MOST COMMON TERMS

Ordinary Life: Also referred to as straight life and whole life insurance. These three synonymous terms refer to the type of life insurance policy that continues during the whole of the insured's life, generally with level premiums payable each year until death or until age 100 when the policy endows if the insured is still living.

Paid-Up Additions: A dividend option that allows the policyowner to use policy dividends to purchase paid-up additional insurance on a net single premium basis at the insured's attained age.

Paid-Up Policy: A policy on which the policyowner has completed payments, but that has not yet matured. This may be (1) reduced paid-up insurance provided under the nonforfeiture provision, (2) a limited payment policy under which all premiums have been paid, or (3) a policy on which accumulated dividends have been applied to pay the net single premium required to pay up the difference between the policy's reduced paid-up insurance and its face amount.

Participating Insurance: An insurance policy, usually issued by mutual companies, that shares a portion of the surplus of the company with policyowners through dividends. The dividends represent the difference between the premiums charged and the actual costs (i.e., claims, expenses, earnings, etc.) experienced during the period for which the premiums were charged. (For contrast, see: nonparticipating life insurance.)

Permanent Insurance: Any form of life insurance in which the insured has the guaranteed right to keep the policy in force as long as he or she pays the premium. Also refers to any life insurance policy that builds cash value. (For contrast, see: term insurance.)

Preferred Risk: A person whose physical condition, occupation, mode of living, and other characteristics (including the size of policy to be purchased) indicate an above-average life expectancy and, therefore, who qualifies for a premium rate that is more favorable than that offered to standard risks. (For contrast, see: standard risk.)

Rated: A rated policy is one issued on a substandard risk with higher than standard premiums.

Rating: The premium classification given to a person who applies for life insurance. The tem is usually used when an applicant is designated as a substandard risk. A higher premium reflects the increased risk.

Renewable and Convertible Term: Term life insurance offering the policyowner both the option to renew the coverage at the end of the term period and the option (within the term period) to convert it to a permanent form of insurance.

Standard Policy: A policy issued with standard provisions and at standard rates; not rated or with special restrictions.

Standard Risk: A person who meets the insurer's underwriting criteria for standard policies. (For contrast, see: substandard risk; rated.)

Stock Company: A company that is owned and controlled by stockholders rather than policyowners. (See also: mutual company.)

Straight Term: A basic form of term life insurance, written for a specific number of years, having a level premium and automatically terminating at the end of the period.

Substandard Insurance: Life insurance issued at premium rates higher than standard, to applicants who are rated or substandard risks. (For contrast, see: standard policy.)

Substandard Risk: A person whose mortality risk is greater than average for his or her age. Substandard rating factors include various medical conditions such as diabetes, hypertension, and heart ailments; high risk occupations such as airline pilots, race car drivers, miners, and high-altitude construction workers; high risk avocations or hobbies such as scuba diving or sky diving; detrimental habits or addictions such as smoking, a history of drug use or alcohol abuse; and possible moral turpitude as evidenced by excessive gambling, criminal convictions, and bankruptcy. Substandard risks, if covered at all, are usually charged additional premium.

Suicide Provision: Life insurance policies include a provision that if the insured commits suicide within a specified period, usually one or two years after date of issue, the company is not liable to pay the face amount of coverage. Generally, liability is limited to a return of premiums paid.

Surrender: The policyowner's return of a policy to the insurance company in exchange for the policy's cash surrender value or other equivalent nonforfeiture values. (See also: nonforfeiture values.)

Surrender Charge: In a variable or universal life policy a special charge is levied on the available cash value to reimburse the insurer for the unrecovered costs of issuing the policy.

Target Premium: The suggested or recommended annual premium for a universal life policy that will maintain the plan of insurance if the actual interest, mortality, and expense experience matches the underlying assumptions used to compute the premium.

Terminal Dividend: Dividends that may be payable upon termination of a policy at death, maturity, or surrender for its cash value, usually after the policy has been in force for at least a specified number of years.

Term Insurance: Life insurance protection that expires after a specified term without any residual value if the insured survives the stated period. The protection period may be as short as 30 days (as in temporary insurance agreements) or as long as 20 years or more. (For contrast, see: whole life insurance.)(click here for example strategy)

Term Insurance Rider: A form providing term life insurance that is attached to a permanent life insurance policy, with the purpose of increasing the total amount of protection during the term period.

Universal Life: A flexible-premium, current-assumption, adjustable-death-benefit policy. Similar to traditional policies, universal life pays a death benefit and accumulates cash value. Unlike traditional products, universal life completely separates the protection element from the accumulation element of the policy. Click here for more detailed Universal Life Illistration.

Vanishing Premium: A feature in some cash value policies whereby the premium, which is based on premium amount and assumed interest rates, will end after a specified period of time, usually as a result of applying dividends as additional premiums.

Variable Annuity: An annuity that invests the contractholder's funds in security-type investments and that does not guarantee the level of payments. Instead, payments may fluctuate up and down in relation to the earnings and market value of the assets in a separate account. Thus, the investment risk is assumed by the contractholder.

Variable Life Insurance: Life insurance that provides a guaranteed minimum death benefit, but the actual benefit paid may be more, depending on the fluctuating market value of investments in the separate account backing the contract at the time of the insured's death. The cash surrender value generally fluctuates with the market value of the investment portfolio.

Whole Life Insurance: A form of life insurance offering protection for the whole of life, proceeds being payable at death. Premiums may be paid under a continuous premium arrangement or on a limited payment basis for virtually any desired period of years (e.g., 1, 10, 20, 30, or to ages 60 or 65).  (See also:  ordinary life.)

Yearly Renewable Term Insurance: A 1-year term insurance contract that may be renewed each year at, generally, successively higher premiums corresponding to the insured's attained age with no evidence of insurability. The right of renewal may extend to ten years or more or to an age such as 60 or 65.

 

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