The following are definitions of commonly used insurance terms:
Agent - An insurance company representative licensed by the state that solicits and negotiates contracts of insurance, and provides service to the policyholder for the insurer. An agent can be independent agent who represents at least two insurance companies or a direct writer who represents and sells policies for one company only.
A.M. Best Company - One of several independent rating companies that evaluate the financial soundness and claims paying ability of insurance companies. Ratings range from a high of A++ (Superior) to S (Rating Suspended).
Annuitant - The person who will receive annuity benefits at stipulated intervals of time such as annually, semi-annually, quarterly or monthly intervals.
Annuity, Deferred - A long-term accumulation vehicle sold by a life insurance company that provides benefits for life or a fixed period of time. During the accumulation phase (before benefits are received), values accumulate on a tax-deferred basis.
Annuity, Fixed - An annuity that earns a fixed, guaranteed rate of return on cash values and provides fixed payments during the payout period, regardless of other economic conditions.
Application - A statement of information made by a person applying for life insurance.
Beneficiary - The person(s) named by the owner of the policy to receive the life insurance proceeds upon the death of the insured.
Cash Value/Cash Surrender Value - The amount that is available in cash for loans and/or withdrawals. Accessing the cash surrender value may reduce the death benefit and may increase the risk of lapse. Withdrawals may be subject to surrender charges and could have a permanent effect on the cash value. Loans reduce the cash value and death benefit by the amount of the loan outstanding plus interest. If the policy is surrendered, the cash surrender value is paid to the policy owner.
Claim - A request for payment of the contractual benefits by the insurer that is made by the insured or the beneficiary.
Contingent beneficiary - A contingent beneficiary is an alternate beneficiary - one whose rights under a contract are dependent upon the death of the primary beneficiary.
Convertible Term Insurance - Term insurance that can be exchanged (converted), at the option of the policyowner and without evidence of insurability, for a permanent insurance policy.
Dividend - A return of part of the premium on participating insurance that is based on the insurer's investment, mortality and expense experience. Dividends are not guaranteed.
Electronic Fund Transfer (EFT) - An automatic payment method whereby the premium payer authorizes withdrawals from his/her bank account.
Face Amount - The amount stated on the face of the policy that will be paid in case of death. It does not include additional amounts payable under accidental death or other special provisions, or acquired through the application of policy dividends.
Free Look Provision - A specific amount of time provided (usually between 10-30 days) to an insured in order to examine the insurance policy and if not satisfied, return it to the company for a full refund.
Grace Period - The time between an insurance policy's premium due date and the date the policy will lapse if the premium remains unpaid. Typically, grace periods are 31 days, and no interest is charged on premiums paid during that time. A grace period protects insured's and their beneficiaries from having the policy terminate inadvertently.
Home Office - The corporate headquarters of an insurance company, where the primary offices of the company are located.
Illustration - A document used to show a life insurance policy's guaranteed and (non-guaranteed) future values, including cash values and death benefits, based on certain assumptions. An illustration is an example of how the policy could perform in a given set of circumstances. It can provide you with valuable information about a policy's potential. However, it is neither an estimate nor guarantee of future results.
Insurable Interest - An individual who has a lawful and substantial economic interest in the life of the insured and would suffer a financial loss or liability as a result of the insured. An insurable interest is required when purchasing life insurance on another person.
Insured - The person on whose life an insurance policy is issued.
Lapse - The termination of an insurance policy due to non-payment of premium.
Loan (Policy Loan) - A loan made by a life insurance company from its general funds to a policyowner on the security of the cash value of a policy. Generally, loans reduce the policy's death benefit and cash value by the amount of the outstanding loan plus interest.
Mortality - The incidence of death at each attained age; frequency of death.
Non-Forfeiture Option - Choices available if the policy owner discontinues premium payments on a policy with a cash value. Options may include to take the cash value in cash or to use it to purchase extended term insurance or reduced paid-up insurance.
Non-Participating - A life insurance policy in which the company does not distribute to policyowners any part of its surplus.
Paid-up Insurance - Insurance that will remain in force with no need to pay additional premiums.
Participating Policy - A life insurance policy that is eligible for the payment of dividends by the insurer (see also Dividend).
Permanent Life Insurance - Any form of life insurance except term; generally insurance that builds up a cash value, such as whole life. Coverage can last a lifetime.
Policy - The printed legal document stating the terms of an insurance contract that is issued to the policyowner by the company.
Policyowner - The person who owns a life insurance policy. This is usually the insured person, but it may also be a relative of the insured, a trust, partnership or a corporation.
Premiums - Payments to the insurance company to purchase a policy and to keep it in force.
Rating - The basis for an additional charge to the standard premium because the person insured is classified as a greater than normal risk usually resulting from impaired health or a hazardous occupation.
Reduced Paid-up Insurance - A form of insurance available as a non-forfeiture option. It provides for continuation of the original insurance plan, but for a reduced amount, without further premiums.
Reinstatement - Restoring a lapsed policy to its original premium paying status, upon payment by the policy owner, with interest, of all unpaid premiums and policy loans, and presentation of satisfactory evidence of insurability by the insured.
Renewable Term Insurance - Term insurance that can be renewed at the end of the term, at the option of the policyowner and without evidence of insurability, for a limited number of successive terms. The rates generally increase at each renewal as the age of the insured increases.
Supplementary Contract - An agreement between a life insurance company and a policyowner or beneficiary in which the company retains at least part of the cash sum payable under an insurance policy and makes payment in accordance with the settlement option chosen.
Surrender - The policy owner's right to terminate policy coverage in exchange for the policy's cash surrender value or other equivalent nonforfeiture values.
Surrender Charge - As provided in the provisions of a life insurance policy or annuity contract, surrender charges are charges an insurance company may deduct if the owner surrenders a life insurance policy or annuity contract for the cash or accumulation value. Companies may also deduct this charge if the owner borrows money on his or her life insurance policy, if the policy lapses for nonpayment, or if the policy owner elects to decrease the face amount of the policy.
Term Life Insurance - Life insurance that does not build up cash value and where the premium normally increases, as the insured gets older.
Underwriting - The process by which a life insurance company determines whether it can accept an application for life insurance, and if so, on what basis so that the proper premium is charged.
Universal Life Insurance - A flexible premium life insurance policy under which the policyowner may change the death benefit from time to time (with satisfactory evidence of insurability for increases) and vary the amount or timing of premium payments. Premiums (less expense charges) are credited to a policy account from which mortality charges are deducted and to which interest is credited at rates, which may change from time to time.
Whole Life Insurance - A basic type of permanent life insurance, which can provide lifetime protection at a level premium. Premiums must generally be paid for as long as the policy is in force.