absolute assignment
An irrevocable transfer of complete ownership of a life insurance policy from one party to another. See also assignment.
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accelerated benefits
Some companies provide "accelerated benefits," also known as "living benefits." This rider allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care, or confinement to a nursing home.
Ask your agent for information about these and other policy riders.
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accidental death and dismemberment (AD&D) rider
A supplementary benefit rider or endorsement that provides for an amount of money in addition to the basic death benefit of a life insurance policy. This additional amount is payable only if the insured dies or loses any two limbs or the sight of both eyes as the result of an accident. Some AD&D riders pay one half of the benefit amount if the insured loses one limb or the sight in one eye.
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accidental death benefit (ADB) rider
A supplementary benefit rider or endorsement that provides for an amount of money in addition to the basic death benefit of a life insurance policy. This additional amount is payable only if the insured dies as the result of an accident.
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accidental means provision
A life insurance policy accidental death benefit provision which states that an accidental death benefit will be payable if the insured's death was the result, directly and independently of all other causes, of bodily injury caused solely by external, violent, and accidental means.
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accidental result provision
A life insurance policy accidental death benefit provision which states that an accidental death benefit will be payable if the insured's death was the result, directly and independently of all other causes, of accidental bodily injury.
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accident perils
A classification used by health insurance underwriters to evaluate the type and degree of peril represented by a particular occupation. Accident perils include exposure to fire, the use of dangerous machinery, the handling of heavy objects, and the risk of falling. See also illness perils.
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accrued benefit
In a defined benefit pension plan, the amount of pension benefit which has accumulated in a pension plan on behalf of an individual plan participant at any particular time.
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accumulated cost of insurance
A factor used in the calculation of life insurance reserves. For a given group of insureds, the accumulated cost of insurance equals the net single premium that would have to be paid at the end of the term of coverage by the surviving insureds to provide death benefits on the insureds who died during the term.
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accumulated funding deficiency
In the United States, the amount by which a qualified pension plan fails to meet the minimum funding standards set by law. Plans with an accumulated funding deficiency are subject to a penalty tax and enforcement provisions. Sometimes simply called a funding deficiency.
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accumulated value
An amount of money invested plus the interest earned on that money.
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accumulation at interest option
A life insurance policy dividend option under which policy dividends are left on deposit with the insurer to accumulate at interest. Also called the accumulation option.
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accumulation period
The period during which premiums are payable on a deferred annuity.
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accumulation units
The term used to identify ownership shares in a variable annuity's separate-account fund. When a person pays premiums for a variable annuity, those premiums are credited to the purchaser's account as a certain number of accumulation units. After the accumulation period ends, the accumulation units are used to buy annuity units. See also annuity units.
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acquisition expenses
See policy acquisition costs.
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actively-at-work provision
A provision found in many group insurance contracts which specifies that, if an employee is absent from work because of sickness, injury, or certain other specified reasons, on the day the employee's coverage under the contract is due to begin, then coverage will not begin until the day the employee returns to work.
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actuarial assumptions
(1) The mortality, morbidity, interest, expense, and other forecasts used to calculate premium rates and reserves. (2) In pension planning, the assumptions that actuaries make in the areas of investment earnings, mortality, plan expenses, salary levels, and employee turnover. These assumptions affect the amount of the annual contribution that is necessary to adequately fund a defined benefit pension plan.
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actuarial cost method
For a defined benefit pension plan, a method of calculating the annual amount a plan sponsor must contribute to fund a given set of plan benefits for a particular group of participants.
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actuarial department
The department in a life and health insurance company responsible for seeing that the company's operations are conducted on a mathematically sound basis. In conjunction with other departments, it designs and revises a company's life and health insurance products. The actuarial department calculates premium and dividend rates, determines what a company's reserve liabilities should be, and establishes nonforfeiture, surrender, and loan values. It also does the research needed to predict mortality and morbidity rates, to establish guidelines for selecting risks, and to determine the profitability of the company's products.
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actuarial valuation
A determination by an actuary of the value of a pension plan's assets and its liabilities. The valuation, which is based on statistical probability, is used to determine if the assets are adequate to fund the plan's liabilities. If the value of the assets is not adequate, the plan sponsor must increase its contributions to make up the deficiency; if the assets are more than adequate, the plan sponsor can reduce contributions. Also called plan valuation.
actuary
A technical expert in life insurance, particularly in mathematics. A person in this job applies the theory of probability to calculate mortality rates, morbidity rates, lapse rates, premium rates, policy reserves, and other values.
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additional term insurance option
A life insurance policy dividend option under which policy dividends are used as a net single premium to purchase one-year term insurance. Also called the additional insurance option or the fifth dividend option.
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adjustable life insurance policy
A life insurance contract designed specifically to allow the policyowner to alter the policy's plan by changing the amount of the coverage or the amount of the premium. The insurer calculates the specific plan of insurance that can be provided based on the requested death benefit and premium. Therefore, an adjustable life insurance policy can use insurance plans that range from a term insurance policy of short duration to a limited-payment whole life insurance policy.
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administrative services only (ASO)
An arrangement whereby an organization (usually an employer) hires an outside firm to perform specific administrative services, usually including claim administration, for a group health insurance program. The organization retains financial responsibility for paying claims. See also self-insured group insurance and third-party administrator (TPA).
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admitted reinsurer
In the United States, a reinsurer which is licensed to accept reinsurance in a given jurisdiction. Also called an authorized reinsurer. Contrast to nonadmitted reinsurer.
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advanced underwriting department
An insurance company home office department responsible for providing technical and sales assistance to agents involved in estate planning and business insurance cases. Also known as the estate planning department.
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advance funding
A procedure in which a pension plan sponsor deposits amounts of money in a fund during the working years of plan participants to guarantee payment of pension benefits to the plan participants when they retire.
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adverse selection
See antiselection.
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Age Discrimination in Employment Act of 1967 (ADEA)
United States legislation that protects employment rights of individuals age 40 and over. ADEA prohibits age-based firings and generally prevents employers from forcing employees to retire at age 65. In relation to pension plans, ADEA prohibits employers from discontinuing contributions or benefit accruals to an individual's pension plan after that person reaches age 65.
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agency
The legal relationship between an agent and a principal. See agency relationship.
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agency agreement
An agreement between a principal and an agent that describes the scope of the agent's actual authority. See agent and principal.
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agency bank
A mutual savings bank that does not sell its own savings bank life insurance policies to the public but, instead, sells such policies as an agent for an issuing bank. An agency bank only accepts applications, collects premiums, and provides service for its policyowners. See also issuing bank and savings bank life insurance (SBLI).
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agency by appointment
An agency relationship that is created when a principal appoints an agent to act on the principal's behalf. See agency relationship. Contrast with agency by ratification.
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agency by ratification
An agency relationship that is created when the principal ratifies a purported agent's unauthorized act. See agency relationship. Contrast with agency by appointment.
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agency relationship
In law, the relationship between two parties by which one party, the agent, is authorized to perform certain acts on behalf of the other party, the principal.
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agency system
A distribution system in which insurance companies use their own commissioned agents to sell and deliver insurance policies. The agency system is the most common system for distributing individual life insurance products and includes the branch office distribution system and the general agency distribution system. Also called the ordinary agency system. See also branch office distribution system, brokerage distribution system, and general agency distribution system.
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agent
A party who is authorized by another party, the principal, to act on the principal's behalf in contractual dealings with third parties. Called a mandatary in Quebec. See also insurance agent.
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agent-brokers
Career agents who place business with companies other than their primary companies. Also known as agents of other companies, surplus brokers, or simply brokers.
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agent of record
The agent or broker who is recognized by the insurer as the person to whom the commission is to be paid.
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agent-owned reinsurance company (AORC)
A captive reinsurance company formed by an insurance company and owned by a group of the company's agents. The company insures all business written by those agents with the captive so that the agents can share in the profits of their own labor.
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agent's statement
The portion of the insurance application in which the agent reports anything he or she knows or suspects about the proposed insured that is not reported by the applicant or proposed insured.
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age of majority
The age at which a person has the legal capacity to enter into and be bound by a contract.
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aggregate funding methods
Pension plan funding methods in which the amount of contributions necessary to fund a plan is determined in the aggregate for all plan participants, rather than separately for each individual plan participant. Contrast with individual funding methods.
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aggregate mortality table
A mortality table based on the experience of all insured lives, including mortality rates both during and after the select period. The mortality rates of an aggregate mortality table fall between those of the select and the ultimate mortality tables. See also mortality tables, select mortality table, select period, and ultimate mortality table.
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aleatory contract
A contract under which one party provides something of value to another party in exchange for a conditional promise, which is a promise that the other party will perform a stated act if a specified, uncertain event occurs. Insurance contracts are aleatory because the policyowner pays premiums to the insurer, and in return the insurer promises to pay benefits if the event insured against occurs.
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alien corporation
In the United States, a company that is incorporated under the laws of another country. Compare to domestic corporation and foreign corporation.
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alienation of benefits
In pension planning, the assignment of a plan participant's benefits to an individual other than the participant. In the United States, ERISA generally prohibits the alienation of benefits, although exceptions to this rule include the use of a participant's vested benefit as collateral for a loan. The ERISA prohibition on alienation of benefits prevents creditors from attaching an individual's pension benefits.
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all-causes deductible
In health insurance, a deductible which need only be satisfied once during a given period of time. If the period of time is a calendar year, as it usually is, then this type of deductible is known as a calendar year deductible. Contrast with per-cause deductible.
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allocated funding
A method of funding a pension plan in which a portion of the total plan funds is allocated to each participant. This type of funding is often achieved through the purchase of annuities or insurance contracts for each participant. Contrast with unallocated funding.
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American Council of Life Insurance (ACLI)
In the United States, an organization which collects and disseminates data on life insurance markets.
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Annual Information Return
In Canada, a report containing financial and other information that pension plans must file annually with the appropriate provincial or federal government.
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annually renewable term (ART) insurance
See yearly renewable term (YRT) insurance.
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Annual Report Form 5500
In the United States, a detailed report of membership and financial information pertaining to the operation of a pension plan. This report must be filed annually with the Internal Revenue Service.
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Annual Statement
An accounting report that insurers must file each year with the appropriate regulatory agency. This report contains detailed accounting and statistical data that regulators use to evaluate a life and health insurance company's solvency and its compliance with insurance laws.
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annuitant
(1) The person designated to receive annuity payments. (2) The person whose lifetime is used as the measuring period to determine how long benefits are payable under a life annuity.
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annuity
(1) A series of payments made or received at regular intervals. (2) A contract that provides for a series of payments to be made or received at regular intervals. There are many kinds of annuities. For the annuities identified in this glossary, see annuity certain, annuity due, annuity immediate, deferred annuity, deferred life annuity, disabled life annuity, flexible premium annuity, group deferred annuity, immediate annuity, joint and survivor annuity, level premium annuity, life annuity, life annuity with period certain, refund annuity, single premium annuity, single premium deferred annuity (SPDA), straight life annuity, temporary life annuity, temporary life annuity due, variable annuity, whole life annuity, and whole life annuity due.
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annuity certain
An annuity that provides a benefit amount payable for a specified period of time regardless of whether the annuitant lives or dies.
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annuity due
A series of payments in which the payments are made at the beginning of each interval of time.
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annuity immediate
A series of payments in which the payments are made at the end of each interval of time.
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annuity mortality table
A tabulation of probabilities of dying at each age. Used by actuaries to calculate premiums and reserves for annuities in which benefits are paid only if a designated person is alive. Annuity mortality tables usually project lower rates of mortality than do mortality tables that are used for life insurance. See also mortality tables.
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annuity period
The time between each benefit payment made under an annuity contract.
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annuity units
The term used for ownership shares in a variable annuity's separate-account fund after the accumulation period has ended. Annuity units are bought with accumulation units and are used to determine benefit payment amounts. See also accumulation units.
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antiselection
The tendency of people with a greater-than-average likelihood of loss to apply for or continue insurance to a greater extent than do other people. Also called adverse selection or selection against the insurer.
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apparent authority
Authority that is not expressly conferred on an agent but that the principal either intentionally or negligently allows a third party to believe the agent possesses. See agent and principal. Compare to express authority and implied authority.
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applicant
The party applying for an insurance policy.
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application
A form that must be completed by an individual or other party who is seeking insurance coverage. This form provides the insurance company with much of the information it will need to decide whether to accept or reject the risk.
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approval type temporary insurance agreement
An agreement issued in conjunction with a conditional premium receipt that provides temporary life insurance coverage as of the date the insurer approves the proposed insured as a standard risk. See also conditional premium receipt and temporary insurance agreements. Compare to insurability type temporary insurance agreement.
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assessment method
An early method of funding life insurance under which members of the plan were charged in advance for the amount of money that the administrators estimated would be needed to pay each year's death claims. Also called the pre-death assessment method. See also mutual benefit method.
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asset-liability matching
The process of investing, purchasing, selling, and otherwise adjusting an insurance company's asset holdings so that cash is available when it is needed to cover the company's liabilities.
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assets
All things of value owned by an individual or organization. Examples of assets include cash, data processing equipment, and investments. Assets are shown on the balance sheet of a life insurance company's Annual Statement as required by law or by insurance department ruling.
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asset share
The amount of assets that any block of insurance policies will have accumulated by a given time.
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asset share calculation
A computation that simulates the way in which the assets of a block of policies should grow, depending on various assumptions about future interest rates, mortality, morbidity, expenses, lapses, etc.
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assignee
The party to whom all or certain contractual rights are transferred under an absolute or collateral assignment.
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assignment
(1) The transfer of ownership rights in a life insurance policy or other type of contract from one party to another. (2) The document that causes the transfer of ownership rights to go into effect. See also absolute assignment and collateral assignment.
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assignment of benefits
An authorization directing an insurer to make payment directly to a provider of benefits, such as a physician or dentist, rather than to the insured.
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assignor
The person or party who transfers certain contractual rights under an absolute or collateral assignment.
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association group insurance
Group insurance extended to the members of a trade, professional, or other association.
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assumption reinsurance
A reinsurance agreement by which one company permanently transfers full responsibility for a block of policies to another company. After the cession, the ceding company is no longer a party to the insurance agreement.
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attained age
The current age of the insured. The age of the insured at the time the insured's policy was issued plus the number of years elapsed since the policy was issued.
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attained age conversion
The changing of a life insurance policy from one form of insurance to another (such as from term life insurance to whole life insurance) at a premium rate that is based on the age the insured person has reached at the time the change takes place.
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Attending Physician's Statement (APS)
A written statement from a physician who has treated, or is currently treating, a proposed insured or an insured for one or more conditions. The statement provides the insurance company with information relevant to underwriting a risk or settling a claim.
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automatic dividend option
For a particular life insurance policy, the dividend option that applies in the event the policyowner does not choose an option. See dividend options.
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automatic nonforfeiture option
For a particular life insurance policy, a specified nonforfeiture benefit that becomes effective automatically when a renewal premium is not paid by the end of the grace period and the policyowner has not elected another nonforfeiture option. See also nonforfeiture options.
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automatic premium loan (APL)
A life insurance nonforfeiture option that allows the insurer to pay overdue premiums on a policy by establishing a loan against the policy's cash value. See also nonforfeiture options.
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automatic reinsurance treaty
A reinsurance agreement in which the reinsurer agrees, for a stipulated type of risk, to accept each risk or a portion of each risk submitted by the ceding company, up to a certain limit, provided the ceding company insures up to its usual retention limit. In this agreement, the ceding company assumes full underwriting responsibility for all cases reinsured.
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average indexed monthly earnings
In the United States, the figure on which social security disability, retirement and other benefits are based. The figure is an average of the monthly earnings on which a worker has paid social security tax. The figure is indexed, that is, adjusted to compensate for inflation.
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aviation exclusion
A life insurance contract provision which specifies that the death benefit is not payable if the insured dies as a result of certain aviation activities.
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back-dating
Making the effective date of an insurance policy earlier than the date of the application so that the premium rate will be lower. State law usually limits back-dating to not more than six months. Also called dating back.
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back-loaded policy
A life insurance policy (usually a universal life insurance policy) in which most of the expense charges occur when the policyowner surrenders the policy or makes cash withdrawals from the policy. Such charges are usually highest in the early policy years and are often eliminated at the end of a certain number of years. See also front-loaded policy and universal life insurance.
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backloading
The practice of providing a higher accrual of pension benefits during a participant's later years of employment. The practice is designed to encourage and reward long service.
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band grading
The grouping of life insurance policies according to death benefit amounts for the purpose of calculating loading.
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basic death benefit
The death benefit according to the terms of the original, basic contract of a life insurance policy. The basic death benefit does not include the benefit for any supplementary riders, such as an accidental death benefit (ADB) rider. For policies whose death benefit remains constant, the basic death benefit is equivalent to the face amount. Compare to death benefit and policy proceeds.
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basic mortality table
A mortality table without a safety margin. Also called a basic experience table. See also mortality table and safety margin.
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basic services
Under dental insurance, dental services, such as fillings, periodontics, and oral surgery, which are often covered at 80 percent of their reasonable and customary charges.
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basket clause
(1) From an investment point of view, a provision that allows insurance companies to invest a small percentage of their assets generally without regard to statutory restrictions. (2) From an accounting point of view, a clause which permits life and health insurers to hold a specified amount of their assets as nonauthorized assets, which are not restricted in the same way as authorized assets.
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beneficiary
The person or other party designated to receive life insurance policy proceeds. See also contingent beneficiary, irrevocable beneficiary, primary beneficiary, and revocable beneficiary.
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beneficiary declaration
In Canada, an insurance policy beneficiary designation that is made in a separate written document after the insurance policy has been issued.
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beneficiary for value
In the common law jurisdictions of Canada, a person who belongs to the class of beneficiaries composed of persons who were named as life insurance policy beneficiaries in return for providing valuable consideration to the insureds (U.S.: policyowners). The 1962 revision of the Uniform Life Insurance Act abolished this class of beneficiaries.
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benefit
The amount of money paid when an insurance claim is approved. Also called the policy benefit.
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benefit of survivorship
Describes the fact that annuity payments will be made as long as the designated recipient is alive at the time the payment is due. This concept is used in the calculation of amounts due under life insurance settlement options.
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benefit schedule
Under a group insurance plan, a table or schedule which specifies the amount of coverage provided for each class of insured. Insureds are often classified with reference either to earnings or to rank or position. Also known as schedule of benefits.
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best-earnings plan
A pension plan which specifies that each participant's benefit will be calculated according to the final-average formula.
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binding premium receipt
A type of initial premium receipt that makes insurance coverage effective immediately but only until the insurance company either rejects the application or approves it and issues a policy. Compare to conditional premium receipt.
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birthday rule
A rule included in some coordination of benefits provisions that specifies the manner in which benefits for dependent children are to be coordinated between two insurance plans. According to the birthday rule, benefits for dependent children will be paid by the plan of the parent whose birthday falls earlier in the year.
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blended rates
Group mortality rates that are based partially on a group's own experience and partially on manual rates. Blended rates are used to determine the appropriate group insurance premium rates for intermediate-size groups. See also experience rating and manual rates.
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Blue Cross plan
A hospital expense insurance plan offered by a regionally-operated health care provider affiliated with a large national nonprofit health care organization. This plan generally provides benefits on a "service-type" basis.
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Blue Shield plan
A physician expense insurance plan offered by a regionally-operated health care provider affiliated with a large national nonprofit health care organization. This plan generally provides benefits on a "service-type" basis.
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branch manager
The individual in charge of a field office of an insurance company that uses the branch office distribution system. Also called a general manager. See also branch office distribution system.
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branch office distribution system
A common system for selling individual life insurance. Under this system, the soliciting agents who work out of a branch office are under contract to the insurance company, not to the branch manager, and the agents receive commissions directly from the insurance company. The branch office manager, supervisors, and clerical personnel in the field office are employees of the insurance company, and these employees are subject to the same types of controls normally exercised by an employer. See also agency system, branch manager, and general agency distribution system.
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break in service
The length of time between the date an employee leaves a firm and the date the employee resumes working for that firm. For pension and employee benefit plan purposes in the United States, a plan participant cannot be deprived of benefits which accumulate before a break in service unless the break is longer than (1) five years or (2) the amount of time that the participant has been employed when the break commences, whichever is greater.
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bridging supplement
In Canada, a supplemental pension provided to a pension plan participant who retires before age 65. The bridging supplement is generally used to integrate private pension plans with public pension plans. If a pension plan participant retires before age 65, the plan sponsor can provide a bridging supplement until the retiree begins to receive payments from the public pension plans at age 65. The combined benefit payment that the participant receives remains level and is the same as the participant would have received had he or she waited until reaching age 65 before beginning to receive benefits. The sponsor is providing an amount in addition to the basic pension payment. Also known as a bridging benefit. Compare to the notched option.
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broker
(1) An insurance salesperson agent who sells insurance products for more than one insurance company. (2) For a career agent, to submit insurance applications to companies other than the agent's own company.
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brokerage distribution system
A distribution system that relies on commissioned agents, called brokers, who sell the products of more than one insurance company.
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brokerage manager
A salaried insurance company employee or an independent agent whose responsibility is to appoint brokers on behalf of the company and to encourage brokers to sell the products of a particular insurance company.
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brokerage shop
An agency operated by an independent general agent who is under contract to a number of insurance companies. Also known as a brokerage general agency.
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broker-dealer
A firm that provides information or advice to its customers regarding the sale and/or purchase of securities and that serves as a financial intermediary between buyers and sellers by manufacturing or acquiring securities in order to market them to its customers.
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bundled insurance product
An insurance product in which the mortality, investment, and expense factors used to calculate premium rates and cash values are not identified separately in the policy. Traditional whole life insurance is an example of a bundled insurance product. See also unbundled insurance product.
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business-continuation insurance
A type of business insurance designed to provide funds so the remaining partners in a business, or the remaining stockholders in a closely-held corporation, can buy the business interest of a deceased or disabled partner or stockholder. See also partnership insurance and stock repurchase insurance.
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business insurance
Insurance that is intended to serve the insurance needs of a business rather than the needs of an individual.
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Buyer's Guide
In the United States, a publication that many states require insurance companies to give to an applicant for life insurance. The Buyer's Guide helps the applicant make an informed choice among policies.
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cafeteria plan
An employee benefit plan which gives each employee several choices as to the types and/or amounts of group benefits. Also known as a flexible benefit plan.
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Canada Pension Plan (CPP)
A plan that primarily provides retirement income and long-term disability income benefits to residents of Canadian provinces other than Quebec.
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Canadian Council of Insurance Regulators (CCIR)
A Canadian organization of provincial insurance regulators who meet regularly to discuss insurance issues and to develop model insurance legislation that it encourages provincial legislatures to adopt. Similar to the National Association of Insurance Commissioners in the United States.
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Canadian Life and Health Insurance Association (CLHIA)
An association of most of the life and health insurance companies in Canada which conducts research on insurance issues and promotes the best interests of the insurance industry. The CLHIA is the primary source of information about the life and health insurance industry in Canada.
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Canadian Life and Health Insurance Compensation Corporation (CompCorp)
In Canada, a federally incorporated, nonprofit company established by the Canadian Life and Health Insurance Association (CLHIA) in order to protect consumers against loss of benefits in the event a life or health insurance company becomes insolvent.
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Canadian method
A method prescribed in Canada for calculating modified net premiums and reserves.
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cancellable policy
An individual health insurance policy that can be terminated at any time by the insurer. See also conditionally renewable policy, guaranteed renewable policy, noncancellable and guaranteed renewable policy, noncancellable policy, and optionally renewable policy.
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capacity
The largest amount of insurance an insurer or a reinsurer is willing or able to underwrite. The term can refer to an insurer's capacity on one individual or to the insurer's capacity for all its business.
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capitation
A method of paying medical providers through a prepaid, flat monthly fee for each covered person. The payment is independent of the number of services received or the costs incurred by a provider in furnishing those services.
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capitation basis
A compensation plan used in some health maintenance organizations (HMOs) in which a physician is paid a flat amount per year per subscriber who has elected to use that physician. For that amount, the physician must treat the subscriber as often as necessary during that year. See also fee schedule basis.
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captive agents
See exclusive agents.
captive insurance company
An insurance company, formed and controlled by a separate company, whose purpose is to provide insurance to the controlling company. Companies which form captive insurance companies include all types of companies which extend credit to customers, including banks and retailers. See also agent-owned reinsurance company (AORC).
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career agent
A full-time commissioned salesperson who works out of an insurance company's field office, holds an agent contract with that company, and sends all, or almost all, of his or her business to that company. A career agent may occasionally broker business with other companies.
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career average (career earnings) benefit formula
A type of defined benefit formula in which the retirement benefit amount is derived on the basis of a participant's compensation during the entire period of participation in the plan. See also defined benefit formula. Contrast with final average benefit formula.
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carry-over provision
A provision found in most medical expense policies stating that expenses incurred during the last three months of a benefit period that are used to satisfy the current benefit period's deductible may be used to satisfy any or all of the following benefit period's deductible.
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case management
A cost-containment program designed to identify alternate, less costly methods of treatment for seriously ill patients without sacrificing the quality of care a patient receives. Also known as catastrophic claim management, large claim management, or medical case management.
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cash-balance pension plan
A type of defined benefit plan in which each participant has an account which is credited with amounts reflecting the employer's contributions and amounts reflecting investment interest. The balance in the account indicates the participant's accrued benefit. Upon retirement or withdrawal, the participant may receive the full account balance in a lump sum, provided that the benefits are fully vested, or may use the account balance to purchase an annuity.
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Cash or Deferred Arrangement (CODA)
See Section 401(k) plan.
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cash payment option
A life insurance policy dividend option under which policy dividends are paid to the policyowner in cash.
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cash premium accounting system
A premium accounting system used for industrial insurance. Under this system, the agent informs the home office of the amount collected on each policy. The home office then updates the policy records to reflect these collections and prepares new route collection records. Contrast with advance and arrears system.
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cash refund option
A form of the life income option with refund which specifies that any proceeds remaining when the beneficiary dies will be paid in a lump sum to the contingent payee. Contrast with the installment refund option.
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cash surrender value
In a life insurance policy, the amount of money, adjusted for factors such as policy loans or late premiums, that the policyowner will receive if the policyowner cancels the coverage and surrenders the policy to the insurance company. Also called the net cash value. Compare to cash value.
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cash surrender value option
A life insurance policy nonforfeiture option which specifies that a policyowner who discontinues premium payments can elect to surrender the policy and receive the policy's cash surrender value.
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cash value
In a life insurance policy, the amount of money, before adjustment for factors such as policy loans or late premiums, that the policyowner will receive if the policyowner allows the policy to lapse or cancels the coverage and surrenders the policy to the insurance company. Cash values are a feature of most types of permanent life insurance, such as whole life and universal life. Compare to cash surrender value. Also called inside build-up and policyowner's equity.
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catastrophic claim management
See case management.
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causal relation requirements
Proof required by statute in Kansas, Missouri, Rhode Island, and Puerto Rico to show that the facts misrepresented in an application for insurance were related to the loss insured against.
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ceding company
In a reinsurance transaction, the insurer that purchases reinsurance to cover all or part of those risks that it does not wish to retain in full. Also called the direct insurer, direct writer, or direct-writing company.
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certain payment
A payment that will definitely be made under any circumstances, its payment not being contingent upon any predesignated condition.
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certificate of assumption
In assumption reinsurance, a certificate sent to each policyholder whose policy has been ceded to give the policyowner (1) notice of the assumption and (2) information concerning the new insurer.
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certificate of authority
(1) A document created by an insurer detailing the authority granted to an agent or group of agents to act on behalf of the insurer. (2) In the United States, a certificate issued by a state's insurance department authorizing an insurer to issue certain types of insurance within the state.
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certificate of indebtedness
A certificate issued by an insurer to the beneficiary of a life insurance policy that specifies a guaranteed minimum interest rate and the frequency with which the insurer will make interest payments under the interest settlement option.
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certificate of insurance
A document given to each person insured by a group insurance plan. This document shows the type and amount of coverage to which the group member is entitled and the beneficiary of the coverage. The certificate may also contain a summary of the contract terms as they affect individual group members. See also master contract.
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cession
(1) In reinsurance, the act of ceding. (2) In reinsurance, a parcel or unit of insurance that a company cedes to a reinsurer.
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change of condition provision
An insurance provision stipulating that, for a policy to become effective, all conditions described in the application must still be true at the time of delivery.
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change of occupation provision
An individual health insurance policy provision that grants the insurer the right to adjust a policy's premium rate or benefits when the insured changes jobs or careers.
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CICA
The CICA, together with the provincial and territorial institutes of chartered accountants, represents a membership of 60,000 professional accountants in Canada and Bermuda. The CICA sets accounting and auditing standards for business, not-for-profit organizations and government. It issues guidance on control and governance, publishes professional literature, develops continuing education programs and represents the CA profession nationally and internationally.
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claim
A request for payment under the terms of an insurance policy.
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claim administration department
The department in a life and health insurance company responsible for processing claims. In this department, claim examiners review claims presented by policyowners or beneficiaries, verify the validity of claims, and authorize the payment of benefits to the proper person.
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claimant
The person or party making a formal request for payment of benefits due under the terms of an insurance contract.
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claim examiner
An employee of an insurance company whose responsibilities include investigating claims, approving the claims that are valid, and denying those that are invalid or fraudulent.
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claim frequency rate
In health insurance calculations, the claim frequency rate is the expected percentage of insured people who will file claims and the number of claims they will file during a given period. The claim frequency rate is used to calculate average claim costs, which are used to calculate premium rates.
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claim investigation
The process of obtaining necessary claim information in order to decide whether or not to pay a claim.
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claim reserve
A claim department's estimate of the amount of money needed to pay a claim. The estimate is made with the help of information that the claim department gathers in the course of handling the claim. This information may involve, for example, the extent to which the claim is covered by the policy, the effect of previously paid claims on the amount of coverage available to pay a current claim, and the effect of any applicable reinsurance coverage on the claim.
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class beneficiary designation
A beneficiary designation that names several people as a group -- for example, "children of the insured" -- rather than naming each person individually.
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clean-up fund
A lump-sum life insurance death benefit designed to pay the insured's outstanding debts and final expenses.
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CLHIA Guidelines
Recommendations to insurance companies adopted by the Canadian Life and Health Insurance Association (CLHIA). Insurers are expected to abide by these guidelines as a condition of membership in the CLHIA.
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closed contract
An insurance contract in which the terms of the insurance contract and the application constitute the entire agreement between the policyowner and the insurer. Commercial insurance companies use closed contracts. See also open contract.
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closing
The process of securing a purchase commitment from a prospect by requesting and obtaining the prospect's agreement to submit an application for the coverage recommended in a sales proposal.
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COBRA
The Consolidated Omnibus Budget Reconciliation Act of 1985, commonly known as COBRA, requires group health plans with 20 or more employees to offer continued health coverage for you and your dependents for 18 months after you leave your job. Longer durations of continuance are available under certain circumstances. If you opt to continue coverage, you must pay the entire premium, plus a two percent administration charge.
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coinsurance
The amount you are required to pay for medical care in a fee-for-service plan or preferred provider organization (PPO) after you have met your deductible. The coinsurance rate is usually expressed as a percentage of charges. For example, if the insurance company pays 80 percent of the claim, you pay 20 percent.
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coinsurance provision
A stipulation found in most health insurance policies that requires an insured to pay a stated percentage, in excess of the deductible, of all eligible medical expenses.
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COLA
See cost-of-living adjustment (COLA).
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collateral assignment
A transfer of some ownership rights in a contract from one party to another, generally for a temporary period. Insurance policies are often assigned as collateral for a loan, in which case all transferred rights revert to the assignor when the loan is repaid. See also assignment.
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combination company
A life and health insurance company that sells both industrial and ordinary insurance products.
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combination clause
A clause in a disability income contract that specifies a point at which the definition of total disability will no longer be based on an insured's inability to perform his or her "own occupation" but on the insured's inability to perform "any occupation."
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combination dental plan
A dental plan which contains features of both scheduled and nonscheduled plans. Typically, combination plans cover preventive and diagnostic procedures on a nonscheduled basis and other services on a scheduled basis. See also nonscheduled dental plan and scheduled dental plan.
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combination plan
A pension plan which employs an approach to funding wherein part of the funding is allocated and part is unallocated. The allocated part of the employer's contribution is used to purchase annuities or life insurance contracts with cash values. The unallocated part is placed in a side fund, also called a conversion fund. See also allocated funding and unallocated funding.
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commission
The amount of money paid to an insurance agent for selling an insurance policy. A commission is almost always calculated as a percentage of the premium.
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Commissioners Method
A method prescribed in the United States for calculating modified net premiums and reserves for life insurance policies.
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common accident provision
(1) A provision of many medical expense insurance contracts which specifies that, if two or more members of the same family are injured in the same accident, their combined medical expenses will only be subject to one deductible. (2) A provision found in many voluntary group accidental death and dismemberment plans which specifies that the amount payable by the insurance company is limited to a stipulated maximum for all employees killed or injured in a single accident.
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common disaster clause
A life insurance policy provision which states that the primary beneficiary must survive the insured by a specified period, such as 60 or 90 days, in order to receive the policy proceeds. Otherwise, the policy proceeds will be paid as though the primary beneficiary had died before the insured.
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community-rating
Applying the same premium rate structure to certain group insurance subscribers, regardless of their past or potential loss experience. See also pooling.
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commuted value
In Canada, the present value of the pension benefits expected to be paid to a retiree from the date of retirement until death.
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company retention method
A method of comparing the costs of various life insurance policies wherein the present value of premiums, cash values, and dividends is calculated by weighting each item each year by the probability that it will be paid. See also cost comparison methods.
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comprehensive major medical insurance
A form of health insurance coverage that combines the features and benefits of a hospital-surgical expense policy and the features and benefits of a major medical policy.
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concurrent review
A component of a utilization review program that monitors an insured's care while the insured is hospitalized and encourages the dismissal of an insured from the hospital as soon as the insured's medical condition no longer warrants continued in-patient care.
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conditionally renewable policy
A health insurance policy that grants an insurer the right to refuse to renew the policy for reasons specified in the policy at the end of a premium payment period. See also cancellable policy, guaranteed renewable policy, noncancellable and guaranteed renewable policy, noncancellable policy, and optionally renewable policy.
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conditional premium receipt
A type of premium receipt given when the applicant pays the initial premium and under which life insurance will become effective before a policy is issued only if the proposed insured is found to be insurable. Also called a conditional receipt. Compare to binding premium receipt. See also approval type temporary insurance agreement and insurability type temporary insurance agreement.
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confirmation certificate
A certificate issued to the beneficiary of a life insurance policy that outlines the amount of life insurance proceeds in a retained asset account, the account number, and the current interest rate.
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conservation
An agent's or an insurer's efforts to prevent a policy from lapsing.
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Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
In the United States, a statute which requires that employers sponsoring group health plans offer continuation of coverage under the group plan to employees and their spouses and dependent children who have lost coverage because of the occurrence of a "qualifying event." Qualifying events include reduction in work hours, many types of termination of employment, death, and divorce.
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constructive delivery
Legally equivalent to physical delivery of a policy. Constructive delivery occurs (a) when an insurer parts with control of the policy with the intention that the insurer will be unconditionally bound by the policy as a completed instrument or (b) when the policy is physically delivered to an agent of the applicant.
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consumer report
As defined by the Fair Credit Reporting Act, a consumer reporting agency's communication of any information pertaining to an individual consumer's creditworthiness, credit standing, credit capacity, general reputation, or personal characteristics.
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consumer reporting agency
Any person or organization that regularly prepares consumer reports and furnishes them, either for profit or on a cooperative, nonprofit basis, to other persons or organizations. Also called a credit reporting agency. See also Fair Credit Reporting Act (FCRA).
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contestable period
The period of time (usually two years) during which an insurer may challenge the validity of a life insurance policy. See also incontestable clause.
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contingencies
Events that are possible but that may or may not happen. Insurers base their premium rates and their willingness to accept risks partly on the probability that certain contingencies will or will not occur.
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contingency reserve
A voluntary reserve established by an insurance company to help pay any unusual and unexpectedly large claim amounts. See also special surplus funds.
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contingent beneficiary
The party designated to receive life insurance policy proceeds if the primary beneficiary should die before the person whose life is insured. Also called the secondary beneficiary or the successor beneficiary.
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contingent payee
The party who will receive any life insurance policy proceeds that are still payable under a settlement option at the time of the primary payee's death. Unlike the contingent beneficiary, the contingent payee's rights do not end when the insured dies. Also called the successor payee.
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contingent payment
A payment that will be made only if some predesignated condition is met, such as the recipient being alive.
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continuance tables
Tables containing morbidity statistics that indicate the distribution of claims according to the duration of the illness or amount of expense involved in the claims.
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continuous-premium whole life insurance
A type of whole life insurance in which premiums are payable until the death of the insured. Also called straight life insurance.
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contract of adhesion
A legally binding agreement that is prepared by one party and that must be accepted or rejected as a whole by the other party, without any bargaining between the parties to the agreement. Insurance contracts are contracts of adhesion.
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contract of indemnity
A type of contract in which the amount of the benefit to be paid is based on the actual amount of financial loss as determined at the time of loss. For example, many hospital expense insurance contracts are contracts of indemnity. See also valued contract.
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contributed surplus
On a Canadian life insurance company's balance sheet, the amount in excess of par value paid in by stockholders minus the amount of dividends paid to stockholders.
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contribution limit
The maximum annual addition permitted by law to be made to a participant's account in a defined contribution pension plan.
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death benefit
The amount of money paid or due to be paid when a person insured under a life insurance policy dies. This amount does not include adjustments for outstanding policy loans, dividends, paid-up additions, or late premium payments. See also basic death benefit and policy proceeds.
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death claim
A request for payment under the terms of a life insurance policy.
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debit
See territory.
debits
In the numerical rating system, debits represent underwriting factors that have an unfavorable effect on an individual's mortality rating. Debits are assigned positive values. See also credits and numerical rating system.
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debtor-creditor groups
A group composed of lending institutions -- banks, credit unions, savings and loan associations, finance companies, retail merchants, and credit card companies -- and their debtors. See also group creditor life insurance.
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decreasing term insurance
A type of term life insurance in which the amount of coverage decreases during the term of coverage.
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decrement
A reduction in the number of participants in a pension plan caused by factors such as retirement, disability, death, or termination.
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deductible
The amount of money you must pay up front each year to cover your medical care expenses before your insurance policy starts paying.
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deferral date
A date some time after the first anniversary of a group insurance policy to which an insurance company defers the payment of the policy's first renewal premium. An insurance company might defer this payment so that it could use the full first year's experience to help calculate the new premium.
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deferred annuity
(1) A series of payments in which the first payment is postponed (deferred) for one or more periods. (2) An annuity contract under which premiums are accumulated at interest but the annuity payment period is postponed (deferred) for one or more periods. See also deferred life annuity and group deferred annuity.
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deferred compensation plan
A plan established by an employer to provide benefits to an employee at a later date, such as after the employee's retirement.
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deferred life annuity
A deferred annuity that provides a series of payments, each of which is made only if a designated person is alive.
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deferred premium arrangement
In group insurance, an agreement between an insurer and a policyholder to lengthen a group insurance policy's grace period, on a permanent basis, usually by 30, 60, or 90 days. This arrangement allows the policyholder to use the deferred premium amounts for the length of time by which the grace period is extended. The arrangement is usually only granted to companies with excellent credit ratings. Also called a premium-delay arrangement.
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deferred premiums
Premiums that are due after a policy's statement date but before the next policy anniversary.
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Deferred Profit Sharing Plan (DPSP)
In Canada, a type of profit-sharing plan in which employer contributions, up to certain limits, are tax deductible for the employer and tax deferred for the employee, and in which the employee can withdraw the benefit before retirement. The ways that plan funds can be invested are restricted. See also profit-sharing plan.
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defined benefit formula
A formula used to determine the periodic payment amounts that each participant in a defined benefit pension plan will receive at retirement. The benefit amount is often related to number of years of participation in the plan.
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defined benefit pension plan
A pension plan that specifies the benefits that the plan promises to pay to a participant upon retirement, with the benefits determined according to a specified formula. Contrast with defined contribution pension plan.
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defined contribution formula
A formula that describes the amount of money that will be deposited into a pension plan each year on behalf of each plan participant. Usually, the contribution is a specified percentage of the participant's compensation.
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defined contribution pension plan
A pension plan that specifies the amount of annual contributions that the plan sponsor will make on behalf of a plan participant. A defined contribution plan does not guarantee a specific amount of retirement benefits. A participant's benefits at retirement are based on the amount that has been contributed to the participant's account, plus investment earnings. Contrast with defined benefit pension plan.
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demutualization
The process of converting a stock insurance company to a mutual insurance company.
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dental maintenance organization
An organization like an HMO which provides only dental care.
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dentist-consultant
A licensed dentist who understands the underwriting intent of dental plan language as well as the accepted standards of dental practice, and who advises insurers as to the appropriateness of dental treatment.
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dependent life insurance
Group life insurance made available to group members, usually on an optional and contributory basis, to cover the spouse, children, or other dependents of the group member. It is usually sold in small amounts which are intended to pay funeral expenses.
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deposit administration contract
A funding vehicle for a pension plan in which the plan sponsor places plan assets in an insurance company's general account. When a plan participant retires, the insurer withdraws sufficient funds from the general account to buy an immediate annuity for the plan participant. A deposit administration contract usually protects the plan sponsor against investment loss and guarantees minimum investment returns. See also immediate annuity and immediate participation guarantee (IPG) contract.
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deposit term insurance
A type of level term insurance that requires a substantially larger premium payment in the first year than the amount of level annual premiums payable in subsequent years.
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determination letter
In the United States, a ruling by the Internal Revenue Service (IRS) as to whether the design of a pension plan satisfies the criteria necessary for the plan to be a qualified plan.
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deviated rate
In group creditor insurance in the United States, a premium rate for a contributory plan which is higher than the prima facie rate and based on the group's actual claims experience. Insurers can charge a deviated rate only after the prima facie rate has been in effect for a certain period of time and only after being granted permission by the state insurance commissioner. Contrast with prima facie rate.
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diagnostic related groups (DRGs)
In the United States, a prospective payment method used in the Medicare Program, in which payment is not based on the number and kinds of medical services that a patient receives, but instead is based on the diagnosis of each patient.
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direct response distribution system
In insurance, a distribution system that relies on advertisements, telephone solicitations, and mailings to generate sales. No agents visit customers to induce sales.
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direct response marketing
A method of selling insurance products directly to the consumer, usually through direct mail, advertising in print and broadcast media, or by telephone solicitation, without the use of insurance agents.
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disability
Inability to work due to an injury or sickness. See also partial disability, presumptive disability, and total disability.
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disability benefits
Benefits that are payable periodically while an insured continues to be disabled. "Being disabled" is generally defined in terms of inability to work. See also total disability.
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disability buy-out insurance
Insurance that provides cash funds to a business or professional partnership so that the business interests of a totally disabled partner or stockholder may be purchased if the disability is long-term or permanent.
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disability income insurance
A type of health insurance designed to compensate insured people for a portion of the income they lose because of a disabling injury or illness. Generally, benefits for disability income insurance are provided for the disabled person in the form of monthly payments. Sometimes called loss of time insurance. See also long-term disability income insurance and short-term disability income insurance.
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disability table
(1) A tabulation of the probabilities of becoming disabled at each age, plus certain related figures. (2) A tabulation of the number of persons who are still disabled at each age and the duration of disability, plus certain related figures.
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disabled life annuity
A series of payments, each of which is contingent on a person being alive and still disabled.
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discharge provision
Part of a small estates statute which releases an insurance company from liability under an insurance contract if it pays the proceeds to the deceased insured's estate. See small estates statutes.
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Discontinuity Index
A test required by the NAIC Model Life Insurance Disclosure Regulation and designed to disclose instances in which policy illustrations have been manipulated so that they present an unrealistic progression of premiums, dividends, and benefits.
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disintermediation
The process of removing money from a financial intermediary in order to earn a higher yield somewhere else, usually with another financial intermediary. Historically, disintermediation, through policy loans or surrendered policies, has been a major problem for life and health insurers during periods of economic depression and high inflation.
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distress termination
In pension and employee-benefit plans, the curtailment of a plan which does not have sufficient funds to cover all the benefits to which the plan's participants are entitled. Contrast to standard plan termination. See also involuntary plan termination and voluntary plan termination.
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distribution expenses
Expenses involved in making insurance products available to the general public. These expenses include agent compensation, group sales representatives' salaries, and postal, printing, and telecommunications expenses for those companies that use direct response marketing.
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distribution system
In an insurance company, the network of organizations and individuals that performs all the marketing activities required to convey a product from an insurer to its customers.
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dividend
(1) A refund of excess premium paid to the owner of an individual participating life insurance policy. Such a dividend is paid out of an insurer's divisible surplus. Also called a policy dividend or a policyowner dividend. See also divisible surplus. (2) The portion of a group insurance premium that is returned to a group policyholder whose claims experience is better than had been expected when the premium was calculated. Also called experience rating refund, experience refund, and retroactive rate reduction. (3) A periodic payment paid by a business to a stockholder. Dividends paid in cash are called cash dividends. Dividends paid in the form of additional shares of stock are called stock dividends.
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dividend accumulations
Amounts that result when a policyowner decides to leave the policy dividends owed to him or her on deposit with the insurer. Also called dividend credits.
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dividend expenses
When an insurer calculates policyowner dividends, dividend expenses represent the amount of money that it costs the insurer to maintain each policy in force for the current year.
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dividend interest rate
The interest rate that represents the actual rate being earned on an insurer's present investments. The dividend interest rate is used to calculate policyowner dividends.
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dividend options
Several alternatives that participating policyowners can choose from to indicate the manner in which they want to receive their share of the insurance company's divisible surplus. See accumulation at interest option, additional term insurance option, automatic dividend option, cash payment option, dividend accumulations, enhancement type policy, paid-up additions, and premium reduction option.
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dividend rate of mortality
The rate of mortality (for a given age) that an insurer chooses to use in calculating policyowner dividends. The dividend rate of mortality is the mortality rate currently experienced by the insurer on the policies it has sold.
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divisible surplus
The portion of an insurance company's earnings that is available for distribution to the owners of the company's participating policies. See also surplus.
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doctrine of reasonable expectations
A doctrine applied by some courts under which the reasonable expectations of policyowners and beneficiaries will be honored, even though the language of the policy does not literally support these expectations.
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domestic corporation
From the point of view of a particular state in the United States, a company incorporated under the laws of that state. Compare to alien corporation and foreign corporation.
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double indemnity
Death benefit coverage that pays an additional benefit equal to the basic death benefit of the policy if the insured's death is accidental. See also accidental death benefit (ADB) rider.
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dread disease policy
See limited coverage policy.
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drinking criticism
An underwriting term for evidence of alcohol abuse or alcoholism.
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dual-choice provision
In the United States, part of the Health Maintenance Organization Act of 1973 which requires employers that meet certain specifications to offer health insurance through a federally qualified HMO as an alternative to a traditional health insurance plan.
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dual registration
The licensing of registered representatives with more than one broker-dealer.
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duplicate coverage inquiry (DCI) form
In the United States, a form filled out by a health insurance company claim office and sent to another company in order to ascertain whether an accident or injury for which the first company has received a claim is also insured by the second company.
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early retirement age
An age specified in a pension plan that is earlier than the plan's normal retirement age but at which a plan participant can still receive an immediate pension benefit. The benefit received at early retirement is usually actuarially reduced from the amount that would have been received had retirement occurred at the normal retirement age. See also late retirement age and normal retirement age.
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election period
A 60-day period following notification of an insured's eligibility for COBRA continuation coverage, during which the individual can accept or decline the coverage.
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elective contributions or elective deferrals
In the United States, contributions to an employee's Section 401(k) plan (cash or deferred arrangement) that are made by the employer on the employee's behalf. The contributions are made using before-tax dollars obtained through a voluntary reduction of the employee's salary. The contributions are tax-deferred to the employee. See also matching contributions and nonelective contributions.
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eligibility period
In contributory group insurance plans, the period of time, usually 31 days, during which a new employee may apply for group insurance coverage.
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eligibility requirements
The conditions a person must meet in order to be a participant in a group life insurance, group health insurance, or retirement plan.
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elimination period
See waiting period.
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employee contribution
See percentage contribution.
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Employee Retirement Income Security Act of 1974 (ERISA)
A United States federal law establishing (a) the rights of pension plan participants, (b) standards for the investment of pension plan assets, and (c) requirements for the disclosure of plan provisions and funding. ERISA also established the Pension Benefit Guaranty Corporation (PBGC).
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employee's cost basis
In the United States, an amount that is subtracted from the total amount of a distribution to a pension plan participant, in order to determine the portion of the distribution that is subject to federal taxation. The cost basis is the amount on which an employee has already been taxed. It includes the amount of the nondeductible contributions made to the plan by the participant, any cost of plan-provided life insurance that was reported as taxable income by the participant, and other factors, including the amount of any employer contributions previously taxed as income to the participant.
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Employees Profit Sharing Plan (EPSP)
In Canada, a type of profit sharing plan in which the employer deposits funds into a trust account and may deduct the deposited amount for tax purposes. Employees are generally taxed on contributions on their behalf in the year the contributions are made and on interest earnings when they are earned, but are not taxed when they leave the plan and receive the benefits. There are few limitations on the size of the contributions employers may make or on the ways that plan funds may be invested.
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employee stock ownership plan (ESOP)
Generally, any qualified employee-benefit plan which invests some or all plan assets in employer stock. In the United States, ERISA further defines an ESOP as either a qualified stock bonus plan or a combination qualified stock bonus plan and defined contribution pension plan designed to invest primarily in employer securities. The employer's contributions are tax deductible for the employer and tax deferred for the employee.
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endorsement
See rider.
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endorsement method
A method of changing the beneficiary of a life insurance policy. The change may be made in one of two ways: (a) The policyowner returns the policy to the insurance company, and the insurer attaches the endorsement with the name of the new beneficiary to the policy, or (b) the policyowner does not send the policy to the insurer but only requests the change by letter or telephone, and the insurer sends an endorsement with the change to the policyowner. Contrast with recording method.
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endowment insurance
A type of life insurance that provides a benefit (a) if death occurs during a specified number of years or (b) if, at the end of the specified number of years, the insured is alive.
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enhancement type policy
A life insurance policy in which part of each dividend provides paid-up additions, while the other part provides one-year term insurance to produce a predetermined total death benefit.
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enrolled actuary
In the United States, a pension actuary who meets the standards of and is enrolled by the federal agency known as the Joint Board for the Enrollment of Actuaries.
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entire contract provision
A life insurance policy provision which states that the policy itself, along with a copy of the application for insurance, if attached, constitutes the entire agreement between the insurer and the policyowner.
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equitable assignment
An assignment that does not meet the requirements of a legal assignment but which will be enforced in an equitable action if fairness so requires.
equity-based insurance product
A life insurance or annuity product in which the cash value and benefit level fluctuate according to the performance of a portfolio of equity investments. The owners of this type of insurance product accept the risk of sharing in the insurer's investment gains and losses. Equity investments are investments by virtue of which investors gain part ownership in a corporation. The primary type of equity investment is corporate stock. See also variable annuity, variable life insurance, and variable universal life insurance.
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equity pension
A pension which provides benefit amounts that, at least in part, vary in accordance with the investment results of a portfolio of common stocks and other investment vehicles. The equity portion of the pension benefit is meant to provide retirees with benefits that increase as inflation rises.
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equivalent level annual dividend (ELAD)
One amount presented to consumers as part of the interest-adjusted method of comparing the costs of life insurance policies. The equivalent level annual dividend is meant to represent the part of the interest-adjusted payment and the cost that is, in effect, not guaranteed by the insurer, because dividends will change in the future as the insurer's experience changes. This amount gives the buyer an indication of the extent to which these nonguaranteed amounts affect the interest-adjusted payment and the cost of a policy.
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equivalent single payment
One payment that can replace several other payments, because it equals the value of the other payments.
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equivocal suicide
An apparent suicide in which there is doubt about whether the deceased intended to die as a result of an apparently self-destructive act.
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ERISA
See Employee Retirement Income Security Act of 1974 (ERISA).
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error and omissions (E&O) insurance
Insurance designed to cover claims that result from the negligent acts or mistakes of an agent, including (1) his or her vicarious liability stemming from negligent acts or (2) mistakes committed by individuals for whom the agent is legally liable.
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ESOP
See employee stock ownership plan (ESOP).
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estate planning
An insurance program designed not only to provide funds for the prospect's dependents upon the death of the prospect, but also to conserve, as much as possible, the personal assets that the prospect wants to bequeath to heirs. Estate planning usually involves accountants, lawyers, and the trust officers of banks, as well as insurance agents.
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evidence of insurability
Proof that a person is an insurable risk.
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excess interest
The amount of interest above the guaranteed amount, that an insurance company pays on a settlement option when interest rates are high.
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exchange program
A program that allows a proposed insured who is replacing a policy to obtain the new policy on the basis of little or no evidence of insurability if his or her insurability has recently been established by the company that issued the original policy.
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exclusion rider
See impairment rider.
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exclusions
Specific conditions or circumstances for which the policy will not provide benefits.
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exclusive agents
Career agents who are under contract with one insurance company only and who are not permitted to sell the products of other insurers. Also known as captive agents.
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exclusive territory
Under the general agency distribution system, a territory in which no individual other than the general agent is permitted to offer the insurer's products. Compare to nonexclusive territory and overlapping territory.
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exculpatory statute
Legislation in community-property states that allows an insurer to pay the proceeds of a life insurance policy in accordance with the terms of that policy without fear of double liability.
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exoneration statutes
Statutes that excuse the insurer from liability if a party claims policy proceeds which the insurer has already paid to a third party in good faith and without knowledge of any conflicting claim.
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experience rating
The process of using a group's own premium and claims experience to calculate premium rates. If the claims experience for the previous year was favorable, the insurer considers reducing the premium rates for the coming year. If the experience was unfavorable, the insurer attempts to discover the reason and may propose higher premium rates for the next year. See also blended rates and manual rates.
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experience refund
(1) The portion of a group insurance premium that is returned to a group policyholder whose claims experience is better than had been expected when the premium was calculated. Also called a dividend, an experience rating refund, and a retroactive rate reduction. See also dividend. (2) The portion of a reinsurance premium that is returned to the ceding company when claims experience is better than had been expected when the premium was calculated.
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experimental underwriting
The practice of cautiously accepting specific types of risk that are considered uninsurable according to the insurer's normal underwriting guidelines.
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express authority
The authority that a principal explicitly confers on an agent. See agent and principal. Compare to apparent authority and implied authority.
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extended spouse's allowance
In Canada, an Old Age Security (OAS) benefit payable to a person who has been receiving a spouse's allowance and whose spouse dies. The benefit is payable until the recipient reaches age 65 or remarries. See also spouse's allowance.
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extended term insurance option
A nonforfeiture option in which the cash value of a policy is applied as a net single premium to purchase paid-up term insurance. The amount of term insurance is equal to the death benefit of the policy being surrendered less any outstanding policy loans. The insured maintains the same amount of coverage but usually for a shorter period of time than the original coverage. See also nonforfeiture options.
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extra-percentage tables method
A commonly used plan for rating substandard risks. Under this method, each substandard class is charged a premium rate that is a certain percentage above the standard premium rate. Contrast with flat extra premium method.
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face amount
In a life insurance policy whose benefit is not variable, the amount stated as payable at the death of the insured or (in the case of an annuity) at the maturity of the contract. It is generally shown on the first page of the policy. Also called the face value. See also basic death benefit, death benefit, and policy proceeds.
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face page
The first page of an insurance policy. The face page normally includes the insured's name and age, the name of the policyowner (if different from the insured's name), the amount of premiums, the policy number, the date on which the policy was issued, and the signatures of the insurance company's president and secretary.
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facility-of-payment clause
A life insurance policy provision that permits an insurer to pay all or part of the policy proceeds either to a blood relative of the insured or to anyone who has a valid claim to those proceeds. The facility-of-payment clause enables the insurer to pay benefits in a timely manner when such benefits cannot be made to the beneficiary identified in the insurance contract.
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factor table
A table used by insurance underwriters to determine an applicant's net worth by specifying what an applicant's annual income should be multiplied by to arrive at the maximum allowable amount of insurance.
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Fair Credit Reporting Act (FCRA)
A United States federal law designed to help ensure that consumer reporting agencies act fairly, impartially, and with respect for the consumer's right to privacy when preparing consumer reports on individuals. See also consumer reporting agency.
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family benefit
A life insurance policy rider that provides term insurance coverage on the insured's spouse and children.
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family deductible
A single deductible which, when satisfied, relieves a family of the burden of satisfying a deductible for each individual family member.
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family income insurance
A specialized individual policy that commonly combines whole life insurance with decreasing term insurance. The whole life insurance portion of the policy is usually paid as a lump sum when the insured dies. The decreasing term insurance portion of the policy provides an income for a predetermined period to help support the insured's family.
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family insurance policy
A life insurance policy that covers all the members of a family under one contract.
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FASB Statement No. 35
Issued in the United States by the Financial Accounting Standards Board (FASB) in 1985, Statement 35 contains rules by which to measure and report a defined benefit pension plan's assets and liabilities in accounting reports that are issued by the pension plan itself. The Statement is titled "Accounting and Reporting by Defined Benefit Plans."
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FASB Statement No. 87
Issued in the United States by the Financial Accounting Standards Board (FASB) in 1985, Statement 87 governs the ways in which an employer accounts for and reports the costs of pension benefits offered to its employees. The Statement, titled "Employers' Accounting for Pensions," requires that, for accounting purposes, employers use a cost method known as the projected unit credit method to determine the net periodic cost of the pension benefits offered to employees. Statement 87 also requires that an employer recognize a liability if the net periodic cost is greater than employer contributions to the plan, and an asset if net periodic cost is less than employer contributions to the plan. An employer must also recognize a liability known as the unfunded accumulated benefit obligation if the accumulated obligations of the plan sponsored by the employer exceed the fair market value of the plan's assets.
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FASB Statement No. 88
Issued in the United States by the Financial Accounting Standards Board (FASB) in 1985, Statement 88 establishes accounting requirements for employers whose defined benefit pension plans are curtailed or terminated, or experience other special events, such as a settlement of a pension obligation through a lump-sum cash payment of benefits to a plan participant. The Statement is titled "Employers' Accounting For Settlements and Curtailments of Defined Benefit Pension Plans and Termination Benefits."
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federally qualified HMO
In the United States, a Health Maintenance Organization which satisfies specific requirements set forth in the Health Maintenance Organization Act of 1973. Federally qualified HMOs are entitled to certain grants and loans from the federal government and are eligible to be used by employers to satisfy the dual choice provision.
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fee-for-service
A payment system for health care where the health-care provider is paid for each procedure or service rendered.
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fee schedule
A schedule or list of maximum benefits that will be paid under a group medical contract for certain listed procedures. See also relative value schedule. May simply be called a schedule.
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fee schedule basis
A compensation plan used in health maintenance organizations (HMOs) and preferred provider organizations (PPOs) in which a physician is paid a predetermined amount for each service that the physician provides. See also capitation basis.
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fiduciary
A person or organization who holds, manages and has discretionary authority and control over money belonging to another person or organization, or who renders investment advice in exchange for compensation. When an insurance company manages pension funds, the insurance company is acting as a fiduciary.
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field force
Those insurance agents who work out of an insurer's field offices.
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field offices
An insurance company's local sales offices.
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field underwriter
See insurance agent.
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field underwriting
The first step in the risk selection process. Field underwriting occurs when an agent gathers pertinent information about the proposed insured and reports that information on the application blank so the home office underwriter can make an underwriting decision.
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fifth dividend option
See additional term insurance option.
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final average (final earnings) benefit formula
A type of defined-benefit formula in which the retirement benefit amount is derived on the basis of a participant's average compensation during a specified period (usually the three to five years preceding retirement) during which the participant was most highly compensated. Contrast with career average benefit formula.
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financial institution
An organization that helps to channel funds through an economy by accepting the surplus money of savers and supplying that money to borrowers, who pay to use the money. Insurance companies are financial institutions.
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financial intermediary
A financial institution that borrows money on its own account and loans money to other borrowers. Insurance companies are financial intermediaries.
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financial settlement
A lump sum payment by an insurer to a disabled insured that extinguishes the insurer's responsibility under the disability contract. Also known as a buy-out or commutation.
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first-dollar coverage
Medical expense insurance under which no deductible or coinsurance is applicable to covered expenses.
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first-year commission
An amount paid to an insurance agent based on a policy's first annual premium amount.
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501(c)(9) trust
In the United States, a type of trust that many self-insured groups establish to fund their group insurance plans. All contributions to a 501(c)(9) trust are deductible for federal income tax purposes, as are all investment gains made on funds in the trust. The trust must meet certain federal government requirements. Also called a voluntary employees' beneficiary association (VEBA). See also self-insured group insurance.
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fixed amount option
A life insurance settlement option under which the insurer uses the policy proceeds plus interest to pay the beneficiary a sum of money in a series of annual or more frequent installments for as long as the proceeds plus interest last. Also called the fixed payment option.
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fixed period option
A life insurance settlement option under which the insurer pays the beneficiary the policy proceeds plus interest in a series of annual or more frequent installments for a specified length of time.
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flat amount formula
A method of determining the retirement benefit for participants in a defined benefit pension plan. A flat amount formula provides the same periodic (e.g., monthly, annual) benefit amount, for example $500 per month, to each retiree. See also flat percentage of earnings formula and unit-benefit formula.
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flat extra premium method
A method for rating substandard risks used when the extra risk is considered to be constant. The underwriter assesses a specific extra premium for each $l,000 of insurance. Contrast with extra-percentage tables method.
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flat percentage of earnings formula
A method of determining the retirement benefit for participants in a defined benefit pension plan. This method provides for each participant to receive a certain percentage of preretirement compensation, for example 60%. The actual payment amount under this formula depends on how compensation is defined. See also career average benefit formula, final average benefit formula, flat amount formula, and unit-benefit formula.
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flexible benefit plan
See cafeteria plan.
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flexible premium annuity
A deferred annuity that gives the purchaser the right to vary the amount of each premium paid to the insurer during the accumulation period.
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foreign corporation
From the point of view of a particular state in the United States, a company that is incorporated under the laws of another state. Compare to domestic corporation and alien corporation.
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foreign insurer
In Canada, a non-Canadian insurance company that is incorporated under the laws of a country which is not a member of the British Commonwealth.
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foreseeability
The ability of an insured to have had a reasonable anticipation that harm or injury would be a likely result of a certain act or an omitted act.
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forfeiture
The unvested amount that remains in a pension or profit sharing plan when a participant leaves the plan and withdraws the amounts which are vested. Forfeitures may occur when an employee is terminated, for example. Forfeitures must either be used to reduce the plan sponsor's future contributions to the plan or be reallocated to other participants.
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fractional premiums
Premiums that are paid in installments during a year, such as semiannually, quarterly, or monthly. Fractional premiums are so called because they are fractions of the annual premium.
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fraternal benefit society
An organization that exists to provide social and insurance benefits to its members. In such a society, members often share a common religious, ethnic, or vocational background, although some fraternals are open to the general public.
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fraternal insurance
Insurance coverage issued by a fraternal benefit society. See also open contract.
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fraudulent claim
A type of claim that occurs when a claimant intentionally uses false information in an attempt to collect policy proceeds.
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fraudulent misrepresentation
According to common law, a false statement which meets the following three criteria: (1) the party that makes the statement is aware that it is not true or disregards whether it is true; (2) the party that makes the statement does so in order to induce another party to enter into a contract; (3) the other party does enter into a contract as a result of the statement and suffers a loss because of the contract.
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free examination period
The period of time after delivery of an insurance policy during which the policyowner may review the policy and return it to the company for a full refund of the initial premium. Full coverage is in force during this period. Also called a ten-day free look.
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front-loaded policy
A life insurance policy (usually a universal life insurance policy) in which most of the expense charges take the form of deductions from each premium payment. Such deductions continue throughout the premium payment period. See also back-loaded policy and universal life insurance.
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full-service plan
A health insurance plan which pays in full the actual cost, if reasonable and customary, of services received, rather than a specified maximum for each service.
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fully contributory
An arrangement in which the insureds under a group policy pay the entire cost of their insurance. Contrast with contributory group insurance and noncontributory group insurance.
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funding agency
The party who holds the assets of a pension plan. Often an insurance company.
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funding standard account
For qualified pension plans in the United States, a bookkeeping account which is maintained in order to determine whether a defined benefit pension plan is meeting minimum funding standards set by law. Many of the entries to the account are derived actuarially. If at any time the plan's funding is inadequate, then an accumulated funding deficiency is said to exist. Also known as a minimum funding standard account. See also minimum funding standards.
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funding vehicle
The legal document which governs the management of pension funds by a funding agency. When the funding agency is an insurance company, the funding instrument is usually an insurance contract. Also called the funding instrument.
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future service
The prospective service that an employee will provide to an employer from the date of entry into a pension, or from the current date, to the employee's normal retirement date. Pension benefits provided for this service are known as future service benefits. See also past service.
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GAAP reserves
Reserves that are calculated in accordance with generally accepted accounting principles.
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general account
An undivided account in which life and health insurers formerly recorded all incoming funds. General accounts are still usually insurers' largest accounts, but since the early 1960s, life and health insurers have begun using other accounts as well. See also separate account.
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general agency distribution system
Along with the branch office system, the general agency distribution system is part of the agency system, which is the most common system used to sell individual life insurance products. Under the general agency system, each field office is headed by a general agent, who is an independent entrepreneur under contract to the insurer. As an independent entrepreneur, the general agent has a great deal of control over how the field office is to operate. Typically, the staff of the field office is employed by the general agent, not the insurer; salaries and office expenses are paid by the general agent, not the insurer; and the soliciting agents are under contract to the general agent, not the insurer. In a traditional general agency system, all commissions from the insurer are paid to the general agent. The general agent keeps a portion of each commission, called an overriding commission, and then pays the remaining commission to the appropriate soliciting agent. Some insurers have modified this procedure and now pay commissions directly to soliciting agents and overriding commissions directly to general agents. See also agency system, branch office distribution system, and overriding commission.
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general agent (GA)
The individual in charge of a field office of an insurer that uses the general agency distribution system. The general agent is an independent entrepreneur who is under contract to the insurer.
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generally accepted accounting principles (GAAP)
The set of accounting principles used by most firms outside the life insurance industry and sometimes used by life and health insurance companies. GAAP is based on the going-concern concept of asset valuation.
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GIC
See guaranteed investment contract (GIC).
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GI rider
See guaranteed insurability (GI) rider.
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good health provision
A provision contained in some group credit policies stating that a policy is void if the insured was not in good health when the application was signed or when the policy was delivered, whichever was specified in the contract.
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grace period
The length of time (usually 31 days) after a premium is due and unpaid during which the policy, including all riders, remains in force. If a premium is paid during the grace period, the premium is considered to have been paid on time.
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graded-premium whole life insurance
A type of whole life insurance in which premiums increase once or at specified points in time, such as every three years, until a premium that remains level is reached.
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gross premium
The amount that policyowners actually pay for their insurance. The gross premium equals the net premium plus the loading.
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group creditor life insurance
Group insurance coverage wherein a master contract is issued to cover the lives of current and future debtors of the policyowner. The beneficiary of such coverage is the policyowner.
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group deferred annuity
A type of annuity sometimes used to fund a pension plan. Employer contributions under a group deferred annuity contract are used to purchase deferred annuities to provide for the retirement benefits of plan participants.
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group insurance
Insurance that provides coverage for several people under one contract, called a master contract.
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group life insureds
In Canada, the persons who are insured by a group life insurance contract. Usually simply called "insureds" in the United States.
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group ordinary life insurance
Group life insurance in which at least a part of the coverage is permanent and builds a cash-value.
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group paid-up insurance
A type of contributory group life insurance in which the employee's contributions are used to purchase paid-up whole life insurance and the employer's contributions are used to purchase term insurance. The amount of insurance coverage on each employee remains level each year. Therefore, as the amount of paid-up insurance on an employee increases over time, the amount of term insurance which the employer must purchase to make up the difference decreases.
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group permanent life insurance
Any of several types of life insurance which build a cash value and are underwritten on a group basis. Group permanent life insurance is often used to fund group pension plans and/or to provide life insurance coverage that will continue after retirement.
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group persons insured
In Canada, the persons who are insured by a group he
