Life Insurance Glossary Tips

Life Insurance Glossary

Absolute Assignment

The transfer of ownership of a life insurance contract to another owner.

Account Value - Accumulation Value - Cash Value

All of these are synonymous. See "Cash Value"

Actuary

A professional person trained in analyzing statistical information about people and insurance policies. Life insurance companies depend on actuaries to balance risks and set premium rates.

Admitted Assets

These are assets permitted on the balance sheet of life insurance companies according to special accounting rules. The purpose of this concept is to facilitate the determination of the liquid financial strength and claims paying ability of insurance companies.

Admitted Company

States regulate insurance companies. An insurance company is "Admitted" if it is licensed and authorized to do business in a particular state.

Adverse Selection

The desire of a person exposed to a higher risk to seek more insurance coverage than an average exposure. If insurers don't consider this concentration of exposure, they can have bad claims experience.

APS- Attending Physician Statement

Medical records of insured client used in life insurance and life settlement underwriting. These are doctor write ups of patient conditions. Most often doctors simply provide copies of the entire medical file.

Beneficiary

The person, persons, or entity named to receive the life insurance death benefit.

Captive Agent

An insurance agent selling for only one insurance company. These agents are prevented by contract from selling for any other carrier unless the insurance application is rejected by the agent's captive company first. This is not favorable to the buyer trying to get the best coverage for the lowest price.

Cash Value

The accumulated portion of unused premiums inside of a universal life policy. This entire amount is invested in the general account of the life insurance company and earns interest. This amount less any surrender charge is available as a refund upon surrender.

Carrier

The life insurance company that issues a life insurance policy.

Contestability Period

The initial 2 years of a new life insurance policy when a death claim can be contested (not paid) for suicide or fraudulent statements made on the insurance application.

Convertible Term Insurance

A term life insurance policy that contains the contractual right to be exchanged upon request for a permanent form of policy without requiring any underwriting (with applicable permanent insurance pricing).

COI- Cost of Insurance

This is the actual monthly costs that must be contributed or already be on deposit in a universal life policy. This amount is sometimes referred to as the "Pure Term Insurance Cost" or the "Pure Cost of Insurance" in analyzing an insurance contract. Life settlement buyers use sophisticated software (Milliman, DataLife and others) to calculate this amount so as to fund the absolute minimum amount monthly onto a policy held in a life settlement portfolio.

Crummy Powers

Trust provisions typically in ILITs where large annual gifts to the trust are allocated to various beneficiaries but are actually intended to go towards paying life insurance premiums. The crummy power permits the trustee to inform all of the beneficiaries of the receipt of the gift and let them know that if they do not elect to withdraw their portion of the gift within a number of days, the trustee will be paying the life insurance premium with the money.

Current Assumptions

The sales ledger "Illustration" for flexible premium life insurance is most often presented using interest rates and cost for insurance that are not guaranteed. Instead they are "currently assumed to be correct" as sanctioned by the issuing insurance carrier. Whenever this is reviewed, it is important to see the sister ledger of guaranteed rates. These guaranteed rates are the actual maximum amounts of premium it can cost to keep the proposed policy in force.

Dynasty Trust

A trust set up in a jurisdiction that permits perpetual trusts and the terms of the trust indicate holding onto assets indefinitely.

Death Benefit

The life insurance amount payable at death (Face Amount)

Estate Planning

The process whereby an individual or a married couple plan for the future disposition of all their property. This can involve who gets what and when, tax planning, income and retirement planning. There may also be considerations for passing along values, family history and cultural components as well. It can be simple or quite complex depending upon what is at stake and the family's tolerance for complexity. This process is best when it involves legal and financial advice from real experts and trusted advisors who can offer alternatives and model potential outcomes.

Estate Tax

A federal tax on individuals' right to transfer property at death beyond a life time amount excluded from this tax. Most states also have estate taxes that are coordinated with the federal estate tax.

Face Amount

The life insurance amount payable at death (Death Benefit)

Flexible Premium

Other than whole life, most permanent life insurance anticipates the option of irregular premium payments. These contract provisions are termed "Flexible Premium" policies.

Free Look Period

There is an initial period from when a new life insurance policy is purchased and when the owner can return it for a full refund. The period runs from 10 to 30 days depending on jurisdiction.

GSTT - Generation Skipping Transfer Tax

This an additional estate tax on direct transfer to generations below children (like grandchildren). The tax kicks in for transfers above lifetime exclusion amounts.

Gift Tax

A federal tax on an individuals' right to transfer property during life. The tax is imposed on gifts in excess of annual exclusions and his or her lifetime exemption.

Grace Period

A 30 day window when premiums have gone unpaid and life insurance coverage has ceased. During this window, the insurance company will accept premiums to reinstate coverage without requiring any underwriting to re-qualify the insured for coverage. At the end of the grace period, the policy lapses and the insured must reapply if coverage is to be reinstated.

Guaranteed Premium

Every sales ledger proposed for flexible premium life insurance must include a ledger for the highest possible premium costs under the contract. These amounts are the guaranteed premiums.

HIPPA

Health Insurance Portability and Accountability Act of 1996 - This federal law strictly dictates rules for handling confidential medical information used in the life insurance business

Illustration - Life Insurance Sales Illustration

All life insurance - including term, universal life, variable life and whole life - should be proposed and presented using a ledger created on software published by the life insurance carrier. These are custom ledgers that indicate many factors: age, gender, product type, coverage amount, medical rating, planned premium, guaranteed premium and interest rate or projected returns. These illustrations are NOT considered part of the life insurance contract.

In Force Ledger

A ledger of projected future costs and coverage created upon request by the life insurance company. It expresses a status report covering a policy that is already in force.

Inside Build Up

The accumulating cash value inside of a Universal Life policy. These amounts earn an annual interest rate published by the insurance carrier. These amounts accumulate tax free and, in most policies, are available for tax free policy loans. Life insurance carriers make the argument that life settlements, and most particularly early life settlements, threaten the special tax free status of cash values because they make life insurance more like an investment product that competes with other taxable investments.

Insurability

An individual's ability to qualify for new life insurance coverage. Insurability is principally limited by 1) health 2) net worth and/or income 3) amount of insurance currently in force including any policies previously sold into the life settlement market.

Insured

The person upon whose life the insurance policy is based.

Insurable Interest

A legal concept describing which categories of possible beneficiaries are legitimate when applying for life insurance. Any person, business or charity that would potentially suffer economic loss.

Interest Rate

Inside universal life insurance policies, life insurance companies, credit cash value accounts at declared "Interest Rates". The effect of this is cash value accounts grow like savings accounts, less deductions for maintaining the insurance coverage.

ILIT- Irrevocable Life Insurance Trust

This is the most popular legal device to hold and administer life insurance policies intended as an estate planning technique. Done correctly, the life insurance proceeds escape all taxation and are available to settle the estate.

Lapse

This occurs when a life insurance policy is cancelled by the insurance company for lack of sufficient premiums to keep it in force.

Lapse Pending

This is a grace period of 30 days when a policy is technically no longer in-force due to lack of premium payments but the life insurance company permits the policy to be reinstated without any new underwriting if sufficient premiums are paid before the 30 days grace period ends.

Life Insurance Producer

This is the life insurance agent licensed by the state and holding a contract with the life insurance company to represent it in the sale of life insurance.

Maturity

An insured person "matures" when they die. A life policy "matures" when it either pays out the death claim or ceases due to contractual terms such as "At age 95 the coverage ends."

Paid-up Insurance

An insurance policy where enough premiums have been paid and the policy will stay in force and pay out the death benefit no matter how long the insured lives.

Participating Policy

A life insurance policy, usually whole life, which pays dividends.

Per Capita

A beneficiary designation where all beneficiaries receive equal benefits if they survive the insured. If a beneficiary dies and his/her children are contingent beneficiaries, the grandchildren of the insured step up in rank to receive a full participating measure of the benefits. (See Per Stirpes)

Per Stirpes

A beneficiary designation where benefits are divided among classes of beneficiaries. If a beneficiary dies and his/her children are contingent beneficiaries, the grandchildren of the insured remain in the class of their deceased parent and share just the deceased parents share of the benefits. (See Per Capita)

Planned Premium

Flexible premium life insurance is most often presented using a sales ledger called an "Illustration" showing premiums to be paid on the policy. These initial proposed premiums are called "Planned Premiums". These planned premiums are not locked in and can vary in frequency and amount. The total amount shown on the illustration may or may not actually be sufficient to pay for the actual costs of maintaining the policy to maturity.

Policy

The written contract for insurance. It is between the owner/applicant and the insurance company. The insured need not be a principal to the contract.

Policy Loan

A loan to the policy owner by a life insurance company using the policy cash value as collateral. In most contracts, loans reduce the policy's death benefit and cash value by the amount of the loan and interest.

Policy Owner

The legal owner of the policy, who can be the insured, partner, business, family member, trustee of a trust, employer, etc.

Premiums

The payments to buy and keep a policy.

Rating - Life Carrier Financial Strength and Claims Paying Ability

All legitimate US-based life insurers are rated by a number of ratings agencies as to their financial strength and their claims paying ability. There are a number of rating agencies including; A M Best, Moody's, Fitch, Standard & Poor's, Weiss.

Rating - Medical Risk Classification

Life insurance policies are issued using an underwriting classification of medical conditions of the insured called ratings. The range is from "Preferred", "Standard" and then there are "Table Ratings" from A through F. A "Preferred" rating is associated with the lowest premium cost based on an assessment of the longest relative life expectancy for a person of a given age and gender.

Rule against perpetuity

Most states have limits on how long a trust can retain property before it is completely liquidated. The rule is often for as long as all lives in being plus 21 years. Some states permit trusts to go on indefinitely. See Dynasty trusts.

Surrender

The process wherein the life policy owner cancels his/her insurance policy by officially informing the issuing carrier and requesting a refund of any surrender value (cash value).

Surrender Charge

The penalty assessed against cash value or accumulation value for early cancellation of a universal life policy. This amount is fixed at the outset of a policy and declines to zero during a predetermined period of years. In most policies, the period runs from about 10 to 20 years.

Surrender Value

The cash amount that is available as a refund upon the surrender of a life insurance policy. It is equal to the cash value less the surrender charges (if any) on the date of the surrender.

SUL - Survivorship Universal Life

A generic term for a universal life policy that insures the lives of two people. The death benefit is paid to beneficiaries only after both insured have died. These are also known as "Second to Die" insurance policies. See Universal Life for more information

Target Premium

The first premium that insurance companies use as a benchmark for calculating commissions to sales agents.

Term Life

A generic expression for a life insurance contract that has no cash value with a pre-determined number of years of coverage at a very reasonable rate. At the end of the pre-determined years of coverage (the expiration date) an increased rate must be paid to continue coverage. The increased rates are so excessive that they amount to cancellation by overcharging. Term life costs less (prior to expiration date) than permanent forms of life insurance because it is scheduled to be cancelled or otherwise not in force before death occurs. This is not withstanding early unanticipated mortality.

Trust Owned Life Insurance - TOLI

In using life insurance as part of an estate plan, a majority of advisors recommend owning life insurance inside a special purpose trust (see ILIT).

Underwriting

The process whereby life insurance companies evaluate whether to issue a policy and if so, what premiums to charge and what amount of coverage are they willing to issue. The process involves reviews of medical information, age, gender, lifestyle, travel and family financial evaluations.

UL - Universal Life

A generic term for a flexible premium permanent type of life insurance contract that has evolved to be the dominant form of permanent policy issued by most life insurance carriers. Unlike whole life, UL pays no dividends. Rather UL generally includes cash values that earn declared interest rates. There are dozens of nuances in UL contracts. The basic premise is that premiums accumulate at a stated interest rate in the general account of the issuing insurance carrier. There are monthly deductions from this account including the "COI", expenses and sales loads.

VUL- Variable Universal Life

A generic term for a flexible premium permanent type of life insurance contract that has embedded mutual fund like investment accounts (called separate accounts) that can earn returns (or lose as the case may be) that can build up cash values. There are dozens of nuances in VUL contracts including "SVUL" Survivorship Variable Universal Life that pays after the second of the two insureds passes away.

Whole Life

The traditional form of permanent life insurance. It is characterized by higher premiums than universal life. Premiums are partially offset with dividends that can be returned in cash, reduce future premiums, or buy paid up insurance.