Key Terms in Life Insurance Concepts

Accelerated Benefit (Option) Rider

This rider allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness that's certified by a physician and is expected to die within one to two years.

Beneficiary

This is the person (or entity) who's designated in a life insurance policy to receive the death proceeds.

Cash Value

This is the equity or savings element of whole life insurance policies.

Class Designation

This is a beneficiary group designation (e.g., all of a person's children), opposed to specifying one or more beneficiaries by name.

Common Disaster Provision

This is a provision of the Uniform Simultaneous Death Act, which ensures a policy owner that death benefits will be paid to the contingent beneficiary if both the insured and the primary beneficiary die within a short period of time of one another. It also states that the primary beneficiary must outlive the insured by a specified period in order to receive the proceeds.

Contingent (Secondary) Beneficiary

This is the beneficiary who's second in line to receive death benefit proceeds if the primary beneficiary dies before the insured.

Earned Premium

This is the amount of premium that's paid by the policy owner for policy coverage or insurance protection up to a specific point.

Expense Factor

Also referred to as the loading charge, this is a measure of what it costs an insurance company to continue to operate.

Excess Interest

In life insurance, this provision means that the cash value will increase faster than the guaranteed rate if the insurer earns a greater return than the guaranteed rate.

Fixed Amount Installment Option

This option pays a fixed death benefit in specified installment amounts until the principal and interest are exhausted.

Fixed/Level Premium

This is a concept which averages what the total single premium would be for a policy over periodic payments. More periodic payments = higher total premium.

Fixed Period or Period Certain Option

This payment option pays the death benefit proceeds in equal installments over a set number of years. The dollar amount of each installment is dependent on the total number of installments.

Graded Premium

This premium funding option is characterized by a lower premium in the early years of the contract, with premiums increasing annually for an introductory period. After the introductory period, the premium increases to an amount that's higher than what the initial level premium would have been. Thereafter, it remains fixed or constant for the life of the policy.

Gross (Annual) Premium

An insurer's gross premium consists of the net premium for insurance PLUS commissions, operating and miscellaneous expenses, and dividends.

Interest Factor

This is the calculation for determining the amount of interest an insurance company can expect to earn from investing insurance premiums.

Interest Only Option

This is a death settlement option in which the insurance company holds the death benefit for a period and pays only the interest that's earned to the named beneficiary. A minimum rate of interest is guaranteed, and the interest must be paid at least annually.

Irrevocable Beneficiary

This is a beneficiary that cannot be changed by the policy owner without the written consent of the beneficiary.

Joint and Survivor Option

This is a settlement option which guarantees that benefits will be paid on a life-long basis to two or more people. This option may include a period certain, and the amount payable is based on the ages of the beneficiaries.

Life Income Option

This is a death benefit settlement option which provides the beneficiary with an income that she cannot outlive. Installment payments are guaranteed for as long as the recipient is alive. The amount of each installment is based on the recipient's life expectancy and the amount of principal.

Life Settlement

This is an agreement in which a policy owner sells or transfers ownership in all or part of a life insurance policy to a third party for compensation that's less than the expected death benefit of the policy.

Lump-Sum Option

This is a death settlement option in which the death benefit is paid in a single payment, minus any outstanding policy loan balances and overdue premiums. The lump-sum option is considered the automatic (or "default") option for most life insurance contracts.

Modified Premium

This is a premium funding option which is characterized by an initial premium that's lower than it should be during an introductory period (typically the first three to five years). After this period, the premium will increase to an amount that's greater than what the initial level premium would have been and then remain level or constant for the life of the policy.

Morbidity Rate

This rate demonstrates the incidence and extent of disability that may be expected from a given group of people.

Mortality Rate

This rate is the measure of the number of deaths (in general or due to a specific cause) in some population, scaled to the size of that population, per unit time.

Net Payment Cost Index

This is a formula that's used to determine the actual cost of a policy for a policy owner. It helps the consumer compare costs of death protection between policies that will be held for 10 to 20 years.

Net (Single) Premium

This is a premium calculation that's used to calculate an insurer's policy reserves factoring in interest and mortality.

Per Capita (By the Head)

This form evenly distributes benefits among all named living beneficiaries (i.e., all living children).

Per Stirpes (By the Bloodline)

This form evenly distributes benefits among an insured's beneficiaries according to the family line, branch, or root (i.e., children and grandchildren).

Premium Mode

This is the frequency in which a policy owner elects to pay premiums.

Primary Beneficiary

This is the first beneficiary in line to receive benefit proceeds upon the death of an insured.

Policy Proceeds

This is the amount actually paid as a death, surrender, or maturity benefit. In the case of a death benefit, it includes the face value, plus any earned dividends, less any outstanding loans and interest. In the case of a surrender benefit, the amount includes any cash value, minus surrender charges, outstanding loans, and interest. In the case of maturity, the benefit amount includes the cash value, less any outstanding loans and interest.

Reserves

This is the money an insurer sets aside (as required by the state's insurance laws) to pay future claims.

Revocable Beneficiary

This is a beneficiary that the policy owner may change at any time without notifying or getting permission from the beneficiary.

Settlement Options

These are optional modes of settlement that are provided by most life insurance policies. Options include lump-sum cash, interest only, fixed-period, fixed-amount, and life income.

Single Premium Funding

This is a policy funding option in which the policy owner pays a single premium that provides protection for life as a paid-up policy.

Spendthrift Clause

This clause prevents creditors from obtaining any portion of policy proceeds upon an insured's death. Additionally, the clause can be selected by the policy owner to prevent a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period.

Surrender Cost Index

This is a cost comparison calculation formula which is used to determine the average cost-per-thousand for a policy that's surrendered for its cash value. It aids in cost comparisons if the policy owner plans to surrender the policy for its cash value in 10 or 20 years.

Tertiary Beneficiary

This is the third beneficiary in line to receive death benefit proceeds. The tertiary beneficiary will only receive the death benefit if both the primary and contingent beneficiaries die before the insured.

Underwriting Department

This is the department within an insurance company that's responsible for reviewing applications, approving or declining applications, and assigning risk classifications.

Unearned Premium

This includes the premium that has been paid by a policy owner for insurance coverage which has not yet been provided.

Uniform Simultaneous Death Act

This act states that if the insured and the primary beneficiary die in a common accident at approximately the same time, with no clear evidence as to who died first, the law will assume that the primary died first. Therefore, the death benefit proceeds are paid to the contingent beneficiaries.

Viatical Settlement

This settlement involves a person with a terminal illness selling his existing life insurance policy to a third party for a percentage of the death benefit.

Viatical (Viatee)

This is the new third-party owner in a viatical settlement.

Viator

This is the original policy owner in a viatical settlement.