Use this glossary to become familiar with terms to make your family protection and retirement planning just a little easier.
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Accelerated death benefit: Benefit paid, under clearly defined health-related circumstances, to a policyholder prior to his or her death. Accelerated death benefits are also known as living benefits.
Accidental death benefit: A provision added to a life insurance policy for payment of an additional benefit if death is caused by an accident. Also known as double indemnity.
Actuary: A person professionally trained in the technical aspects of insurance and related fields, particularly in the mathematics of insurance such as the calculation of premiums, reserves, and other values.
Accumulation period: The time prior to a deferred annuity’s payout period when money builds up in the annuity contract.
Activities of daily living (ADLs): The basic activities of daily living, such as bathing, eating, getting dressed, using the toilet, and transferring from bed to chair.
Adjustable life insurance: A type of life insurance that allows the policyholder to change the plan of insurance, raise or lower the policy’s face amount, increase or decrease the premium, and lengthen or shorten the protection period.
Adjuster: A person, usually employed by a property/casualty insurer, who evaluates losses and settles claims. Independent adjusters are independent contractors who adjust claims for the insurance companies.
Agent: A representative of an insurance company who is authorized to sell and service insurance contracts. Life insurance agents are also known as life underwriters or producers.
Annuitant: The person whose life expectancy is used to determine the payout of an annuity.
Annuitize: To convert the value of an annuity contract into a steady stream of income for life.
Annuity: A financial contract issued by a life insurance company that offers tax-deferred savings and a choice of payout options to meet an owner’s needs in retirement: income for life, income for a certain period of time, or a lump sum.
Annuity certain: A contract that provides an income for a specified number of years, regardless of life or death.
Annuity consideration: The payment, or one of regular periodic payments, that a policyholder makes to an annuity.
Application: A statement of information made by a prospective purchaser that helps the insurer assess the acceptability of risk.
Assets: Property owned by an insurance company—including stocks, bonds, and real estate. Insurance accounting focuses on solvency and the ability to pay claims; therefore, a conservative valuation of assets is required. This prohibits companies from listing assets on their balance sheets when values are uncertain.
Asset valuation reserve (AVR): A reserve that makes provisions for credit-related losses on fixed-income assets (default component) as well as all types of equity investments (equity component).
Assignment: The legal transfer of one person’s interest in an insurance policy to another person.
Assume: To accept the risk of potential loss from another insurer.
Assumption reinsurance: A reinsurance agreement in which one company permanently transfers full responsibility for a block of policies to another company. After the transfer, the ceding company is no longer a party to the insurance agreement.
Automatic premium loan: A loan provision in a life insurance policy allowing any premium not paid by the end of the grace period (usually 30 or 31 days) to be paid automatically through a policy loan if cash value is sufficient.
Balance sheet: Information on a company’s financial condition at a single point in time showing assets, investments, and liabilities. The balance sheet also reveals a company’s equity, known as policyholder surplus. Changes in the surplus are one indicator of a company’s financial standing.
Bank holding company: A company that owns or controls one or more banks. The Federal Reserve regulates and supervises bank holding company activities such as approving mergers and acquisitions. The authority of the Reserve applies even though a bank owned by a holding company may be under the primary supervision of the Comptroller of the Currency or the FDIC.
Beneficiary: The person or financial entity (for instance, a trust fund) named in a life insurance policy or annuity contract as the recipient of policy proceeds in the event of the policyholder’s death.
Benefit: The amount payable by the insurance company to a claimant, assignee, or beneficiary when the insured suffers a loss covered by the policy.
Bond: A security obligating the issuer to pay interest at specified intervals and to repay the principal at maturity. Bonds are a form of suretyship: Various types guarantee a payment or reimbursement for financial losses resulting from dishonesty, failure to perform, and other failures.
Bond rating: An evaluation of a bond’s financial strength by an established rating agency such as Standard & Poor’s or Moody’s Investor Services.
Broker: A sales and service representative who handles insurance for clients and generally sells insurance of various kinds from one company or several.
Business disability insurance: Disability insurance purchased by a business on a member of a firm. This insurance is often used to protect business partners against loss caused by a partner’s disability and to reimburse corporations for loss caused by the disability of a key employee.
Business life insurance: Insurance purchased by a business on the life of a member of the firm. This insurance protects surviving business partners against loss caused by the death of a partner and reimburses corporations for loss caused by the death of a key employee.
Capacity: The amount of insurance available to meet demand. Availability depends on the industry’s capacity for risk. For an individual insurer, it is the maximum amount of risk it can underwrite based on its financial condition. An insurer’s capital relative to its exposure to loss is an important measure of its solvency.
Captive agent: A person who represents only one insurance company and is restricted by agreement from submitting business to any other company unless rejected first by the captive agent’s company.
Capital stock: The initial book value of stock sold by a company to start its operations.
Cash balance plan: A defined benefit plan that strongly resembles a defined contribution plan. Benefits accrue through employer contributions to employee accounts and interest credits to balances in those accounts. The accounts serve as bookkeeping devices to track benefit accruals.
Cash value: The amount available in cash upon surrender of a permanent life insurance policy. Also known as cash surrender value.
Cede: To transfer the risk of potential loss to another insurer.
Certificate: A statement issued to persons insured under a group policy that defines the essential provisions of their coverage.
Claim: Notification to an insurance company that payment of an amount is due under the terms of a policy.
COBRA: (Consolidated Omnibus Budget Reconciliation Act) A federal law under which group health plans sponsored by employers with twenty or more employees must offer continuation of insurance coverage to employees and their dependents after they leave their employment. Under COBRA, coverage can be continued for up to 18 months; the employee pays the entire premium.
Codification: A process undertaken by NAIC to redefine life company statutory accounting to ensure consistency in how companies present their accounts in their annual statements. This process culminated in the 2001 annual statements, the structure of which was noticeably different from the previous years.
Convertible term insurance: Term insurance that can be exchanged, at the option of the policyholder and without evidence of insurability, for another plan of insurance.
Credit disability insurance: Disability insurance issued through a lender or lending agency to cover payment of a loan, an installment purchase, or other obligation in case of disability.
Credit life insurance: Term life insurance issued through a lender or lending agency to cover payment of a loan, an installment purchase, or other obligation in case of death.
Declination: Rejection of an application for insurance coverage by an insurance company, usually due to the applicant’s health or occupation.
Deductible: The amount of loss paid by the policyholder. Either a specified dollar amount, a percentage of the claim amount, or a specified amount of time that must elapse before benefits are paid. The larger the deductible, the lower the premium charged for the same coverage.
Deferred annuity: A contract in which annuity payouts begin at a future date.
Deferred group annuity: A type of group annuity providing for the purchase each year of a paid-up deferred annuity for each group member. The total amount received by a member at retirement is the sum of these deferred annuities.
Defined benefit plan: A pension plan that specifies the benefits an employee will receive after retirement. Benefits typically are based on length of service and salary, and are usually funded by the employer on behalf of each plan participant.
Defined contribution plan: A pension plan that specifies the contributions made by employees, and in many cases the employer, on behalf of each plan participant. These funds accumulate for each participant until retirement, when they are distributed as a lump sum or monthly annuity. Benefits are based on the amount of contributions plus earnings.
Deposit administration group annuity: A type of group annuity that allows contributions to accumulate in an undivided fund, out of which annuities are purchased as each member of the group retires.
Deposit term insurance: A form of term insurance in which the first-year premium is larger than subsequent premiums. A partial endowment typically is paid at the end of the term period. In many cases, the partial endowment can be applied toward the purchase of a new term or whole life policy.
Deposit-type contracts: Contracts that do not include mortality or morbidity risks.
Disability: A physical or mental condition that makes an insured person incapable of working.
Disability benefit: The benefit paid under a disability income insurance policy; also a feature added to some life insurance policies providing for waiver of premium, and sometimes payment of monthly income, if the policyholder becomes totally and permanently disabled.
Disability income insurance: Insurance that provides periodic payments, or in some cases a lump-sum payment, based on the insured’s income replacement needs, when the insured is unable to work due to illness or injury.
Dividend: An amount of money returned to the holder of a participating life insurance policy. The money results from actual mortality, interest, and expenses that were more favorable than expected when the premiums were set. The amount of any dividend is set by the insurer based on the insurer’s standards.
Dividend addition: An amount of paid-up insurance purchased with a policy dividend and added to the policy’s face amount.
Earned premium: The portion of premium that applies to the expired part of the policy period. Insurance premiums are payable in advance but the insurance company does not fully earn them until the policy period expires.
Endowment: Life insurance payable to the policyholder on the policy’s maturity date, or to a beneficiary if the insured dies prior to that date.
Equity in investments: The ownership interest of shareholders. In a corporation, stocks as opposed to bonds.
Evidence of insurability: The common requirement by life insurance companies that potential policyholders undergo a physical examination or medical tests, such as blood pressure or cholesterol screening, before the applicant can purchase an individual life insurance policy.
Extended term insurance: A form of insurance available as a non-forfeiture option providing the original amount of insurance for a limited time.
Extra risk: A person possessing a greater-than-average likelihood of loss.
Face amount: The amount stated on the face of a life insurance policy that will be paid upon death or policy maturity. The amount excludes dividend additions or additional amounts payable under accidental death or other special provisions.
Family policy: A life insurance policy providing insurance on all or several family members in one contract. It generally provides whole life insurance on the principal breadwinner and small amounts of term insurance on the spouse and children, including those born after the policy is issued.
Fiduciary: A person or organization authorized to control or manage pension assets to administer a pension plan. Fiduciaries are legally obligated to discharge their duties solely in the interest of plan participants and beneficiaries, and are accountable for any actions that may be construed by courts as breaching that trust.
Fixed annuity: A deferred annuity contract in which the life insurance company credits a fixed rate of return on premiums paid or an immediate annuity in which the periodic amount is fixed.
Flexible premium policy or annuity: A life insurance policy or annuity contract that allows the amount and frequency of premium payments to be varied.
401(k) plan: An employment-based retirement savings plan that allows employees to make tax-deferred contributions from current earnings.
403(b) plan: A retirement savings plan, similar to a 401(k), for employees of charitable and educational organizations.
457 plan: A retirement savings plan, similar to a 401(k), for employees of state and municipal governments.
Fraternal life insurance: Life insurance provided by fraternal orders or societies to their members.
Fraud: Intentional lying or concealment by policyholders to obtain payment of an insurance claim that would otherwise not be paid, or lying or misrepresentation by the insurance company managers, employees, agents, and brokers for financial gain.
General account: An undivided account in which life insurers record all incoming funds. A general account is usually an insurer’s largest, although separate accounts can also be used to fund specific liabilities as well.
Grace period: A period of usually a number of days following each insurance premium due date except the first, during which an overdue premium may be paid and the policy be maintained. All policy provisions remain in force during this period.
Group annuity: A pension plan providing annuities at retirement to a group of people under a master contract, usually issued to an employer for the benefit of employees. Each group member holds a certificate as evidence of his or her annuity.
Group life insurance: Life insurance on a group of people, usually issued to an employer for the benefit of employees. Each group member holds a certificate as evidence of his or her insurance.
Guaranteed interest contract (GIC): A contract offered by an insurance company guaranteeing a rate of return on assets for a fixed period, and payment of principal and accumulated interest at the end of the period. GICs sometimes are used to fund the fixed-income option in defined contribution plans, such as 401(k)s.
Immediate annuity: An annuity contract in which periodic payments begin immediately or within one year of the policy’s issue.
Indemnity reinsurance: A form of reinsurance in which the risk is passed to a reinsurer, which reimburses the ceding company for covered losses. The ceding company retains its liability to and contractual relationship with the insured.
Indexed annuity: A type of fixed annuity in which earnings accumulate at a rate based on a formula linked in part to a published equity index, such as the Standard & Poor’s 500 composite Stock Price Index, which tracks the performance of the 500 largest publicly traded securities. Also referred to as equity indexed annuity.
Individual life insurance: Life insurance on a person with premiums payable annually, semiannually, quarterly, or monthly.
Individual policy pension trust: A type of pension plan frequently used for small groups and administered by trustees authorized to purchase individual level-premium policies or annuity contracts for each plan member. The policies usually provide both life insurance and retirement benefits.
Individual retirement account (IRA): An account to which a person can make annual contributions of earnings up to a specified dollar limit. These contributions are tax-deductible for workers who are not covered by an employment-based retirement plan, regardless of income, or whose income does not exceed certain taxable income levels.
Insolvency: Insurer’s legal inability to pay its future policyholder obligations. Insurance insolvency standards and the regulatory actions taken vary from state to state. Typically, the first indications of an insurer’s financial stress is its inability to pass the financial tests regulators routinely administer.
Institutional investor: An organization such as a bank or insurance company that buys and sells large quantities of securities.
Insurable risk: Risks for which it is relatively easy to get insurance. Such risks meet certain criteria including being definable, accidental in nature, and part of a group of similar risks large enough to make losses predictable. Such conditions make it possible for an insurer to offer insurance at a reasonable rate.
Insurance: A system to make coverage of large financial losses affordable by pooling the risks of many individuals or business entities and transferring them to an insurance company in return for a premium.
Insurance examiner: The state insurance department representative assigned to conduct the official audit and examination of an insurance company’s operations.
Insured: The person on whose life an insurance policy is issued. Also known as insured life.
Interest maintenance reserve (IMR): A reserve that captures all realized, interest-related capital gains and losses on fixed-income assets. These gains and losses are amortized into income over the remaining life of the investment sold.
Joint and survivor annuity: An annuity in which payments are made to the owner for life and, after the owner’s death, to the designated beneficiary for life.
Keogh (H.R. 10) account: A retirement savings account to which a self-employed person can make annual tax-deductible contributions, subject to limitations.
Lapsed policy: An insurance policy terminated at the end of the grace period because of nonpayment of premiums. See non-forfeiture value.
Legal reserve life insurance company: A life insurer operating under state insurance laws that specify the minimum basis for reserves that the company must maintain on its policies.
Level premium life insurance: Life insurance for which the premium remains the same from year to year. The premium is more than the actual cost of protection during earlier years of the policy and less than the actual cost in later years. The initial overpayments build a reserve which, together with interest to be earned, balances the underpayments of later years.
Life annuity: An annuity contract that provides periodic income payments for life.
Life expectancy: The average years of life remaining for a group of persons of a given age, according to a mortality table.
Life insurance in force: The sum of face amounts and dividend additions of life insurance policies outstanding at a given time. Additional amounts payable under accidental death or other special provisions are excluded.
Limited payment life insurance: Whole life insurance on which premiums are payable for a specified number of years, or until death if it occurs before the end of the specified period.
Load: Any sales fees or charges you pay in purchasing an annuity contract.
Long-term care insurance: Insurance that provides financial protection for persons who become unable to care for themselves because of chronic illness, disability, or cognitive impairment such as Alzheimer’s disease.
Lump-sum distribution: The non-periodic withdrawal of money invested in an annuity.
Malpractice insurance: Professional liability coverage for physicians, lawyers, and other specialists against lawsuits alleging negligence or errors and omissions that have harmed their clients.
Managed care: An arrangement between an employer or insurer and selected providers to provide comprehensive health care at a discount to members of the insured group and coordinate the financing and delivery of health care. Managed care uses medical protocols and procedures agreed on by the medical profession to be cost effective. These protocols are also known as medical practice guidelines.
Master policy: A policy issued to an employer or trustee establishing a group insurance plan for designated members of an eligible group.
Mediation: Legal procedure in which a third party or parties attempts to resolve a conflict between two other parties. Mediation can be binding or non-binding.
Medicaid: A federal and state public assistance program created in 1965 and administered by the states for people whose income and resources are insufficient to pay for health care.
Medicare: Federal program for people sixty-five years of age or older that pays part of the costs associated with their health care such as hospital stays, surgery, home care and nursing care.
Mortality and expense charge: The fee for a guarantee that annuity payments will continue for life.
Mortality table: A statistical table showing the death rate at each age, usually expressed per thousand.
Mutual life insurance company: A life insurance company without stockholders whose management is directed by a board elected by the policyholders. Mutual companies generally issue participating insurance.
Non-forfeiture value: The value of an insurance policy if it is cancelled or required premium payments are not paid. The value is available to the policyholder either as cash or reduced paid-up insurance.
Non-medical limit: The maximum face value of a policy that a given company will issue without a medical examination of the applicant.
Nonparticipating policy: A life insurance policy under which the company does not distribute to policyholders any part of its surplus. Premiums usually are lower than for comparable participating policies. Some nonparticipating policies have both a maximum premium and a current lower premium, which reflects anticipated experience more favorable than the company is willing to guarantee. The current premium may change from time to time for the entire block of business to which the policy belongs. See participating policy.
Nonproportional reinsurance: A form of reinsurance in which the reinsurer’s liability depends on the number or amount of claims incurred in a given period.
Operating expenses: The cost of maintaining a business, including property, insurance, taxes, utilities and rent, but excludes income tax, depreciation, and other financing expenses.
Options: Contracts that allow, but do not oblige, the buying or selling of assets at a certain date at a set price.
Ordinary life insurance: A life insurance policy that remains in force for the insured’s lifetime, usually for a level premium. Also referred to as whole life insurance. In contrast, term life insurance only lasts for a specified number of years (but may be renewable).
Paid-up insurance: Insurance on which all required premiums have been paid; frequently refers to the reduced paid-up insurance available as a non-forfeiture option.
Partial disability benefit: A benefit sometimes found in disability income policies providing payment of reduced monthly income if the insured cannot work full time or is unable to earn a specified percentage of predisability earnings due to a disability.
Participating policy: A life insurance policy under which the company distributes to policyholders the part of its surplus that its board of directors determines is not needed at the end of the business year. Such a distribution reduces the premium that the policyholder had paid. See policy dividend and nonparticipating policy.
Pensions: Programs to provide employees with retirement income after they meet minimum age and service requirements. Life insurers hold some of these funds. Over the last 25 years, the responsibility of funding these retirement accounts has shifted from the employers (who offered defined benefit plans promising a specific retirement income) to employees (who now have defined contribution plans that are financed by their own contributions and not always matched by employers).
Permanent life insurance: Generally, insurance that can stay in force for the life of the insured and accrues cash value, such as whole life or endowment. May also be referred to as ordinary life insurance.
Policy: The printed document that a company issues to the policyholder, which states the terms of the insurance contract.
Policy dividend: A refund of part of the premium on a participating life insurance policy, reflecting the difference between the premium charged and actual experience.
Policyholder/Policy owner: The owner of an insurance policy, who may be the insured, a relative of the insured such as a spouse, or a nonnatural person such as a partnership or corporation.
Policy illustration: A depiction of how a life insurance policy will work, showing premiums, death benefits, cash values, and information about other factors that may affect policy costs.
Policy loan: The amount a policyholder can borrow at a specified rate of interest from the issuing company, using the insurance policy’s value as collateral. If the policyholder dies with the debt partially or fully unpaid, the insurance company deducts the amount borrowed, plus accumulated interest, from the amount payable to beneficiaries.
Policy reserves: The funds that a life insurance company holds specifically for fulfilling its policy obligations. Reserves are required by law to be calculated so that, together with future premium payments and anticipated interest earnings, they enable the company to pay all future claims.
Preferred risk: A person considered less of a risk than the standard risk.
Premium: The payment, or one of the periodic payments, that a policyholder makes to own an insurance policy or annuity.
Premium loan: A policy loan for paying premiums.
Principal: The amount paid into an annuity contract, separate from the earnings that are credited to it; may also be referred to as purchase payments or contributions.
Proportional reinsurance: A form of reinsurance in which the amount ceded is defined at the point the risk is transferred, not at the point of claim. The amount of risk may vary with time by formula.
Qualified plan: An employee benefit plan that meets Internal Revenue Code requirements. Employer contributions to such plans are immediately deductible. Contributions to and earnings in such plans are not included in the employee’s income until distributed to the employee. Also known as tax-qualified plan.
Rated policy: An insurance policy issued at a higher-than-standard premium rate to cover extra risk, as when the insured has impaired health or a hazardous occupation. Also known as extra-risk policy.
Reduced paid-up insurance: A form of insurance available as a non-forfeiture option providing for continuation of the original insurance plan at a reduced amount.
Reinstatement: The restoration of a lapsed insurance policy. The company requires evidence of insurability and payment of past-due premiums plus interest.
Reinsurance: The transfer of some or all of an insurance risk to another insurer. The company transferring the risk is called the ceding company; the company receiving the risk is called the life assuming company or reinsurer.
Reinsure: To transfer the risk of potential loss from one insurer to another insurer.
Renewable term insurance: Term insurance that can be renewed at the end of the term, at the policyholder’s option and without evidence of insurability, for a limited number of successive terms. Rates increase at each renewal as the insured ages.
Reserve: The amount required to be carried as a liability on an insurer’s financial statement to provide for future commitments under policies outstanding.
Retrocede: To cede insurance risk from one reinsurer to another reinsurer.
Retrocessionaire: A reinsurer that contractually accepts from another reinsurer a portion of the ceding company’s underlying risk. The transfer is known as a retrocession.
Return-to-work program: A program that helps persons with activity limitations return to work. Assistance may involve maximizing medical improvement to diminish the effect of limitations, or facilitating job or job-site accommodations, retraining, or other means of taking activity limitations into account.
Rider: An amendment to an insurance policy that expands or restricts the policy’s benefits or excludes certain conditions from coverage. See accelerated death benefit and accidental death benefit.
Risk-based capital (RBC): Method developed by the National Association of Insurance Commissioners to measure the minimum amount of capital that an insurance company needs to support its overall business operations. RBC sets capital requirements that consider the size and degree of risk taken by the insurer and presumes that stakeholders will still receive limited payment should insolvency occur. RBC has four components:
Asset risk: Determines an asset’s default of principal or interest, or fluctuation in market value, as a result of market changes.
Credit risk: Measures the default risk on amounts due from policyholders, reinsurers, or creditors.
Underwriting risk: Calculates the risk from underestimating liabilities from business already written, or inadequately pricing current or prospective business.
Off-balance-sheet risk: Measures the risk from excessive growth rates, contingent liabilities, or other items not reflected on the balance sheet.
Risk classification: The process by which a company decides how its premium rates for life insurance should differ according to the risk characteristics of persons insured—their age, occupation, gender, and health status, for example—and how the resulting rules are applied to individual applications. See underwriting.
Roth IRA: An individual retirement account (IRA) in which earnings on contributions are not taxed at distribution, as long as the contributions have been in the account for five years and the account holder is at least age 59 1/2, disabled, or deceased. Contributions to a Roth IRA are not tax-deductible.
Self-insured plan: A retirement plan funded through a fiduciary—generally a bank but sometimes a group of people—which directly invests the accumulated funds. Retirement payments are made from these funds as they fall due. Also known as trusteed plan or directly invested plan.
Separate account: An asset account maintained independently from the insurer’s general investment account and used primarily for retirement plans and variable life products. This arrangement permits wider latitude in the choice of investments, particularly in equities.
Settlement options: The several ways, other than immediate payment in cash, that a policyholder or beneficiary may choose to have policy benefits paid. See supplementary contract.
Standard risk: A person possessing an average likelihood of loss.
Stock life insurance company: A life insurance company owned by stockholders who elect a board to direct the company’s management. Stock companies generally issue nonparticipating insurance.
Straight life annuity: An annuity whose periodic payouts stop when the annuitant dies.
Straight life insurance: Whole life insurance on which premiums are payable for life.
Structured settlement: An agreement allowing a person who is responsible for making payments to a claimant to assign to a third party the obligation of making those payments. An annuity contract is often used to make structural settlement payments.
Substandard risk: A person who cannot meet the normal health requirements of a standard insurance policy. Protection is provided under a waiver, special policy form, or higher premium charge. Also known as impaired risk.
Supplementary contract: An agreement between a life insurance company and a policyholder or beneficiary in which the company retains the cash sum payable under an insurance policy and makes payments according to the settlement option chosen.
Surplus: The remainder after an insurer’s liabilities are subtracted from its assets. The financial cushion that protects policyholders in case of unexpectedly high claims.
Term-certain annuity: An annuity which makes periodic payments over a fixed number of years. See annuity certain.
Terminal funded group plans: The reserves under an annuity contract for benefits accumulated outside of the contract, such as under a defined benefit retirement plan that has been terminated.
Term insurance: Insurance that covers the insured for a certain period of time, known as the term. The policy pays death benefits only if the insured dies during the term, which can be one, five, ten or even twenty years.
Third-party administrator: Outside group that performs administrative functions for an insurance company.
Title insurance: Insurance that indemnifies real estate owners in case clear ownership of the property is challenged by the discovery of faults in the title.
Tort: A legal term denoting a wrongful act resulting in injury or damage on which a civil court action or legal proceeding may be based.
Total disability: The inability of a person to perform all essential functions of his or her occupation, or in some cases any occupation, due to a physical or mental impairment.
Umbrella policy: Coverage for losses beyond the limits of underlying property-casualty, homeowners, or auto insurance policies. While the umbrella applies to losses over the dollar amount in underlying policies, coverage terms are sometimes broader than those specified in the underlying policies.
Unallocated contract: A contract under which premiums and contributions are deposited to a fund, rather than used immediately, to purchase annuities for benefit plan participants.
Underwriting: The process of classifying applicants for insurance by identifying such characteristics as age, gender, health, occupation, and hobbies. People with similar characteristics are grouped together and charged a premium based on the group’s level of risk.
Uninsurable risk: Risks for which insurance coverage may not be available.
Universal life insurance: A type of permanent life insurance that allows the insured, after the initial payment, to pay premiums at various times and in varying amounts, subject to certain minimums and maximums. To increase the death benefit, the insurance company usually requires the policyholder to furnish satisfactory evidence of continued good health. Also known as adjustable life insurance.
Variable annuity: A contract in which the premiums paid are invested in separate accounts which holds funds, including bond and stock funds. The selection of funds is guided by the level of risk assumed. The account value reflects the performance of the funds that the owner has chosen for investment.
Variable life insurance: A type of permanent insurance providing death benefits and cash values that vary with the performance of a portfolio of investments. The policyholder may allocate premiums among investments offering varying degrees of risk, including stocks, bonds, combinations of both, and accounts that guarantee interest and principal.
Variable-universal life insurance: A type of permanent insurance that combines the premium flexibility of universal life insurance with a death benefit that varies as in variable life insurance. Excess interest credited to the cash value depends on the investment results of separate accounts investing in equities, bonds, real estate, and others. The policyholder selects the accounts to which premium payments are made.
Vesting: The right of an employee to all or a portion of the benefits he or she has accrued, even if employment terminates. Employee contributions, as in a 401(k) plan, always are fully vested. Employer contributions vest according to a schedule defined by the plan and are usually based on years of service.
Viatical settlement companies: Companies that purchase life insurance policies at a discounted value from a policyholder who is elderly or terminally ill. The companies then assume the premium payments and collect the face value of the policy upon the death of the person originally insured.
Void: Denotes when an insurance policy is freed from legal obligations for reasons specified in the policy contract (ie., a policy could be voided by an insurer if information given by a policyholder is proven untrue).
Waiver of premium: A provision that sets conditions under which an insurance company would keep a policy in full force without the payment of premiums. The waiver is used most frequently for policyholders who become totally and permanently disabled.
Whole life insurance: The most common type of permanent life insurance, in which premiums generally remain constant over the life of the policy and must be paid periodically in the amount specified in the policy. Also known as ordinary life insurance.
Workers compensation: Insurance that pays for medical care related to on-the-job injuries and physical rehabilitation. Workers compensation helps cover lost wages while an injured worker is unable to work. State laws vary widely on benefit amounts paid and other compensation provisions.