to net premiums written. This ratio measures the company’s operational efficiency in underwriting its book of business.
The amount of the death benefit payable under a life insurance policy.
Free Look Provision
An individual life insurance and annuity provision that gives the policy owner a stated time, usually 10 days after the policy is delivered, in which to cancel the policy and receive a full refund on the initial premium payment.
The length of time (usually 31 days) after a premium is due and unpaid during which the policy, including all riders, remains in force. If a premium is paid during the grace period, the premium is considered to have been paid on time.
A life insurance provision that limits the time within which the insurer has the right to void the contract on the ground of material misrepresentation in the application for the policy.
A life insurance policy beneficiary who has a vested interest in the policy proceeds even during the insured’s lifetime because the policy owner has the right to change the beneficiary designation only after obtaining the beneficiary’s consent.
The interest an insurance policy owner has in the risk that is insured. The owner of a life insurance policy has an insurable interest in the insured when the policy owner is likely to benefit if the insured continues to live and is likely to suffer some loss or detriment if the insured dies.
Life and Health Guarantee Association
An organization that operates under the supervision of a state insurance commissioner to protect policy owners, insured’s, beneficiaries, and specified others against losses that result from the financial impairment or insolvency of a life insurer that operates in the state.
A misrepresentation that would effect the insurance company’s evaluation of a proposed insured.
Charts that show the death rates an insurer may reasonably anticipate among a particular group of insured lives at certain ages
National Association of Insurance Commissioners (NAIC)
Association of state insurance commissioners whose purpose is to promote uniformity of insurance regulation, monitor insurance solvency and develop model laws for passage by state legislatures..
Permanent Life Insurance
Life insurance that provides coverage throughout the insured’s lifetime and may also provide a cash value.
The written contract of insurance, or in which the rights and duties of the insurer and the insured are set out.
As a general rule, the date on which coverage under an insurance policy became effective.
An amendment to an insurance policy that becomes part of the insurance contract and either expands or limits the benefits payable under the contract.
A proposed insured who presents a significantly less than average likelihood of loss and who is charged a lower than standard premium rate.
The price of insurance protection for a specified risk for a specified period of time.
In effect, insurance that an insurance company buys for its own protection. The risk of loss is spread so a disproportionately large loss under a single policy doesn’t fall on one company. Reinsurance enables an insurance company to expand its capacity; stabilize its underwriting results; finance its expanding volume; secure catastrophe protection against shock losses; withdraw from a line of business or a geographical area within a specified time period.
An insurance company that assumes all or part of an Insurance or Reinsurance policy written by a primary insurance company.
The automatic re-establishment of in-force status effected by the payment of another premium.
A specified maximum 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.
Risk Based Capital (RBC)
The amount of required capital that the insurance company must maintain based on the inherent risks in the insurer’s operations
Measurement of the amount of capital (assets minus liabilities) an insurance company has as a basis of support for the degree of risk associated with it s company operations and investments. This ratio identifies the companies that are inadequately capitalized by dividing the company’s by the minimum amount of capital that the regulatory authorities feel is necessary to support the insurance operations.
Risk class, in insurance underwriting, is a grouping of insureds with a similar level of risk. Typical underwriting classifications are preferred, standard and substandard, smoking and nonsmoking, male and female.
Section 1035 Exchange
This refers to a part of the Internal Revenue Code that allows owners to replace a life insurance or annuity policy without creating a taxable event.
Part of the Internal Revenue Code that defines the conditions a life policy must satisfy to qualify as a life insurance contract, which has tax advantages.
Having sufficient assets–capital, surplus, reserves–and being able to satisfy financial requirements–investments, annual reports, examinations–to be eligible to transact insurance business and meet liabilities.
Fee charged to a policyholder when a life insurance policy or annuity is surrendered for its cash value. This fee reflects expenses the insurance company incurs by placing the policy on its books, and subsequent administrative expenses.
Term Life Insurance
Life insurance that provides protection for a specified period of time. Common policy periods are 10, 15, 20 and 30years. Term policies usually do not build up any of the nonforfeiture values associated with permanent life policies.
The individual trained in evaluating risks and determining rates and coverages for them.
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 rejection of those risks that do not qualify.
Underwriting Expenses Incurred
Expenses, including net commissions, salaries and advertising costs, which are attributable to the production of net premiums written.
Underwriting Expense Ratio
This represents the percentage of a company’s net premiums written that went toward underwriting expenses, such as commissions to agents and brokers, state and municipal taxes, salaries, employee benefits and other operating costs. The ratio is computed by dividing underwriting expenses by net premiums written. The ratio is computed by dividing underwriting expenses by net premiums written. A company with an underwriting expense ratio of 31% is spending more than 31 cents of every dollar of net premiums written to pay underwriting costs.
A measure of the risk that arises from under-estimating the liabilities from business already written or inadequately pricing current or prospective business.
Details the underwriting practices of an insurance company and provides specific guidance as to how underwriters should analyze all of the various types of applicants they might encounter. Also called an underwriting manual, underwriting guidelines, or manual of underwriting policy.
Universal Life Insurance
A life insurance policy that allows flexibility of premium payments which may affect the benefit to be paid and/or the length of time coverage is in force.
Variable Life Insurance
A form of life insurance whose face value fluctuates depending upon the value of the dollar, securities or other equity products supporting the policy at the time payment is due.
Variable Universal Life Insurance
A combination of the features of variable life insurance and universal life insurance under the same contract. Benefits are variable based on the value of underlying equity investments, and premiums and benefits are adjustable at the option of the policyholder.