Terms

Risk

The chance something bad might happen.

Peril

The actual cause of a loss (death, fire, accident).

Hazard

Anything that makes a loss more likely.

Physical Hazard

A physical condition that increases risk (icy sidewalk, faulty wiring).

Moral Hazard

Someone acts dishonestly because insurance exists.

Morale Hazard

Someone becomes careless because insurance exists.

Indemnity

Restoring someone financially after a loss.

Insurable Interest

You would suffer financially or emotionally if the insured died.

Transfer of Risk

Moving financial risk from yourself to the insurance company.

Valued Contract

Pays a stated amount when a covered loss occurs (life insurance).

Consideration

What each side gives to make the contract valid.

Applicant’s Consideration

Premium payment and truthful statements.

Insurer’s Consideration

Promise to pay benefits.

Aleatory Contract

One party may pay little and receive a lot.

Adhesion Contract

Insurance company writes the contract.

Unilateral Contract

Only the insurer makes a legally enforceable promise.

Conditional Contract

Benefits are paid only if conditions are met.

Competent Parties

People legally able to enter a contract.

Legal Purpose

Contract must be for a legal reason.

Offer and Acceptance

One party offers, the other agrees.

Underwriting

Evaluating risk and deciding whether to insure someone.

APS (Attending Physician Statement)

Medical records from a doctor.

MIB

Database used by insurers to verify medical information.

Inspection Report

Background information gathered on applicant.

Field Underwriting

Agent’s observations of applicant.

Producer Report

Agent’s notes submitted to insurer.

Preferred Risk

Better-than-average risk.

Standard Risk

Average risk.

Substandard Risk

Higher-than-average risk.

Rated Policy

Higher premium because of higher risk.

Declined Risk

Application denied.

Adverse Selection

High-risk people seek more insurance.

Grace Period

Extra time to pay a premium after due date.

Reinstatement

Restoring a lapsed policy.

Incontestability Clause

After 2 years, insurer generally can’t contest statements.

Entire Contract Clause

Policy and application make up the contract.

Misrepresentation

False statement on application.

Concealment

Leaving out important information.

Fraud

Intentional deception.

Warranty

Statement guaranteed true.

Representation

Statement believed to be true.

Material Fact

Information affecting underwriting decisions.

Waiver

Giving up a legal right.

Estoppel

Prevents someone from changing their position after others relied on it.

Beneficiary

Receives death benefit.

Primary Beneficiary

First in line.

Contingent Beneficiary

Backup beneficiary.

Revocable Beneficiary

Can be changed anytime.

Irrevocable Beneficiary

Requires permission to change.

Class Beneficiary

Group designation such as 'my children'.

Minor Beneficiary

Beneficiary under legal age.

Trust Beneficiary

Trust receives proceeds.

Per Stirpes

Deceased beneficiary’s share goes to their descendants.

Per Capita

Living beneficiaries split proceeds equally.

Policyowner

Person who controls the policy.

Insured

Person whose life is covered.

Assignment

Transfer of rights.

Absolute Assignment

Transfers all ownership rights.

Collateral Assignment

Uses policy as loan collateral.

Ownership Clause

Explains owner rights.

Term Life Insurance

Temporary coverage only.

Whole Life Insurance

Permanent coverage with cash value.

Universal Life Insurance

Flexible permanent coverage.

Variable Life Insurance

Permanent coverage with investments.

Ordinary Whole Life

Premiums paid for life.

Limited Pay Whole Life

Premiums paid for a set number of years.

Single Premium Whole Life

One large premium payment.

Modified Premium Whole Life

Lower premiums at first, higher later.

Renewable Term

Renew without proving health.

Convertible Term

Convert to permanent insurance without proving health.

Level Term

Same death benefit throughout.

Increasing Term

Death benefit increases.

Decreasing Term

Death benefit decreases.

Cash Value

Savings component inside a permanent policy.

Cash Surrender Value

Amount received when policy is canceled.

Policy Loan

Borrowing against cash value.

APL (Automatic Premium Loan)

Cash value pays overdue premium.

Nonforfeiture Options

Ways to keep value after lapse.

Cash Surrender Option

Take the cash.

Reduced Paid-Up Insurance

Smaller permanent policy.

Extended Term Insurance

Same death benefit for limited time.

Waiver of Premium Rider

If you become disabled, the insurance company pays your premiums.

Accidental Death Rider

Pays extra money if death is caused by an accident.

Guaranteed Insurability Rider

Lets you buy more insurance later without a medical exam.

Payor Benefit Rider

If the person paying for a child’s policy dies or becomes disabled, premiums are waived.

Accelerated Death Benefit Rider

Lets a terminally ill insured receive part of the death benefit while still alive.

Cost of Living Rider (COLA)

Increases benefits over time to help offset inflation.

Return of Premium Rider

Returns premiums paid if you outlive the term policy.

Flexible Premium

Policyowner can adjust premium payments.

Flexible Death Benefit

Death benefit can be adjusted.

Interest-Sensitive Cash Value

Cash value grows based on current interest rates.

Separate Account

Investment account used for variable policies.

General Account

Insurance company’s main account used for fixed policies.

Prospectus

Document explaining investment risks and objectives.

Securities Registration

License required to sell variable products.

Investment Risk

Risk that investments lose value; in variable policies, this risk belongs to the policyowner.

Participating Policy

Eligible to receive dividends.

Nonparticipating Policy

Not eligible to receive dividends.

Dividend

Return of excess premium, not considered taxable income.

Cash Option

Receive dividend in cash.