403(b) Plan – A retirement plan for specific employees of public schools, tax-exempt organizations and certain ministers. These plans can invest in either annuities or mutual funds. A 403(b) plan is also another name for a tax-sheltered annuity plan, and the features of a 403(b) plan are comparable to those found in a 401(k) plan.
Agent – An insurance company representative licensed by the state who solicits and negotiates contracts of insurance, and provides service to the policyholder for the insurer. An agent can be independent agent who represents at least two insurance companies or a direct writer who represents and sells policies for one company only.
Annuity – A contract that provides a periodic income at regular intervals, usually for life.
Annuity Certain – A contract that provides an income for a specified number of years, regardless of life or death.
Application – A statement of information made by a person applying for life insurance. It helps the life insurance company assess the acceptability of risk. Statement made in the application are used to decide on an applicant’s underwriting classification and premium rates.
Beneficiary – The person named in the policy to receive the insurance proceeds at the death of the insured. Anyone can be named as a beneficiary.
Broker – Insurance brokers represent multiple insurance companies. Thus, brokers are free to offer a wider range of products to their clients. They can search the market and obtain multiple price quotes to fit their clients’ budgets.
Bonus Rate Annuity – An extra percent of interest credited to an annuity during the first year that it is in force. The extra amount is above the interest rate to be credited beginning the second year and the remaining years that the annuity is in force. The extra rate is paid in the first year in an effort to attract new policyholders.
Cash Surrender Value – The amount available in cash upon voluntary termination of a policy by its owner before it becomes payable by death or maturity. The amount is the cash value stated in the policy minus a surrender charge and any outstanding loans and any interest thereon.
Direct Response – Insurance sold directly to the insured by an insurance company through its own employees by mail or over the counter.
Disclosure Statement – A comparison form required by New York Department of Financial Services Regulations to be given to every applicant considering replacing one life insurance policy with another.
Dividend – A return of part of the premium on participating insurance to reflect the difference between the premium charged and the combination of actual mortality, expense and investment experience. Dividends are not considered to be taxable distributions because they are interpreted as a refund of a portion of the premium paid.
Evidence of Insurability – A statement or proof of your health, finances or job, which helps the insurer decide if you are an acceptable risk for life insurance.
Expense – Your policy’s share of the company’s operating costs-fees for medical examinations and inspection reports, underwriting, printing costs, commissions, advertising, agency expenses, premium taxes, salaries, rent, etc. Such costs are important in determining dividends and premium rates.
Face Amount – The amount stated on the face of the policy that will be paid in case of death or at the maturity of the policy. It does not include additional amounts payable under accidental death or other special provisions, or acquired through the application of policy dividends.
Free Look Provision – A certain amount of time provided (usually between 10-30 days) to an insured in order to examine the insurance policy and if not satisfied, to return it to the company for a full refund.
Insurable Interest – For persons related by blood, a substantial interest established through love and affection, and for all other persons, a lawful and substantial economic interest in having the life of the insured continue. An insurable interest is required when purchasing life insurance on another person.
Lapse Rate – The rate at which life insurance policies terminate because of failure to pay the premiums. When policies are lapsed before enough premium payments are made to cover early policy expenses, the company must make up this loss from remaining policyholders. Therefore, the lapse rate will affect the cost of the policy.
Life Expectancy – The probability of an individual living to a certain age according to a particular mortality table. This is the beginning point in calculating the pure cost of life insurance and annuities and is reflected in the basic premium.
Misstatement of Age – The falsification of the applicant’s birth date on the application for insurance. When discovered, the coverage will be adjusted to reflect the correct age according to the premium paid in.
Mortality – The incidence of death at each attained age; frequency of death.
Non-Forfeiture – One of the choices available if the policy owner discontinues premium payments on a policy with a cash value. Options available are to take the cash value in cash or to use it to purchase extended term insurance or reduced paid-up insurance.
Non-Participating – A life insurance policy in which the company does not distribute to policyowners any part of its surplus.
Participating Policy – A life insurance policy under which the company agrees to distribute to policyowners the part of its surplus that its Board of Directors determines is not needed at the end of the business year. The distribution serves to reduce the premium the policyowners had paid.
Policy – The printed legal document stating the terms of insurance contract that is issued to the policyowner by the company.
Policy Proceeds – The amount actually paid on a life insurance policy at death or when the policyowner receives payment at surrender or maturity.
Policyowner – The person who owns a life insurance policy. This is usually the insured person, but it may also be a relative of the insured, a partnership or a corporation.
Premium – The payment, or one of the periodic payments, a policyowner agrees to make for an insurance policy. Depending on the terms of the policy, the premium may be paid in one payment or a series of regular payments, e.g., annually, semi-annually, quarterly or monthly. The premium charged reflects the expectation of loss, expenses and profit contingencies.
Rating – The basis for an additional charge to the standard premium because the person insured is classified as a greater than normal risk usually resulting from impaired health or a hazardous occupation.
Reduced Paid-up Insurance – A form of insurance available as a non-forfeiture option. It provides for continuation of the original insurance plan, but for a reduced amount, without further premiums.
Reinstatement – Restoring a lapsed policy to its original premium paying status, upon payment by the policy owner, with interest, of all unpaid premiums and policy loans, and presentation of satisfactory evidence of insurability by the insured.
Rider – An endorsement to an insurance policy that modifies clauses and provisions of the policy, including or excluding coverage.
Risk Classification – The process by which a company decides how its premium rates for life insurance should differ according to the risk characteristics of individuals insured (e.g., age, occupation, sex, state of health) and then applies the resulting rules to individual applications.
Settlement Options – The several ways, other than immediate payment in cash, in which a policyholder or beneficiary may choose to have policy benefits paid. These options typically include the following:
Interest Option – death benefit left on deposit at interest with the insurance company with earnings paid to the beneficiary annually.
Fixed Amount Option – death benefit paid in a series of fixed amount installments until the proceeds and interest earned terminate.
Fixed Period Option – death benefit left on deposit with the insurance company with the death benefit plus interest paid out in equal payments for the period of time selected.
Life Income Option – death benefit plus interest paid through a life annuity. Income continues under a straight life income option for as long as the beneficiary lives or whether or not the beneficiary lives, under a life income with period certain option.
Standard Risk – The classification of a person applying for a life insurance policy who fits the physical, occupational and other standards on which the normal premium rates are based.
Substandard Risk – The classification of a person applying for a life insurance policy who does not meet the requirements set for the standard risk. An additional premium is charged on substandard risks to provide for the probability that such a person will have a shorter life span than a standard risk.
Supplementary Contract – An agreement between a life insurance company and a policyowner or beneficiary in which the company retains at least part of the cash sum payable under an insurance policy and makes payment in accordance with the settlement option chosen.
Underwriter – The person who reviews the application for insurance and decides if the applicant is acceptable and at what premium rate.
Underwriting – The process by which a life insurance company determines whether it can accept an application for life insurance, and if so, on what basis so that the proper premium is charged.