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Glossary of Insurance Terms

absolute assignment An irrevocable transfer of complete ownership of a life insurance policy from one party to another. See also assignment.

baby group plan See small group insurance plan.

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.

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.

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.

band grading The grouping of life insurance policies according to death benefit amounts for the purpose of calculating loading.

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.

basic experience table See basic mortality table.

basic mortality table A mortality table without a safety margin. Also called a basic experience table. See also mortality table and safety margin.

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.

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.

beneficiary The person or other party designated to receive life insurance policy proceeds. See also contingent beneficiary, irrevocable beneficiary, primary beneficiary, and revocable beneficiary.

beneficiary declaration In Canada, an insurance policy beneficiary designation that is made in a separate written document after the insurance policy has been issued.

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.

benefit The amount of money paid when an insurance claim is approved. Also called the policy benefit.

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.

benefits budget A type of expense budget indicating the amount of money a company expects to pay for claims, cash surrenders, policy dividends, and policy loans in the coming year.

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.

best-earnings plan A pension plan which specifies that each participant's benefit will be calculated according to the final-average formula.

bill of interpleader See interpleader.

binding limit See automatic binding limit.

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.

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.

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.

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.

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.

bordereau In a reinsurance arrangement, a report provided regularly by the ceding company to the reinsurer containing information about the reinsured risks. A bordereau frequently includes information about insureds, the details of their coverage, and their premium status. Bordereaux are used in self-administered reinsurance arrangements in lieu of cession cards. See cession card and self-administration.

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.

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.

break-even period See validation period.

break-even point See validation point.

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.

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.

British Insurer In Canada, an insurance company incorporated under the laws of either the United Kingdom or any British Commonwealth country besides Canada.

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.

brokerage distribution system A distribution system that relies on commissioned agents, called brokers, who sell the products of more than one insurance company.

brokerage general agent See brokerage shop.

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.

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.

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.

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.

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.

business insurance Insurance that is intended to serve the insurance needs of a business rather than the needs of an individual.

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.

buy-out See financial settlement.

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.

calendar year deductible See all-causes deductible.

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.

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.

Canadian Institute of Chartered Accountants (CICA) Handbook Section 3460 See Section 3460.

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.

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.

Canadian method A method prescribed in Canada for calculating modified net premiums and reserves.

Canadian Reinsurance Conference A Canadian group which meets annually to discuss subjects of importance to companies involved in reinsurance, such as standards of conduct in the reinsurance industry.

Canadian Reinsurance Guidelines A set of guidelines developed by the Canadian Reinsurance Conference to standardize reinsurance procedures. Although the guidelines do not have any formal authority, they are generally accepted as representing standard industry practice in Canada.

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.

canned presentations See sales tracks.

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.

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.

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).

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.

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.

Career Profile System A system developed by LIMRA that gathers and uses information about a candidate's work history and personal background to predict the candidate's likelihood for success as an insurance agent or a financial services consultant.

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.

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.

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.

cash dividend See dividend.

Cash or Deferred Arrangement (CODA) See Section 401(k) plan.

cash payment option A life insurance policy dividend option under which policy dividends are paid to the policyowner in cash.

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.

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.

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.

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.

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.

catastrophic claim management See case management.

catastrophic reinsurance plan A reinsurance plan which specifies that, when a certain minimum number of claims result from a single accidental occurrence, such as more than two claims resulting from an airplane crash, a hurricane, or an earthquake, the reinsurer pays losses in excess of the plan deductible. The reinsurer's liability is limited to a maximum amount per catastrophe. Sometimes called catastrophe reinsurance or cat cover.

cat cover See catastrophic reinsurance plan.

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.

CCIR See Canadian Council of Insurance Regulators (CCIR).

ceding commission See allowance.

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.

center of influence A person who has many contacts in a community and who is willing to refer or recommend an agent to those people.

certain payment A payment that will definitely be made under any circumstances, its payment not being contingent upon any predesignated condition.

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.

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.

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.

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.

cession (1) In reinsurance, the act of ceding. (2) In reinsurance, a parcel or unit of insurance that a company cedes to a reinsurer.

cession card In a reinsurance relationship which is not self-administered, a card used by the ceding company and the reinsurer in their communications with each other to indicate the cession of a risk. See also individual cession administration.

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.

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.

claim A request for payment under the terms of an insurance policy.

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.

claimant The person or party making a formal request for payment of benefits due under the terms of an insurance contract.

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.

claim fluctuation reserve Usually associated with small group insurance policies, a claim fluctuation reserve is a fund established by an insurer and designed to protect the insurer against unfavorable claims experience. By setting aside funds in such a reserve, the insurance company can offer a small group relatively stable premium rates in future years. For a listing of other types of reserves, see reserve.

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.

claim investigation The process of obtaining necessary claim information in order to decide whether or not to pay a claim.

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.

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.

clean-up fund A lump-sum life insurance death benefit designed to pay the insured's outstanding debts and final expenses.

CLHIA See Canadian Life and Health Insurance Association (CLHIA).

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.

client and policy master file The data base that provides much of the information about individuals and individual policies for an insurer's management information system.

client service department See customer service department.

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.

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.

COB clause See coordination of benefits (COB) clause.

COBRA See Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).

CODA See Section 401(k) plan.

coinsurance (1) In a health insurance policy, the percentage of all eligible medical expenses, in excess of the deductible, incurred as a result of a sickness or injury, that an insured is required to pay. Also called percentage participation. (2) A type of reinsurance plan in which the ceding company pays the reinsurer part of the premium paid by the insured, minus a proportionate share of the commission and premium taxes associated with the policy that is being reinsured and a portion of the ceding company's general overhead expenses. In return, the reinsurer agrees to pay the ceding company a proportionate part of the death benefit when a claim is filed and to contribute to all other policy benefits, including dividends, on a scale determined by the ceding company. In addition, the reinsurer agrees to accumulate the required reserves for the reinsured portion of the policy.

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.

COLA See cost-of-living adjustment (COLA).

cold canvassing A type of prospecting which involves unannounced visits by an agent to prospects whom the agent has not contacted previously.

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.

collected premiums The amount of premium income received by an insurance company during an accounting period.

collection report A report prepared weekly or monthly by a home service agent which shows the total premiums collected, the premiums paid in advance, and the premiums overdue.

combination company A life and health insurance company that sells both industrial and ordinary insurance products.

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."

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.

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.

commingling of funds The illegal misuse of funds by combining monies belonging to policyowners with an agent's own funds.

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.

commission chargeback A charge against an agent's commission account to repay the company for all or part of a commission previously credited to the agent. Commission chargebacks are made on an agent's account, for example, when premiums are returned to the policyowner or when a policy for which an agent receives an annualized commission lapses before the end of the policy year.

Commissioners Method A method prescribed in the United States for calculating modified net premiums and reserves for life insurance policies.

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.

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.

community-rating Applying the same premium rate structure to certain group insurance subscribers, regardless of their past or potential loss experience. See also pooling.

commutation See financial settlement.

commutation function A quantity representing a combination of mortality table figures and interest table figures, used to simplify calculations of annuities, premiums, and reserves.

commuted commissions The present value of future renewal commissions. Commuted commissions are sometimes paid instead of renewal commissions.

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.

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.

CompCorp See Canadian Life and Health Insurance Compensation Corporation (CompCorp).

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.

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.

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.

conditionally vested commission A commission that begins as a nonvested commission and becomes vested -- guaranteed payable to an agent -- after the agent attains a certain age or number of years of service. Also known as an earned commission.

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.

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.

conservation An agent's or an insurer's efforts to prevent a policy from lapsing.

conservative mortality table A mortality table containing mortality rates that are higher than expected if used for life insurance calculations or lower than expected if used for annuity calculations. See also mortality table.

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.

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.

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.

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).

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.

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.

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.

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.

contingent owner See successor owner.

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.

contingent payment A payment that will be made only if some predesignated condition is met, such as the recipient being alive.

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.

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.

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.

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.

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.

contribution limit The maximum annual addition permitted by law to be made to a participant's account in a defined contribution pension plan. The annual contribution includes employer contributions, employee contributions, and forfeitures that have been reallocated from other participants' accounts. The limit is subject to legislative change and is generally indexed to inflation so that it increases as price levels increase. In the United States, the contribution limit is set under Section 415 of the Internal Revenue Code. See also maximum benefit and Section 415 limits.

contribution to surplus In mutual insurance companies, the income that results when an insurance company makes more money than is needed to pay for the cost of providing insurance.

contributory group insurance Any group insurance plan that calls for the insureds to pay a portion of the cost of the group insurance coverage. Contrast to noncontributory group insurance.

contributory plan Any pension or employee benefit plan in which plan participants can or must make contributions to the plan out of their own funds. Contrast with noncontributory plan.

convention blank The standardized Annual Statement form that all United States insurers must complete and submit yearly to their state's insurance regulators. See Annual Statement.

conversion fund The fund in which unallocated employer contributions to a combination plan are accumulated. Also called a side fund.

conversion privilege (1) The right of a person who is covered by a group insurance policy to convert his or her group coverage to coverage under an individual insurance policy. Such a conversion can be made when a person leaves the group, benefits are downgraded or terminated for a specific class, or when the group master policy is ended. (2) The right to change insurance coverage in certain prescribed situations from one type of policy to another. For example, the right to change from an individual term insurance policy to an individual whole life insurance policy.

convertible term insurance A type of term insurance that allows the policyowner to change the term insurance policy to a whole life policy without providing evidence of insurability. The premium rate is normally based on the age of the insured at the time of the conversion.

cooperative advertising program An advertising arrangement in which the insurance company pays part of a distributor's cost to advertise in the distributor's local market.

coordination of benefits (COB) clause A provision in a group health insurance policy specifying that benefits will not be paid for amounts reimbursed by other group health insurers. The purpose of a coordination of benefits provision is to assure that an insured's benefits from all sources do not exceed 100 percent of allowable medical expenses. See also overinsurance provision.

corridor (1) In the United States, the required difference between a universal life insurance policy's death benefit and the policy's cash value. This difference is a specified percentage that depends on the insured's age. If a policy's cash value exceeds the required percentage of the death benefit (that is, intrudes on the corridor), the policy will be considered an investment contract rather than an insurance contract. Also called the TEFRA corridor. (2) In reinsurance, an amount of insurance which is in excess of the ceding company's retention limit but which is less than the reinsurer's minimum cession. The ceding company must usually retain this amount of insurance.

corridor deductible A flat amount that an insured must pay above the amount paid by his or her hospital-surgical expense policy before any benefits are payable under the major medical policy. In a sense, the deductible bridges the gap between a hospital-surgical policy and a major medical policy.

cost comparison methods The different formulas that insurance companies use to show prospective policyowners the cost of different insurance policies. See also company retention method, interest-adjusted net cost method, and rate of return method.

cost-of-living adjustment (COLA) An increase in a pension benefit, disability income benefit or life income benefit to compensate for an increase in the cost of living. See also indexation.

coupon advertisement As defined by the Superintendent's Guidelines in Canada, (1) a sales inducement designed to invite the public to contract for insurance by the inclusion of an application for an individual insurance contract or (2) a broad description of coverage designed to invite the public to request an application for insurance with additional printed material for the purpose of issuing the applicant an individual insurance contract.

CPP See Canada Pension Plan (CPP).

credibility percentage The amount of credit or weight given to a group's actual claims experience in determining a projection of future claims or in the calculation of a dividend. Sometimes called the credibility factor. See also experience rating and experience refund.

credit life insurance A type of decreasing term insurance designed to pay the balance due on a loan if the borrower dies before the loan is repaid.

credit reporting agency See consumer reporting agency.

credits In the numerical rating system, credits represent underwriting factors that have a favorable effect on an individual's mortality rating. Credits are assigned negative values. See also debits and numerical rating system.

cross-selling The process of selling both property/casualty and life and health insurance, as well as other financial services products, to the same customer.

current assumption whole life insurance A type of whole life insurance in which premium rates and cash values vary according to the insurer's assumptions regarding mortality, investment, and expense factors. Each policyowner can decide whether he or she wants favorable changes in assumptions to result in a lower premium or a higher cash value for the policy. If changes in assumptions result in a higher premium than that paid when the policy was purchased, the policyowner may choose to lower the policy's death benefit and maintain the previous premium or pay the higher premium and maintain the original death benefit. As with indeterminate premium life insurance, current assumption whole life insurance guarantees that the premium will not increase above the rate guaranteed when the policy was purchased. Also called interest-sensitive whole life insurance.

current settlement option rates Settlement option rates that reflect the interest rates currently earned by the insurer.

curtailment An event or amendment to a pension plan that significantly reduces plan benefits or employer contributions. Types of curtailments include a reduction of the expected years of future service of present employees, and the elimination of the accrual of defined benefits for some or all of the future services of a significant number of employees.

customer service department The department in a life and health insurance company that is charged with providing assistance to the company's policyowners, agents, and beneficiaries. Customer service specialists answer policyowners' requests for information, help them interpret policy language, answer questions about policy coverage, and make changes requested by the policyowner, such as changing the policyowner's address, beneficiary designation, and mode of premium payment. The customer service department may also send premium notices to customers, collect premium payments, and calculate and process policy loans, nonforfeiture options, dividends, and surrenders. In some companies, the customer service department also processes commission payments for company agents. Also called the client service department, the policy administration department, the policyowner service department, and the service and claim department.

cut-off A termination provision of a reinsurance agreement by virtue of which the reinsurer is not liable for losses covered by reinsured policies in force on the date of termination if the losses occur after the date of termination. Contrast to run-off.

dating back See back-dating.

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.

death claim A request for payment under the terms of a life insurance policy.

debit See territory.

debiting In the home service distribution system, charging an agent with the amount of premiums to be collected in that agent's 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.

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.

decreasing term insurance A type of term life insurance in which the amount of coverage decreases during the term of coverage.

decrement A reduction in the number of participants in a pension plan caused by factors such as retirement, disability, death, or termination.

deductible A flat amount that an insured must pay before the insurance company will make any benefit payments under a health insurance policy. Also called the deductible amount or initial deductible. See also calendar year deductible, corridor deductible, family deductible, integrated deductible and per cause deductible.

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.

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.

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.

deferred life annuity A deferred annuity that provides a series of payments, each of which is made only if a designated person is alive.

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.

deferred premiums Premiums that are due after a policy's statement date but before the next policy anniversary.

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.

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.

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.

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.

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.

delay clause See survivorship clause.

demutualization The process of converting a mutual insurance company to a stock insurance company.

dental maintenance organization An organization like an HMO which provides only dental care.

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.

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.

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.

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.

detached agent An insurance agent who works out of personal offices located in or close to the agent's home, rather than in one of the insurer's field offices. See also insurance agent.

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.

development allowances See training allowances.

development expenses The costs of planning and creating insurance products.

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.

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.

direct insurer See ceding company.

direct mail In insurance, printed solicitations that are addressed directly to prospective purchasers of insurance products.

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.

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.

direct writer See ceding company.

direct writing company See ceding company.

disability Inability to work due to an injury or sickness. See also partial disability, presumptive disability, and total disability.

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.

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.

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.

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.

disabled life annuity A series of payments, each of which is contingent on a person being alive and still disabled.

disabled life reserves A claim reserve liability that is the present value of all amounts that are predicted to become payable while an insured is disabled.

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.

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.

discretionary costs Costs that are partially or wholly under the control of current management and are flexible components of an insurer's budget.

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.

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.

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.

distribution of risk See good distribution of risk.

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.

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.

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.

dividend additions See paid-up additions.

dividend credits See dividend accumulations.

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.

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.

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.

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.

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.

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.

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.

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.

DPSP See Deferred Profit Sharing Plan (DPSP).

dread disease policy See limited coverage policy.

drinking criticism An underwriting term for evidence of alcohol abuse or alcoholism.

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.

dual registration The licensing of registered representatives with more than one broker-dealer.

due and unpaid claims Claims that have been approved by an insurer but that have not been paid.

due income Income that was due to be received prior to the financial reporting date but that has not been received by the insurer as of the reporting date.

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.