life insurance

Absolute Assignment

This is a policy assignment under which the assignee (person to whom the policy is assigned) receives full control over the policy and full rights to its benefits. Generally, when a policy is assigned to secure a debt, the owner retains all the rights in the policy over the debt, although the assignment is absolute in form.

Accidental Death Benefit Rider

This rider pays an additional sum to the beneficiary if the insured dies due to a covered accident. The amount paid is a multiple of the policy face amount, such as double or triple the original benefit. this life insurance provides the cheapest way to add a significant amount of coverage for a limited period

Accelerated Benefits Rider

This rider allows the insured to receive a portion of the death benefit before death if the insured has a terminal illness and is expected to die within one-to-two years. Regardless of the amount that's withdrawn in an accelerated death benefit, it will decrease the death benefit when death occurs.

Automatic Premium Loan Provision

This provision allows the insurance company to deduct the overdue premium from an insured's cash value by the end of the grace period if a payment is missed on a life policy. The insurance company can automatically take out a loan for the insured against cash value to cover premiums if it does not receive payment when due

Cash Surrender Option

This non-forfeiture option allows the policy owner to receive the policy's cash value. If this option is exercised, the policy owner no longer has coverage. Typically, the maximum period that a life insurance company may legally defer paying the cash value of a surrendered policy is six months (delayed payment provision).

Collateral Assignment

This is an assignment of a policy to a creditor as security for a debt. The creditor is entitled to be reimbursed out of policy proceeds for the amount owed. Any proceeds above the amount due at the insured's time of death will be paid to a beneficiary designated by the policy owner

Consideration Clause

This clause states a policy owner must pay a premium in exchange for the insurer's promise to pay benefits. A policy owner's consideration consists of completing the application and paying the initial premium. The amount and frequency of premium payments are contained in the consideration clause.

Dependent Riders

a rider on a life insurance policy is an optional add-on that provides a small death benefit to cover final expenses if a covered spouse or child passes away

Dividend Options

These are the options that a policy owner has when receiving dividend payments from an insurance policy. Options include cash, reduced premiums, accumulated interest, paid-up additions, and one-year term insurance.

Entire Contract Provision

This provision states the insurance policy itself, including any riders, endorsements/amendments, and the application comprises the entire contract between all parties.

Free-Look Period

This period states that the policy owner is permitted a certain number of days once the policy is delivered to examine the policy and return it for a refund of all premiums paid.

Grace Period

This is a period after the due date of a premium during which the policy remains in force without penalty. Suppose an insured dies during the grace period of a life insurance policy before paying the required annual premium. In that case, the beneficiary will receive the face amount of the policy minus any outstanding premiums. For life insurance, the grace period is typically one month.

Claims Department

The department responsible for processing, investigating, and paying claims.

Broker

A person who represents the insured (client) rather than the insurance company and cannot bind coverage.

Mutual Insurance Company

An insurer owned by policyholders that typically issues participating insurance policies with potential dividends.

Nonparticipating Policy

A policy that doesn't provide dividends or voting rights to policy owners.

Participating Policy

A policy that allows policy owners to receive dividends and elect the board of directors.

Producer

An individual licensed to sell, solicit, or transact insurance, including both agents and brokers.

Stock Insurance Company

An insurer owned by stockholders that typically issues nonparticipating policies.

Underwriting Department

The department responsible for reviewing applications, approving or declining coverage, and assigning risk classifications.

Adverse Selection

The tendency of higher-risk individuals to seek insurance coverage more frequently than lower-risk individuals.

Law of Large Numbers

The principle that the larger the number of similar risks insured, the more accurately future losses can be predicted.

Pure Risk

A risk that involves only the possibility of loss, with no chance of gain; the only type of risk that is insurable.

Speculative Risk

A risk that involves the possibility of both loss and gain; not insurable.

Physical Hazard

physical or tangible conditions that make a loss more likely

Moral Hazard

dishonest character or intentional behavior that increases the chance of loss.

morale hazards

careless attitude or indifference to loss because insurance exists.

indemnity

this is a promise or legal agreement where one person or company agrees to pay for the financial losses or damages of another party

endowment

a temporary policy that provides both a death benefit and a guaranteed lump-sum cash payout if you survive a set term

Contract of Adhesion

An insurance contract prepared by the insurance company with no negotiation between the applicant and insurer. The applicant must accept the contract terms on a "take it or leave it" basis.

Insurable Interest

The financial or economic interest that a person must have in the subject of insurance to purchase legally enforceable coverage. A person has this if they would suffer a financial loss from damage to or loss of the insured person or property.

Material Misrepresentation

A false statement made by an applicant that influences either the insurer's decision to accept the risk or the classification and pricing of an accepted risk.

Void Contract

A contract that has never been legally in force because it lacks one of the essential elements of a contract.

Voidable Contract

A contract that may be set aside by one of the parties for a reason satisfactory to the court.

Waiver

The voluntary giving up of a known legal right.

Competent parties

first "C" of CLOC, parties must have legal capacity such as legal age, mental capacity, licensed insurer, sober.

legal purpose

"L" in CLOC, contract must serve a lawful purpose, public interest, legal activity, valid intent.

offer and acceptance

"O" in CLOC, a mutual agreement to contact terms, such as, complete application, premium payment, and policy insurance.

Consideration

exchange of value, premium payments, a promise to pay claims, and truthful statements.

Accidental Death Benefit (ADB)

A type of policy that provides benefits in the event of accidental death; the accidental loss of sight, speech, or hearing; loss of use of limbs (i.e., paralysis); or loss of a member(s), such as the loss of an arm or a leg.

Adjustable Life Insurance

A permanent life policy offering the policyowner flexibility in premium payment amounts and an adjustable death benefit. Unlike Universal Life, the cash value grows at a guaranteed fixed rate

Attained Age

The age that an insured has attained as of a given date. For life insurance purposes, the age is based on either the nearest birthday or the last birthday, depending on the practices of the insurance company involved. Attained age is also referred to as "current age."

Cash Surrender Value

The amount available in cash upon the surrender of a policy by the owner before or after the policy matures.

Convertible Term Life Insurance

Temporary life insurance allowing the policy owner to convert the term policy for a permanent whole life policy offered by the insurance company without evidence of insurability.

Decreasing Term Insurance

A type of temporary protection characterized by a reducing face amount each year, often used in conjunction with a debt or loan.

Endowment Contract

A contract that pays a face amount after a fixed period (10, 20 years, or at age 65), or upon the insured's death if it occurs before the end of the period.

Extended Term Insurance

A nonforfeiture option available when a policy is surrendered, continuing the same face amount of the policy in force for a specified period.

Family Income Policy

A policy that combines a whole life policy with a decreasing term rider to provide a death benefit and monthly income payments to the beneficiary.

Joint Life Insurance

A policy that covers the lives of two or more persons, paying a death benefit and ending when the first insured dies

Universal Life Insurance

The most flexible life insurance policy with flexible premiums and adjustable death benefits. The accumulation account grows at a guaranteed rate, but the insurer often credits a higher rate

Family Maintenance Policy

A policy that combines a whole life policy with a level term policy to provide a monthly income payments to the beneficiary for a certain amount of time, followed by a full lump-sum payout

cash (dividend option)

If the policy owner is entitled to a $50 dividend, they may request that the insurer send the payment directly to them. Again, received insurance dividends are tax-exempt.

reduced premiums (dividend option)

If the policy owner's annual premium is $250, and they discover they're entitled to a $50 dividend, they may choose to direct the insurer to retain the dividend and subtract that amount from the upcoming premium.

accumulated interest (dividend option)

Under this option, the policy owner directs the insurer to retain the $50 dividend in a designated account. When this occurs, the insurer must pay interest on the dividend(s) it holds. Although the dividend is tax-exempt (not taxable), any interest earned on dividends left with the insurer is taxable as ordinary income in the year in which the interest is credited, regardless of whether the policy owner receives it

paid-up additions (dividend option)

the policy owner may elect to use the $50 dividend to purchase additional permanent whole life insurance. In other words, the dividend is used to purchase a small face amount of single-premium life insurance. Each paid-up addition also has cash value. Therefore, this option provides an increase in the policy owner's cash value. If this option is used, it increases the total death coverage to its maximum.

Paid-up Policy (dividend option)

Although uncommon, a policy dividend may be used to pay up a policy earlier than expected or as originally planned. In such cases, policy owners continue to pay their normal premium and use the dividends as additional payments toward the overall cost of their insurance

one-year term insurance (dividend option)

The $50 dividend can be used to simply purchase any type of term insurance that the insurer offers. The one-year term option is the dividend option that provides the policy owner with a different type of life insurance (i.e., term life insurance) than that which is provided by the primary policy (i.e., whole life), paying the dividend.

provisions/clauses

rules/laws intended to protect the policy owner

EXECUTION CLAUSE

The execution clause states that the insurance contract will be executed when both parties (the insurer and the policy owner) have satisfied the conditions of the contract. In other words, when both parties have fulfilled their responsibilities, the contract will be executed

MODIFICATION PROVISION

This provision, which may be listed separately from the entire contract provision, states that any changes made to the contract must be in writing and endorsed or attached to the policy. It also states that only an executive officer of the insurer or authorized home office personnel has the authority to make any changes or modifications, or to waive a policy provision.

The privilege of change clause - also known as the policy change provision or conversion option

outlines the conditions under which the company allows the policy owner to change the policy's coverage. If the premium is increasing, but the face value remains the same, the insured will not be required to prove insurability. However, the insured must prove insurability if premiums are decreasing or the face value is increasing, as this could lead to adverse selection.

INSURING AGREEMENT CLAUSE PROVISION

sets forth the company's fundamental promise to pay the policy benefits upon the insured's death or as otherwise defined in the insurance contract. This provision appears on the first page of the policy, which is also referred to as the policy face or cover page.

CONSIDERATION CLAUSE

there must be an exchange of value between the two parties for the contract to be legally enforceable.

INCONTESTABLE CLAUSE

clause or provision specifies that, after a certain period has elapsed (usually two years from the issue date), the insurer no longer has the right to contest the validity of the insurance policy as long as the contract continues in force but there are 3 exceptions; Impersonation or Identity, Lack of Insurable Interest, and Intent to Murder

MISSTATEMENTS OF AGE OR SEX (GENDER) PROVISION

This provision states that if the insured's age is "misstated" on the application, the policy will not be voided or canceled. However, the amount of insurance will be adjusted to the amount that would have been purchased at the premium paid had the correct age been known. If the insured's sex is misstated, the insurer will adjust the face amount as well.

OWNER'S PROVISION

this provision states that the policy owner possesses all of the rights contained in the policy. In any insurance policy or contract, the policy owner may name or change the beneficiary, borrow against the cash value (if applicable), and select the frequency of premium payments (i.e., the premium mode, such as annual, monthly, etc.). The owner may also choose to transfer one or more of these rights to another party. The transfer of policy ownership rights is referred to as "policy assignment." Additionally, if the contract is participating, the policy owner has the right to receive any dividends (also referred to as excess interest credits) payable and to vote to elect the company's board of directors.

APPLICANT CONTROL OR OWNERSHIP CLAUSE

If a proposed insured is under the age of majority (i.e., a minor), a parent or guardian is typically the applicant and the policy owner. When this occurs, the parent may have a provision inserted into the contract that provides them with full control of the policy until the minor reaches a specific age.

ASSIGNMENT PROVISION

this provision reiterates one of the policy owner's rights, as stated in the contract. It enables the policy owner to transfer any or all of their policy rights to another person.

absolute or complete assignment

an assignment occurs when the policy owner transfers all policy (ownership) rights

Collateral or conditional assignment

an assignment occurs when the policy owner assigns one or some of the ownership rights to another party but doesn't assign all of the policy ownership rights. can also be a partial and temporary transfer of policy rights to another person.

FREE-LOOK PROVISION

This provision allows the policy owner to return the policy for a full premium refund without providing a reason.

settlement

an option is a method of distributing a Life Insurance policy's death benefit OTHER than a lump sum payment.

MODE OF PREMIUM (PREMIUM PAYMENT) PROVISION

this provision states that premiums must be paid to an insurer or its representative for coverage to be provided and allows policy owners to select the mode (frequency) of premium. Insurers vary in the payment modes they offer. Policy owners can choose from the available options such as, yearly, semiannually, quarterly, or monthly. less maintenance and administrative costs for insurers equals less premium costs for insured.

GRACE PERIOD PROVISION

this provision is meant to protect the policy owner from an unintentional policy lapse. a grace period is the time following the premium due date during which coverage does not lapse even if the premium has not been paid. This period is generally 30 days, or one month, unless otherwise required by state law. Coverage remains in effect for the days following the due date.

REINSTATEMENT PROVISION

the policy lapses if premiums aren't paid, and this provision allows policyowners to reinstate the policy, within 3 years of the lapse, and the insured must provide proof of insurability to get approved. the policy also cannot be reinstated if it was surrendered

Excess Interest provision (cash value)

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. Therefore, allows interest that exceeds the policy's guaranteed rate of interest to be credited to the cash value account.

Index-linked method

Credits the excess interest from earnings tied to an economic indicator (e.g., the Consumer Price Index).

Portfolio method

Credits the excess interest in direct relation to the insurance company's earnings on its investments.

POLICY LOAN PROVISION

this provision is required in all whole life policies, states that the policy owner has the right to access their equity at their discretion. This provision, which is supported by the previously reviewed owner's rights provision, permits the owner to receive an advance against the cash value buildup of the whole life policy.

automatic premium loan (APL) provision

this provision is an optional financial safety mechanism in permanent life insurance policies, designed to prevent unintentional policy lapses. Think of it as an automated backup system that kicks in when traditional premium payments fail. automatically initiates a loan against the policy's cash value to cover the missed premium.

TAXATION

In general, policy loans may be taken out of an individual whole life policy without any tax implications as long as the policy remains active. However, this changes if the policy lapses or is surrendered, and there is an outstanding loan greater than the total premiums paid. When a policy with an outstanding loan is lapsed or surrendered (before the insured's death), any gains (i.e., the amount received via policy loan that exceeds the premiums paid) will be taxed as ordinary income. Additionally, interest paid to the insurer on a policy loan is not tax-deductible.

CASH SURRENDER OPTION

Policy owners may request an immediate cash payment of their cash values when their policies are surrendered. Any outstanding policy loans or debts reduce the amount of cash value that the policy owner will receive.

REDUCED PAID-UP OPTION

the policy owner uses the policy's cash value as the premium for a single-premium whole life policy at a lesser face amount than the original policy. When this option is exercised, its a cash value policy like the original, but for a lesser amount of coverage. This means that if the original policy was a participating policy, the new policy will also be a participating policy.

EXTENDED TERM OPTION

the default option when a whole life policy lapses, and it is automatically activated. this option permits the policy owner to surrender the policy and use the cash value to purchase a paid-up level term insurance policy. Unless a policy loan is outstanding, the face amount of extended term coverage is identical to the original whole life policy's face amount.

BENEFICIARY DESIGNATION PROVISIONS

The policy owner has the right to designate who will receive any policy proceeds upon the insured's death

SETTLEMENT OPTIONS PROVISION

this provision outlines the various ways that the policy's death benefit may be paid to the beneficiary, as well as who has the authority to decide how the funds will be distributed.

The spendthrift clause

this clause protects a death benefit against the claims of a beneficiary's creditors as well as the beneficiary's own poor financial decisions. It prevents creditors from claiming a right to death benefit funds yet to be paid by the insurer in the form of a settlement option over time. The clause only applies to non-lump-sum settlement options

WITHDRAWAL PROVISION

this provision is often used when the policy proceeds are held by the insurer and earn interest. This provision outlines the steps and requirements for withdrawing any funds left on deposit with the insurer. The beneficiary may have the option to withdraw all of the funds or only a limited amount each year.

ACCELERATED DEATH BENEFITS PROVISION (TERMINAL ILLNESS RIDER)

this provision allows an insured to "accelerate" the death benefit of a life insurance policy while still living if a physician diagnoses and verifies that the insured is suffering from a terminal illness and is likely to die within 12 to 24 months or less. its typically added to a policy through an accelerated benefits rider or terminal illness rider. Specific conditions for payment must be satisfied for a benefit to be paid. This provision, or rider, is typically offered without a premium increase.

WAIVER OF PREMIUM RIDER

this rider ensures that an insurance policy remains active if the insured becomes totally disabled. After the waiting period stated in the contract—usually six consecutive months of total disability— the insurer waives future premium payments until the insured returns to work. During this period, the insurer effectively makes premium payments, allowing the policy's cash value to accumulate and dividends, if applicable, to be paid as usual. Some companies will reimburse premiums paid during the waiting period. If the insured recovers, they resume premium payments without repaying the premiums that were waived.

Waiver of Cost of Insurance Rider

is typically reserved for universal life policies. Premiums for a universal life policy can fluctuate. For this reason, insurers generally only offer to waive the monthly cost of the insurance, not the total premium paid by the insured. In this case, the cash value will remain level and continue to collect interest, but it will not grow to the extent that it would have had the full premiums been paid.

Payor Benefit Rider

this rider is added only to a policy an adult purchases to cover the life of a child or juvenile. This rider waives premiums until the child reaches a specified age (usually 18, 21, or 25) if the premium payor (i.e., parent or guardian) dies or becomes totally disabled.

Disability Income Benefit Rider

this rider provides an income benefit if the insured is totally and permanently disabled as defined by the policy. Most disability income benefit riders provide for a small, stated benefit, such as 1% of the face amount of the policy, that is payable if the insured is totally disabled. The monthly income paid is generally limited to no more than $1,000 per month. Income benefits begin after the stated waiting period previously described.

accidental death benefit (ADB) rider

This rider provides an additional death benefit by multiplying the face policy's amount when the cause of death is an accident. Policies that pay a multiple of two times the policy face amount are referred to as double indemnity, while those that pay three times the death benefit for death due to accidents are referred to as triple indemnity, and so forth.

Accidental Death and Dismemberment (AD&D) Rider

Pays a lump-sum benefit for death, loss of limbs, or blindness. Identical to the standalone AD&D policy.

principal sum

The death benefit paid under accidental death coverage

capital sum

The dismemberment (severance) benefit paid under the accidental death and dismemberment rider and is most often one-half of the principal sum.

Guaranteed Insurability Option Rider

this rider allows a policy owner to purchase additional life insurance coverage at specified dates without providing evidence of insurability (i.e., no medical exam required). Insurers offer this option on a "use it or lose it" basis. The rider expires if the insured declines to exercise the option, so as to reduce the risk of adverse selection.

COST-OF-LIVING (ADJUSTMENT) RIDER

This rider automatically increases the face amount of the policy at specified intervals based on increases in the Consumer Price Index (CPI). Decreases in the CPI do not impact the face amount. The CPI measures the inflation rate each year.

TERM INSURANCE RIDERS

these riders were created to give insureds an inexpensive option to add additional temporary coverage to a permanent policy. These riders allow for an additional death benefit (above the permanent face value) if the insured dies during a specified term. Although there's an additional expense for the extra protection, it's nominal compared to the cost for the permanent protection and less than if the insured were to take out a separate term policy.