Terms 1-10

Agent: An individual authorized to solicit, sell, and transact coverage for specific insurance providers under an agent contract.

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

Claims Department: The department responsible for processing, investigating, and paying claims.

Insurance: The transfer of risk through the pooling or accumulation of funds.

Insured: The customer who receives insurance protection under an insurance policy.

Insurer: An insurance company that provides coverage and assumes risk.

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.

Hazard: A condition that increases the likelihood of a loss occurring.

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

Loss: An unintentional decrease in value due to a covered peril.

Peril: The specific event or cause that results in a loss.

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

Risk: The uncertainty regarding the possibility of loss.

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

Agent: A person who represents the insurer during an insurance transaction and has been authorized to act on the insurance company's behalf. Agents have a fiduciary responsibility to both the insurer and the policy owner.

Broker: A licensed producer who represents the insured (client) during an insurance transaction. Unlike agents, brokers don't hold appointments with insurers and cannot bind coverage.

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.

Consideration: The items of value that each party provides in a contract. The applicant provides material information and premiums; the insurer promises to pay covered claims.

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 an insurable interest 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.

Utmost Good Faith: The principle that both the policy owner and insurer must disclose all material facts and relevant information, with no attempt to conceal or deceive.

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.

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.

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. Accident death 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: Dependents may be added as additional (other) insureds through the use of a dependent rider. Other insured riders are typically used for spouses and children.

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.

Grace Period: The time after the premium due date during which payment can be made without penalty.

Policy Lapse: The termination of a policy due to non-payment of premiums.

Loading Charge: Another term for the expense factor in premium calculations.

Mortality Table: A table showing the probability of death at each age.

Surrender Value: The amount available in cash upon voluntary termination of a policy before it becomes payable by death or maturity.

Policy Loan: A loan issued by the insurance company using the policy's cash value as collateral.

Settlement Option: The method used to distribute the policy proceeds.

Contingent Beneficiary: The person or entity designated to receive the death benefit if the primary beneficiary predeceases the insured.

Spendthrift Clause: A provision that prevents creditors from claiming any portion of the policy proceeds.

Common Disaster Clause: A provision that specifies how proceeds are distributed if the insured and primary beneficiary die in the same accident.

Policy Reserves: Funds that an insurer sets aside to pay future claims.

Premium Mode: The frequency with which a policy owner elects to pay premiums (e.g., monthly, quarterly, annually).

Adverse Selection: The tendency of higher-risk individuals to seek insurance coverage. Sound underwriting practices help insurers identify and manage this risk to maintain fair premiums for all policyholders.

Attending Physician Statement (APS): A report from an applicant's doctor providing detailed medical information requested by underwriters when the application reveals conditions requiring further investigation.

Conditional Receipt: A document provided when premium is collected with an application that establishes when coverage begins, subject to the applicant proving insurability. Coverage is typically effective as of the application date or medical exam date.

Field Underwriter: The agent or producer who initiates the underwriting process by completing the application, collecting information, and submitting it to the home office underwriter.

Fiduciary Capacity/Responsibility: The legal obligation of insurance producers to act in the best interest of their clients when collecting premiums and providing advice. This trust relationship requires producers to place client interests above their own and exercise care, loyalty, and good faith in all insurance transactions.

Free-Look Period: A minimum 10-day period (30 days for mail-order policies) after policy delivery during which the owner can return the contract for a full premium refund if dissatisfied.

Insurable Interest: A financial or emotional relationship between parties that justifies one owning life insurance on another. Insurable interest must exist at policy issue and is automatically presumed in certain relationships (spouses, parents, children, business partners).

Medical Information Bureau (MIB): A service organization that collects and shares medical data on insurance applicants among member companies to help detect undisclosed health conditions and prevent fraud.

Representations: Statements made by applicants on insurance applications that are considered substantially true to the best of their knowledge. Unlike warranties, representations must only be materially accurate, not absolutely true in every detail.

Risk Classification: The categorization of applicants based on their risk profile, typically as preferred, standard, or substandard risks. Classification determines premium rates and insurability.

Underwriting: The process of evaluating applicants to determine insurability and appropriate risk classification. Underwriting involves analyzing information from various sources to decide whether to issue coverage and at what premium rate.

Blanket Health Policies: These policies are issued to cover a group that may be exposed to the same risks, but whose composition (i.e., the individuals within the group) is continually changing. A blanket health plan may be issued to an airline or a bus company to cover its passengers or to a school to cover its students. Unlike group insurance, no certificates of coverage are issued in a blanket health plan.

Certificate of Insurance: This is a document issued by an insurance company or broker that verifies insurance coverage granted to individuals under specific conditions. With group insurance, the group (typically the employer) is the policy owner and maintains a master policy. The insureds (typically the employees) receive a certificate of insurance rather than a policy.

Contributory Plan: This is a group insurance plan issued to an employer, under which both the employer and employees contribute to the plan's cost. Generally, at least 75% of eligible employees must be covered by insurance in most states. The employees must contribute to the cost of the plan.

Conversion Privilege: Before an original group insurance policy expires, this privilege enables the policy owner to convert the expiring group coverage (usually group term) to an individual whole life policy. The insured is not required to prove insurability (good health) when converting a policy.

Credit Policies:  These policies are designed to help the insured pay off a loan in the event the insured passes away. The policy will pay a lump sum to the creditor to pay off the loan. Credit policies typically cannot exceed the amount of the loan since that’s the limit of the creditor’s insurable interest in the insured(s).

Franchise Insurance:  This is a life or health insurance plan that covers groups of individuals with uniform policies, though the benefits may vary. Solicitation typically takes place in an employer’s business with the employer’s consent. Franchise insurance is generally written for groups that are too small to qualify for regular group coverage. This policy may be referred to as wholesale insurance when it involves life insurance.

Master Policy:  This policy is issued to the employer under a group plan and contains all the insuring clauses that define employee benefits. Individual employees who participate in the group plan receive personalized certificates that outline the key highlights of their coverage, including their beneficiary designation.

Noncontributory Plan: This is an employee benefit plan under which the employer bears the full cost of the employees’ benefits. The plan must cover 100% of eligible employees. Employees do not contribute to the plan's cost.

Persistency:  As it pertains to insurance, persistency is the percentage of an insurer's policies that remain in force after a specified period. Persistency is negatively impacted by policies that are replaced by other insurers, cancelled, or that lapse due to nonpayment. Companies with higher persistency tend to be more stable and profitable than those with lower persistency.

Cross-Purchase Plan: This is a plan that, upon a business owner’s death, surviving owners will purchase the deceased’s interest, often with funds from life insurance policies owned by each principal on the lives of all the other principals.

Entity Plan: This is an agreement whereby a business assumes the obligation of purchasing a deceased owner’s interest in the business, which proportionately increases the interests of the surviving owners.

Human Life Value Approach: This is a method of determining an individual’s economic worth as measured by the sum of the individual’s future earnings that is devoted to the individual’s family.

Key Person Insurance: This insurance protects a business against financial loss caused by the death or disability of a vital member of the company, often individuals who possess special managerial or technical skills or other expertise.

Needs Approach: This is a method for determining how much insurance protection a person should have by analyzing a family’s or business’s needs and objectives if the insured were to die, become disabled, or retire.

403(b) Plan: A retirement plan for certain employees of public schools, tax-exempt organizations, and ministers.

1035 Contract Exchange: A provision allowing tax-free exchanges of annuities, life insurance policies, or endowment contracts.

Accumulation Period: The phase during which premiums are credited as accumulation units before payout begins.

Annuity Units: Units used to make payments to the annuitant once accumulation units are converted.

Deferred Annuity: An annuity that postpones payments until after a specified period or age.

Equity-Indexed Annuity (EIA): A fixed deferred annuity with interest linked to an equity market index.

Fixed Annuity: An annuity providing a guaranteed rate of return with investment risk assumed by the insurer.

Immediate Annuity: An annuity purchased with a single payment that begins paying income within one month.

Joint Life and Survivor Option: An annuity payout option providing payments to two people, continuing to the survivor for life.

Life with Period-Certain Option: A payout option providing income for life with a guaranteed minimum period of payments.

Market Value Adjustment: An adjustment in deferred annuities affecting crediting rates based on market conditions.

Variable Annuity: An annuity where investment risk is shifted to the contract owner, with payments fluctuating based on securities value.