Life Insurance Principles, Policy Types, and Riders

Comprehensive vocabulary flashcards covering fundamental insurance concepts, risk handling, policy classifications, premium formulas, underwriting terms, and life insurance riders.

Term Insurance

Life insurance coverage provided for a specific period (term) that offers pure death protection without a cash value component.

Whole Life Insurance

Permanent life insurance coverage that lasts for the insured's entire lifetime, incorporating a cash value component and level premiums.

Universal Life Insurance

Flexible permanent life insurance that features flexible premium payments, adjustable death benefits, and an unbundled policy structure.

Interest-Sensitive Whole Life

A form of permanent life insurance (also called Current Assumption Life) where policy values or premiums are tied to the insurer's current interest-rate assumptions.

Survivor Protection

The primary personal use of life insurance, designed to replace lost income and protect surviving dependents from financial hardship following a wage-earner's death.

Cash Accumulation

A feature of permanent life insurance where cash value accumulates on a tax-deferred basis and can be accessed via policy loans or surrender.

Liquidity

The accessibility of funds made available to beneficiaries via death benefits or to policyholders while living through cash value loans and living benefits.

Estate Creation

The creation of an immediate financial estate for beneficiaries upon the death of the insured through the payment of the life insurance death benefit.

Estate Conservation

The use of life insurance proceeds to pay estate taxes, final expenses, and settlement costs, preventing heirs from having to sell estate assets.

Insurable Interest

A financial or familial interest in an insured's life where the policy owner would suffer a financial loss upon the insured's death; it must exist at the time of application.

First-Party Ownership

An insurance arrangement in which the policy owner and the insured are the exact same person.

Third-Party Ownership

An insurance arrangement in which the policy owner is a different individual or entity than the insured person.

Indemnification

The insurance principle of restoring the insured to approximately the same pre-loss financial position without allowing a financial profit from the loss.

Valued Policy

A policy approach used in life insurance that pays a specific, predetermined dollar amount upon the occurrence of a covered loss.

Pure Risk

A category of risk involving only the possibility of loss or no loss, with no chance of financial gain; it is the type of risk insurable by insurance companies.

Speculative Risk

A category of risk involving the possibility of loss, no loss, or gain (such as stock market investing), which is uninsurable.

Exposure

A situation presenting risk and potential loss for an insurance company, evaluated during underwriting to establish premiums.

Underwriting

The process conducted by an underwriter to assess, classify, and evaluate the degree of risk presented by an applicant.

Premium

The specified amount of money charged by an insurance company for providing insurance coverage.

Hazard

A physical condition, circumstance, or attitude that increases the likelihood or severity of an insurance loss.

Physical Hazard

A physical, tangible, or observable condition (such as bald tires or cigarette smoking) that increases the probability of a loss.

Moral Hazard

A hazard stemming from an individual's dishonesty, poor ethics, or criminal background that increases the likelihood of an intentional or fraudulent loss.

Morale Hazard

A hazard arising from an attitude of carelessness or indifference to loss simply because an insurance policy is in place.

Peril

The direct cause of an insurance loss, such as a car accident, burglary, or fire.

Loss

The end result of a peril that gives rise to an insurance claim, representing physical damage, injury, or financial harm.

Avoidance

A risk management method that completely eliminates or avoids an activity that could cause a financial loss.

Retention

A risk handling method where an individual or business retains financial responsibility for a risk, such as through self-insurance or policy deductibles.

Sharing

Dividing financial risk among multiple entities, such as through an $80/20$ coinsurance arrangement.

Reduction

Taking proactive measures to decrease the probability or severity of a loss without abandoning the activity.

Transfer

Shifting financial risk from an individual to another party, primarily accomplished by purchasing an insurance policy.

Group Insurance

An insurance contract that covers a group of individuals (such as employees) under a single master policy issued to a sponsor (such as an employer).

Stock Insurer

An insurance company owned by stockholders/shareholders that operates for profit and issues only non-participating policies.

Mutual Insurer

An insurance company owned by its policyholders, who hold voting rights and may receive non-guaranteed policy dividends from divisible surplus.

Participating Policy

An insurance policy issued by mutual insurers that is eligible to receive policy dividends declared from the company's divisible surplus.

Non-Participating Policy

An insurance policy that does not pay policy dividends based on insurer surplus, issued exclusively by stock insurers.

Human Life Value Approach

A method used to determine required life insurance based on the economic value of the insured's future lost earning potential, using average earnings, deductions, years to retirement, and capitalization rate.

Needs Approach

A method determining life insurance requirements by calculating the survivors' specific future financial needs and subtracting existing available assets.

Mortality Rate

The annual proportion of deaths per $1,000$ insured individuals in a specified demographic group, used by insurers to calculate risk and premiums.

Gross Premium

The premium cost calculation before accounting for investment returns, expressed as: $\text{Gross Premium} = \text{Mortality Rate per } \$1,000 + \text{Expenses}$.

Net Premium

The premium calculation incorporating the insurer's expected investment earnings, expressed as: $\text{Net Premium} = \text{Mortality Rate per } \$1,000 + \text{Expenses} - \text{Interest Earned}$.

Policy Summary

A required disclosure document given to an applicant detailing the specific coverage, features, costs, and values of the proposed policy.

Buyer's Guide

A required consumer document providing general educational information to help applicants understand life insurance products and make informed decisions.

Attained Age

The insured's current age at any given policy anniversary or renewal point, commonly used to re-rate renewable term insurance premiums.

Step-Rate Premium

A premium structure where term insurance costs increase ('step up') at specified renewal intervals based on the insured's attained age.

Annually Renewable Term (ART)

A 1-year term policy that guarantees annual renewal without proof of health, with premiums stepping up each year based on attained age.

Decreasing Term Insurance

A term policy where the face amount gradually decreases to $\$0$ over the policy term while the premium generally remains level.

Increasing Term Insurance

Term insurance where the face amount increases over time via a flat dollar amount or percentage without requiring new proof of health.

Conversion Option

A provision in a convertible term policy allowing the policyowner to convert term coverage to permanent insurance without proving insurability.

Original Age

The age of the insured when a policy was originally issued, used to determine level premiums for permanent policies or original-age conversions.

Amount at Risk

The pure life insurance portion of a whole life contract held by the insurer, calculated as: $\text{Amount at Risk} = \text{Face Amount} - \text{Cash Value}$.

Continuous Premium Whole Life

The traditional whole life arrangement (also called straight life) where level premiums are paid continuously for the insured's whole life or until endowment.

Limited Payment Whole Life

Permanent life insurance where premiums are paid for a restricted timeframe (e.g., 20-Pay Life or Paid-Up at 65), after which coverage remains in force without further payments.

Single-Premium Whole Life

A permanent life insurance policy funded entirely by a single upfront lump-sum premium payment.

Endowment

The maturity point of a whole life policy (commonly age 100 or 120) when accumulated cash value equals the face amount and is paid out to the policyowner.

Variable Whole Life Insurance

Permanent life insurance with fixed premiums where cash value is held in separate accounts invested in securities, carrying investment risk and requiring a securities license to sell.

General Account

An insurer's primary investment account that holds cash values for fixed life insurance policies and supports guaranteed minimum interest rates.

Separate Account

An investment account maintained separately from the insurer's general account, holding cash values for variable policies invested in stock, bond, or money market funds.

Modified Whole Life

A permanent whole life policy with lower initial premiums during an introductory period (3–10 years) that increases once at a set time and remains level thereafter.

Graded Whole Life

Permanent life insurance where the death benefit starts at a lower amount and gradually increases (typically over 3–5 years) to the full face amount while premiums stay level.

Adjustable Whole Life

A flexible permanent policy that allows the policyowner to adjust the face amount and/or premium payments as financial needs change.

Seven-Pay Test

An IRS limitation test that restricts the cumulative premium amount paid into a life insurance contract during its first 7 years to prevent overfunding.

Modified Endowment Contract (MEC)

A life insurance contract that fails the Seven-Pay Test due to excessive funding, permanently forfeiting standard tax-free distribution benefits.

Indeterminate Premium Whole Life

Permanent life insurance with non-guaranteed premiums that the insurer can adjust periodically based on current costs, up to a stated maximum premium.

Waiver of Premium Rider

A policy rider that waives ongoing premium payments if the insured suffers a total disability, usually following a 90–180 day waiting period.

Accelerated Benefit Rider

A provision allowing terminally or critically ill insureds to receive a portion of the policy's death benefit while living, which reduces the final death payout.

Facility of Payment Clause

A provision enabling an insurer to pay death proceeds to an eligible relative or trustee if the named beneficiary is a minor or incapable of receiving payments.

Return of Premium (ROP) Rider

A rider that increases the death benefit by an amount equal to the total premiums paid into the policy upon the insured's death.

Joint Life Policy

A single policy covering two or more individuals (first-to-die) that pays the death benefit upon the first death and then terminates.

Survivorship Life Policy

A single life insurance policy covering two or more people (also called Last-to-Die) that pays the death benefit only after the last insured person dies.

Risk Corridor

The one-year renewable term insurance amount at risk in a Universal Life policy, calculated as: $\text{Risk Corridor} = \text{Face Amount} - \text{Cash Value}$.

Target Premium

The recommended planned monthly premium in a Universal Life policy intended to cover costs and keep the policy on track to endow at age 95.

Excess Interest

The portion of credited interest in a Universal Life or Interest-Sensitive policy that exceeds the guaranteed minimum rate: $\text{Excess Interest} = \text{Current Rate} - \text{Guaranteed Minimum Rate}$.

Unbundled Contract

An insurance policy structure (typical of Universal Life) where mortality costs, investment earnings, and expense charges are separated and disclosed individually.

Variable Universal Life (VUL)

An unbundled permanent life policy combining flexible premiums and adjustable death benefits with separate account equity investments.

Jumping Juvenile Policy

A juvenile policy (Junior Estate Builder) whose face amount automatically increases (commonly 5×) at age 18 or 21 with no premium increase or medical underwriting.