Life Insurance & Investment-Linked Policies – Essential Vocabulary

A comprehensive set of vocabulary flashcards covering traditional, permanent, and variable life insurance concepts, policy provisions, riders, underwriting terms, and basic investment fund terminology likely to appear in life-insurance licensing exams.

Endowment Policy

A life insurance plan that guarantees cash values and pays the face amount if the insured dies within the term OR survives to the policy’s maturity date.

Term Life Insurance

Pure protection that provides coverage for a specified period only; builds no cash value and usually offers renewal and conversion privileges.

Whole Life Policy

Permanent insurance with level premiums and guaranteed cash values that normally remain in force to age 100 or for life.

Universal Life Policy

A flexible-premium, adjustable-benefit policy whose cash value depends on investment performance and the amount of premium paid.

Variable Life Insurance (VUL)

A flexible-premium policy whose benefits and cash values vary with the performance of an underlying separate investment fund.

Cash Surrender Value (CSV)

The guaranteed amount payable to the policy owner upon voluntary termination of a whole-life or endowment contract before maturity or death.

Non-forfeiture Options

Choices (Cash Surrender, Reduced Paid-Up, Extended Term) that allow a policyowner to keep part of a policy’s value if premiums stop.

Reduced Paid-Up Insurance

A non-forfeiture option that uses a policy’s cash value to buy a smaller amount of fully paid permanent coverage.

Extended Term Insurance

A non-forfeiture option that uses the cash value to buy term insurance for the full face amount for a limited period.

Policy Loan

A loan a policyowner may take from the insurer using the policy’s cash value as collateral; interest accrues on the outstanding amount.

Grace Period

The 31-day (typical) period after a premium due date during which coverage continues even though the premium is unpaid.

Incontestability Clause

A provision preventing the insurer from voiding the policy after it has been in force for two years, except for non-payment of premiums or fraud.

Suicide Clause

Policy provision stating that death by suicide within a specified period (often two years) is not covered; premiums are usually refunded instead.

Misstatement of Age Provision

Clause that adjusts the benefit to the amount the premium would have purchased at the correct age, rather than voiding the policy.

Insurable Interest

A financial or emotional relationship that must exist at policy inception whereby the policyholder would suffer a loss if the insured dies.

Primary Beneficiary

The first in line to receive policy proceeds upon the death of the insured.

Contingent (Secondary) Beneficiary

Receives proceeds only if all primary beneficiaries predecease the insured.

Irrevocable Beneficiary

A beneficiary whose rights cannot be changed without his or her written consent; proceeds are normally excluded from estate tax.

Revocable Beneficiary

Beneficiary whose designation the policyowner may change without consent; proceeds may form part of the estate for tax purposes.

Absolute Assignment

A complete and permanent transfer of all ownership rights in a policy from the assignor to an assignee.

Binding (Conditional) Receipt

Interim coverage issued at application that remains effective until the policy is delivered, declined, or a set time elapses.

Renewable Term

Term insurance that may be renewed at the end of each period without evidence of insurability but at higher age-based premiums.

Convertible Term

Term insurance that can be exchanged for permanent insurance without evidence of insurability within a specified period.

Settlement Options

Ways death proceeds can be paid: Fixed Amount, Fixed Period, Life Income, or Interest-Only deposit with the insurer.

Paid-Up Additions

Small single-premium whole life units bought with dividends, increasing both death benefit and cash value.

Rider

An optional provision added to a policy to provide additional benefits such as Accidental Death, Disability Waiver, or Critical Illness.

Disability Waiver of Premium Rider

Rider that waives all future premiums if the insured becomes totally disabled before a stated age and after a waiting period.

Accidental Death Benefit (ADB) Rider

Provides an additional death benefit—often equal to the face amount—if death results from an accident.

Total Disability Benefit (TDB) Rider

Pays a regular income to the insured when totally and permanently disabled.

Contestable Period

Usually the first two policy years during which the insurer may investigate and void the policy for material misrepresentation.

Anti-Selection (Adverse Selection)

The tendency of individuals with higher-than-average risk to seek or maintain insurance coverage to a greater extent than average risks.

Law of Large Numbers

Statistical principle that allows insurers to predict losses more accurately as the number of exposure units increases.

Application for Insurance

The written request that supplies underwriting information, expresses the applicant’s desire for insurance, and forms part of the contract.

Underwriting

The insurer’s process of evaluating risk and determining whether and on what terms coverage will be offered.

Medical Evidence Requirement

Extent of medical tests and reports—based on age and sum assured—needed to assess an applicant’s insurability.

Policy Conservation

Efforts by agents and companies to keep existing policies in force through service and needs-based selling.

Counselor / Total Needs Selling

Sales approach that analyses a prospect’s full financial situation before recommending life insurance solutions.

Ratable Substandard Rating

Higher premium charged to applicants with higher risk factors (health, occupation, hobbies) instead of declining coverage outright.

Dividend

A non-guaranteed return of surplus to participating policyholders, often used to reduce premium, buy paid-up additions, or take cash.

Participating Policy

Contract that shares in the insurer’s divisible surplus via policy dividends; opposite of non-participating policy.

Non-Participating Policy

Policy that does not share in dividends; premiums and benefits are fixed and guaranteed.

Policy Fee

A flat administrative charge deducted from premiums or fund values, especially in variable life contracts.

Bid Price

The price at which the insurer will redeem (buy back) units in a variable life fund—used to compute withdrawal values.

Offer (Ask) Price

The price at which new units are purchased in a variable life fund—used to determine how many units premiums will buy.

Bid-Offer Spread

Percentage difference between bid and offer price, covering fund management and dealing costs.

Top-Up

Additional single premium paid into a variable life policy to buy extra units beyond scheduled premiums.

Switching Facility

Right of a variable life policyholder to move fund units from one investment portfolio to another under set rules.

Unit Trust / Mutual Fund

A pooled investment vehicle established by trust deed, where investors buy units representing shares of the underlying portfolio.

Equity Fund

Investment fund primarily holding shares of stock; offers high growth potential with higher volatility and risk.

Bond (Fixed-Income) Fund

Fund investing chiefly in corporate or government bonds, aiming for steady income and capital preservation.

Balanced Fund

Portfolio that mixes bonds and equities to achieve moderate risk and return.

Diversification

Investment strategy of spreading assets across various securities or asset classes to reduce unsystematic risk.

Rebating

Illegal practice of giving part of the agent’s commission or other inducement to a prospect to secure a sale.

Twisting

Unethical act of inducing a policyholder to lapse or surrender one policy in order to purchase a new one, using misleading comparisons.

Withdrawal Value

Amount available to the owner of a variable life policy upon surrender, equal to bid price times units minus charges.

Specific (Unsystematic) Risk

Risk related to an individual company, such as fraud or excessive leverage, reducible through diversification.

Systematic (Market) Risk

Risk inherent to the entire market or asset class, such as recession or interest-rate changes, not eliminated by diversification.

Preferred Stock

Equity security that pays fixed dividends and has priority over common stock for assets and income but limited appreciation.

Fixed Income Security

Investment, such as a bond, that provides regular interest payments and returns principal at maturity.

Derivatives

Financial instruments (e.g., options, futures) whose value is derived from an underlying asset; generally high-risk.