Glossary of
Insurance Terms Glossary of Insurance & Securities Terms This is a
list of terms will help you while you are shopping for insurance
and securities products. It is not meant to be all-inclusive,
but should help you understand some of the most common terms.
A
ACCELERATED DEATH BENEFITS
A life insurance policy option that provides policy proceeds to
insured individuals over their lifetimes, in the event of a
terminal illness. This is in lieu of a traditional policy that
pays beneficiaries after the insured's death. Such benefits kick
in if the insured becomes terminally ill, needs extreme medical
intervention, or must reside in a nursing home. The payments
made while the insured is living are deducted from any death
benefits paid to beneficiaries.
ACCELERATED DEATH BENEFIT RIDER (ADB)
A rider added to a life insurance policy to protect the insured
against financial loss in the event of a terminal illness. An
ADB makes living benefits payable to the insured for medical
expenses prior to death. Accelerated (or living) benefits paid
reduce the death benefit payable to the beneficiary(ies) upon
death.
ACCIDENT AND HEALTH INSURANCE
Coverage for accidental injury, accidental death, and related
health expenses. Benefits will pay for preventative services,
medical expenses, and catastrophic care, with limits.
ACTUARY
An insurance professional skilled in the analysis, evaluation,
and management of statistical information. Evaluates insurance
firms' reserves, determines rates and rating methods, and
determines other business and financial risks.
ADMINISTRATOR
An individual or professional organization, such as a bank's
trust department, appointed by the probate court to administer
an estate when the owner dies without having made a will or
without nominating an executor. An executor may also be
appointed if the named executor declines to serve.
ADVERSE SELECTION
The tendency of those exposed to a higher risk to seek more
insurance coverage than those at a lower risk. Insurers react
either by charging higher premiums or not insuring at all, as in
the case of floods. (Flood insurance is provided by the federal
government but sold mostly through the private market.)
AGENT
Insurance is sold by two types of agents: independent agents and
exclusive or captive agents. Independent agents are
self-employed, represent several insurance companies and are
paid on commission. Exclusive or captive agents represent only
one insurance company and are either salaried or work on
commission.
ANNUITY
A contract sold by life insurance companies that allows you to
pay a lump sum or accumulate money over time, and the issuing
company guarantees payment to the buyer in the future, usually
at retirement. You will not pay income taxes on the money until
those payments are made.
ANNUITY PAYMENTS
Periodic payments made to an annuitant or to the annuitant's
designated beneficiary. The payments may be made on an annual,
semiannual, quarterly, or monthly basis, and may last for life
or for a specified period. Moreover, depending on whether the
annuity in question is a fixed annuity or a variable annuity,
the annuitant (or his/her beneficiary) may receive either
payments of a fixed dollar amount or payments that vary in
amount according to the value of the underlying securities.
APPORTIONMENT
The dividing of a loss proportionately among two or more
insurers that cover the same loss.
APPRAISAL
A survey to determine a property's insurable value, or the
amount of a loss.
APPRECIATION
When an investment increases in value, it appreciates. For
example, a stock whose price goes from $20 a share to $25 a
share, it has appreciated by $5.
ASSET
Property and resources, such as cash and investments, comprise a
person's assets; i.e., anything that has value and can be
traded. Examples include stocks, bonds, real estate, bank
accounts, and jewelry.
ASSET ALLOCATION
When you divide your money among various types of investments,
such as stocks, bonds, and short-term investments (also known as
"instruments"), you are allocating your assets. The way in which
your money is divided is called your asset allocation.
AVERAGE ANNUAL RETURN
This is the hypothetical rate of return that, if the fund
achieved it over a year's time, would produce the same
cumulative total return if the fund performed consistently over
the entire period. A total return is expressed in a percentage
and tells you how much money you have earned or lost on an
investment over time, assuming that all dividends and capital
gains are reinvested. Return to top of page.
B
BENEFICIARY
A person who is named in a will, retirement plan, individual
retirement account, or insurance policy and who will inherit
money or other property left by the decedent. A trust or
institution also can be named as a beneficiary.
BINDER
A temporary or preliminary agreement which provides coverage
until a policy can be written or delivered.
BROKER
A licensed person or organization paid by you to look for
insurance on your behalf.
C
CAFETERIA PLANS
An employee benefits plan that allows employees to customize
their benefit package. Employees receive a fixed amount of
dollars that can be allocated between several fringe benefits.
CANCELLATION
The termination of insurance coverage during the policy period.
Flat cancellation is the cancellation of a policy as of its
effective date, without any premium charge.
CAPACITY
The supply of insurance available to meet demand. Capacity
depends on the industry's financial ability to accept risk.
Reduced capacity leads to higher premiums, but higher premiums
eventually attract more capacity to the market.
CAPITAL
The amount of money you have invested. When your investing
objective is capital preservation, your priority is trying not
to lose any money. When your investing objective is capital
growth, your priority is trying to make your initial investment
grow in value.
CAPITAL GAIN
Profit from a sale of an investment constitutes a capital gain.
For example, if you bought a share of stock for $5 and later
sold it for $7.50, you would have a capital gain of $2.50.
CAPITAL GAINS TAX
Tax on the gain realized from the sale of capital assets such as
stock, mutual funds, business interests, or other asset.
Long-term capital gains tax rates apply to assets held longer
than 12 months.
CAPITAL LOSS
Amount by which the proceeds from the sale of a capital asset
are less than its cost basis.
CAPTIVE AGENT
Representative of a single insurer or fleet of insurers who is
obliged to submit business only to that company, or at the very
minimum, give that company first refusal rights on a sale. In
exchange, that insurer usually provides its captive agents with
an allowance for office expenses as well as an extensive list of
employee benefits such as pensions, life insurance, health
insurance and credit unions.
CARRIER
Insurance company that actually underwrites and issues the
insurance policy. The term refers to the fact that the company
carries (or assumes) certain risks for the policyholder.
CARRYOVER
Refers to the process of shifting to a future taxable year those
losses and other deductions that exceed limits for the current
tax year.
CASH SURRENDER VALUE
Amount available to the owner if a life insurance policy or
annuity is surrendered. The amount represents the cash value
minus surrender charges and any outstanding loans due upon
cancellation of the policy.
CASH VALUE
The cash within a permanent life insurance policy. Cash value is
the premium paid less the cost of insurance policy. Cash value
is also adjusted by any investment performance within the
insurance policy.
CASH VALUE LIFE INSURANCE
A permanent insurance policy that builds cash value, often
described as a savings account within the policy.
CASUALTY
Liability or loss resulting from an accident.
CLAIM WRITTEN
Request by an insured for the insurance company to cover an
incurred loss, usually submitted on the company's standard form.
CLAIMANT
Any person who asserts right of recovery.
COMMISSION
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.
CONTESTABILITY PERIOD
Period of time, generally two years, during which an insurance
company can declare a life insurance contract void because of
misrepresentation or concealment by the insured in obtaining the
policy. Once this period has elapsed, the company cannot cancel
the policy or refuse to pay claims for any reason other than
nonpayment of premiums.
CONVERTIBLE TERM INSURANCE
Term life insurance coverage that can be converted into
permanent life insurance upon the policy's expiration. The
insured generally cannot be denied permanent coverage or charged
an additional premium because of health problems.
CREDIT LIFE INSURANCE
Life insurance coverage on a borrower designed to repay the
balance of a loan in the event the borrower dies before the loan
is repaid. It may also include disablement and can be offered as
an option in connection with credit cards and auto loans.
D
DEATH BENEFIT
The amount payable, as stated in a life insurance policy, to the
designated beneficiary(ies) upon the death of the insured. The
amount paid is the face value, plus any riders, less any
outstanding loans.
DECLINE
The company refuses to accept the request for insurance
coverage.
DEDUCTIBLE
The amount of the loss which the insured is responsible to pay
before benefits from the insurance company are payable. You may
choose a higher deductible to lower your premium.
DEFERRED ANNUITY
An annuity in which the income payments/withdrawals begin at
some future date.
DEPENDENT
An individual for whom the taxpayer provides at least 50 percent
of the support regardless of where they live. Generally the
individual bears a specific relationship to the taxpayer (i.e.,
child, sibling, parent) and/or resides primarily in taxpayer's
household.
DEPOSIT PREMIUM
The premium deposit paid by a prospective policyholder when an
application is made for an insurance policy. It is usually equal
to at least the first month's estimated premium and is applied
toward the total policy premium when billed.
DURABLE POWER OF ATTORNEY
Legal document which appoints an individual to act on the
principal's behalf and remains in effect even if the principal
becomes incapacitated.
E
ECONOMIC LOSS
Total financial loss resulting from the death or disability of a
wage earner, or from the destruction of property. Includes the
loss of earnings, medical expenses, funeral expenses, the cost
of restoring or replacing property, and legal expenses. It does
not include non-economic losses, such as pain caused by an
injury.
ENDORSEMENT
Amendment to the policy used to add or delete coverage. Also
referred to as a "rider."
ERRORS AND OMISSIONS COVERAGE / E&O
A professional liability policy covering the policyholder for
negligent acts and omissions that may harm his or her clients.
ESCROW ACCOUNT
Funds that a lender collects to pay monthly premiums in mortgage
and homeowners insurance, and sometimes to pay property taxes.
ESTATE
All assets a person owns at the time of death, including
securities, real estate, business interests, physical property,
and cash, less outstanding liabilities. The estate is
distributed to heirs according to the terms of the person's will
or, if there is no will, by court ruling.
ESTATE PLANNING
The process of developing and implementing a master plan that
facilitates the distribution of your property after your death
according to your goals and objectives.
ESTATE TAX
A tax imposed by the federal government and some state
governments on the transfer of assets to heirs.
EXCLUSION
Certain causes and conditions listed in the policy, which are
not covered.
EXECUTION
The signing, sealing, and delivery of a contract or agreement
making it valid. Also, a broker who buys or sells shares of
stock upon a client's request is said to have executed an order.
EXECUTOR/EXECUTRIX
An individual or professional organization, such as a bank's
trust department, named in a will to administer an estate upon
the death of the owner.
EXEMPT
Assets that are not considered for bankruptcy proceedings.
Exempt is also used to refer to assets not considered in the
determination of eligibility for Medicaid.
EXPENSE RATIO
Percentage of each premium dollar that goes to insurers'
expenses including overhead, marketing, and commissions.
EXPIRATION DATE
The date on which the policy ends.
EXPOSURE
Possibility of loss.
EXTENDED COVERAGE
An endorsement added to an insurance policy, or clause within a
policy, that provides additional coverage for risks other than
those in a basic policy.
F
FACE AMOUNT
The dollar amount to be paid to the beneficiary when the insured
dies. It does not include other amounts that may be paid from
insurance purchased with dividends or any policy riders.
FAIR MARKET VALUE
The price that a willing buyer would pay a willing seller.
FEDERAL GIFT TAX
A federal tax that is imposed on the transfer of securities,
property, or other assets. The tax is based on the fair market
value of the transferred assets and applies to transfers valued
over $10,000 per individual per year (indexed for inflation).
FIDUCIARY
A person, company, or association that holds assets in trust for
a beneficiary. The fiduciary is charged with the responsibility
of investing the assets wisely for the beneficiary's benefit.
Examples of fiduciaries include executors of wills and estates,
trustees, and those who administer the assets of underage or
incompetent beneficiaries.
FIDUCIARY CAPACITY
A person is said to act in a fiduciary capacity when business is
transacted, or money and property are handled for the benefit of
another. The term is not limited to technical or express trusts,
but may also apply to such offices or relations as attorneys,
guardians, executors, brokers, and agents.
FINANCIAL GUARANTEE INSURANCE
Covers losses from specific financial transactions and
guarantees that investors in debt instruments receive timely
payment of principal and interest if there is a default. Raises
the credit rating of debt to which the guarantee is attached.
Investment bankers who sell securities backed by loan portfolios
use this insurance to enhance marketability.
FIXED ANNUITY
A contract issued by an insurance company allowing for a fixed
rate of interest in both the accumulation and income phases;
periodically adjusted by the insurance company.
G
GRACE PERIOD
A period (usually 31 days) after the premium due date, during
which an overdue premium may be paid without penalty. The policy
remains in force throughout this period.
GUARANTEED INSURABILITY
An option that permits the policyholder to buy additional stated
amounts of life insurance at stated times in the future without
evidence of insurability.
GUARANTEED ISSUE
A requirement that health plans must permit you to enroll
regardless of your health status, age, gender, or other factors
that might predict your use of health services. All health plans
sold to small employers in Iowa are guaranteed issue.
I
IMMEDIATE ANNUITY
An annuity that begins to make income payments immediately (or
soon after) after the first premium is paid, as opposed to a
deferred annuity.
INCAPACITY
The inability to properly care for one's property and/or person,
or to make or communicate rational decisions concerning one's
affairs.
INCIDENTS OF OWNERSHIP
A policyowner's rights under a life insurance policy, including
the right to change the beneficiary and the right to surrender
the policy for the cash value.
INCONTESTABLE CLAUSE
A policy provision in which the company agrees not to contest
the validity of the contract after it has been in force for a
certain period of time, usually two years.
INCOME REPLACEMENT
Benefit in disability insurance policies where an injured or
sick wage earner receives a monthly income payment that is
sufficient to replace a percentage of lost earnings.
INCOMPETENCY
The inability to properly care for one's property and/or person,
or to make or communicate rational decisions concerning one's
person.
INDEMNIFY
Provide financial compensation for losses.
INDEMNITY
The principle upon which all property/casualty insurance
contracts are based. According to this principle, the objective
of insurance is to restore the insured to the same financial
position after a loss that he/she was in prior to the loss.
INDEMNITY PLAN
A type of health insurance plan that provides reimbursement of
covered medical expenses and gives plan participants
considerable freedom to choose their own health care providers.
INDEPENDENT AGENT
A contractor who represents different insurance companies, is
not controlled by any one company, and earns commissions from
policies sold.
INDIVIDUAL POLICY
An insurance policy (life, health, or disability) that provides
coverage for an individual person (and, in some cases, his/her
family members), as opposed to a group policy that provides
coverage for a group of individuals.
INFLATION
When the price of goods and services rises, the result is called
inflation. This means that things you buy today at one price are
likely to cost more in the future.
INFLATION RIDER
An attachment or amendment to an insurance policy that provides
protection against inflation by adjusting the level or amount of
the benefit to keep pace with inflation.
INSTALLMENT PAYMENTS
A sale made with the agreement that the purchased goods or
services will be paid for in fractional amounts over a specified
period of time.
INSURABLE
An individual applicant who qualifies for an insurance policy
based on the coverage standards that are set by the insurance
company.
INSURABLE INTEREST
A relationship between an insured person or property and the
potential beneficiary of the insurance. This requirement must be
present at the time the life insurance policy is applied for but
doesn't need to exist at the time of the insured's death.
Insurable interest exists because there is a reasonable
expectation that the beneficiary will benefit from the continued
life of the insured, or experience a loss at the death of the
insured.
INSURED
The policyholder - the person(s) protected in case of a loss or
claim.
INSURER
The insurance company.
INSURANCE PREMIUM
This is the amount you pay for your insurance policy.
IRREVOCABLE BENEFICIARY
A beneficiary designation that cannot be changed.
IRREVOCABLE TRUST
A trust that cannot be altered, amended, revoked, or terminated
by the settlor.
J
JOINT LIFE EXPECTANCY
The probability that two people will live to specific ages
according to a mortality table.
JUDGMENT
Decision by a court of law ordering someone to pay a certain
amount of money. The term also refers to the condemnation awards
by government entities in payment for private property taken for
public use.
L
LAPSE
The expiration of a right or privilege when one party does not
live up to its obligations during the time allowed.
LAW OF LARGE NUMBERS
The theory of probability on which the business of insurance is
based. Simply put, this mathematical premise says that the
larger the group of units insured, such as sport-utility
vehicles, the more accurate the predictions of loss will be.
LEVEL TERM POLICY
This is a type of insurance that pays a level benefit in case of
death during the term of the policy. The premium is also level.
LIABILITIES
A claim on the assets of a company or individual to satisfy a
debt.
LIABILITY INSURANCE
Protection for your negligent acts that result in bodily injury
and/or damage to another's property.
LIFE ANNUITY
An annuity that makes regular (e.g., monthly, quarterly, etc.)
income payments for the life of a person (the annuitant). The
annuitant cannot outlive the payments. Upon his/her death,
however, all income payments cease and there are no beneficiary
benefits.
LIFE ESTATE
A form of property ownership, also known as a life interest,
giving the holder (the life tenant) an interest in the property
to possess, use, and enjoy the property, or income from the
property, for the duration of their life. Upon the death of the
holder, the remainder interest automatically reverts to the
original owner or passes to a beneficiary (known as the
remainder person).
LIFE EXPECTANCY
The number of years a person is expected to live as determined
by actuaries using mortality (actuarial) tables This information
is used to calculate annuity payments, life insurance premiums,
and annual minimum distributions from IRAs.
LIFE EXPECTANCY TABLES
Mortality tables that are used to calculate life expectancy
figures.
LIFE INSURANCE
A policy that will pay a specified sum to beneficiaries upon the
death of the insured.
LIFE SETTLEMENTS
The purchase of life insurance contracts by a Viatical
Settlement Company, for a fraction of the policy's face amount,
from healthy individuals with a life expectancy of greater than
two years These are also known as Senior Settlements, since the
typical person selling his or her life insurance policy is at
least 65 years old.
LIMIT
Maximum amount a policy will pay either overall or under a
particular coverage.
LIVING TRUST
A revocable or irrevocable trust created during the life of the
grantor that is also known as an inter vivos trust.
LLOYD'S OF LONDON
A marketplace where underwriting syndicates, or mini-insurers,
gather to sell insurance policies and reinsurance. Originally,
Lloyd's was a London coffee house in the 1600s patronized by
shipowners who insured each other's hulls and cargoes.
LONG-TERM CARE INSURANCE
Coverage that, under specified conditions, provides skilled
nursing, intermediate care, or custodial care for a patient
(generally over age 65) in a nursing facility or his or her
residence following an injury.
LOSS
A reduction in the quality or value of a property, or a legal
liability.
LOSS OF INCOME
A definition of disability based on income loss, not on loss of
occupation. Loss-of-income disability definitions are used in
residual disability (income replacement) policies.
LUMP-SUM DISTRIBUTION
When you withdraw all your money during one tax year from a
retirement plan, such as a 401(k) or 403(b) retirement account,
you get a lump-sum distribution. This type of withdrawal does
not apply to some other retirement plans, such as 457 plans.
M
MANAGED CARE
A kind of health insurance plan. Like an HMO, managed care plans
can limit coverage to health care provided by doctors and
hospitals that work for or contract with them - also called
"network providers." Often managed care plans will require you
to get permission (a "referral") from your family doctor before
you get care from a specialist in their network. Some managed
care plans will reduce coverage for your care if you go to a
non-network provider or if you get specialist care without a
referral. See also HMO.
MATURITY
This is the length of time (term) before a debt, a bond or
policy is due to be paid in full.
MEDICAID
A federal/state public assistance program created in 1965 and
administered by the states for people whose income and resources
are insufficient to pay for health care.
MEDICARE
Federal program for people 65 or older that pays part of the
costs associated with hospitalization, surgery, doctors' bills,
home health care, and skilled-nursing care.
MEDIGAP/MEDSUP
Policies that supplement federal insurance benefits particularly
for those covered under Medicare.
MODIFIED ENDOWMENT CONTRACT (MEC)
A special class of life insurance. Funds withdrawn from a MEC
policy in the form of policy loans, partial surrenders,
assignments, and pledges are treated as gross income to the
recipient and therefore subject to taxation.
MORTALITY (ACTUARIAL) TABLE
A statistical table showing the rate of death at each age in
terms of the number of deaths per thousand, indicating the
probability of a certain number of people from a group dying in
a given year. Insurance companies and the IRS use mortality
(actuarial) tables to establish premiums for different age
groups, to base life estates, and annuity valuations.
MORTALITY CHARGE
The cost of the insurance protection based on a statistical
projection of future deaths.
MUTUAL INSURANCE COMPANY
A company owned by its policyholders that returns part of its
profits to the policyholders as dividends. The insurer uses the
rest as a surplus cushion in case of large and unexpected
losses.
N
NET ASSET VALUE
Also known as NAV, this is the share price (or dollar value) of
one share of a mutual fund. NAV is calculated at the end of
every business day. It is figured by adding up the value of all
the securities and cash in the mutual fund's portfolio (its
assets), subtracting the fund's liabilities, and dividing that
number by the number of shares that the fund has issued. It does
not include a sales charge. The NAV increases (or decreases)
when the value of the mutual fund's holdings increases (or
decreases).
NET WORTH
A person's net worth is equal to the total value of all
possessions, such as a house, stocks, bonds, and other
securities, minus all outstanding debts, such as mortgage and
revolving credit lines.
NURSING HOME INSURANCE
A form of long-term care policy that covers a policyholder's
stay in a nursing facility.
O
OPEN ENROLLMENT PERIOD
A period of time, often once or twice a year, during which
individuals are permitted to enroll in group insurance plans.
OPEN PERIL COVERAGE
Insurance coverage for all risks other than those that the
policy specifically excludes.
ORDINANCE OR LAW COVERAGE
Endorsement to a property policy, including homeowners, that
pays for the extra expense of rebuilding to comply with
ordinances or laws that did not exist when the building was
originally built.
ORDINARY LIFE INSURANCE
A life insurance policy that remains in force for the
policyholder's lifetime.
Return to top of page.
P
PACKAGE POLICY
A single insurance policy that combines several coverages
previously sold separately. Examples include homeowners
insurance and commercial multiple peril insurance.
PAID UP ADDITIONS
An amount of paid up insuranced purchase with a policy dividend
and added to the face amount of the policy.
PARTIAL DISABILITY
Inability of the insured to perform one or more of the important
daily duties of his or her regular occupation. The income
payment to the insured is reduced from that of total disability.
PAYEE
An insured individual or a beneficiary who receives a loss or
benefit payment from an insurer.
PERMANENT
In the insurance context, permanent life insurance is ordinary
life insurance such as whole life--as opposed to term life
insurance which expires unless renewed at the end of each term.
PERSONAL LINES
Property/casualty insurance products that are designed for and
bought by individuals, including homeowners and automobile
policies.
PERSONAL PROPERTY
For homeowners insurance purposes, this term generally includes
all the contents of your household (e.g., furniture, jewelry,
knickknacks, etc.). Coverage for personal property is
automatically set at 50 percent of your coverage limit for your
house, unless you choose to raise your coverage. This coverage
is generally subject to a deductible.
POLICY
The written contract of insurance.
POLICY LIMIT
The maximum amount a policy will pay, either overall or under a
particular coverage.
POLICY LOAN
The amount that the owner of a life insurance policy can borrow,
at an interest rate set by the company, from the insurer up to
the cash surrender value. If interest is not paid when due it is
deducted from any remaining cash value. At the death of the
policyholder any outstanding policy loans and interest due are
subtracted from the death benefit.
POLICY PERIOD
Time period during which an insurance policy is in force.
POST MORTEM
After death.
POWER OF ATTORNEY FOR HEALTH CARE
A durable power of attorney for health care. Allows a
representative to make medical decisions only for an individual
who is seriously ill or incapacitated. Also called a health care
proxy.
POWER OF ATTORNEY
A written document that authorizes an individual to perform
certain acts on behalf of the person signing the document. The
document, which must be witnessed by a notary public or some
other public officer, may bestow either full power of attorney
or limited power of attorney and it becomes void upon the death
of the signer.
PREEXISTING CONDITION
Any condition (either physical or mental) for which medical
advice, diagnosis, care, or treatment was recommended or
received within the 6-month period immediately preceding
enrollment in a group health plan. Pregnancy cannot be counted
as a preexisting condition. Genetic information about your
likelihood of developing a disease or condition, without a
diagnosis of that disease or condition cannot be considered a
preexisting condition. Newborns, newly adopted children, and
children placed for adoption covered within 30 days cannot be
subject to preexisting condition exclusions.
PREFERRED RISK
An insured or applicant for insurance who has a lower
expectation of incurring a loss than the standard applicant and
can obtain favorable premiums.
PREMIUM
A bond premium is the amount by which a bond sells above its par
(face) value. For insurance, the premium is the amount you pay
for your insurance policy.
PREMIUM FINANCING
A policyholder contracts with a lender to pay the insurance
premium on his/her behalf. The policyholder agrees to repay the
lender for the cost of the premium, plus interest and fees.
PREMIUM TAX
A state tax on premiums paid by its residents and businesses and
collected by insurers.
PRINCIPAL
The amount borrowed or unpaid on a loan.
PRINCIPAL
The applicant for or subject of insurance. The one from whom an
agent derives his or her authority.
PRINCIPAL RESIDENCE
The home that a taxpayer lives in most of the time during the
taxable year.
PRIOR APPROVAL STATES
States where insurance companies must file proposed rate changes
with state regulators, and gain approval before they can go into
effect.
PROPERTY INSURANCE
Property Insurance indemnifies an insured whose property is
stolen, damaged, or destroyed by a covered peril. The term
property insurance includes direct or indirect property losses
covered in several lines of insurance.
PRO-RATA CANCELLATION
When the policy is terminated midterm by the insurance company,
the earned premium is calculated only for the period coverage
was provided. For example: an annual policy with premium of
$1,000 is cancelled after 40 days of coverage at the company's
election. The earned premium would be calculated as follows:
40/365 days X $1,000=.110 X $1,000=$110.
PROVISIONS
Words, sentences, and paragraphs in an insurance contract that
specify the terms and limitations of the policy as well as the
rights and obligations of the insured and the insurer.
PROXIMATE CAUSE
The actual cause of loss under an insurance policy
PURE INSURANCE
The difference between the face amount of a life insurance
policy and and its cash value.
R
RATE
Cost per unit of insurance. When used to calculate a premium, it
must be adequate enough to pay expected losses according to
frequency and severity, reasonable to the point that insurers do
not not earn an excessive profit and not discriminatory or
inequitable. Based on the amount of coverage needed, an
individual will purchase the appropriate number of units of
insurance with the total cost reflected in a premium payment.
RATED POLICY
A policy for which the insured pays a higher-than-standard
premium because of a higher risk due to a physical impairment,
past medical condition, hazardous occupation, or a hazardous
hobby. This type of policy is sometimes called an extra-risk
policy.
RATE REGULATION
The process by which states monitor insurance companies' rate
changes, done either through prior approval or open competition
models.
RATING AGENCIES
Six major credit agencies determine insurers' financial strength
and viability to meet claims obligations. They are A.M. Best
Co.; Duff & Phelps Inc.; Fitch, Inc.; Moody's Investors
Services; Standard & Poor's Corp.; and Weiss Ratings, Inc.
Factors considered include company earnings, capital adequacy,
operating leverage, liquidity, investment performance,
reinsurance programs, and management ability, integrity and
experience. A high financial rating is not the same as a high
consumer satisfaction rating.
REINSURANCE
Insurance bought by insurers. A reinsurer assumes part of the
risk and part of the premium originally taken by the insurer,
known as the primary company. Reinsurance effectively increases
an insurer's capital and therefore its capacity to sell more
coverage. The business is global and some of the largest
reinsurers are based abroad. Reinsurers don't pay policyholder
claims. Instead, they reimburse insurers for claims paid.
RIDER
Usually known as an endorsement, a rider is an amendment to the
policy used to add or delete coverage.
RISK
The chance of loss -or- the person or entity that is insured.
RISK MANAGEMENT
Management of the varied risks to which a business firm or
association might be subject. It includes analyzing all
exposures to gauge the likelihood of loss and choosing options
to minimize loss. These options typically include reducing and
eliminating the risk with safety measures, buying insurance, and
self-insurance.
S
SECONDARY MARKET
The organized trading of securities (stocks, bonds, etc.)
through various exchanges and over-the-counter markets where
securities are bought and sold subsequent to their original
issuance. Trading in secondary markets is subject to the rules
and regulations of the SEC.
SECURITIES
This is another word for stocks, bonds, and short-term
investments.
SECURITIES AND EXCHANGE COMMISSION / SEC
The organization that oversees publicly-held insurance
companies. Those companies make periodic financial disclosures
to the SEC, including an annual financial statement (or 10K),
and a quarterly financial statement (or 10-Q). Companies must
also disclose any material events and other information about
their stock.
SHARE PRICE
For a mutual fund, the value of one share is known as its share
price, or its net asset value (NAV), and is calculated daily or
even hourly. That's because the value of a fund's securities
changes in response to the movements of the stock, bond, and
money markets. Multiplying the share price, or NAV, times the
number of shares you have in the fund gives you the value of
your investment.
SHORT-RATE CANCELLATION
When the policy is terminated prior to the expiration date at
the policyholder's request. Earned premium charged would be more
than the pro-rata earned premium. Generally, the return premium
would be approximately 90 percent of the pro-rata return
premium. However, the company may also establish its own
short-rate schedule.
SHORT-TERM COVERAGE
Coverage that lasts less than one year in duration.
SHORT-TERM DISABILITY INSURANCE
A disability insurance policy that pays benefits only for a
limited period of time (e.g., 26 weeks or one year).
SHORT-TERM LIQUIDITY
The ability to convert an asset into cash relatively easily.
This concept also is simply known as "liquidity."
SPECIAL ENROLLMENT PERIOD
A time, triggered by certain specific events, during which you
and your dependents must be permitted to sign up for coverage
under a group health plan. Employers and group health insurers
must make such a period available to employees and their
dependents when their family status changes or when their health
insurance status changes. Special enrollment periods must last
at least 30 days. Enrollment in a health plan during a special
enrollment period is not considered late enrollment. See also
Late Enrollment.
SPREAD OF RISK
The selling of insurance in multiple areas to multiple
policyholders to minimize the danger that all policyholders will
have losses at the same time. Companies are more likely to
insure perils that offer a good spread of risk. Flood insurance
is an example of a poor spread of risk because the people most
likely to buy it are the people close to rivers and other bodies
of water that flood.
SUBROGATION
The legal process by which an insurance company, after paying
for a loss, seeks to recover the amount of the loss from another
party who is legally liable.
SUICIDE CLAUSE
Limitation in life insurance policies to the effect that no
death benefits will be paid if the insured commits suicide
during a specified initial period, usually the first two years
that the policy is in force.
SURETY BOND
A guarantee to one party that the contractor will perform
specified acts, usually within a stated period of time.
Contractors are often required to purchase surety bonds if they
are working on public projects. The surety company becomes
responsible if the contractor defaults.
SURPLUS LINES
Property/casualty coverage that isn't available from insurers
licensed by the state, called admitted companies, and must be
purchased from a non-admitted carrier. Examples include risks of
an unusual nature that require greater flexibility in policy
terms and conditions than exist in standard forms or where the
highest rates allowed by state regulators are considered
inadequate by admitted companies. Laws governing surplus lines
vary by state.
SURRENDER
To terminate or cancel a life insurance policy before the
maturity date. In the case of a cash value policy, the
policyholder may exercise one of the nonforfeiture options at
the time of surrender.
SURRENDER CHARGE
Many annuities impose a surrender charge to discourage
withdrawals in the early years of the contract. The charges
typically decline year by year -- perhaps from 5% in year one of
the plan to 4% in year two and so on -- until they eventually no
longer apply.
SURRENDER TO BASIS
With cash value life insurance policies that allow policy
withdrawals, this is a strategy where the policyholder withdraws
only up to his or her basis (i.e., the amount he or she has paid
into the policy) so as to avoid having the withdrawal taxed.
Investment earnings, which would be taxable upon withdrawal, are
left in the policy.
T
TAX-FREE EXCHANGE
Section 1035 of the Internal Revenue Code provides that certain
exchanges of life insurance contracts, annuity contracts, and
modified endowment contracts will generally not trigger a
taxable gain as long as the owner is the same person under both
contracts.
TERM INSURANCE
Protection against premature death that comes in a form of life
insurance. It pays a benefit only when an insured dies within a
specified period, and a designated beneficiary receives the
death benefit. If the insured lives beyond the specified period,
the beneficiary receives nothing.
U
UMBRELLA POLICY
Coverage for losses above the limit of an underlying policy. It
applies to losses over a large dollar amount, but terms of
coverage are sometimes broader than those of underlying
policies.
UNDERWRITING
The process of selecting applicants for insurance and
classifying them according to their degrees of insurability so
that the appropriate premium rates may be charged. The process
includes rejection of unacceptable risks.
UNINSURANCE/UNDERINSURANCE
The result of the policyholder's failure to buy sufficient
insurance. An underinsured policyholder may only receive part of
the cost of replacing or repairing damaged items covered in the
policy.
UNIVERSAL LIFE INSURANCE
A flexible premium policy that combines protection against
premature death with a savings account that typically earns a
money market rate of interest. Premiums can be changed during
the life of the policy within limits and the policy will lapse
if there isn't enough money to cover mortality and
administrative costs.
V
VARIABLE LIFE INSURANCE
A policy that combines protection against premature death with a
savings account that can be invested in stocks, bonds, and money
market mutual funds at the policyholder's discretion.
VIATICAL SETTLEMENT COMPANIES
Firms that buy life insurance policies at a discount from
policyholders who are often terminally ill. The companies
provide early payouts to the policyholder, assume the premium
payments, and collect the face value of the policy upon the
policyholder's death.
VIATICAL SETTLEMENT CONTRACT
A viatical contract is made when an investor purchases the right
to receive the benefits of a life insurance policy. This is
often done when the policy owner is terminally ill and wants to
receive the cash payout. (How the viatical settlement contract
works: A viatical settlement broker arranges the sale of a
policyholder's life insurance policy to a viatical settlement
provider. A viatical settlement provider then may resell all or
a portion of its interest in the life insurance policy to an
investor through a viatical settlement agent.)
VIATICAL SETTLEMENT INVESTMENT CONTRACT
A viatical settlement investment contract is made when an
investor purchases the right to receive the benefits of a life
insurance policy from a viatical settlement provider. (How the
viatical settlement investment contract works: A viatical
settlement provider sells an interest in a viaticated life
insurance policy to an investor at a discount. The investor may
be required to make the remaining premium payments and collects
all or a portion of the face value of the policy upon the
policyholder's death.)
W
WAIVER
The surrender of a right or privilege which is known to exist.
WAIVER OF PREMIUM
A clause or rider on a life insurance, disability, or long-term
care insurance policy that cancels the premium payments the
insured must make if he or she is disabled longer than a certain
time period (usually six months) and as long as he or she
continues to be disabled. The policy remains in force even
though the insured is no longer paying the premiums.
WHOLE-LIFE INSURANCE
The insurance policy offers protection in case the insured dies,
but it also builds up cash value over time. Under normal
circumstances, the policy remains active for the lifetime of the
insured or for until a specified age. The insured usually pays a
level annual premium, and the earnings on the cash value in the
policy accumulate tax-deferred. You may borrow against the
premium.
WRAP-UP INSURANCE
Broad policy coordinated to cover liability exposures for a
large group of businesses that have something in common. Might
be used to insure all businesses working on a large construction
project, such as an apartment complex.
WRITE
To insure, underwrite, or accept an application for insurance.
