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INSURANCE TERM GLOSSARY
A
Accident
An event or occurrence that is unforeseen and unintended, and occurs suddenly and at a definite place.
Accidental Death Benefit
Provides for additional benefit in case of death by accidental means.
Acquisition Cost
The immediate cost of issuing a new policy, including cost of clerical work, printing, agent’s commission, records, and medical inspection fees.
Actual Cash Value
The cost of repairing damaged property with other of like kind and quality in the same physical condition; commonly defined as the replacement cost less accumulated depreciation since purchase.
Actuary
A person trained in mathematics, statistics, accounting and risk appraisal responsible for determining premium rated, resources, and dividends as well as conducting various other statistical studies.
Adjustable Life Policy
A participating life insurance contract that offers the insured flexibility to change: (1) premium payments, (2) the face amount, and (3) the mix of whole life and term insurance.
Adjustable Premium
A premium that an insurance company may modify under certain special conditions in accordance with policy provisions. Also may refer to an option by the owner to elect a change in premium amount.
Adjuster
A person who represents an insurance company who seeks to determine the extent of the firm’s liability for a loss when a claim is submitted.
Admitted Company
An insurance company licensed and authorized to do business in a particular state.
Advanced Funded Plan
A retirement plan that accumulated funds during the time employees are actively working.
Agent
One who solicits, negotiates or effects contracts of insurance on behalf of an insurer.
Aggregate
The maximum dollar amount that may be collected for a single occurrence, during the policy period or during the insured’s lifetime.
Allied Lines
A term for forms of insurance allied with property insurance, covering such perils as sprinkler leakage, water damage, and earthquake.
Allocated Benefits
Benefits for which the maximum amount payable for specific services is itemized in the contract.
Annuity
A contract issued by an insurance company that guarantees an income for a specific period of time, such as a number of years or for life. The person receiving the payment is called an annuitant. Annuity payments are usually made monthly but can be quarterly, semi-annually or annually.
Application
A signed statement of facts requested by the company on the basis of which the company decides whether or not to issue a policy. This becomes a part of the contract; it places a reliance on the statements made by the applicant.
Arson
The willful and malicious burning of, or attempt to burn, any structure or other property, often with criminal or fraudulent intent.
Assessable
A policy that gives the insurer the right to require policyholders to pay additional premium.
Assignment
Transfer of the ownership or the benefits of a policy.
Automatic Premium Loan Provision
Provides that if a life insurance premium is not paid, a policy loan in the amount of the premium due will automatically be made at the end of the grace period, provided there is enough available cash value to cover the loan and its interest for one year.
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B
Basic Health Care Policies
Provide first-dollar coverage for hospital, surgical and non-surgical doctor’s care, usually subject to relatively low maximum dollar amounts or days of service.
Beneficiary
A person, persons or entity designated by the policyholder to receive a specified payment upon the insured’s death. Usually the proceeds from a retirement plan, life insurance policy or annuity, or the benefits of a trust.
Benefit Duration
The maximum period during which disability income benefits are to be payable to an insured.
Binder
A temporary insurance contract made by an agent of an insurance company placing coverage into effect.
Bond
A three-party contract of indebtedness (or a loan) in which one party (the surety) guarantees the specific performance of a contract or an agreement between a second party (the principal) and a third party (the obligee). The surety makes the guarantee to the obligee on behalf of the principal. A contract extending for more than one year that is an obligation that must be repaid at a certain time. The borrower pays interest to the lender for the use of the funds. Bonds are also called debt or fixed income securities.
Broker
One who represents an insured in the solicitation, negotiation or procurement of contracts of insurance. A person in the business of making transactions in securities for accounts of others. The broker receives a commission for the sale and purchase of securities on your behalf.
Business Interruption Insurance
Provides coverage for a loss of earnings in the event that the policyholder’s business is shut down or hampered by fire, windstorm, explosion, or other insured peril.
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C
Capacity
The financial ability of an insurer to underwrite new insurance. It is generally measured by the relationship of premiums written to surplus (net worth) and is modified by access to reliable reinsurance.
Catastrophic Loss
A loss (or related losses) that is unbearable in that it causes severe consequences such as bankruptcy to a family, organization, or insurer.
Ceding Company
An insurance company that shifts part or all of a risk it has assumed to another insurance company. The latter company is the insurer.
Chartered Life Underwriter
A professional designation offered by the American College to people who: (1) pass a series of ten professional examinations on subjects related to life-health insurance, (2) have at least three years of life health insurance experience and (3) subscribe to a code of ethics.
Chartered Financial Consultant
A professional designation (ChFC) offered by the American College to people whom: (1) pass a series of ten professional examinations on subjects related to life-health insurance, (2) have at least three years of life health insurance experience and (3) subscribe to a code of ethics.
Claim
A demand to the insurer by the insured person for the payment of benefits under a policy.
Class Rating
A premium rate determination in which all risks with similar characteristics is charged the same rate.
Coinsurance Clause
A clause under which the insured shares in losses to the extent that he is underinsured at the time of loss or in a proportion agreed to in advance.
Comprehensive Medical Insurance
A health insurance policy. It is normally characterized by a low deductible amount, a coinsurance (participation) clause, and high maximum benefits.
Conditional Binding Receipt
A receipt given for an initial premium payment accompanying the application for life insurance. This binds the company if the applicant is insurable to make the policy effective from the date of receipt. If you die while your application is being processed, a claim for the death benefit will be paid only if you are insurable.
Confining Sickness
An illness that confines an insured person to their home or a hospital.
Consequential Loss
An indirect loss arising from the policyholder’s inability to use the property over a period of time.
Conversion Privilege
Right to change from term to certain forms of permanent insurance without providing any evidence of insurability.
Coordination Of Benefits
A method of integrating benefits payable under more than one health insurance plan so that the insured’s benefits from all sources do not exceed 100 percent of allowable medical expenses.
Cost Of Living Adjustment
A retirement plan provision that increases benefits during retirement years in accordance with a cost-of-living or wage index. Usually subject to a maximum increase such as 4 or 5 percent per year.
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D
Deductible
A provision that requires the policyholder to contribute up to a specified sum per claim or accident toward the amount of insured loss.
Deferred Annuity
An annuity under which payments will begin at some definite future date, such as in a specified number of years or at a specified age.
Defined Benefit Plan
Clearly defines, by its benefit formula, the amount of retirement income available at retirement, or which might be payable to survivors.
Defined Contribution Plan
A plan that provides for an individual account for each participant based solely on the amount contributed to that person's account, plus account earnings and possibly forfeitures.
Direct Loss
A loss that results directly from a peril such as fire.
Dismemberment
Loss of, or loss of use of, specific members of the body resulting from accidental bodily injury.
Dividend
Policyholder’s share in the insurer’s divisible surplus funds apportioned for distribution. May take the form of a refund of part of the premium of a participating policy. A non-guaranteed payment of a life insurance contract, representing a distribution of gains. These gains can consist of investment income in excess of the policy guarantee, realized capital gains, return of mortality costs collected but not used in paying claims, less a charge for expenses.
Dividend Addition
Paid-up life insurance purchased with policy dividend and added to the face amount of the policy.
Double Indemnity
Life insurance policy provision that doubles the death benefit when death is caused by an accident.
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E
Employee Benefits
Employer-sponsored programs to increase the economic security of employees. Both insurance and non-insurance benefits are included.
Employee Stock Ownership Plan (ESOP)
A profit-sharing plan where employer contributions are not a function of profits. Contributions are generally in the form of the employer’s common stock, and each employee will have a separate plan account.
Endorsement
A document that modifies the protection of a policy, either expanding or decreasing its benefits, or adding/excluding certain conditions from the policy.
Endowment
Life insurance contract that pays the face amount if the insured dies during the premium paying period or at the end of this period.
Evidence Of Insurability
Any statement or proof of a person’s physical condition and/or other factual information affecting his/her acceptance for insurance. May also include medical exam, special tests, or treatment records.
Exclusions
Specific perils or losses or an expense or condition listed in the policy that will not provide benefit payments.
Exposure
The state of being subject to the possibility of loss.
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F
Face Amount
Paid upon death of the insured or the maturity date of an endowment policy.
Family Income Policy
A combination of decreasing term and ordinary life insurance that, in the event of the insured’s death within a specified period such as twenty years, pays a monthly income of $10 per $1000 of ordinary life face amount for the remainder of the specified period, and the face amount of ordinary life at the end of this period.
Family Maintenance Policy
A combination of level term and ordinary life insurance that, in the event of the insured’s death within a specified period such as twenty years, pays a monthly income of $10 per $1000 of ordinary life face amount for a specified number of years from the date of death and the face amount of ordinary life at the end of the monthly payments.
Fidelity Bond
A contract that indemnifies an employer for losses caused by dishonest or fraudulent acts of employees.
Fiduciary
One who exercises discretionary authority or control over a retirement plan or disposition of its assets; renders investment advice for a fee with respect to moneys or property of a plan or has authority or responsibility to do so; or has discretionary authority or responsibility in the administration of a plan or a particular investment.
First-Dollar Insurance
Contracts that start paying losses without any retention, perhaps in the form of a deductible, by the insured.
Floater Policy
A property insurance policy in which the protection follows the property wherever it may be located, such as a provision in a homeowner policy covering a diamond ring.
Fortuitous Losses
Losses that occur as a matter of chance. Losses are not controlled or influenced at all by the insured.
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G
Grace Period
A period after a premium payment is due, in which the policyholder may make payments and during which the policy remains in force.
Group Insurance
Insurance plan, under which a number of people and their dependents are insured by a single policy, issued to their employer or an association with which they are affiliated. Individual certificates are given to each insured person.
Guaranteed Cost Policy
Life insurance policy that does not pay dividends. Also called non-participating.
Guaranteed Insurability
Allows the policy owner to make periodic purchase of additional amounts of life insurance without proof of insurability.
Guaranteed Renewable
A policy the insured has the right to continue in force by the timely payment of premiums to a specified age. During this period, the insurer has no right to make changes in any provision of the contract while it is in force, other than a change in the premium rate for an entire class of insureds.
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H
Hazard
A condition that increases the probability or severity of loss.
Health Maintenance Organization
An organization that provides for wide comprehensive health care services for a specified group at a fixed periodic payment.
Hold-Harmless Clause
A contractual provision that transfers risk from one party such as a property owner, to another party, such as a tenant.
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I
Incontestable Clause
A clause that provides that the insurer may not challenge the validity of the contract after it has been in force for a specified period, such as two years.
Indemnity
A principle that says an insured should not collect more from insurance than the amount of loss.
Independent Adjuster
A person who represents various insurers in settling loss claims but is not an employee either of the insurer or of the insured.
Independent Agent
An agent who represents several companies as an independent contractor rather than an employee or agent of only one company.
Indirect Loss
A loss that arises out of a direct loss but not caused directly and immediately by that peril.
Insurable Interest
If the occurrence of a loss, such as destruction of a house by fire, will affect someone adversely, he or she has an insurable interest.
Insured
In life insurance, the person on whose life a policy is issued; the subject of insurance. In property and liability insurance, the person to whom, or on whose behalf, benefits are payable.
Insuring Clause
The clause that sets forth the type of loss being covered by the policy and the parties to the insurance contract.
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J
Joint Life Policy
A special contract that insures two lives (such as husband and wife) and pays upon the first or last death.
K
Key-Person Insurance
Life or health insurance to protect the firm from the loss caused by the death or disability of an employee who makes significant contributions.
L
Lapse
Termination of a policy caused by the policyholder’s failure to pay the premium within the time required.
Last Survivor Policy
A life insurance contract insuring two or more persons that pays benefits only after all parties have died.
Level Premium
A premium that remains unchanged throughout the life of a policy.
Life Expectancy
The average number of years of life remaining for a group of people of a given age according to a particular mortality table.
Livery
In automobile insurance, the carrying of passengers for hire.
Loss Control
Activities that reduce the severity of a loss that has occurred.
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M
Malpractice Insurance
Liability insurance policy for professionals, such as physicians, to protect them against the risk of claims for damages in connection with professional services, errors and omissions of insurance agents and investment advisors.
Medicaid
A federal/state cooperatively funded and state-operated program of health benefits and public assistance to eligible low-income persons regardless of age. It was established under Title XIX of the Social Security Act. States determine program benefits, eligibility requirements, and rates of payment for agencies and institutions that provide services and methods of administering the program under broad federal guidelines. Medicaid operates in every state except Arizona, which has a comparable program.
Medicare
A federal health insurance program for person's aged 65 and over who are eligible for Social Security or Railroad Retirement benefits and for some people under age 65 who are disabled. Medicare was established under Title XVIII of the Social Security Act and provided by the Social Security Administration. There are two parts:
- Hospital insurance (Part A) which is automatic
- Supplementary medical insurance (Part B)
Part B covers physicians and other services, and is voluntary, requiring the payment of a monthly premium. Medigap Insurance
Private health insurance purchased to cover the gaps, and often some additional services, not covered by Medicare.
Mortality Table
Shows the number of people living, dying and the death rate starting at a certain age by year. It is used to calculate the probability of dying in, or surviving through any period.
Mortgage Protection
A term life insurance contract in which the amount of insurance decreases at approximately the same pace as the principal on a mortgage loan.
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N
Non-confining Sickness
An illness that prevents the insured person from working but that does not confine him or her to a hospital or home.
O
Optionally
A contract provision of health insurance in which the insurer reserves the right to terminate the coverage at any anniversary or, in some cases, at any premium due date, but does not have the right to terminate coverage of the insured between such policy dates.
Ordinary Life Policy
Whole life insurance on which premiums are paid for life. Also called straight life.
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P
Paid-Up Policy
A policy that will remain in force without any further premium payments required.
Participating Insurance
Insurance that allows the insured to share in the profits of the insurance operation. Profits are shared in the form of dividends that may also include the refund of part or all of an initial increase or overcharge in premium.
Participation Clause
Requires the insured to pay for a specified percentage of the cost or health care services covered by a health insurance policy.
Peril
The cause of a possible loss.
Policy Loan
A loan made by the insurer to the owner of a life insurance policy, using its surrender value as collateral.
Policy Term
The period of time for which an insurance policy provides coverage.
Portability
The transfer of medical coverage or pension rights and retirement credits when a worker changes jobs.
Pre-Existing Condition
A physical and/or mental condition of an insured that existed prior to the issuance of his or her policy.
Premium
The payment made by the policy owner for an insurance policy.
Probationary Period
A specified number of days after the date of the issuance of the policy during which there is no coverage for sickness. The purpose of this type of provision is to eliminate or to reduce adverse selection.
Prorata Liability Clause
If a loss covered by this policy is also covered by other insurance, the insurer will pay only the proportion of the loss that the limit of liability that applies under this policy bears to the total amount of insurance covering the loss.
Proximate Cause
The cause actually responsible for the loss; the one that set in motion the events that led to a loss.
Punitive Damages
Damages awarded by a court or arbitrator separately and in addition to compensatory damages as punishment for the wrongdoer.
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Q
Qualified Plan
An employee benefit plan that the Internal Revenue Service approves as meeting the requirements of ERISA and is thus entitled to certain tax advantages.
R
Reciprocal
An insurance organization in which each insured assumes a share of the risk brought to the organization by other insureds.
Recurring Clause
A provision in some health insurance policies that specifies a period of time during which the recurrence of a condition is considered continuation of a prior period of disability or hospital confinement.
Reinstatement
The resumption of coverage under a policy that has been lapsed for non-payment of premium.
Reinsurance
A financial instrument used to transfer all or some mortality or morbidity risk to another company. The re-insurer assumes the risk and uses its capital to establish Reserves. In return, the company assuming the reinsured risk receives a fee.
Renewal
The continuation of coverage under a policy beyond its original term by the acceptance of a premium for a new policy.
Rider
A document that modifies the protection of a policy, either by expanding or decreasing its benefits or by adding or excluding certain conditions from the policy.
Risk Management
An organized, formal approach to dealing with pure risks.
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S
Separate Accounts
Divisions of a policy or retired plan that permit independent selection of the investment element - such as a 401K plan, a variable annuity or variable life contract (opposite of General Account Assets).
Service Benefit
An insurance benefit in the form of hospital or medical care services rather than money.
Split Funding
An arrangement whereby a portion of the contributions to a retirement plan is paid to a life insurance company and the remainder invested through a corporate trustee, mostly in equities. An insurer created to make a profit for stockholders.
Subrogation
Gives the insurer whatever right against third parties you may have as a result of the loss for what the insurer paid you.
Suicide Clause
A provision that precludes the payment of life insurance death benefits for a specified period of one or two years after which suicide is paid the same as death from natural causes.
Surety Bond
An agreement providing for monetary compensation should there be a failure to perform specified acts within a stated period.
Surrender Cost Index
A measure of the cost, including interest foregone, of a life insurance policy if kept in force for a specified period and then surrendered for the cash surrender value.
T
Term Life Insurance
A type of life insurance that pays if death occurs during a specified time, such as a year. Term insurance usually has an increased pattern of premiums overtime and is pure protection (no savings).
Traditional Net Cost
A measure of the surrender cost of a life insurance policy that ignores the cost of interest foregone.
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U
Umbrella Liability Policy
Amounts covered by other liability insurance policies; also protects the insured in many situations not covered by the usual liability policies, subject to a deductible.
Underwriting
The process by which the insurer decides whether or not and on what basis it will issue a policy and reviews a proposed insured’s qualifications for insurance documented in evidence of current health, finances, etc.
Unisex Mortality Factors
A weighed average of male and female mortality rates. Required for employer-sponsored employee benefit plans, after August 1, 1983.
Universal Life Insurance
A life insurance product with explicit charges for mortality and expense, and explicit earnings credit procedures. Typical designs are earnings sensitive and allow for flexible premium deposits that can be varied by the policy owner at will. This contract that clearly separates its insurance, investment and expense elements.
V
Variable Annuity Insurance
An annuity policy where funds are invested into a separate account usually at owner discretion, causing the policy value or amount of payment to vary with the change in investments.
Variable Life Insurance
An ordinary life, A Whole Life or Universal Life policy in which the face amount of insurance changes in relation to the performance of its equity-based investment accounts selected by the policy owner normally subject to a guaranteed minimum face amount.
Vesting
A provision concerning the right of pension and profit sharing plan participants to contributions made by the employer.
W
Waiting Period
Time between the beginning of an insured's disability and the beginning of benefit payments, such as 90 days.
Waiver
An agreement attached to a policy that excludes coverage from certain disabilities or injuries that are normally covered by the policy; may be temporary or permanent.
Warranty
A statement made by the applicant for insurance that if false provides the basis for the voiding of the policy.
Whole Life Policy
A fixed premium life insurance policy that remains in force throughout the life of the insured. A product, which develops guaranteed cash value equal to the original face amount at some age, such as age 95 or 100.
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