- Risk
- Uncertainty regarding a financial loss. Insurance is a mechanism for transferring the risk of loss from an individual to an insurer.
- Pure risk
- A risk that involves only the chance of loss or no loss, with no opportunity for gain. Only pure risk is insurable.
- Speculative risk
- A risk that involves the chance of either loss or gain, such as gambling or investing. It is not insurable.
- Peril
- The immediate, specific cause of a loss, such as death, illness, fire, or accident.
- Hazard
- A condition that increases the likelihood or severity of a loss. Types include physical, moral, and morale hazards.
- Moral hazard
- A hazard arising from a person's character or tendency toward dishonesty, such as faking a loss to collect on insurance.
- Morale hazard
- A hazard arising from indifference or carelessness toward a loss because insurance exists, such as careless behavior.
- Law of large numbers
- The principle that the larger the number of similar exposure units, the more accurately an insurer can predict future losses.
- Adverse selection
- The tendency of higher-risk individuals to seek or continue insurance more than lower-risk individuals. Insurers control it through underwriting.
- Insurable interest
- A financial interest in the continued life or health of the insured. In life insurance it must exist only at the time of application, not at the time of claim.
- Indemnity
- The principle of restoring an insured to the same financial position held before a loss, without profit. Life insurance is valued, not strictly indemnity.
- Reinsurance
- Insurance purchased by an insurer (the ceding company) from another insurer (the reinsurer) to transfer part of its risk.
- Domestic insurer
- An insurer organized under the laws of the state in which it transacts business (its home state).
- Foreign insurer
- An insurer organized under the laws of another U.S. state, but doing business in this state.
- Alien insurer
- An insurer organized under the laws of a country other than the United States.
- Certificate of authority
- The license issued by a state insurance department that allows an admitted insurer to legally transact business in that state.
- Stock insurer
- An insurance company owned by stockholders, who receive taxable dividends. It typically issues nonparticipating policies.
- Mutual insurer
- An insurance company owned by its policyowners, who may receive nontaxable policy dividends. It issues participating policies.
- Producer
- The state-licensed individual who solicits, negotiates, or sells insurance on behalf of an insurer; commonly called an agent.
- Law of agency
- The body of law governing the relationship in which an agent represents the insurer (the principal) and binds it within authority granted.
- Express authority
- The authority specifically granted to an agent in writing within the agency contract.
- Implied authority
- Authority not expressly granted but that the public reasonably believes the agent has, based on the agent's position.
- Apparent authority
- Authority an agent appears to have based on the insurer's actions, leading a third party to reasonably believe it exists.
- Fiduciary responsibility
- An agent's legal duty to act in a position of trust when handling premiums and funds belonging to the insurer or applicant.
- Stranger-originated life insurance
- An illegal arrangement in which a third party with no insurable interest initiates a policy on another's life to later acquire the death benefit. Also called STOLI.
- Utmost good faith
- The principle that both the insurer and the insured must deal honestly and disclose all material facts when forming the contract.
- Warranty
- A statement guaranteed to be true in all respects. In modern insurance, applicant statements are treated as representations, not warranties.
- Representation
- A statement believed to be true to the best of the applicant's knowledge. A false one is a misrepresentation.
- Material misrepresentation
- A false statement that, if known, would have altered the insurer's underwriting decision. It can void the contract.
- Concealment
- The intentional failure to disclose a known material fact, which can void the insurance contract.
- Fraud
- An intentional deception or misrepresentation made to gain an unfair or unlawful advantage, such as collecting on a false claim.
- Twisting
- The illegal practice of inducing a policyowner to replace a policy through misrepresentation or incomplete comparisons.
- Churning
- The illegal practice of replacing a policy using values from an existing policy with the same insurer, to the client's detriment.
- Rebating
- Offering anything of value not stated in the policy to induce a purchase. It is illegal in most states.
- Defamation
- Making a false statement, oral or written, intended to injure the reputation of another insurer or producer.
- Human life value approach
- A method of determining life insurance need based on the insured's future earnings lost to the family due to premature death.
- Needs approach
- A method of determining life insurance need by analyzing the family's specific cash needs and obligations at the insured's death.
- Premature death
- Death occurring before a person has met financial obligations such as raising children or paying off a mortgage. It is the primary risk life insurance addresses.
- Final expense need
- The funds needed at death for funeral costs, medical bills, and estate settlement, often funded by life insurance.
- Mortality table
- A statistical chart showing the death rate per 1,000 people at each age, used to predict claims and set premiums.
- Morbidity
- The incidence of sickness in a group. Contrast with mortality (the incidence of death): life insurance premiums are based on mortality, not morbidity.
- Net amount at risk
- The difference between a policy's death benefit (face amount) and its accumulated cash value at a given point in time.
- Mortality cost
- The portion of a premium based on the probability of death; the actual cost of insurance protection.
- Interest assumption
- The rate of return the insurer expects to earn on invested reserves, used to reduce the premium charged.
- Loading
- The portion of the premium added to cover the insurer's operating expenses, commissions, and contingencies.
- Net premium
- The premium calculated from mortality and interest only, before expenses (loading) are added.
- Gross premium
- The total premium charged to the policyowner: the net premium plus loading for expenses.
- Insured
- The person whose life is covered by the life insurance policy; the death of this person triggers the death benefit.
- Policyowner
- The person who owns the policy, pays premiums, and holds all contractual rights such as naming the beneficiary.
- Beneficiary
- The person or entity designated to receive the policy's death benefit when the insured dies.
- Primary beneficiary
- The person first in line to receive the death proceeds upon the insured's death.
- Contingent beneficiary
- The party who receives the death benefit if the primary beneficiary dies before the insured. Also called secondary.
- Revocable beneficiary
- A beneficiary the policyowner may change at any time without the beneficiary's consent.
- Irrevocable beneficiary
- A beneficiary who cannot be changed without their written consent, having a vested interest in the policy.
- Per capita
- A death-benefit distribution method that divides proceeds equally among the living named beneficiaries.
- Per stirpes
- A death-benefit distribution method in which a deceased beneficiary's share passes to that beneficiary's descendants (by bloodline).
- Estate
- Naming the policyowner's estate as beneficiary, which subjects the proceeds to probate and possible estate taxes.
- Common disaster clause
- A provision presuming the insured survived the beneficiary when both die in the same event, protecting the contingent beneficiary.
- Spendthrift clause
- A provision protecting policy proceeds left with the insurer from the claims of the beneficiary's creditors.
- Cash value
- The savings element that builds inside a permanent life policy, available through loans, withdrawals, or surrender.
- Living benefits
- The values a permanent policy provides while the insured is alive, such as cash value, policy loans, and dividends.
- Term life insurance
- Temporary coverage that pays a death benefit only if the insured dies within a specified period and builds no cash value.
- Level term
- Term insurance in which the death benefit and premium remain constant throughout the policy period.
- Decreasing term
- Term insurance with a death benefit that declines over time while the premium stays level; often used for mortgage protection.
- Increasing term
- Term insurance with a death benefit that increases over time, often used as a rider or to keep pace with inflation.
- Annual renewable term
- Term insurance that may be renewed each year without evidence of insurability, with a premium that rises with age.
- Renewable provision
- A term-policy feature allowing the policyowner to renew coverage without proving insurability, at a higher age-based premium.
- Convertible provision
- A term-policy feature allowing conversion to permanent insurance without evidence of insurability.
- Whole life insurance
- Permanent insurance providing lifetime coverage with a level premium, guaranteed cash value, and a fixed face amount.
- Continuous premium whole life
- Standard whole life (straight life) in which level premiums are paid until the insured's death or age 100/121.
- Limited pay whole life
- Whole life in which premiums are paid over a set, shorter period (such as 20 years), with coverage continuing for life.
- Single premium whole life
- Whole life purchased with one large lump-sum premium that immediately creates substantial cash value.
- Endowment
- A policy that pays the face amount if the insured dies or, if the insured survives, when the policy matures (endows).
- Modified whole life
- Whole life with lower premiums in the early years that increase to a higher level after a set period.
- Graded premium whole life
- Whole life with premiums that start low and increase annually for a period before leveling off.
- Joint life policy
- A single policy covering two or more lives that pays the death benefit on the first insured to die.
- Survivorship life
- A policy covering two lives that pays the death benefit only when the second (last) insured dies; common in estate planning.
- Universal life insurance
- Flexible permanent insurance allowing adjustable premiums and death benefits, with cash value earning a current interest rate.
- Option A death benefit
- A universal life death benefit equal to the level face amount (level death benefit).
- Option B death benefit
- A universal life death benefit equal to the face amount plus the accumulated cash value (increasing death benefit).
- Corridor
- The required gap between cash value and death benefit in universal life that keeps the contract qualifying as life insurance for tax purposes.
- Variable life insurance
- Permanent insurance with cash value invested in separate-account subaccounts, where the owner bears the investment risk.
- Variable universal life
- A policy combining the premium and death-benefit flexibility of universal life with the investment subaccounts of variable life.
- Separate account
- The investment account holding variable life and variable annuity funds, regulated as a security and not guaranteed by the insurer.
- Indexed universal life
- Universal life whose cash value growth is linked to a market index such as the S&P 500, subject to caps and floors.
- Industrial life insurance
- Small face-amount whole life sold door-to-door with premiums collected weekly or monthly; also called home service or debit insurance.
- Juvenile life insurance
- A policy covering the life of a minor, typically owned and paid for by a parent or guardian.
- Entire contract provision
- A provision stating the policy and attached application constitute the whole agreement; nothing can be incorporated later by reference.
- Insuring clause
- The provision stating the insurer's basic promise to pay the death benefit upon the insured's death.
- Consideration clause
- The provision identifying the policyowner's consideration (the application plus the initial premium) given in exchange for coverage.
- Free look provision
- A provision giving the policyowner a set period (commonly 10 days) to return a new policy for a full premium refund.
- Owner's rights provision
- The provision giving the policyowner all contractual rights, such as naming the beneficiary, taking loans, and assigning the policy.
- Incontestability clause
- A provision barring the insurer from contesting the policy for misstatements after it has been in force two years during the insured's lifetime.
- Grace period
- The period after a premium due date during which coverage continues; commonly 30 or 31 days for life insurance.
- Reinstatement provision
- A provision allowing a lapsed policy to be restored, typically within three years, upon proof of insurability and payment of back premiums with interest.
- Misstatement of age or sex
- A provision adjusting the death benefit to what the premium paid would have purchased at the correct age or sex, rather than voiding the policy.
- Suicide clause
- A provision limiting payment to a return of premiums if the insured dies by suicide within a stated period, usually two years.
- Policy loan provision
- A provision allowing the policyowner to borrow against a permanent policy's cash value; unpaid loans reduce the death benefit.
- Automatic premium loan
- A provision that automatically borrows from the cash value to pay an overdue premium and prevent the policy from lapsing.
- Assignment provision
- A provision allowing the policyowner to transfer ownership rights, either absolutely (collateral) or in full, to another party.
- Absolute assignment
- A complete and permanent transfer of all policy ownership rights to another person or entity.
- Collateral assignment
- A partial, temporary transfer of policy rights, commonly to a lender as security for a loan.
- Nonforfeiture options
- Guaranteed options for using a lapsing permanent policy's cash value: cash surrender, reduced paid-up, or extended term.
- Reduced paid-up insurance
- A nonforfeiture option using the cash value as a single premium to buy a smaller, fully paid-up whole life policy.
- Extended term insurance
- A nonforfeiture option using the cash value to buy term insurance for the full face amount for as long as it will last. It is the default option.
- Cash surrender option
- A nonforfeiture option that pays the policy's net cash value to the owner in cash, terminating the coverage.
- Dividend options
- Choices for using policy dividends from a participating policy, including cash, premium reduction, accumulation at interest, paid-up additions, and one-year term.
- Paid-up additions
- A dividend option that buys small amounts of additional fully paid-up whole life insurance, increasing both death benefit and cash value.
- Accumulation at interest
- A dividend option in which the insurer holds dividends and pays interest on them; the interest is taxable.
- Settlement options
- The methods by which death proceeds may be paid: lump sum, interest only, fixed period, fixed amount, or life income.
- Interest only option
- A settlement option in which the insurer holds the proceeds and pays only the interest to the beneficiary periodically.
- Fixed period option
- A settlement option that pays equal installments of principal and interest over a chosen number of years.
- Fixed amount option
- A settlement option that pays a set dollar amount periodically until the proceeds and interest are exhausted.
- Life income option
- A settlement option that guarantees payments for the beneficiary's lifetime, with the amount based on life expectancy.
- Waiver of premium rider
- A rider that pays the policy premiums for the policyowner if the insured becomes totally disabled, after a waiting period.
- Guaranteed insurability rider
- A rider allowing the purchase of additional coverage at specified dates without evidence of insurability.
- Accidental death benefit rider
- A rider that pays an additional benefit, often double the face amount, if death results from an accident. Also called double indemnity.
- Accelerated death benefit rider
- A rider allowing an insured with a terminal or chronic illness to receive part of the death benefit while still living.
- Family term rider
- A rider providing term coverage on the insured's spouse and children under one base policy.
- Return of premium rider
- A rider that pays an increasing benefit equal to the premiums paid if the insured dies during the term.
- Cost of living rider
- A rider that periodically increases the death benefit in line with inflation, usually without proof of insurability.
- Payor benefit rider
- A juvenile-policy rider that waives premiums if the adult premium payer dies or becomes disabled before the child reaches a set age.
- Application
- The form completed by the applicant that provides the insurer with the information used to underwrite and issue the policy.
- Field underwriting
- The producer's initial screening of an applicant by completing the application accurately and gathering risk information.
- Underwriting
- The insurer's process of evaluating, classifying, and selecting risks to decide whether to issue coverage and at what rate.
- Standard risk
- An applicant whose expected mortality is average, qualifying for normal premium rates.
- Preferred risk
- An applicant whose health and lifestyle are better than average, qualifying for lower-than-standard premiums.
- Substandard risk
- An applicant with greater-than-average risk who is offered coverage at a higher premium or with restrictions; also called rated.
- Conditional receipt
- A receipt given when the initial premium is paid with the application, providing coverage as of the application or exam date if the applicant proves insurable.
- Binding receipt
- A receipt that provides immediate temporary coverage from the date of issue, regardless of insurability, for a limited time.
- Medical Information Bureau
- A nonprofit member organization that maintains coded medical and risk information to help insurers detect fraud and omissions.
- Attending physician statement
- A report from the applicant's doctor requested by an insurer to clarify the applicant's medical history.
- Fair Credit Reporting Act
- The federal law regulating consumer reports and requiring insurers to notify applicants when information from such reports affects underwriting.
- Inspection report
- An investigative consumer report on an applicant's lifestyle, finances, and reputation gathered from outside sources.
- USA PATRIOT Act
- Federal anti-money-laundering law requiring insurers to verify customer identity and report suspicious activity on cash-value products.
- Policy delivery
- The act of providing the issued policy to the owner; constructive delivery occurs when the insurer mails or relinquishes control of it.
- Statement of good health
- A statement the insured signs at delivery confirming no change in health since the application, required when no premium was paid at application.
- Backdating
- Dating a policy earlier than the application date (within limits, usually six months) to secure a lower age-based premium.
- HIV consent form
- A form an applicant must sign before HIV testing, confirming informed consent and confidentiality of the results.
- Replacement
- Acting to terminate or alter an existing policy in connection with the sale of a new one; subject to disclosure rules to protect the consumer.
- Buyer's guide
- A consumer publication explaining life insurance basics, often required to be delivered with or before the policy.
- Policy summary
- A document delivered with the policy stating its specific premiums, benefits, values, and surrender charges.
- Annuity
- A contract that systematically liquidates a sum of money into a stream of income, protecting against outliving one's assets.
- Annuitant
- The person whose life expectancy determines the annuity's payout and on whose life payments are based.
- Accumulation period
- The pay-in phase of an annuity, during which premiums are deposited and the value grows tax-deferred. Also called the pay-in phase.
- Annuity period
- The pay-out phase, during which the accumulated value is converted into a stream of income payments. Also called annuitization.
- Immediate annuity
- An annuity funded with a single premium that begins income payments within one payment period, usually one year.
- Deferred annuity
- An annuity in which income payments begin more than one year after purchase, allowing tax-deferred accumulation.
- Fixed annuity
- An annuity that guarantees a minimum interest rate and a fixed, level income payment, with funds held in the insurer's general account.
- Variable annuity
- An annuity whose value and payments fluctuate with separate-account investments; the owner bears the investment risk and it is a security.
- Indexed annuity
- A fixed annuity whose interest is tied to a market index, offering a guaranteed minimum plus index-linked gains subject to caps.
- Single premium annuity
- An annuity funded with one lump-sum payment rather than periodic contributions.
- Flexible premium annuity
- A deferred annuity that allows the owner to vary the amount and timing of contributions.
- Life only annuity
- An annuitization option paying income for the annuitant's life with no refund or guarantee to beneficiaries; it provides the highest payment. Also called straight life.
- Life with period certain
- An annuity option paying for life but guaranteeing payments to a beneficiary for at least a stated number of years.
- Life with refund
- An annuity option paying for life and, if the annuitant dies early, refunding any unpaid principal to a beneficiary. Also called refund annuity.
- Joint and survivor annuity
- An annuity covering two lives that continues payments, sometimes reduced, until the second annuitant dies.
- Surrender charge
- A declining penalty an insurer deducts when an annuity or cash-value policy is surrendered early during the surrender period.
- Nonforfeiture (annuity)
- The guarantee that an annuity owner who surrenders the contract will receive the value of payments made, less a surrender charge.
- Death benefit tax treatment
- Life insurance death proceeds paid in a lump sum are generally received income-tax-free by the beneficiary.
- Tax-deferred growth
- The feature by which cash value and annuity earnings accumulate without current income tax until withdrawn.
- Cost basis
- The total of premiums paid into a policy or annuity; amounts withdrawn up to basis are generally received tax-free.
- Modified endowment contract
- A life policy funded too quickly that fails the 7-pay test; its living distributions are taxed LIFO and may incur a 10% penalty before age 59 1/2.
- Seven-pay test
- An IRS test comparing cumulative premiums in the first seven years to the limit for a paid-up policy; failing it creates a MEC.
- Section 1035 exchange
- A tax-free exchange allowing a policyowner to transfer the value of one life or annuity contract into another qualifying contract without recognizing gain.
- LIFO taxation
- Last-in, first-out tax treatment applied to nonqualified annuity and MEC distributions, taxing earnings before the return of basis.
- Annuity exclusion ratio
- The formula that determines the tax-free portion of each annuity income payment by dividing the cost basis by the expected return.
- Transfer for value rule
- A rule causing death proceeds to become partly taxable when a policy is transferred for valuable consideration, with stated exceptions.
- Estate tax inclusion
- Death proceeds are included in the insured's taxable estate if the insured held incidents of ownership at death.
- Premium deductibility
- The general rule that personal life insurance premiums are not income-tax deductible.
- Group life insurance
- Coverage issued under one master contract to a group, usually an employer, with members receiving certificates of coverage.
- Group term life
- Employer-provided term coverage in which the first $50,000 of benefit is income-tax-free to the employee under IRS rules.
- Conversion privilege
- A group-life feature allowing a departing employee to convert coverage to an individual permanent policy without proof of insurability.
- Noncontributory plan
- A group plan fully paid by the employer, generally requiring 100% eligible-employee participation.
- Contributory plan
- A group plan in which employees pay part of the premium, generally requiring at least 75% participation.
- Key person insurance
- Life insurance a business buys on an essential employee, with the business as owner, payer, and beneficiary, to offset loss from that person's death.
- Buy-sell agreement
- A funded agreement obligating surviving owners or the business to buy a deceased owner's share, ensuring business continuation.
- Cross-purchase plan
- A buy-sell arrangement in which each owner buys a policy on every other owner to fund the purchase of a deceased owner's interest.
- Entity purchase plan
- A buy-sell arrangement in which the business itself owns policies on the owners and buys back a deceased owner's interest.
- Qualified plan
- A retirement plan meeting IRS requirements for favorable tax treatment, such as pre-tax contributions and tax-deferred growth.
- Nonqualified plan
- A plan that does not meet IRS qualification rules, funded with after-tax dollars and offering more flexibility but fewer tax breaks.
- Traditional IRA
- An individual retirement account allowing tax-deductible contributions and tax-deferred growth, with distributions taxed as ordinary income.
- Roth IRA
- An individual retirement account funded with after-tax dollars, offering tax-free qualified distributions in retirement.
- 401(k) plan
- An employer-sponsored qualified plan letting employees defer pre-tax salary into investments, often with an employer match.
