Following is a dictionary of words and phrases specific to the field of life insurance. These will be useful as a handy guide. Since the explanations are concise and the statements general, they are not, of course, to be regarded or used as technically complete statements or legal definitions.
Administrator – The person appointed by court to manage and settle the estate of a deceased person usually because the deceased person left no will.
Application – A form supplied by a life insurance company, usually filled in by the agent and medical examiner (if applicable) on the basis of information received from the applicant. The form is signed by the applicant and is part of the insurance contract if a policy is issued. This form gives information to the Home Office Underwriting Department so it may consider whether a life insurance policy will be issued and if so, in what classification and at what premium rate.
Automatic Premium Loan Option – An option which will automatically pay any premium which is in default at the end of the grace period and charge the amount so paid against the policy as a policy loan, provided such premium is not in excess of the policy’s cash surrender value on the due date of the premium (computed on the assumption that such premium had been paid).
Binding Receipt – The receipt for the first payment of the first premium which assures the applicant that, if he or she dies before receiving the policy, the company will pay the full claim if the policy is issued or would be issued as applied for upon receipt of the application.
Cash Refund Annuity – An annuity which provides that upon the death of the annuitant before payments totaling the purchase price have been made, the excess of the amount paid by the purchaser over the total annuity payments received will be paid in one sum to designated beneficiaries.
Cash Value – The amount available to the owner when a policy is surrendered to the company. During the early policy years, the cash value equals the policy reserve less a “surrender charge”; in the later policy years, the cash value usually equals or closely approximates the reserve value at time of surrender. A schedule of the cash value per $1,000 (or unit) at the end of various representative policy years is generally included in the contract.
Contract – The chief requirements for the formation of a valid contract are (1) parties having legal capacity to contract, (2) mutual assent of the parties to a promise, or set of promised, generally consisting of an offer made by one party and an acceptance thereof by the other, (3) a valuable consideration, (4) the absence of any statute or other rule making the contract void, and (5) the absence of fraud or misrepresentation by either party. A life insurance policy meeting these requirements qualifies as a contract.
Convertible Term – Some term contracts provide that they may be converted to permanent forms of insurance without medical examination if the conversions are made within a limited period as specified in the contracts. The conversion may be made as of the attained age of the insured at the time of conversion.
Defamation – A form of misrepresentation. Many state laws provide penalties for verbal or printed circulation of materials calculated to injure any life insurance company’s business or reputation, or for the abetting of such acts.
Deferred Annuity – An annuity contract which provides for the postponement of the commencement of an annuity until after a specified period or until the annuitant attains a specified age. Deferred annuities may be purchased either on the single premium or annual premium basis. Deferred annuities are also known as “retirement annuities”.
Dividend – A dividend on participating life insurance contracts is a refund of that part of the premium paid at the beginning of the year which still remains after the company has set aside the necessary reserve and made deductions for claims and expenses. The dividend may also include a share of the company’s investment, mortality, and operating profits.
Dividend Additions – Participating policies provide that policy dividends may be used as single premiums at the insured’s attained age to purchase paid-up insurance as additions to the amount of insurance specified on the face of the contract.
Emergency Fund – One of the basic uses for life insurance. A reserve death benefit fund provided by the insured to protect their families against sudden large, unbudgetable expenses such as accidents, operations, etc. The increasing loan values of life insurance policies also constitute, and often are referred to as, emergency funds for the insured while they are living.
Extended Term Insurance – The nonforfeiture option which provides that the cash surrender value of a policy may be used as a net single premium at the attained age of the insured to purchase term insurance for the face amount of the policy, less indebtedness, for as long a period as possible, but not longer than the term of the original policy. It is now the usual practice for companies to deduct any policy indebtedness from the cash surrender value and then to use the net equity to purchase term insurance for the full amount of the policy including dividend additions, less indebtedness, for the maximum period possible, but not exceeding the term of the original policy.
Face Amount – Since the amount of insurance protection provided under a given policy is usually stated on the face or first page of the contract, the term “face amount” is commonly used when referring to the principal sum involved in the contract. The actual amount payable by the company may be decreased by loans or increased by additional benefits or interest payable under specified conditions, or stated in a rider.
Fraternal Insurance – Insurance protection provided by fraternal benefit societies, organized without capital stock and not for profit, and maintaining a lodge system. Practically all fraternals operate on a level rate and legal reserve basis in accordance with special fraternal insurance regulation, and under supervision of the state insurance authorities. They are subject to periodical examinations. Rate payments often are collected by the financial secretaries of the local lodges. The distinguishing feature of fraternal insurance in contrast to old-line insurance is the “open contract’.
Grace Period – Most life insurance contracts provide that premiums may be paid at any time within a period varying from 28 to 31 days following the premium due date, the policy remaining in full force in the mean time. If death occurs during the grace period, the premium is deducted from the proceeds payable. As a general rule, no interest is charged on overdue premiums if paid during the grace period.
Immediate Annuity – An annuity contract which provides for the first payment of the annuity at the end of the first interval of payment after purchase. The interval may be monthly, quarterly, semiannual, or annual.
Insurable Interest – The interest arising when a beneficiary of a policy has a reasonable expectation of benefiting from the continuance of the insured’s life, or of suffering a loss at the insured’s death. Policies obtained by one person on the life of another without insurable interest are not enforceable since they are considered contrary to public policy.
Level Rate or Premium – A premium which remains the same from year to year throughout the premium-paying period of a policy, and yet makes possible, by means of an accumulating reserve, the payment of all death claims as they occur in a given group.
Liabilities – An insurance company’s liabilities consist of its immediate or contingent policy obligations, unpaid claims, funds left under settlement options, assigned surplus, the miscellaneous debts.
License – Certification, issued by a state department of insurance, that an individual is qualified to solicit insurance applications for the period covered. Usually issued for a period of one year, renewable on application without necessity of the individual’s periodic repetition of the original qualifying requirements. Each agent should study carefully the licensing laws and regulations of his/her own state.
Life Insurance – Insurance in which the risk insured against is the death of a particular person called the insured, upon whose death within a stated term, or whenever death occurs if the contract so provides, the insurance company agrees to pay a stated sum or income to the beneficiary.
Loan Value – A determinable amount which can be borrowed from the issuing company by the policy owner using the value of the policy as collateral. In the event the policy matures by death or as an endowment with the debt either partially or fully unpaid, then the amount borrowed plus any accrued interest is deducted from the face amount.
Misrepresentation – A false statement as to a past or present material fact, made in an application for insurance, and that induces an insurer to issue a policy it would not otherwise have issued. Also, an agent who misrepresents a policy’s terms, dividends, etc., may be guilty of a misdemeanor, and is subject to such penalty as may be prescribed by state law.
Mortality Table – The instrument by means of which are measured the probabilities of life and death. A mortality table, based on large groups of people covering a long period of time, shows death rates, compiled for all ages.
Nonforfeiture Options – This term refers to privileges allowed under terms of the contract after cash values have been created. Four privileges exist: (1) surrender for full cash value; (2) loans up to full amount of cash value; (3) Paid-up policy for amount of insurance which cash value, as a single premium, will buy at new rates; (4) term insurance for full face amount of original policy for as long a period as cash value will last to pay necessary premiums.
Nonmedical Insurance – Life insurance issued on a regular basis without requiring the applicant to submit to a regular medical examination. In passing on the risk, the company relies on the applicant’s own answers to questions regarding applicant’s physical condition and on personal references or inspection reports.
Ordinary Life – Whole Life – Straight Life – These three terms are synonymous and are applied to the type of policy which continues during the whole of the insured’s life and provides for the payment of amount insured at the insured’s death, or usually on the basis of age 100 on the CSO Table, if the insured still is living at that age.
Premium – The term used for the rate charged for a given form of insurance policy or annuity contract at a given age, or the amount payable to the company for the benefits provided under a certain contract.
Rebating – The granting of any form of inducement, favor, or advantage to the purchaser of a policy not available to all under the standard policy terms. Rebating in some states is a penal offense for which both the agent and the person accepting the rebate can be punished by fine or imprisonment, and with the agent also subject to revocation of license.
Reduced Paid-Up Insurance – One of the nonforfeiture options contained in most life insurance policies provides that the insured may elect to have the cash surrender value of the policy used to purchase a paid-up policy for a proportionate amount of insurance.
Refund Annuity – A contract which provides for the continuance of an annuity during the lifetime of the annuitant, but an any event until total payments equal to the purchase price have been made by the company.
Reinstatement – By the terms of most life insurance policies, the policyowner has the right to reinstate a lapsed policy within a reasonable time after lapse by furnishing satisfactory evidence of insurability. The right is usually denied if the policy has been surrendered for its cash value.
Reserve – On the level premium plan, the reserve represents the combined funds held by the company for all policies which, together with future premiums and interest earnings, are sufficient to meet all future claims.
Substandard Risk – A person who is considered an under-average or impaired insurance risk because of his or her physical condition, family or personal history of disease, occupation, residence in unhealthy climate, or dangerous habits.
Term Insurance – Insurance protection during a limited number of years but expiring without value if the insured survives the stated period. The protection period may be one or more years but ordinarily is five to 20 years since such periods usually cover the needs for temporary protection.