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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.

IYM See investment year method (IYM).

jet screening The process of evaluating simple applications for insurance as quickly as possible according to strictly defined underwriting criteria.

jet unit An underwriting approach in which a group of entry-level or trainee underwriters screens some types of applications and approves those that meet certain well-defined criteria for acceptance. Also called a speedy issue unit.

JL&S See joint life and last survivor option (JL&S).

joint and survivor annuity An annuity under which a series of payments is made to two or more annuitants. The annuity payments continue until both or all of the annuitants have died. Also called a joint and last survivorship annuity.

joint and survivorship option A life insurance settlement option under which payments will be made to two or more payees. These payments will continue until both or all the named payees are deceased.

joint credit life insurance Credit life insurance that pays the full benefit amount to a lender upon the death of any of the cosigners of a loan.

joint life and last survivor option (JL&S) In Canada, a pension plan provision which provides for the continuation of pension benefits to the spouse of a retired plan participant after the death of the participant. The survivor's benefits, which usually are not as large as the original benefits, continue until the death of the spouse. The provision is required in most Canadian jurisdictions, unless the participant (with spouse approval) elects to forego it. A very similar provision, called a qualified joint and survivor (QJ&S) annuity, is required in the United States for qualified pension plans.

joint whole life insurance policy One insurance policy that covers two lives and that generally provides for payment of the proceeds at the time of the first insured's death.

jumbo limit In an automatic reinsurance treaty, an amount which the total insurance with all insurers in force or applied for on any individual must not exceed for a ceded risk to be accepted automatically by the reinsurer.

juvenile insurance policy A life insurance policy purchased by an adult to cover the life of a child.

Keogh Act In the United States, the unofficial name for the Self-employed Individuals Tax Retirement Act of 1962. The Keogh Act created a mechanism for self-employed people to save money for retirement. Under a Keogh plan, also called an H.R. 10 plan, an eligible person deposits money in a government-approved account that is managed by a financial institution, such as an insurance company or a bank.

key employee In pension planning in the United States, a highly paid employee who satisfies any one of four criteria relating to compensation and company ownership. The criteria are described in legislation and tax rules. The amount of benefits accrued to key employees in a pension plan, as compared to benefits accrued to other employees, is the major factor in determining whether the plan is a top-heavy employee benefit plan. See top-heavy plan.

key-person insurance Life insurance purchased by a business on the life of a person (usually an employee) whose continued participation in the business is necessary to the firm's success and whose death or disability would cause financial loss to the company.

lapse The termination of an insurance policy because premiums were not paid when they came due.

lapse rate For a block of policies, the percentage of in-force policies that terminate as a result of nonpayment of renewal premiums during a given policy year. The lapse rate is determined by dividing the number of policies that lapse during a given policy year by the number of policies in force at the beginning of that policy year. Also called the voluntary termination rate or withdrawal rate. Contrast with persistency rate.

large claim management See case management.

late-remittance offer A means of encouraging reinstatement of lapsed insurance policies. A late-remittance offer specifies that the company will accept an overdue premium after the grace period ends and will reinstate the policy without requiring the policyowner to complete a reinstatement application or submit evidence of insurability. Also called a late-payment offer.

late retirement age Retirement after the normal retirement age (usually age 65) contained in a pension plan. In the United States, a qualified pension plan generally cannot force a plan participant to retire at the normal retirement age or any other age and generally cannot stop accruing pension benefits for a plan participant who elects to work beyond the normal retirement age. See also early retirement age and normal retirement age.

law of large numbers The theory of probability which specifies that the greater the number of observations made of a particular event, the more likely it will be that the observed results will approximate the results anticipated by the mathematics of probability.

layering In reinsurance, the practice of ceding risks in bands, called "layers." For example, the first $500,000 of a risk might be ceded to one reinsurer, the next $500,000 to another reinsurer, and so on.

lead reinsurer In a group or pool of reinsurers, a reinsurer that takes responsibility for underwriting and pricing risks which are submitted to the group for reinsurance on a facultative basis. The other members of the group agree to accept the underwriting and pricing decisions of the lead reinsurer and to share proportionately all the risks which are accepted for reinsurance.

ledger liability A liability that is recorded on the insurer's books.

ledger proposal A printed illustration of a policy's premium rates, cash values, and applicable dividends over a specified number of years.

legal actions provision In an individual health insurance policy, a provision that limits the period during which a claimant may sue the insurer to collect a disputed claim amount and which specifies that no suit may be brought against an insurer until a specified period after a claim is filed.

legal reserve See statutory reserve. See also reserve for a list of many different kinds of reserves.

letters patent In Canada, a procedure used by insurance companies wishing to incorporate through the federal government or in the provinces of Quebec, New Brunswick, Prince Edward Island, and Manitoba to petition the appropriate government agency for incorporation.

level commission schedule A commission schedule that provides the same commission rate for the first and renewal years.

levelized commission schedule A commission schedule that provides different percentages for first-year and renewal commissions, but the differences between these percentages are smaller than the differences between first-year and renewal commissions under traditional commission schedules. Also known as a heaped commission schedule.

level premium annuity A deferred annuity for which the purchaser of the annuity pays equal premium amounts at regular intervals, such as monthly or annually, until the date the benefit payments are scheduled to begin.

level premiums Premiums that remain the same each year that the life insurance policy is in force.

level premium system A life insurance pricing system whereby the purchaser pays the same premium amount each year the policy is in force.

level premium whole life insurance A type of whole life insurance for which equal premiums are payable throughout the premium payment period.

level term insurance A type of term insurance that provides a death benefit that remains the same during the period specified. Premiums for level term insurance policies usually remain the same throughout each term of coverage.

leveraged business See minimum deposit business.

leveraged ESOP An employee stock ownership plan (ESOP) that borrows money and uses the borrowed funds to buy stock of the employer. The employer then makes regular contributions to the plan on behalf of the participating employees. The ESOP uses this contributed money to pay back the loan and allocates the stock little by little to the employees. The employer's contributions are tax deductible for the employer and tax deferred for the employee.

liabilities A company's debts and future obligations. For an insurance company, liabilities include amounts owed to creditors and the actual and expected claims of its policyowners and their beneficiaries.

liability insurance A kind of insurance that provides a benefit payable on behalf of a covered party who is held legally responsible for harming others or their property.

licensed broker An insurance salesperson who is not under an agency contract with any insurance company, and who is usually considered to be an agent of the client rather than of the insurer. Also known as a pure broker.

LICTI See life insurance company taxable income (LICTI).

life annuity A series of payments that are made at regular intervals as long as a designated person, the annuitant, is then alive.

life annuity with period certain A life annuity which promises that if the annuitant dies before the end of a designated period (usually 5, 10, or 20 years), the insurer will continue payments to a contingent payee until the end of the designated period. Also called a life income with period certain annuity.

life income option A life insurance settlement option under which the insurer uses the policy proceeds and interest to pay the beneficiary a series of equal payments for as long as the beneficiary lives.

life income option with period certain A life insurance settlement option in which the insurer guarantees to pay the beneficiary a series of equal payments for a designated period, such as 10 years; thereafter, the payments will continue only as long as the original beneficiary lives. If the original beneficiary dies during the guaranteed period, payments will be made to a recipient designated by the original beneficiary until the end of the guaranteed period, at which time all payments will stop.

life income option with refund A type of life income settlement option in which the insurer guarantees that if the beneficiary dies before the total amount paid under the option equals the proceeds of the policy, then the insurer will pay the difference to a contingent payee. Also call a refund life income option. See also cash refund option, installment refund option, and settlement options.

life income with period certain annuity See life annuity with period certain.

life insurance Insurance that provides protection against the economic loss caused by the death of the person insured.

life insurance company taxable income (LICTI) The difference between a life insurance company's gross income and its tax deductions.

life insured In the common law provinces of Canada, the person whose life is insured by an individual life insurance policy. Called the insured in the United States and Quebec. (For the purposes of this glossary, we have used the United States term "insured", except in definitions of purely Canadian terms, in which cases we have made it clear that "life insured" is a Canadian term.)

lifetime maximum For any individual, the maximum amount that a medical expense policy will pay for all the eligible medical expenses the individual incurs while insured under the policy.

life underwriter See insurance agent.

limited coverage policy A type of medical expense policy designed to cover only those medical expenses caused by a specified disease, such as cancer, which is named in the policy. Also called a dread disease policy.

limited-payment whole life insurance A type of whole life insurance that does not require premium payments during the entire lifetime of the insured. Some limited-payment policies specify the number of years during which premiums are payable, while other policies specify an age after which premiums are no longer payable. Single-premium whole life insurance, in which only one premium payment is made, is an extreme type of limited-payment insurance.

line In reinsurance, a way of referring to the dollar amount of the ceding company's retention on a risk or class of risk. Automatic reinsurance treaties are often expressed in terms of lines. For example, a two-line treaty is one in which the reinsurer agrees to reinsure automatically up to twice the amount of the ceding company's retention.

Linton yield method See rate of return method.

living benefit rider A life insurance policy rider which allows the insured to receive all or part of the policy's death benefit before the insured's death if certain conditions are met. This type of provision is often used to help an insured pay health care costs if he or she becomes terminally ill.

loading A charge that the insurer adds to the net premium to produce the gross premium actually paid by the policyowner. The loading is designed to cover the operating expenses of the company, to compensate the company for the loss of income when policies lapse and to provide margins for profits and contributions to surplus.

location-selling distribution system A system that distributes insurance products by locating insurance offices and agents in places where consumers generally shop for other items or take care of other business matters, such as department stores, grocery stores, and banks. Also known as the retail outlet distribution system.

lock-box banking A method of premium collection in which premium payments are received at a specified post office box. The insurer authorizes a bank to have access to that box and to remove and open the mail. All premium payments are deposited immediately in the bank, and the returned portions of the premium notices, along with a record of deposits, are sent to the insurer.

lock-in concept Under generally accepted accounting principles, a feature of reserve calculations which holds that, once an insurer adopts a set of reserve assumptions for a particular group of policies for a particular year of issue, these assumptions must continue prospectively; that is, they must be used for reserve calculations in future years.

long-form reinstatement application A reinstatement application similar to a policy application in that both address the long-term health history of the insured.

long-term care (LTC) insurance Coverage available on an individual or group basis to provide medical and other services to patients who need constant care in their own home or in a nursing home.

long-term disability income insurance Disability income insurance which typically provides disability income benefits that begin at the end of a specified waiting period and that continue until the earlier of the date when the insured person returns to work, dies, or becomes eligible for pension benefits. See also disability income insurance and short-term disability income insurance.

loss limit A factor used in the calculation of group life and health insurance dividends to minimize the effects of fluctuations in the amounts of claims from year to year. A loss limit is the maximum amount of claims that will be used in the calculation of dividends for any policy year.

loss of time insurance See disability income insurance.

loss ratio In pricing health insurance, the loss ratio is a means of comparing claims losses to premium earnings. To determine its loss ratio, an insurer divides the dollar amount of claims it incurred during a given year by the dollar amount of premiums it earned during the same year.

maintenance expenses The costs of keeping a policy in force. Maintenance expenses include the cost of processing premium payments and making policy dividend payments and the time that agents and customer service personnel spend in servicing and conserving policies that are in force.

major medical insurance A type of medical expense insurance that provides broad coverage for most of the expenses associated with treating a covered illness or injury. See also comprehensive major medical insurance and supplemental major medical insurance.

major services In dental insurance, dental services, such as inlays, crowns, prosthodontics, and orthodontics, which are often covered at 50 percent of their reasonable and customary charges.

managed care The name given to a broad spectrum of techniques by which insurance companies attempt to reduce health care costs by participating in decisions concerning the treatment given to those they insure. See also case management and utilization review.

managing general agent (MGA) An independent contractor who is authorized to appoint PPGAs on a company's behalf and who may represent more than one company.

mandatary In Quebec, a party who is authorized by another party, the mandator, to act on the mandator's behalf in contractual dealings with third parties.

mandated benefit A benefit required by state law to be included in a health insurance policy.

mandator In Quebec, a party who authorizes another party, the mandatary, to act on the mandator's behalf in contractual dealings with third parties.

mandatory securities valuation reserve (MSVR) In the United States, a liability account that is designed to absorb, within certain specified limits, realized and unrealized capital gains and losses resulting from an insurer's investments.

manual rates Premium rates that are established for broad classes of groups. Manual rates are often used to establish premium rates for small groups with no credible loss experience, and to establish initial premium rates for large groups. See also blended rates and experience rating.

MAP (Monitoring Attitudes of the Public) Survey Provided by the ACLI, a survey which uses in-depth interviews with representative samples of the adult U.S. population to provide the industry with information on consumers' changing viewpoints toward life and health insurance products, insurance agents, the insurance industry, and other aspects of the marketing environment.

marketing committee In an insurance company, an interdepartmental committee that makes recommendations on the design of insurance contracts, specific coverages to be provided under these contracts, premium rates, and guarantees to be included in contracts.

marketing department The department in an insurance company responsible for getting insurance products to the company's customers. The marketing department normally conducts market research, works with other departments in the company to develop new products and revise current ones to meet the needs of the company's customers, prepares advertising campaigns (in conjunction with the company's executive office and corporate communications committee), designs promotional materials, and establishes and maintains distribution systems for the company's products.

master contract The legal contract between an insurance company and a group insurance policyholder. The master contract insures a number of people under a single contract. Also called the master policy. See also certificate of insurance.

master plan A standardized form of pension or other employee-benefit plan developed by a financial institution to simplify plan drafting for plan sponsors. Although similar to a prototype plan, a master plan usually refers to a plan document developed by a financial institution (like an insurer) that can be adopted only by plan sponsors who use that financial institution to fund the plan.

master policy See master contract.

matching contributions In the United States, contributions made by an employer to an employee's Section 401(k) plan (cash or deferred arrangement) and designed to equal the employee's contributions up to a certain amount or percentage of compensation. See also elective contributions and nonelective contributions.

material fact A fact that is relevant to an insurance company's underwriting decision regarding issuing or rating a policy.

material misrepresentation In insurance, a misstatement by an applicant that is relevant to the insurer's acceptance of the risk, because, if the truth had been known, the insurer would not have issued the policy or would have issued the policy on a different basis.

matured endowment An endowment insurance policy that has reached the end of its term during the lifetime of the insured and is therefore payable.

maximum benefit The largest benefit amount that a defined benefit pension plan is legally permitted to provide to a plan participant. In the United States, the maximum benefit is determined under Section 415 of the Internal Revenue Code. The maximum benefit is subject to legislative change and is generally indexed to inflation so that it increases as price levels increase. In Canada, a maximum pension benefit is also established under taxation rules. See also contribution limit and section 415 limits.

maximum benefit period The maximum length of time for which disability income payments will continue.

maximum benefits for related confinements provision A provision included in basic hospital and surgical policies that limits the maximum benefits for all hospital confinements and for all surgery performed during one period of sickness or for any single injury.

MDO insurance See monthly debit ordinary (MDO) insurance.

mean reserve The average of the initial reserve and the terminal reserve of a life insurance policy in any given policy year.

Medicaid A government-funded program in the United States that provides medical expense coverage for eligible people under age 65 who are indigent and meet certain other criteria. The program is administered by the states and is supported by state and federal funds.

medical application An application for insurance in which the proposed insured is required to undergo some type of medical examination. The results of the medical examination are then reported to the insurance company.

medical case management See case management.

medical expense insurance Any of several types of health insurance designed to pay for part or all of an insured's health care expenses, such as hospital room and board, surgeon's fees, visits to doctors' offices, prescribed drugs, treatments, and nursing care. See also hospital confinement insurance, hospital-surgical expense insurance, major medical insurance, and specified expense coverage.

Medical Information Bureau (MIB) An organization that serves as a clearinghouse for medical information for the life insurance industry. When a person applies for life insurance, the insurance company sends the applicant's medical test results and any indication of health impairments to the MIB. This information is then available to other insurers when they are investigating an applicant's insurability. Access to MIB-coded information is restricted to authorized medical, underwriting, and claim personnel in member companies. No member company can request information from the MIB unless the individual being investigated gives written consent. An insurance company cannot base its underwriting decision solely on information provided by the MIB.

medical necessity provision A condition included in most major medical expense plans, stating that medical services that are educational or experimental in nature are not eligible for coverage.

medical report A report on a proposed insured's health that is completed by a physician and is based on a physical examination and questioning of the proposed insured. Such a medical report serves as part of a medical application.

Medicare A United States government program that provides medical expense coverage to persons age 65 and over and to people with certain disabilities, as specified by Congress.

Medicare carve-out Medical expense coverage offered by employers to retired employees that reduces medical expense benefits to the extent that those benefits are provided by Medicare.

Medicare supplement Medical expense coverage that provides benefits for certain expenses not covered under Medicare. This coverage is available only to individuals who are covered by Medicare and can by purchased by individuals or by employers to cover retired employees.

member contribution See percentage contribution.

memorandum of association In Canada, a document of incorporation that can be used by insurance companies wishing to incorporate in the provinces of British Columbia, Alberta, Saskatchewan, Ontario, Newfoundland, or Nova Scotia. This document contains the fundamental terms for registering for incorporation.

MET See multiple-employer trust (MET).

MIB See Medical Information Bureau (MIB).

midterminal reserve The average of a health insurance policy's terminal reserve for the previous policy year and the terminal reserve for the current policy year.

minimum age requirement In pension planning, a requirement that an employee attain a certain age before being permitted to participate in the employer's pension plan. In the United States, a private employer's qualified pension plan cannot have a minimum age requirement greater than age 21. See also minimum service requirement.

minimum cession In an automatic reinsurance treaty, the smallest amount that a reinsurer will reinsure for any particular policy. See also corridor.

minimum deposit arrangement An arrangement whereby a policyowner can apply the first-year cash value of a policy to the initial premium amount.

minimum deposit business The use of policy loans to pay premiums. In minimum deposit business, a policyowner instructs the insurance company to pay the premium out of the policy's cash value and to bill the policyowner for a premium only if the cash value is insufficient to pay the premium. Also called leveraged business.

minimum funding standard account See funding standard account.

minimum funding standards In the United States, standards established under Section 412 of the Internal Revenue Code relating to the advance funding of qualified pension plans. The standards are designed to ensure that contributions to a qualified plan are adequate to meet the plan's current and future obligations. Failure to satisfy minimum funding standards can lead to penalty taxes and enforcement actions. See also funding standard account.

minimum premium plan (MPP) A group health insurance plan that is partially self-insured by the group policyholder but fully administered by an insurance company. The premium is small because the group policyholder pays most of the claims itself. See also administrative services only (ASO) contract and self-insured group.

minimum service requirement In pension planning, a requirement that an employee complete a certain period of employment (often known as a probationary or waiting period) before being permitted to participate in the employer's pension plan. In the United States, an employee who meets minimum age requirements generally cannot be subject to a waiting period of more than one year, although a plan with full and immediate vesting of benefits can require a two-year waiting period. In Canada, a two-year waiting period is permissible. See also minimum age requirement.

misrepresentation (1) A false or misleading statement made to induce a prospect to purchase insurance. Misrepresentation is a prohibited insurance sales practice. (2) A false or misleading statement made by an applicant for insurance. Certain misrepresentations provide a basis for the insurer to avoid the policy.

misstatement of age provision Life insurance policy wording that specifies the action the insurer will take if, at the insured's death, the insurer discovers that the insured's age was misstated in the application and the misstatement has resulted in an incorrect premium for the amount of insurance purchased. In an individual life insurance policy, this provision specifies that the policy's benefit amount will be adjusted. In a group insurance policy, this provision generally specifies that the policy's premium amount will be adjusted.

MLA system See multiple-line agency (MLA) system.

modco See modified coinsurance (modco) plan.

mode of premium payment The frequency with which premiums are paid (for example, annually, quarterly, monthly).

model bill Sample legislation developed by the National Association of Insurance Commissioners (NAIC) in the United States or the Canadian Council of Insurance Regulators (CCIR) in Canada. States and provinces may adopt this sample legislation exactly as written or use it as the basis for developing their own laws.

Model Life Insurance Solicitation Regulation In the United States, a regulation adopted by the NAIC in 1976 that requires insurers to give life insurance consumers (1) information that will improve their ability to select the most appropriate plan of life insurance to meet their needs, (2) an understanding of the basic features of the policy that has been purchased or that is under consideration, and (3) the ability to evaluate the relative costs of similar plans of life insurance.

model office A mathematical model composed of a number of hypothetical situations, such as a company's total forecasted sales for a particular product at various combinations of issue ages and face amounts, that in total will reasonably reflect the entire range of the product's sales which will occur in real life.

Model Rules Governing the Advertisement of Life Insurance In the United States, an NAIC model law which provides a set of comprehensive guidelines covering nearly all aspects of advertisements for life insurance policies and annuity contracts.

Model Unfair Trade Practices Act In the United States, an NAIC model law that prohibits unfair trade practices, such as defamation, rebating, unfair discrimination, and unfair claim settlement practices; the law contains a general prohibition against any form of insurance advertising that is "untrue, deceptive, or misleading."

modified coinsurance (modco) plan A plan of reinsurance in which the basic provisions of coinsurance are modified by having the ceding company maintain the entire policy reserve. At the end of each year, the reinsurer transfers back to the ceding company an amount equal to the increase in the reserve for the reinsured portion of the policy less the interest earned by the ceding company on the reserve for the reinsured portion of the policy. In the event of a claim, the reinsurer is responsible for the death benefit of the reinsured portion of the policy less the reserve credited for that amount.

modified net premiums Net premiums that are other than level, generally being lower for the first year than for subsequent years.

modified-premium whole life insurance A type of whole life insurance in which the policyowner pays a lower than normal premium for a specified initial period, such as five years. After the initial period, the premium increases to a stated amount that is somewhat higher than usual. This higher premium is then payable for the life of the policy.

modified reserves Reserves calculated using modified net premiums. Modified reserves accumulate from policies for which the amount of premium set aside for reserves is lower in early policy years than in later policy years.

money market fund A low-risk mutual fund that achieves great liquidity by investing primarily in short-term securities.

money-purchase pension plan A type of defined contribution plan that specifies a rate of contribution to each participant's account (for example, 8% of annual compensation) and results in a benefit that is equal to the amount in the participant's account (including investment gains and losses) at retirement. Upon retirement, the money that the employer has contributed, plus investment earnings, is often used to purchase an annuity which will provide a regular pension benefit.

Monitoring Attitudes of the Public Survey See MAP (Monitoring Attitudes of the Public) Survey.

monthly debit ordinary (MDO) insurance Ordinary life insurance that is marketed under the home service system and paid for by monthly premium payments, usually made to an agent. See also home service distribution system.

monthly outstanding balance method In group creditor insurance, a premium-paying arrangement for contributory plans whereby, every month, the lender adds to the outstanding balance of the loan an amount sufficient to insure that balance for one month. Contrast with single-premium method.

moral hazard The danger that a proposed insured might deliberately attempt to conceal or misrepresent information. Moral hazard is a risk factor that affects the underwriting decision.

morbidity Sickness, disability, or failure of health.

morbidity rate The likelihood that a person of a given age will suffer an illness or disability. The premium that a person pays for health insurance is based in part on the morbidity rate for that person's age group.

morbidity table A chart that shows the rates of sickness and injury occurring among given groups of people categorized by age.

mortality charge The cost of the insurance protection element of a universal life policy. This cost is based on the net amount at risk under the policy, the insured's risk classification at the time of policy purchase, and the insured's current age.

mortality curve A line graph that represents the mortality rates as they change from age to age.

mortality experience The actual number of deaths occurring in a given group of people.

mortality rate The frequency with which death occurs among a defined group of people. The premium that a person pays for life insurance is based in part on the mortality rate for that person's age group.

mortality table A chart that displays the rates of death among a given group of people categorized by age. See also aggregate mortality table, annuity mortality table, basic mortality table, select and ultimate mortality table, select mortality table, and ultimate mortality table.

mortgage redemption insurance A form of decreasing term insurance that covers the life of a person who takes out a mortgage. If the person dies during the term of insurance, the policy proceeds will approximate the remaining amount of the mortgage loan.

movement of securities return A semiannual statement required of federally licensed insurers in Canada. The statement details transactions involving securities and loans made during the previous six months.

MPP See minimum premium plan (MPP).

MSVR See mandatory securities valuation reserve (MSVR).

multi-company representation In Canada, an arrangement by which a life and health insurance agent is allowed to represent more than one insurance company.

multi-employer plan A pension or other employee-benefit plan involving more than one employer and established by collective bargaining (negotiation between a union and employers). Coverage under the plan is portable within the group, which means that an employee who leaves one employer who is a member of the group and goes to work for another member of the group may continue coverage under the plan.

multiple-employer trust (MET) (1) An arrangement whereby several employers (often in the same industry) cooperate to procure group insurance for their employees. (2) An arrangement made by an insurance company to cover several employers under one master policy, usually with specific benefit packages and limitations.

multiple-line agency (MLA) system A personal selling distribution system that uses full-time career agents to distribute both life and health and property/casualty insurance products for groups of financially interrelated or commonly managed insurance companies. Also known as the multiple-line exclusive agency system or all-lines exclusive agency system.

mutual benefit method An early method of funding life insurance, formerly used by fraternal orders or guilds. Under the mutual benefit method, the promised death benefit was provided by charging participating members an equal amount after the death of an insured member. Also called the post-death assessment method. See also assessment method.

mutual insurance company An insurance company owned by policyowners rather than stockholders.

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

NAIC See National Association of Insurance Commissioners (NAIC).

NAIC Model Privacy Act A model bill written by the National Association of Insurance Commissioners and designed to set standards for the collection, use, and disclosure of information gathered for or by insurance institutions, agents, or insurance-support organizations.

National Association of Insurance Commissioners (NAIC) In the United States, an association of state insurance commissioners designed to promote consistent insurance regulation. Although the NAIC has no legal power, the recommendations of the NAIC and the actions taken at its semiannual meetings carry great weight with the individual state insurance commissioners, the state legislatures, and the insurance industry. Similar to the Canadian Council of Insurance Regulators in Canada.

National Association of Securities Dealers (NASD) A voluntary association of securities firms empowered by the Maloney Act of 1938 to regulate the affairs of securities firms and to promote fair and ethical practices in the securities business.

national brokerage houses Large, independent firms that specialize in providing risk management and employee benefits advice to large, commercial clients.

National Organization of Life and Health Guaranty Associations (NOLHGA) In the United States, an organization supported by the individual state guaranty associations which are its members. It serves as a central source of information for the state associations and helps resolve problems created by the insolvency of insurers that are licensed in more than one state. See also guaranty association.

needs analysis Part of the fact-finding stage in the personal selling process; the process of developing a detailed personal and financial picture of a prospect in order to evaluate his or her insurance needs.

negotiated trusteeship An agreement resulting from collective bargaining (negotiation between a union and one or more employers) which provides group insurance for the members of the union. Also called a Taft-Hartley Trust.

net amount at risk The death benefit of a life insurance policy minus the policy's reserve at the end of the policy year.

net asset value The value or purchase price of a share of stock in a mutual fund.

net benefit premium Under generally accepted accounting principles (GAAP), the portion of the premium that funds the benefit reserve. See net premium.

net cash value See cash surrender value.

net cost (1) In individual insurance, any one of several different figures used to indicate the cost of an insurance policy. (2) In group insurance, premiums less dividends.

net expense premium Under generally accepted accounting principles (GAAP), the portion of the premium that covers the expenses of maintaining and acquiring the policy. See loading.

net gain The total of an insurer's income minus the total of its expenses, benefit payments, federal income taxes, and policyholder dividends, if the difference is positive.

net level annual premiums Net premiums that stay the same each year during the premium-payment period. See also level premiums and net premiums.

net level premium reserve The amount of liability that an insurance company establishes for a policy. The net level premium reserve is calculated using net level annual premiums.

net loss The total of an insurer's income minus the total of its expenses, benefit payments, federal income taxes, and policyholder dividends, if the difference is negative.

net payment cost index See interest-adjusted payment.

net policy proceeds See policy proceeds.

net premium The amount of money needed to provide life insurance benefits for a policy. The net premium is calculated by using only an assumed interest rate and a tabular mortality rate. No loading for expenses is added. The net premium equals a policy's gross premium minus the policy's loading. Under statutory accounting, the net premium funds the benefit reserve. See also gross premium, loading, net benefit premium, tabular interest rate, and tabular mortality rate.

net single premium The present value of the expected benefits of an insurance policy. The net single premium is the amount of money that would have to be collected at the time a policy is issued to assure that there will be enough money to pay the death benefit of the policy, assuming that interest is earned at the expected rate and that claims occur at the expected rate.

new business department See underwriting department.

new money method See investment year method (IYM).

no-evidence limit In group insurance, the maximum amount for which an insurance company will insure an individual without first securing evidence of insurability. Also known as the guaranteed issue limit.

NOLHGA See National Organization of Life and Health Guaranty Associations (NOLHGA).

no-load fund A mutual fund in which the investor buys shares directly from the fund and no sales commissions are paid.

nonadmitted assets Those assets that cannot be included on the balance sheet of a life insurance company's Annual Statement.

nonadmitted reinsurer In the United States, a reinsurer who is not licensed to accept reinsurance in a given jurisdiction. Contrast to admitted reinsurer.

noncancellable and guaranteed renewable policy An individual health insurance policy that the insurer cannot terminate and for which the premiums cannot be raised. See also cancellable policy, conditionally renewable policy, guaranteed renewable policy, noncancellable policy, and optionally renewable policy.

noncancellable policy An individual health insurance policy for which the premium cannot be raised by the insurer and which must be renewed by the insurer until the insured reaches a specified age, provided premiums are paid when due. See also cancellable policy, conditionally renewable policy, guaranteed renewable policy, noncancellable and guaranteed renewable policy, and optionally renewable policy.

noncontributory group insurance A group insurance plan in which the insureds pay no portion of the premium for their insurance. The group policyholder pays the entire premium. If a group plan is noncontributory, the enrollment of group members is automatic; all eligible group members are covered. Contrast to contributory group insurance.

noncontributory plan A pension or employee-benefit plan in which contributions are made entirely by the plan sponsor. Contrast with contributory plan.

nonduplication of benefits A method of coordinating medical expense benefit payments between two insurance carriers that allows the secondary carrier to pay the difference, if any, between the amount paid by the primary plan and the amount that would have been payable by the secondary plan had that plan been the primary plan.

nonelective contributions In the United States, contributions other than matching contributions made by an employer to an employee's Section 401(k) plan (cash or deferred arrangement). The contributions are made using employer funds and not through a reduction of the employee's salary. See also elective contributions and matching contributions.

nonexclusive territory Under the general agency system, a territory in which more than one general agent may represent the same insurer. Compare to exclusive territory and overlapping territory.

nonforfeiture factors Special values, similar to annual premiums, that some insurers use to calculate their policies' cash values. Each insurer calculates its own nonforfeiture factor. In the United States, the nonforfeiture factor can never be greater than the adjusted premiums required by the Standard Nonforfeiture Law.

nonforfeiture options The various ways in which a policyowner may apply the cash value of a life insurance policy if the policy lapses. See also automatic nonforfeiture option, automatic premium loan (APL), cash surrender value option, extended term insurance option, and reduced paid-up insurance option.

nonforfeiture values The benefits, as printed in a life insurance policy, that the insurer guarantees to the policyowner if the policyowner stops paying premiums. These amounts may be used in a variety of nonforfeiture options.

nonguaranteed premium life insurance See indeterminate premium life insurance.

noninsured pension fund A pension fund that is not funded by insurance contracts.

noninterference clause In an agent's contract, a statement that prevents the agent from replacing a company's policies for a specified period--usually one to three years--after the agent terminates his or her association with the company.

nonmedical application An application for insurance in which the proposed insured is not required to undergo a medical examination. However, a nonmedical application does contain questions that the proposed insured must answer about his or her health. See also nonmedical supplement.

nonmedical declaration See nonmedical supplement.

nonmedical supplement A report that describes the proposed insured's health history. A nonmedical supplement is completed by the agent based on information provided by the proposed insured and can serve as part of a nonmedical application. Also called a nonmedical declaration. See also nonmedical application.

nonpar policy See nonparticipating policy.

nonparticipating policy A type of life insurance policy or annuity in which the policyowner does not receive policy dividends. Also called a nonpar policy.

nonproportional reinsurance A type of reinsurance plan in which the amount (proportion) of the risk to be carried by the ceding company and the amount (proportion) of the risk to be carried by the reinsurer are not known at the time the reinsurance treaty is made. For example, see catastrophic reinsurance plan, excess reinsurance plan, and stop-loss reinsurance plan.

nonqualified annuity A type of annuity in the United States funded with money that has already been taxed by the federal government in the year in which the funds are deposited.

nonqualified deferred-compensation plan In the United States, a retirement income plan that does not meet the requirements of the Internal Revenue Service (IRS) for qualified plans. Although such plans do not receive the tax advantages of qualified plans, they need not satisfy the restrictive plan design requirements that qualified plans must satisfy. Nonqualified plans are often used as a benefit for executives or highly compensated employees.

nonresident license A license authorizing an agent who resides in another state to sell insurance in the licensing state.

nonretroactive disability benefits A type of disability benefit that is payable only for the period of disability that follows an elimination period.

nonscheduled dental plan A dental plan which pays benefits for procedures based on the dentist's actual charges, as long as the charges are usual, customary, and reasonable. See also combination dental plan and scheduled dental plan.

nonsmoker risk class An underwriting risk class that includes people who are standard risks and who have not smoked cigarettes for a specified period of time, usually 12 months, before applying for insurance. People in the nonsmoker risk class pay lower than standard premiums.

nonvested commission A commission that is payable to an agent only if the agent still represents the company when the commission becomes due.

normal cost The actuarially determined amount needed to fund for one plan year the retirement benefits of a pension plan participant or of a pension plan as a whole. A plan's normal cost is dependent on the actuarial funding method and assumptions used by the plan.

normal retirement age The earliest age at which a participant in a pension plan can retire and receive the plan's specified benefit in full. Usually age 65. See also early retirement age and late retirement age.

notched option A method of integrating private pension plans with Canadian public pension plans. Under this option, a participant who retires before age 65 receives a greater benefit from the private plan until age 65 and a smaller benefit after 65, when the participant begins to receive public pension payments. When both the public and private plan benefits are considered, the participant receives the same combined benefit payment before and after age 65. However, this benefit payment is smaller than the payment the participant would have received had he or she waited until reaching age 65 before beginning to receive benefits. The notched benefit is designed so that the sponsor pays the same total benefit as it would have if the amount of the private benefit payments had been constant throughout. Compare to bridging supplement.

numerical rating system A method of classifying risks in which each medical and nonmedical factor is assigned a numerical value based on its expected impact on mortality. See also credits and debits.

OAS See Old Age Security Act (OAS).

OASDHI See Old Age, Survivors, Disability and Health Insurance Act (OASDHI) and Social Security.

occupation class A group of occupations that present a similar risk to an insurance company. If all other factors are equal, people in the same occupation class will pay the same premium rates for health insurance.

Office of the Superintendent of Financial Institutions (OSFI) In Canada, the government office that administers the federal laws pertaining to the various financial institutions, including insurance companies.

Office of the Superintendent of Insurance In Canada, a provincial executive agency that is responsible for administering the province's insurance laws and regulations.

offset A tax law provision that allows an insurer to use the amount paid for one type of tax to reduce another aspect of the company's tax liability.

offset approach A way of integrating benefits from a private defined benefit pension plan with benefits from a government plan. The benefit payable from the private plan is reduced by a specified percentage of the benefit received from the government plan.

Old Age Security Act (OAS) Canadian legislation that provides a pension to virtually all citizens who are age 65 or older.

Old Age, Survivors, Disability and Health Insurance Act (OASDHI) The legislation that created Social Security in the United States. See Social Security.

open contract A type of insurance contract used by fraternal benefit societies. Under this type of contract, the society's charter, constitution, and bylaws become a part of the insurance contract, and any amendments to them automatically become amendments to the insurance contract. No such amendment, however, can destroy or diminish benefits that the society is contractually obligated to pay. See also closed contract and fraternal benefit society.

open debit In a home service sales territory, a block of policyowners that does not have an assigned servicing agent.

option A choice that a policyowner can make when deciding how to apply settlements, dividends, or nonforfeiture values. See also dividend options, nonforfeiture options, and settlement options.

option A plan A plan used in universal life insurance in which the potential policy proceeds remain level. In an option A plan, the policy proceeds are equal to the policy's death benefit. Consequently, the net amount at risk is equal to the difference between the policy's death benefit and the policy's cash value. As the cash value increases, the net amount at risk decreases. Contrast to option B plan.

option B plan A plan used in universal life insurance in which the potential policy proceeds increase. In an option B plan, the policy proceeds are equal to the death benefit plus the policy's cash value. Consequently, the net amount at risk is always equal to the death benefit of the policy. Contrast to option A plan.

optional modes of settlement See settlement options.

optionally renewable policy An individual health insurance policy that is renewable on a policy anniversary only if the insurer chooses to renew it. See also cancellable policy, conditionally renewable policy, guaranteed renewable policy, noncancellable and guaranteed renewable policy, and noncancellable policy.

ordinary agency system See agency system.

ordinary insurance See individual insurance.

ordinary life insurance Life insurance which is available to individuals in relatively unrestricted maximum death benefit amounts, and premiums may be paid monthly or less frequently.

original age conversion The fact or the act of changing a term life insurance policy to a whole life policy at a premium rate based on the age of the insured at the time the term policy was purchased.

orphan A policy owner whose insurance agent is no longer available to provide customer service.

OSFI See Office of the Superintendent of Financial Institutions (OSFI).

outliers Medicare patients whose illnesses are unique and whose conditions may not be classifiable under one of the diagnostic related groups.

outstanding premium In Canada, a premium that is due on or before the policy statement date but that has not been received by that date.

overinsurance An amount of insurance that is excessive in relation to the loss insured against.

overinsurance provision A provision in an individual health insurance policy specifying that, under certain circumstances, policy benefits will be reduced if the insured has more insurance than needed to cover medical expenses or if disability income would exceed the insured's predisability earnings. See also coordination of benefits (COB) clause.

overlapping territory Under the general agency system, a territory in which some portion of the territory is open to an agent other than the general agent, while the rest of the territory is the exclusive domain of the general agent. See also exclusive territory and nonexclusive territory.

overlined See over-retained.

over-retained The situation in which an insurance or reinsurance company has accepted an amount of insurance which exceeds the company's normal capacity on a specific risk. Also referred to as overlined.

override See overriding commission.

overriding commission A commission earned by a field office manager that is based on the business produced by the agents in that office. An overriding commission may be earned each time an agent sells business or it may be based on the overall production of the field office. Also called the override.

PAC See preauthorized payment system.

package selling The process of putting a simple insurance plan into a standardized presentation and looking for prospects who can use that package of coverage.

paid-up additions Additional life insurance purchased with policy dividends. No additional premiums are needed for paid-up additions. Also called dividend additions.

paid-up policy An insurance policy that will provide benefits in the future but that requires no further premium payments.

paramedical report A report based on a physical examination and a medical history completed by a medical technician, a physician's assistant, or a nurse, rather than a physician. A paramedical report describes the health of a proposed insured and can serve as part of an insurance application.

par policy See participating policy.

partial disability A disability that prevents an insured from engaging in some of the duties of his or her usual occupation or from engaging in the occupation on a full-time basis.

partial disability benefit A flat amount specified in a disability income insurance policy that is payable when the insured suffers a partial disability. Usually the partial disability benefit is half the full disability benefit. See also residual disability benefit.

partial plan termination The termination of a pension or employee-benefit plan for one group of participants but not for another. Sponsors sometimes do this to reclaim some of the assets of an overfunded plan.

partial surrender provision See withdrawal provision.

participating policy A type of life insurance policy or annuity under which policy dividends may be paid to the policyowner. Also called a par policy. See also dividend.

participation limit (1) In reinsurance, an amount which the total insurance in force or applied for on any individual must not exceed or the reinsurer will decline to participate in any further coverage on that individual. The participation limit includes coverage with all insurers and, in many companies, applies primarily to accidental death benefit coverage. (2) See relation of earnings to insurance clause.

partnership insurance A type of business insurance designed to provide funds so the remaining partners in a business can buy the business interest of a deceased or disabled partner. See also business-continuation insurance.

past service The period of employment service rendered by an employee before a pension plan was begun or amended or before the employee enrolled in the pension plan. A plan sponsor must decide whether pension benefits will be credited to an employee for the employee's past service or only for current and future service. See also future service.

payee The person to whom benefits are payable under a supplementary contract. See also supplementary contract.

payment of insurance money into court In the common law jurisdiction of Canada, an action that an insurer takes when the insurer admits liability to pay policy proceeds but cannot determine the proper recipient. Once the insurer pays the money into court, the insurer is discharged of any further liability under the policy. In Quebec, an insurer in such a situation can obtain a valid discharge of liability by paying the policy proceeds to the Minister of Finance. In the United States, the process is called interpleader.

payroll deduction plan (1) See salary-reduction plan. (2) A premium payment method for individual insurance under which an individual's employer deducts the employee's premium amount from his or her paycheck and sends the premium to the insurer.

PBSA See Pension Benefits Standards Act (PBSA).

peer review group A group of local physicians who help solve insurance claim disputes and promote fair and ethical practices in the health-care industry.

pension A life income payable to a person who has retired.

Pension Benefit Guaranty Corporation (PBGC) In the United States, the organization which insures benefits in defined benefit pension plans. Its purpose is to make sure that all participants in qualified defined benefit pension plans receive the vested benefits to which they are entitled, even if their pension fund goes bankrupt.

Pension Benefits Guarantee Fund In Canada, a fund established in the province of Ontario to guarantee payment of benefits in the case of the insolvency of a defined benefit pension plan.

Pension Benefits Standards Act (PBSA) In Canada, federal legislation that governs the administration of pension plans covering federal employees and those individuals whose employment falls under the legislative authority of the Canadian Parliament (including those working in the transportation field, telecommunications workers, and bank workers).

pension fund (1) The assets used to pay the pensions of retirees. (2) An investment institution established to manage the assets used to pay the pensions of retirees.

Pension Index In Canada, the index used by the Canada Pension Plan and Quebec Pension Plan to vary pension benefit payments to reflect the effects of inflation. The Pension Index is based on the Consumer Price Index.

pension trust See trusteed pension plan.

per capita beneficiary designation A class beneficiary designation under which life insurance policy proceeds are shared only by those class members who survive the insured. Contrast to per stirpes beneficiary designation.

per-cause deductible A deductible which must be satisfied for each separate accident or illness before major medical benefits will be paid. Also known as a per-disability deductible. Contrast with all-causes deductible.

per-cause maximum For any individual, the maximum amount that a medical expense policy will pay for medical expenses resulting from any particular illness or injury.

percentage contribution The amount of the premium that a group member pays in a contributory group insurance plan. Also known as employee contribution or member contribution. See also contributory group insurance.

percentage participation See coinsurance.

per-disability deductible See per-cause deductible.

period certain The specified time during which the insurer unconditionally guarantees that benefit payments will continue under a settlement option or annuity.

permanent and total disability A condition that prevents an insured from returning to any gainful employment.

persistency The retention of business that occurs when a policy remains in force as a result of the continued payment of the policy's renewal premiums.

persistency bonuses Financial incentives given to agents and agency managers to reward good persistency results.

persistency fee See service fee.

persistency rate For a block of policies, the ratio of the policies in force for which renewal premiums were paid during a given period to the policies for which premiums were due during that period. The persistency rate is the complement of the lapse rate. Contrast with lapse rate.

personal interview report A report that contains the same types of information as an inspection report, except that the personal interview report relies on the proposed insured as the only source of information. See also inspection report.

personal producing general agency (PPGA) system A personal selling distribution system that relies on the use of PPGAs.

personal producing general agent (PPGA) A type of general agent who more closely resembles a broker than an agency manager. Most PPGAs are under contract to several insurance companies and spend the majority of their time selling insurance rather than building and managing an agency office.

personal selling distribution system An insurance distribution system that uses commissioned or salaried sales personnel to sell products through oral presentations made to prospective purchasers.

per stirpes beneficiary designation A class beneficiary designation under which the descendants of a deceased class member receive the deceased class member's share of the life insurance policy proceeds. Contrast to per capita beneficiary designation.

physical examination provision A health insurance policy provision that grants the insurer the right to have an insured who has submitted a claim examined by a doctor of the insurer's choice at the insurer's expense.

placement ratio In facultative reinsurance, the number of risks ceded by a particular ceding company to a particular reinsurer divided by the number of risks submitted by that ceding company to that reinsurer for evaluation.

plan document A written document that is adopted by an employer and that specifies the terms of a pension plan. A plan document identifies the benefits the participants are to receive and the requirements they must meet to become entitled to those benefits.

plan participant A person on whose behalf contributions are made or benefits are accrued under a pension or employee-benefit plan.

plan sponsor An entity which has adopted and maintains a pension or employee-benefit plan. The plan sponsor is often an employer, but may be a union, a trade or professional association, or a committee composed of representatives of a number of employers or associations.

plan valuation See actuarial valuation.

point of sale underwriting See immediate underwriting.

policy A written document that serves as evidence of an insurance contract and contains the pertinent facts about the policyowner, the insurance coverage, the insured, and the insurer.

policy acquisition costs Costs that are directly attributable to the production of new business. Also called acquisition expenses.

policy administration department See customer service department.

policy anniversary The anniversary of the date on which a policy was issued. Sometimes simply called the anniversary.

policy benefit See benefit.

policy charge An amount that an insurer adds to the gross premium to help cover the insurer's expenses. This amount is the same regardless of the size of the policy. Also called a policy fee.

policy dividend See dividend.

policy fee See policy charge.

policy filing The process of obtaining legal permission to sell an insurance product in a specific jurisdiction.

policyholder (1) The company or organization that owns a group insurance contract (called the group policyholder in Canada). The policyholder of a group insurance contract does not have the same ownership rights under the contract that a policyowner has under an individual contract. (2) In Quebec, the owner of an individual life insurance policy (called the policyowner in the United States and the insured in the rest of Canada). Also sometimes called the owner in Quebec. (3) Often used interchangeably with policyowner.

policy loan A loan that is made to a life insurance policyowner by an insurer. A policy loan is secured by a policy's cash value and cannot exceed the cash value. When the policy benefits are paid, the amount of any outstanding policy loan made against the policy is deducted from the benefits.

policyowner The person or party who owns an individual insurance policy. The policyowner is not necessarily the person whose life is insured. The terms policyowner and policyholder are frequently used interchangeably.

policyowner dividend See dividend.

policyowner's equity See cash value.

policyowner service department See customer service department.

policy proceeds The amount that the beneficiary actually receives from a life insurance policy after adjustments have been made to the basic death benefit for policy loans, dividends, paid-up additions, late premium payments, and supplementary benefit riders. Compare to basic death benefit and death benefit. Also called net policy proceeds.

policy provisions The statements, following the face page of an insurance policy, that describe the operation of the insurance contract.

policy purchase rider See guaranteed insurability (GI) rider.

policy reserve (1) A liability account that identifies the amount of assets that, together with the future premiums to be received from in-force policies, is expected to be sufficient to pay future claims on those in-force policies. (2) The actual assets that guarantee that the insurer will have sufficient funds to pay future claims. See reserve for a list of reserves.

policy summary A document, often in the form of a computer printout, that contains certain legally required data regarding the specific policy being considered by an applicant.

policy year The 12-month period between a policy's anniversaries.

pool In pool reinsurance, a name for the group of reinsurers taking part in the reinsurance arrangement.

pooling In group insurance, the practice of underwriting a number of small groups as one large group.

pool reinsurance An arrangement in which (a) several insurance or reinsurance companies with similar underwriting policies and standards agree to accept reinsurance business from one another automatically within certain limits and (b) the cost of reinsurance is allocated proportionately to all members, based on the loss ratios experienced by the whole group.

portability A pension plan participant's right to transfer (usually tax-free) pension credits that have accrued under a pension plan sponsored by one employer to a plan sponsored by another employer.

portfolio (1) A group of investments managed or owned by an individual or organization. (2) All of the products offered by an insurance company.

portfolio method A method of accounting among insurers in which each customer or policyowner receives a rate of interest equal to the average rate of interest earned on the entire portfolio of assets in the insurer's general account. Compare to the investment year method (IYM).

post-death assessment method See mutual benefit method.

post-notice As required by the Fair Credit Reporting Act, a form that the insurer must send to an applicant in cases in which the insurer has made an adverse decision based on information contained in a report from a consumer reporting agency.

power of agency An agent's right to act for an insurer. The power of agency is established through agency contracts between an insurer and its agents.

PPGA See personal producing general agent (PPGA).

PPO See preferred provider organization (PPO).

preadmission review A component of a utilization review program that requires an insured person, or that person's physician, to obtain prior authorization from an insurer before any non-emergency hospitalization.

pre-approach letter A direct mail prospecting tool designed to help an agent secure an interview with a prospect. Pre-approach letters (1) are directed to prospects to whom a specific appeal can be made, (2) describe a financial/insurance need or product, and (3) state that an agent will call to discuss the topic further.

preauthorization of benefits provision See predetermination of benefits provision.

preauthorized check (PAC) system See preauthorized payment system.

preauthorized payment system A method of payment in which a policyowner signs a two-part authorization for the payment of insurance premiums. The first part authorizes the insurance company to withdraw funds from the policyowner's bank account in the amount of the premium due. The second part authorizes the bank to honor the withdrawals, which do not contain the policyowner's signature. When the preauthorized payment system is implemented through the use of checks, it is called the preauthorized check (PAC) system.

precertification of benefits provision See predetermination of benefits provision.

pre-contract training A trial program that permits an individual to prepare to become an agent while continuing to work at his or her current job until offered a full-time agent contract.

pre-death assessment method See assessment method.

predetermination of benefits provision A provision often included in dental policies which specifies that when dental treatments are expected to exceed a stated level, such as $100, $150, or $200, the dentist should submit to the insurer the proposed treatment plan for the patient so that the insurer can determine the amount payable by the dental plan. Also known as a preauthorization of benefits provision, precertification of benefits provision, or pretreatment review provision.

pre-existing condition (1) In individual health insurance, an injury that occurred or a sickness that first manifested itself before the policy was issued and that was not disclosed on the application. (2) In group health insurance, a condition for which an individual received medical care during a specified period, usually three months, immediately prior to the effective date of coverage.

pre-existing conditions provision A provision in most medical expense insurance policies stating that until the insured has been covered under the policy for a certain period, the insurer will not pay benefits for any pre-existing condition.

preference beneficiary clause Life insurance policy wording which states that if no specific beneficiary is named, the insurer will pay the policy proceeds in a stated order according to a list of individuals included in the policy.

preferred beneficiary In Canada, a class of beneficiaries applicable to policies issued before June 30, 1962, and consisting of the spouse, children, parents, and grandchildren of the insured. The policyowner can change the beneficiary of a policy from a preferred beneficiary to a beneficiary who is not a preferred beneficiary only with the consent of the preferred beneficiary.

preferred provider organization (PPO) A group of hospitals and physicians that makes a contract with employers, insurers, and other organizations to provide comprehensive health care services at discounted fees for individuals who are members of the PPO.

preferred risk class In life insurance, a risk class that consists of individuals whose anticipated mortality is lower than the norm established for the standard risk class. Among other things, people in the preferred risk class are in excellent physical condition, have good family medical histories, and do not smoke. Sometimes called the superstandard risk class.

preliminary inquiry form A type of application form used when there is a high probability that a policy either will not be issued or will be issued with such a high substandard rating that the policy premium will be unacceptable to the applicant. Using a preliminary inquiry form usually brings a quick response from the underwriting department. Also called a trial application.

premium The payment, or one of a series of payments, required by the insurer to put an insurance policy in force and keep it in force.

premium deficiency reserve A name sometimes used for a special reserve which an insurance company establishes when the gross premium for a policy is less than the net premium. This situation sometimes arises when the legally prescribed mortality table is very old.

premium-delay arrangement See deferred premium arrangement.

premium deposits Amounts that are left on deposit with the insurer for the payment of future premiums.

premium receipt An acknowledgement of an insurer's receipt of an initial premium.

premium receipt book A book given to the policyowner when a home service agent makes a policy sale. The premium receipt book contains prenumbered receipts that are signed by the agent when the agent collects a premium.

premium reduction option A life insurance policy dividend option under which policy dividends are applied toward the payment of renewal premiums.

premium suspense A premium income classification used to record amounts that are intended as premiums but that cannot be accepted as income right away.

pre-notice As required by the Fair Credit Reporting Act, advance notice to an insurance applicant from an insurer that an investigative consumer report may be made on the applicant.

preretirement survivor annuity A pension plan provision which specifies a benefit for the surviving spouse of a vested plan participant if the participant dies before retirement. In the United States, qualified plans are required to include this provision, as are registered plans in Canada.

prescribed annuity contract (PAC) In Canada, a kind of annuity that meets the criteria established by the Income Tax Regulations to qualify as exempt from accrual taxation.

present value The amount of money that must be invested on a certain day, sometimes called the evaluation date, in order to accumulate to a specified amount at a later date.

present value factor The number by which an amount of money to be paid later is multiplied in order to derive the present value of that money.

present value of amounts not yet due on claims An amount an insurer sets aside as a reserve for future payments on claims currently being paid in installments, as in the case of disability income coverages and waiver-of-premium benefits.

presumptive disability A condition that, if present, automatically causes an insured to be considered totally disabled. Examples of presumptive disabilities are total and permanent blindness or loss of two limbs.

pretreatment review provision See predetermination of benefits provision.

prima facie rate In group creditor insurance in the United States, the standard premium rate recommended by state government regulators for a contributory policy. An insurer can not charge more than the prima facie rate when a contributory group creditor insurance policy is first issued. Contrast with deviated rate.

primary beneficiary The party or parties who have first rights to receive policy benefits when the benefits of an insurance policy become payable.

primary provider of benefits In a coordination of benefits situation, the medical expense plan that pays the full benefits provided by its plan before any benefits are paid by another medical expense plan.

principal A party who authorizes another party, the agent, to act on the principal's behalf in contractual dealings with third parties. Called the mandator in Quebec.

probability The likelihood of some event occurring. In mathematics, probability is the number of times that something is likely to occur out of a number of possible occurrences. Probability theory is an essential aspect of the mathematical foundations of insurance.

probationary period See waiting period.

proceeds The amount of money that the insurance company is obligated to pay for the settlement of a life insurance policy, endowment insurance policy, or annuity.

professional reinsurer An insurance company whose only or major line of business is reinsurance.

profit sharing pension plan In Canada, a money purchase pension plan in which employer contributions are linked to company profits. Employers must make a minimum contribution of 1% of employee earnings, regardless of whether they make a profit, and the plan is subject to the same legal requirements as pension plans.

profit sharing plan An employee-benefit plan whereby the employer pays a portion of the company's profits to the employees. The employer's contributions are discretionary and may be (1) paid in cash or stock when profits are determined, (2) deferred to individual accounts for each employee, or (3) distributed by a combination of the two methods. Profit-sharing plans can be used as a source of retirement income or as a more short-term savings/investment vehicle.

projection method A method for keeping annuity tables up-to-date which assumes that the mortality rate at any given age decreases, or improves, by a constant percentage each calendar year.

property insurance A type of insurance that provides a benefit if insured items are damaged or lost because of fire, theft, accident, or other cause described in the policy.

proportional reinsurance A type of reinsurance plan in which the proportion of the risk to be carried by the ceding company and the proportion of the risk to be carried by the reinsurer are known when the reinsurance treaty is made. Also called pro rata reinsurance.

proposal form In Canada, a document that is given to a prospective purchaser of an insurance policy and that contains personalized information about the policy and policy values.

pro rata reinsurance See proportional reinsurance.

prospecting The activity of identifying, contacting, and qualifying potential insurance customers (prospects).

prospective method A method of calculating terminal reserves for life insurance policies by looking to the future. In the prospective method, the terminal reserve equals the present value of future benefits minus the present value of future net premiums. See also retrospective method.

prospects Potential customers for insurance products.

protective information Information about a proposed insured's impairments that will help the underwriter place the individual in the appropriate risk class.

prototype plan A standardized form of pension or other employee-benefit plan developed to simplify plan drafting for plan sponsors. Similar to a master plan.

provider fraud A type of medical insurance fraud that is initiated by a medical care provider on patients' claims in order to increase the provider's own income. Contrast with individual fraud.

proximate cause of death An event that is directly responsible for a death or an event that initiates an unbroken chain of events that lead to death.

prudent expert rule The legal requirement that the sponsor or manager of a pension plan exhibit certain standards of competence and prudence in accounting for assets in a pension plan and investing the pension plan's funds.

pure broker See licensed broker.

pure endowment An amount payable only to those people who survive for a certain period of time; those who do not survive that period of time receive nothing. Unless they are combined with some form of life insurance, pure endowments are generally illegal.

QDRO See qualified domestic relations order (QDRO).

QPP See Quebec Pension Plan (QPP).

qualified annuity In the United States, a type of annuity which is funded with money that is deductible, up to a stated maximum, from the depositor's gross income in the year in which the funds are deposited.

qualified domestic relations order (QDRO) In the United States, a decree or settlement in regard to alimony, child support, or marital property rights that assigns all or a portion of a plan participant's pension benefits to an alternate payee. The alternate payee is generally a spouse, former spouse, or a child or other dependent of the plan participant.

qualified joint and survivor (QJ&S) annuity In the United States, a form of annuity which provides for the continuation of pension benefits to the spouse of a retired pension plan participant after the death of the participant. The survivor's benefits, which cannot be less than 50 percent nor more than 100 percent of the original benefits, continue until the death of the spouse. This form of annuity is required in United States qualified plans, unless the participant (with consent of the spouse) elects to forego it. A similar requirement, called the joint life and last survivor (JL&S) option, applies in most Canadian jurisdictions.

qualified plan In the United States, a pension plan or employee-benefit plan which meets a series of federal government requirements and is therefore eligible for certain tax advantages.

qualifying The process of determining whether a prospect is really a potential customer.

quality business See well-written business.

Quebec Pension Plan (QPP) A plan that primarily provides retirement income and long-term disability income benefits to residents of Quebec.

quota share reinsurance plan A type of reinsurance plan in which the assuming company reinsures a specified percentage of every risk of a certain type insured by the ceding company.

RAA See retained asset account (RAA).

rated policy A policy issued to insure a person classified as having a greater-than-average likelihood of loss. The policy may be issued (a) with special exclusions, (b) with a premium rate that is higher than the rate for a standard policy, or (c) with exclusions and a higher than standard premium rate.

rate making The calculation of premium rates for an insurance company's products. Actuaries consider several factors when they establish life insurance premium rates. The most important factors are mortality rates, interest rates, and loading.

rate of return method A method of comparing the costs of life insurance policies wherein the key figure calculated is an annual interest rate, representing a rate of return. Also called the Linton yield method. See also cost comparison methods.

rating classes The three different approaches that insurers take when they use mortality assumptions to calculate group life insurance premiums. The three rating classes for group premiums are manually rated premiums, experience rated premiums, and blended premiums. See also blended rates, experience rating, and manual rates.

rating manual An abbreviated underwriting manual that includes only suggested ratings and a small amount of background information for each impairment listed.

RDA See regional director of agencies (RDA).

rebating An insurance sales practice that is prohibited in most of the United States and Canada. In rebating, the agent offers the prospect a special inducement to purchase a policy. The rebate is usually made in the form of a share of the agent's commission.

recapture In reinsurance, the process by which the ceding company takes back from the reinsurer a portion of the reinsured business.

reciprocity In reinsurance, the practice whereby two insurers cede insurance to each other and accept ceded insurance from each other. The insurers often endeavor to cede a near-equal amount of insurance to each other.

recording method A method of changing the beneficiary of a life insurance policy in which the policyowner makes the change effective simply by notifying the insurance company in writing of the change. Also called the filing method. Contrast with endorsement method.

recovery benefit A partial or residual disability benefit payable after an insured satisfies a qualification or an elimination period, returns to work, and then suffers a loss of earnings directly resulting from a preceding total or partial disability. Also known as income replacement benefit. See also partial disability benefit and residual disability benefit.

reduced paid-up insurance option A nonforfeiture option under which the net cash value of a life insurance policy is used as a net single premium to purchase a smaller amount of fully paid insurance of the same kind and for the same period as the policy being surrendered.

referred leads Prospect names that an agent receives from a client.

refund annuity A life annuity that specifies that at least the purchase price of the annuity will be paid out in benefits. See also life annuity.

refund life income option See life income option with refund.

regional director of agencies (RDA) An insurance company employee responsible for appointing PPGAs to represent the company.

registered pension plan In Canada, a pension plan which has met the requirements of and has been registered by the Canadian Minister of National Revenue.

registered principal Any person who is licensed with the National Association of Securities Dealers and who holds a management or supervisory position in a securities broker-dealer firm.

registered reinsurer In Canada, a reinsurer which is licensed to accept reinsurance in a given jurisdiction. Contrast to unregistered reinsurer.

registered representative Any person who is licensed with the National Association of Securities Dealers and who is engaged either in selling securities as the agent or representative of a broker-dealer or in training the sales persons associated with a broker-dealer.

registered retirement plan In Quebec, a pension plan which has met the requirements of and has been registered by the Quebec Department of Revenue.

registered retirement savings plan (RRSP) A plan enabling Canadian citizens to establish tax-sheltered accounts to accumulate money toward retirement.

reinstatement The process by which a life insurance company puts back in force a policy that had lapsed because of nonpayment of renewal premiums.

reinstatement provision A life insurance policy provision that describes the conditions the policyowner must meet in order for the insurer to reinstate the policy if it has terminated because of nonpayment of renewal premiums.

reinsurance A transaction between two insurance companies in which one company purchases insurance from the other to cover part or all of the risks that the first company does not wish to retain in full. See also ceding company and reinsurer.

Reinsurance Guidelines - Canada See Canadian Reinsurance Guidelines.

reinsurance intermediary A third party who negotiates a reinsurance agreement between a reinsurer and a ceding company, and may also participate in handling administration and underwriting under the agreement.

reinsurance treaty A broadly worded statement of the agreement between a reinsurer and a ceding company. The three common types of reinsurance treaties are automatic, facultative, and facultative-obligatory. Usually just called a treaty. See also automatic reinsurance treaty, facultative reinsurance treaty, and facultative-obligatory (fac-ob) reinsurance treaty.

reinsurer An insurance company that accepts the risk transferred from another insurance company in a reinsurance transaction. Also called the assuming company.

relation of earnings to insurance clause A clause included in some guaranteed renewable or noncancellable individual disability policies that limits the amount of benefits in which an insurer will participate when the total amount of disability benefits from all insurers exceeds an insured's usual earnings. Also known as a participation limit.

relative value schedule A surgical schedule which expresses the cost of a surgical procedure as a unit value rather than as a dollar amount. A procedure with a value of 20, for example, should cost twice as much as a procedure with a value of 10. See also fee schedule.

released reserve A policy reserve, established in connection with an in-force policy, that is no longer required.

renewable term insurance A type of term insurance which includes a renewal provision that gives the policyowner the right to renew the insurance coverage at the end of the specified term without submitting evidence of insurability.

renewal commissions Those commissions paid to the agent for a specified number of years, usually nine, after the first policy year. The renewal commission rate is generally much lower than the first-year commission rate and is paid only on policies that remain in force.

renewal premiums Premiums payable after the initial premium.

renewal provision (1) An individual life insurance policy provision that gives the policyowner the right to continue the insurance coverage at the end of the specified term without submitting evidence of continued insurability. (2) A provision in an individual health insurance policy describing the circumstances under which the insurance company may refuse to renew the coverage, may cancel the coverage, or may increase the policy's premium rate.

replacement The act of surrendering an insurance policy or part of the coverage of an insurance policy in order to buy another policy.

replacement ratio See income replacement ratio.

reportable event In the United States, an event that indicates that the financial condition of a pension plan is or may be deteriorating to the point that the plan may be terminated. Such events must be reported to the Pension Benefit Guaranty Corporation (PBGC).

representation A statement by an insurance applicant of facts upon which the insurer bases its decision as to whether or not to issue the policy as applied for.

required reserve In Canada, a reserve that an insurance company must maintain as required by the insurance department of the province in which the insurer operates and by any foreign jurisdictions in which the insurer operates.

rescission An equitable remedy under which the insurer seeks to void a policy or have it declared void. Rescissions usually occur when there has been material misrepresentation in the insurance application.

reserve Typically, the liability account that identifies the amount of assets needed to pay future claims. There are many different types of reserves. When the term "reserve" is used in the life insurance industry, it usually refers to the policy reserve. See policy reserve. For the reserves identified in this glossary see claim fluctuation reserve, claim reserve, contingency reserve, initial reserve, mandatory securities valuation reserve (MSVR), mean reserve, midterminal reserve, net level premium reserve, policy reserve, required reserve, reserve for future contingent benefits, statutory reserve, terminal reserve, and unearned premium reserve.

reserve destrengthening The reduction of policy reserves in order to increase surplus.

reserve for future contingent benefits In health insurance, an amount established as a reserve for deferred maternity benefits and for any other claims that may have already been incurred but that may be contingent upon a future event or circumstances beyond the insurer's control.

reserve strengthening The process of setting up additional policy reserves.

residual disability benefit A partial disability benefit amount that is established according to a formula specified in a disability income insurance policy. The amount of the benefit varies according to the percentage of income loss attributable to the disability. See also partial disability benefit.

resisted claim A claim that an insurer has refused to pay but that it may pay in the future.

response letter A direct mail prospecting tool designed to help an agent secure an interview with a prospect. Response letters are semi-personalized letters containing a sales message of general appeal to a large number of people. Prospects indicate their interest by replying to the letter, usually by calling the agent or by returning a coupon or some other inquiry form.

restricted stock Stock that is conditionally given by an employer to compensate an executive. In some instances, the executive is only granted full ownership of the stock if the executive continues to work for the company for a certain period of time.

result clause A type of war hazard exclusion that excludes payment of benefits only for losses resulting from war or acts of war. Contrast with status clause.

result-type war exclusion provision See result clause.

retail outlet distribution system See location-selling distribution system.

retained asset account (RAA) An interest-bearing money market checking account that is established by an insurer for the beneficiary of a life insurance policy, and into which the insurer deposits the policy's death benefit.

retention (1) In reinsurance, the amount of a reinsured risk which the ceding company retains. (2) See retention charge.

retention charge For a group insurance contract, the portion of the premium that is intended to cover expenses (other than claims) and to allow the insurance company to make a profit. Sometimes simply called retention.

retention limit The maximum amount of insurance that an insurance company will carry at its own risk on any individual without ceding part of the risk to a reinsurer.

retention schedule Part of a reinsurance agreement which specifies the ceding company's retentions for various types of risk. For example, in life reinsurance, retentions will be listed for insureds who fit various age and underwriting classifications.

retired lives reserve A fund that some employers establish and pay into on behalf of employees while they are employed in order to provide group life insurance to the employees after they retire.

retroactive disability benefit A type of disability benefit that is payable from the date of disability. The first payment is not made, however, until an elimination period has been satisfied.

retroactive rate reduction See experience refund.

retrocession (1) The act of one reinsurer's ceding its excess risk to another reinsurer. (2) A parcel or unit of insurance that one reinsurer has assumed and that it cedes to another reinsurer.

retrocessionaire The reinsurance company that accepts the excess risk of another reinsurer.

retro premium In group insurance, a premium rate agreed upon by the insurer and policyholder at the beginning of a premium-paying period but paid at the end of the period only if the group's claim experience warrants it. The insurer collects a lower base premium at the beginning of the period and, if necessary, charges the retro premium retroactively at the end of the period.

retrospective method A method for calculating terminal reserves for life insurance policies by using past occurrences. In the retrospective method, the terminal reserve equals the accumulated value of net premiums received minus the accumulated cost of insurance. See also prospective method.

retrospective-rating arrangement An alternative funding method for a group insurance contract whereby the insurer collects only a percentage (often between 90% and 95%) of the premium from the policyholder at the beginning of the premium-paying period and collects the rest of the premium at the end of the period, unless the group's claim experience is better than expected and the additional premium therefore is not owed. With this system the policyholder retains control of part of the premium for a longer time than with the traditional system.

retrospective review A component of a utilization review program that provides an insurer with periodic reports on physicians' practice patterns and hospitals' average lengths-of-stay.

revocable beneficiary A named beneficiary whose right to life insurance policy proceeds is not vested during the insured's lifetime and whose designation as beneficiary can be cancelled by the policyowner at any time prior to the insured's death. See also beneficiary.

rider An amendment to an insurance policy that becomes a part of the insurance contract and expands or limits the benefits payable. Also called an endorsement.

right of survivorship A stipulation sometimes included in assignments of life insurance policies which provides that if an assignee dies, the assignee's survivors are entitled to his or her portion of the assignment.

risk charge (1) In group insurance, the part of a policy's premium which is intended to contribute to the reserves the insurer maintains to pay for unusually high claims experience. The risk charge is one element of the retention charge. (2) In reinsurance, the amount charged the ceding company by the reinsurer for providing reinsurance.

risk class A group of insureds who present a substantially similar risk to the insurance company. Among the most common risk classes used by life insurance companies are standard, preferred, nonsmoker, substandard, and uninsurable.

risk premium reinsurance (RPR) See yearly renewable term (YRT) reinsurance.

rollover In the United States, the tax-free transfer of account balances to an individual retirement account from a qualified retirement plan or another individual retirement account.

RRSP See registered retirement savings plan (RRSP).

run-off A termination provision of a reinsurance agreement by virtue of which the reinsurer is liable for losses covered by reinsured policies in force on the date of termination, even if the losses occur after the date of termination. Contrast to cut-off.

safety margin In life insurance, the safety margin is the amount by which actuaries increase the probability of mortality for each age group in a mortality table. The safety margin helps protect the insurance company from adverse experience.

salaried sales agents Insurance sales representatives who are employees of the insurer and who are usually paid on a salary plus incentive compensation basis. Salaried sales personnel may work with other agents or independently, may make sales directly to consumers or promote the sale of an insurer's products through other intermediaries, and are often used to distribute group insurance and pension products. Also known as salaried sales representatives.

salaried sales distribution system A distribution system that uses salaried employees of the insurance company to sell and service policies. Salaried sales personnel may work either with agents or independently and are often used to distribute group insurance products.

salaried sales representatives See salaried sales agents.

salary continuation plan A disability or sick-leave plan which provides for employees to continue to receive up to 100 percent of their salary for a limited number of days if they become ill or disabled. The number of days per year granted to an employee generally increases as the employee's length of service increases. Most such plans are self-insured. Also known as a sick-leave plan.

salary-reduction plan A plan whereby an employee authorizes the employer to reduce the amount of compensation that the employee receives in cash and to contribute the difference to a group insurance, pension or other employee-benefit plan.

sales illustration A graphic representation used by an agent to help explain an insurance product to a potential customer. Sales illustrations often consist of numeric charts describing the customer's goals and the cost elements and mechanics of the insurance product being proposed. Sometimes simply called an illustration.

sales tracks Standardized sales presentations typically used by new or inexperienced agents. Also known as canned presentations.

SAP See statutory accounting practices (SAP).

savings bank life insurance (SBLI) In the United States, life insurance coverage sold by authorized savings banks to people who live or work in the state in which the insurance is sold. Savings bank life insurance is permitted in three states -- Massachusetts, New York, and Connecticut.

savings plan A defined contribution plan offered by an employer or other plan sponsor to give employees/participants a vehicle for investing funds for retirement or other needs. Most plans feature employer matching of employee contributions, and plan participation is voluntary. Also known as a thrift plan.

schedule See fee schedule.

scheduled dental plan A dental plan which pays fixed benefits for specific procedures according to a schedule. See also combination dental plan and unscheduled dental plan.

schedule of benefits See benefit schedule.

SCI See interest-adjusted cost.

secondary beneficiary See contingent beneficiary.

second excess See second surplus.

second surplus In a layered reinsurance agreement, the amount of risk ceded in the second layer. See also layering. Also called second excess.

second-to-die life insurance See survivorship life insurance.

Section 79 Section 79 of the United States Internal Revenue Code, which provides that employer contributions to purchase group term life insurance receive preferable tax treatment. It also gives a list of specifications which a plan must meet in order to be considered a nondiscriminatory group term insurance plan for tax purposes.

Section 401(k) Plan In the United States, a qualified cash or deferred profit-sharing or stock-bonus plan which allows participants to decide how much of their compensation is deferred. Participant contributions are not taxable until the funds are withdrawn, and sponsor contributions as well as investment earnings are also tax-deferred to the participant. Also called a Cash or Deferred Arrangement (CODA).

Section 403(b) Plan In the United States, a type of employee retirement plan established by certain tax-exempt organizations (i.e., hospitals, charities, churches) and educational organizations. Section 403(b) plans were created by Congress to serve as an incentive for tax-exempt organizations (who could not benefit from the tax advantages of qualified pension plans) to offer their employees some form of retirement compensation. Also known as a tax-deferred annuity (TDA) plan or a tax-sheltered annuity (TSA) plan.

Section 415 limits In the United States, limits placed on the amount of annual additions (contributions) that can be made on behalf of a defined contribution plan participant or the amount of benefits that can be paid to a participant in a defined benefit plan. These limits are determined under Section 415 of the Internal Revenue Code. See also contribution limit and maximum benefit.

Section 3460 In Canada, a set of recommendations contained in section 3460 of the Canadian Institute of Chartered Accounts (CICA) Handbook which concerns employers' accounting for pension costs and obligations. Section 3460 recommends that, for defined benefit plans, the projected benefit method be used to determine pension costs for accounting purposes.

segmentation A process by which an insurer divides its general account investments into distinct parts, or segments, that correspond with each of the insurer's major lines of business. For example, one segment can be used to account for group life insurance investments, while another can be used to account for individual life insurance investments.

segregated account In Canada, an asset account that stands apart from a company's general account. Called a separate account in the United States. See also separate account.

select and ultimate mortality table A mortality table that shows select mortality experience as well as the ultimate mortality experience that follows the select period. Select and ultimate mortality tables are used most frequently for making comparative mortality studies and for calculating dividends, dividend scales, and premium rates. See also mortality tables and select mortality table.

select group Applicants who have been accepted for life insurance at standard rates. For a given period after being accepted, the mortality rate of the select group is better than the mortality rate of the general population.

selection against the insurer See antiselection.

selection of risks See underwriting.

select mortality table A mortality table that uses only the mortality experience of a select group. The mortality rates shown in a select mortality table are based on both the age of the insured at the time the policy was issued and the period of time since the insurance was issued. See also mortality tables.

select period The period of years during which there is a significant difference in mortality rates between persons whose good health was proved at the beginning of the period (the select group) and other persons of the same age.

self-administered group insurance plan Under this type of group insurance plan, the group policyholder rather than the insurer performs most of the administrative work for the plan. The policyholder maintains detailed records of group membership, processes routine requests, such as requests for beneficiary changes and name and address changes, prepares its own premium statements, and, in some cases, prepares certificates for new group members.

self-administration In reinsurance, a system of administration whereby the ceding company prepares the majority of the records for cessions, and uses written or electronic lists, often called bordereaux, to notify the reinsurer of cessions. See also bordereau. Contrast to individual cession administration.

self-insured group insurance A form of group insurance in which the group sponsor, not an insurance company, is financially responsible for paying claims made by group insureds. A group may be partially or fully self insured. See also administrative services only (ASO) contract.

sentinel effect The tendency of hospitals involved in hospital audit programs to carefully prepare hospital bills because they expect their bills to be reviewed in detail by insurers.

SEP See simplified employee pension (SEP).

separate account An account maintained separately from a life insurance company's general accounts to help manage the funds used for nonguaranteed insurance products. By maintaining separate accounts, insurance companies are able to modify some of their investment strategies without affecting the funds in the general accounts. Called a segregated account in Canada. See also general account and investment-sensitive life insurance.

separate account contract A pension plan funding vehicle in which a pension's assets are invested through an insurer's separate account. A separate account contract usually does not guarantee investment performance. Also called an investment facility contract.

SERP See supplemental executive retirement plan (SERP).

service and claim department See customer service department.

service fee A form of agent compensation that constitutes a small percentage of the premium and that is usually payable only after renewal commissions on a policy have ceased. Also called a persistency fee.

setback The number of years sometimes subtracted from the true age in life insurance mortality tables. A setback is used with male mortality tables when an insurer needs to calculate mortality rates for females.

settlement (1) See financial settlement. (2) In the United States, an irrevocable action that relieves the plan or plan sponsor of the obligation for a pension benefit and that eliminates the risk to the plan assets used to carry out the settlement. One example of a settlement is payment of a lump-sum benefit to a plan participant, thus discharging any further benefit obligation to the participant. Settlement is defined in FASB Statement No. 88.

settlement agreement The arrangement made between an insurer and a policyowner (or beneficiary) concerning the manner in which the insurer will pay the policy proceeds to the beneficiary. See also settlement options.

settlement option payments Periodic payments made by an insurance company in lieu of an immediate lump-sum payment of life insurance policy proceeds.

settlement options Choices given to the policyowner or the beneficiary of a life insurance policy regarding the method by which the insurer will pay policy proceeds. Also known as optional modes of settlement. See also fixed amount option, fixed period option, interest option, joint and survivorship option, life income option, life income option with period certain, life income option with refund, and straight life income option.

settlement option table A table showing the various amounts that the insurance company will pay as periodic payments in the settlement of a life insurance policy.

shopping In facultative reinsurance, the practice of submitting an application to several reinsurers in order to obtain the best underwriting rating or the lowest overall cost for the policy in question.

short-form reinstatement application A reinstatement application that asks a few questions designed to guard against reinstatements by insureds whose conditions have changed drastically since the premium due date. A short-form reinstatement application is generally used for reinstatements requested within a comparatively short period, such as 30 to 90, days after the end of the grace period.

short-term disability income insurance Disability income insurance which provides a benefit for a short disability or for the first part of a long disability. See also disability income insurance, long-term disability income insurance, and weekly indemnity plan.

sick-leave plan See salary continuation plan.

side fund See conversion fund.

simplified employee pension (SEP) In the United States, a pension plan in which an employer contributes money to an individual retirement account (IRA) for each employee covered by the plan. The IRA is owned by the employee, not the employer. A SEP is especially useful to employers who cannot afford the time or money needed to administer and maintain a more complicated pension plan. SEP's may also be used by self-employed persons.

simultaneous death act A state or provincial law which provides that if the insured and the primary beneficiary both die under conditions in which it is impossible to determine which one died first, the insured will be presumed to have survived the primary beneficiary unless there is a policy provision to the contrary.

single-need selling A basis for selling life insurance in which the agent isolates one of a prospect's financial needs that can be met by insurance. For example, the agent may point out to a prospect the need for sufficient life insurance to cover the outstanding balance on the prospect's home mortgage. Contrast to total-needs programming.

single premium annuity An annuity that is purchased with only one premium payment. A single premium annuity can be an immediate annuity or a deferred annuity.

single-premium deferred annuity (SPDA) A deferred annuity for which only one premium payment is made.

single-premium method In group creditor insurance, a premium-paying arrangement for contributory plans whereby, at the inception of the loan, the entire premium amount for the insurance is either paid in a lump sum by the borrower or added to the principal of the loan. Contrast with monthly outstanding balance method.

single-premium whole life insurance See limited-payment whole life insurance.

single purchase annuity contract A group contract in which a single premium is applied to purchase annuities for participants in a pension plan that is terminating. Immediate annuities are purchased for current retirees in the plan, and deferred annuities are purchased for participants who have not yet reached retirement age.

six and six exclusion A pre-existing conditions exclusion commonly used in credit disability policies, which states that an insured's disability is not covered if the insured (1) was treated for the condition within six months prior to the effective date of coverage and (2) becomes disabled from that same condition within six months after the effective date of coverage.

small estates statutes Legislation that enables an insurer to pay relatively small amounts of policy proceeds to an estate without involved court proceedings.

small group insurance plan A type of group life insurance plan that uses group underwriting techniques but adds some degree of simplified individual underwriting and is designed to cover groups containing 2 to 25 people. Also called a baby group plan.

small life insurance company deduction A United States federal income tax deduction that may be used by certain life insurance companies if they meet criteria relating to the amount of the company's assets and tentative life insurance company taxable income, or LICTI.

social insurance supplement policy A medical expense policy sold by insurance companies to provide benefits that complement the benefits available from a specified government health insurance program.

Social Security In the United States, a program of the United States federal government that provides retirement income, health care for the aged, and disability coverage for eligible workers and their dependents.

Social Security Disability Income (SSDI) In the United States, a long-term disability income program that provides benefits to disabled workers who are under age 65 and who have paid a specified amount of Social Security tax for a prescribed number of quarter-year periods.

sole proprietorship insurance Insurance on the life of the sole proprietor of a business. Sole proprietorship insurance is used either to pay the salary of someone hired to run the business after the owner's death or disablement or to compensate the owner's family for the loss of potential income due to the failure of the business after the owner's death or disability.

soliciting agent Typically, an insurance agent who works under a general agent or a branch manager. The soliciting agent is the person who actually contacts prospective customers, delivers policies, and collects initial premiums. See also insurance agent.

SPDA See single-premium deferred annuity (SPDA).

special surplus fund Surplus that a life insurance company's board of directors has segregated for the purpose of meeting unforeseen contingencies or paying for certain extraordinary expenses that may arise. Also called appropriated surplus, assigned surplus, contingency reserve, and earmarked surplus.

specified expense coverage Health insurance coverage which provides benefits for specific medical supplies or treatments or for specific illnesses. Examples include dental expense coverage, vision care coverage, prescription drug coverage, long-term care (LTC) coverage and dread disease coverage. See also limited coverage policy and long-term care (LTC) insurance.

speculative underwriting The practice of knowingly accepting risks at an inadequate premium rate in order to obtain business by undercutting the market price for similar coverage.

speedy issue unit See jet unit.

spendthrift trust clause A life insurance policy provision that protects, under certain conditions, policy proceeds held by the insurer from being seized by a beneficiary's creditors.

split-dollar insurance plan A type of business insurance in which an employee is covered by individual life insurance that is paid for jointly by the employee and the employer. The employee names the beneficiaries. Each year the employer pays the portion of the premium that is equal to the increase in the policy's cash value for that year, and the employee pays the balance of the premium. If the employee dies, the employer will receive an amount of the proceeds equal to the cash value of the policy, while the beneficiaries of the policy will receive the remaining benefits.

split funding A method of funding a pension plan in which a portion of the total contributions to the plan are used to purchase an allocated funding instrument while the remainder of the contributions are placed in an unallocated fund.

spouse and children's insurance rider An addition to a life insurance policy that provides coverage for a spouse and/or children.

spouse's allowance In Canada, a benefit available to some spouses of Old Age Security (OAS) recipients. The benefit is designed to ensure that a married couple in which one spouse is age 60 to 65 receives a minimum monthly pension that is comparable to the monthly pension of a married couple in which both spouses are over the age of 65.

spread loss reinsurance A type of reinsurance by virtue of which the reinsured company pays premiums to the reinsurer and, if the reinsured company experiences total losses in a given year which are greater than a certain limit, then the reinsurer remits the amount of the excess loss to the reinsured company in a lump sum, and the reinsured company pays back the reinsurer over a period of years, usually by means of increased reinsurance premiums. In this way, the reinsured company's losses for a certain year are "spread" over a period of years. This type of insurance is seen more frequently in group insurance than in individual insurance.

stacking The practice of ignoring benefits payable under public pension plans in the design or selection of private pension plans. When no attempt is made to integrate benefits from a public and a private pension plan, the two plans are said to be "stacked."

Standard Nonforfeiture Law A law, which is virtually uniform in all states, specifying the minimum cash values required to be provided by life insurance policies.

standard plan termination In pension and employee-benefit plan terms, the process of terminating a plan which has sufficient funds to cover all the benefit amounts to which the plan's participants are entitled. Contrast to distress termination. See also involuntary plan termination and voluntary plan termination.

standard premium rate The premium rate charged for insurance on a person classified as having an average likelihood of loss.

standard risk class A risk class made up of individuals whose anticipated likelihood of loss is regarded as average. People in the standard risk class pay standard premium rates. Most insureds are included in the standard risk class.

Standard Valuation Law A law, which is virtually uniform in all states, specifying minimum standards for calculating, or valuing, insurance reserves.

status clause A type of war hazard exclusion that excludes payment of benefits for any loss occurring while an insured is in military service. Contrast with result clause.

status-type war exclusion provision See status clause.

statutory accounting practices (SAP) The accounting methods and principles that apply to the completion of the statutory Annual Statement which life insurance companies are required to submit to regulatory authorities.

statutory reserve A reserve that is reported to government authorities, as required by statutes. Also called a legal reserve. See also policy reserve.

stock bonus plan An employee-benefit plan whereby part of the employees' compensation is in the form of the employer's stock. Most stock bonus plans are maintained in the same fashion as profit-sharing plans, but the employer's stock contributions are not necessarily related to profits. As with profit-sharing plans, employer contributions are most often discretionary, and the plan may not be intended as a retirement plan.

stock dividend See dividend.

stock insurance company An insurance company that is owned by people who buy shares of the company's stock.

stock option incentive An incentive plan for executives whereby an employer offers to sell the company's stock to the executive at a certain price on a certain date. It is in the executive's interest for the company to do well and the stock's value to rise. If the stock's value does rise, the executive may, by exercising the stock option, be able to buy the company's stock at a price below the stock's market value, thus making a paper profit (if the stock is or must be held) or a realized profit (if the stock is sold at the higher price).

stock repurchase insurance Life insurance intended to finance the purchase of stock from the estate of a deceased stockholder by other stockholders in the same company. Typically used for closely-held corporations that have few stockholders. See also business-continuation insurance.

stop-loss provision A health insurance policy provision specifying that the insurer will pay 100 percent of the insured's eligible medical expenses after the insured has incurred a specified amount of out-of-pocket expenses under the coinsurance feature.

stop-loss reinsurance plan A type of nonproportional reinsurance plan in which the ceding company pays all claims as they occur during a specified period, such as one year, up to a certain amount, called the attachment point. At the end of the period, the reinsurer pays the ceding company an agreed-upon percentage of the claims in excess of the attachment point up to a stated maximum per period. Stop-loss coverage affects only the portion of each risk retained by the ceding company. Amounts in excess of the company's retention limit are reinsured under other arrangements.

straight life annuity An annuity that provides periodic payments to the annuitant for as long as the annuitant lives and that provides for no benefit payments after the annuitant's death.

straight life income option A life insurance policy settlement option under which payments to the beneficiary-payee will continue until the payee's death, after which no further payments are made.

straight life insurance See continuous-premium whole life insurance.

substandard broker A general agent who runs a brokerage shop specializing in finding coverage for substandard cases or selling the products of several insurers with expertise in underwriting substandard risks.

substandard premium rate The premium rate charged for insurance on an insured person classified as having a greater than average likelihood of loss. This premium rate is higher than a standard premium rate.

substandard risk class A risk class made up of people with medical or nonmedical impairments that give them a greater than average likelihood of loss. Substandard risks pay higher-than-standard premiums.

successor beneficiary See contingent beneficiary.

successor owner A person designated to become the owner of a life insurance policy if the owner dies before the person insured by the policy dies. In Quebec, known as the contingent owner.

successor payee See contingent payee.

suicide clause Life insurance policy wording which specifies that the proceeds of the policy will not be paid if the insured takes his or her own life within a specified period of time (usually two years) after the policy's date of issue.

summary information folder In Canada, a document that is used in marketing variable life insurance products. The document discloses all of the material facts about the particular variable contract and contains certain statements of financial information about the contract's segregated funds.

Summary Plan Description (SPD) (1) In the United States, a document required by ERISA to provide information about a pension plan to plan participants in simple language. The SPD must, among other requirements, identify the plan's administrator and those who are responsible for managing the plan's assets, must explain the plan's eligibility requirements and the circumstances under which a plan participant could forfeit his or her benefits under the plan, and must explain the procedures for making claims under the plan. (2) In the United States, a description of various aspects of a group insurance plan which must be provided to all plan participants and to the Department of Labor.

superimposed major medical plan A major medical plan that is coordinated with various basic medical expense coverages and that provides benefits for expenses that exceed these coverages.

superintendent of agencies Under the home service distribution system, the administrative link between the home office and the district offices.

Superintendent of Insurance In Canada, the director of a provincial Office of the Superintendent of Insurance.

Superintendent's Guidelines In Canada, a series of recommendations made by the Canadian Council of Insurance Regulators (CCIR) to insurance companies concerning a variety of matters, such as variable life insurance contracts, health insurance contracts, and group insurance contracts.

superstandard risk class See preferred risk class.

supplemental executive retirement plan (SERP) A nonqualified deferred compensation retirement plan designed to provide benefits for a group of executives, without regard to benefits provided under a qualified retirement plan.

supplemental group life insurance Life insurance over and above the basic coverage provided by a group policy. The supplemental coverage may provide an additional amount of the same type of insurance or may provide a different type of insurance. Supplemental coverage is usually contributory and subject to stricter underwriting standards than is the basic group coverage.

supplemental major medical insurance Major medical insurance providing benefits over and above those benefits paid by basic hospital-surgical expense insurance.

supplementary benefit rider A rider that is added to an insurance policy to provide additional benefits. Some typical supplementary benefit riders are accidental death coverage, waiver of premium, and the guaranteed insurance option. See also rider.

supplementary contract A contract between the insurer and the beneficiary of a life insurance policy. A supplementary contract is formed when policy proceeds are applied under a settlement option.

supplementary contract with life contingencies (WLC) A supplementary contract or annuity in which the duration of the payment period depends on the lifetime of the beneficiary.

supplementary contract without life contingencies (WOLC) A supplementary contract or annuity in which the proceeds of a life insurance policy are held at interest or paid in installments over a specified period.

supplementary notice As required by the Fair Credit Reporting Act, notice to a consumer of the nature and scope of the investigation mentioned in the pre-notice form that an insurance company has already sent to the consumer.

supplementary statement Under the NAIC Model Privacy Act, a written statement made by a person who has been investigated. The supplementary statement is intended to correct what the investigated person believes to be incorrect information in his or her file. This statement must remain with the disputed information in the person's file and must be made available to anyone reviewing the disputed information.

surgical schedule The part of a health insurance policy that describes the maximum benefit amounts payable for specified surgical procedures. See also fee schedule and relative value schedule.

surplus The amount by which an insurance company's assets exceed its liabilities and capital.

surplus brokers See agent-brokers.

surplus relief In financial reinsurance, the situation that occurs when an insurance company cedes insurance to a reinsurer and, because it no longer maintains reserve liability accounts for the ceded insurance, increases its surplus for statutory accounting purposes. It is generally accepted that an insurance company's insurance in force (or "premiums written") should not exceed a certain proportion of its surplus. If, at any time, the insurer decides that its surplus is not sufficient for this criterion to be met, the insurer may seek surplus relief.

surrender charge (1) An amount of money deducted from a policy's reserve to arrive at the policy's cash value. (2) The expense charges applied when the owner of a back-loaded policy surrenders the policy for its cash value.

surrender cost index (SCI) See interest-adjusted cost.

surrender cost index (SCI) method See interest adjusted net cost (IANC) method.

survivor income benefit insurance A type of group life insurance which provides income benefits if the insured is survived by a "qualified survivor." Usually the qualified survivor category includes only the insured's spouse and children.

survivorship clause A life insurance policy provision, inserted at the request of the policyowner, which provides that the beneficiary must survive the insured by a stated number of days in order to receive the death benefit. Also called a delay clause or a time clause.

survivorship life insurance A type of whole life insurance which insures two people and pays benefits only after the second person dies. It is generally designed to provide funds to pay estate taxes. Also called second-to-die life insurance.

suspense account In insurance accounting, an account used to record transactions that cannot be credited immediately to a permanent account. For example, when a company receives payment in advance for a policy not yet issued, it records the payment in a suspense account.

switch See flip-flop.

tabular cost of insurance The contribution, based on the particular mortality table being used to calculate policy reserves, which must be made by each of those insured in order to make up the full amount of the death claims payable in any year.

tabular interest rate The interest rate used to calculate a policy's reserves.

tabular mortality rate The rate of death at any given age, as shown in the mortality table that is used to calculate life insurance premium rates.

Taft-Hartley Trust See negotiated trusteeship.

TAP See Trend Analysis Program (TAP).

target-benefit pension plan A defined contribution plan where the contribution amount is designed to provide the participant with a specific (or "target") benefit. However, the sponsor does not guarantee the benefit, so no adjustment is made if actual investment results (or other variables) differ from initial projections. At retirement, the funds in the employee's account may be paid in a lump sum or used to purchase an annuity.

tax-deferred annuity (TDA) plan See Section 403(b) Plan.

Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) United States federal legislation designed to increase tax revenues through a variety of means such as restrictions on the tax deductibility of certain investments, including some life insurance and pension products, and the elimination of distinctions in tax law applicable to partnerships and sole proprietorships.

tax-sheltered annuity (TSA) plan See Section 403(b) Plan.

TDA See Section 403(b) Plan.

team underwriting An underwriting approach in which the underwriting department is divided into small, independent groups composed of underwriters and processing clerks.

TEFRA See Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).

TEFRA corridor See corridor.

temporary insurance agreements Legal agreements between an insurer and a proposed insured that provide a guaranteed amount of temporary life insurance coverage for a specific period of time, usually the underwriting period. Also known as interim insurance agreements and temporary insurance receipts.

temporary life annuity A series of regular periodic payments, each of which is made only if a designated person is then alive, with the number of such payments limited to a specified number.

ten-day free look See free examination period.

terminal policy dividend A substantial extra dividend or pro-rata dividend covering the period between the last policy anniversary date and the termination date of the policy.

terminal reserve The reserve on a policy at the end of a policy year.

termination expenses The cost of processing death benefit claims and cash surrenders.

term insurance Life insurance under which the benefit is payable only if the insured dies during a specified period. See also convertible term insurance, credit life insurance, decreasing term insurance, deposit term insurance, family income insurance, increasing term insurance, level term insurance, mortgage redemption insurance, and renewable term insurance.

territory (1) The geographical area for which a home service agent has exclusive responsibility. Home service districts are divided into territories. Also called an account, an agency, or a debit. (2) The geographical area for which an insurance agent or general agent has responsibility.

testamentary disposition In life insurance, the use of a will to indicate the person or party to whom the proceeds of a life insurance policy should be distributed.

third-party administrator (TPA) An organization that administers an insurance contract but that does not have financial responsibility for paying claims. The self-insured group pays its own claims. See also administrative services only (ASO) contract and self-insured group insurance.

third-party application An insurance application submitted by a person or party other than the proposed insured.

third-party endorsement A method of marketing individual insurance to groups. In the third-party endorsement method, a life insurance company makes an agreement with an organization (such as a club, a business, or a professional association) to sell individual insurance to members or employees of the organization. The organization endorses the insurer's products, but the group members are free to buy the products or not.

third-party insurance Insurance coverage applied for by someone other than the proposed insured.

13-month rate A lapse rate that is computed on the basis of the proportion of new policies on which no part of any required second year premium has been paid. Companies use a 13-month rate, rather than a one-year rate, because most lapses of policies purchased on an annual premium mode occur when the first renewal premium remains unpaid at the end of the policy's 13th month in force.

three-factor contribution method A method for calculating policy dividends, considering separately the contributions arising from interest, mortality, and loading.

thrift plan See savings plan.

time clause See survivorship clause.

top-heavy plan In the United States, a pension plan or employee-benefit plan which provides more than 60% of its accrued benefits to the owners, executives or most highly paid employees of a company (known as key employees). To remain qualified, a top-heavy plan must provide certain minimum benefits to nonkey employee participants. See also key employee.

total disability When a disability begins, it is typically considered a "total disability" if it prevents an insured person from performing the essential duties of his or her regular occupation. Under many insurance policies, the definition of total disability changes at the end of a specified period after the disability begins, usually two years. Therefore, insureds are considered totally disabled only if their disabilities prevent them from working at any occupation for which they are reasonably fitted by education, training, or experience. See also disability.

total-needs programming A basis for selling life insurance in which the agent takes into consideration all the prospect's financial needs, calculates the amount of money required to take care of all those needs, determines the amount of funds that will be available when the prospect dies, and calculates the amount of life insurance required to provide the difference. Sometimes called financial planning. Contrast to single-need selling.

TPA See third-party administrator (TPA).

traditional cession administration See individual cession administration.

traditional net cost (TNC) method An insurance policy cost comparison method that is prohibited by the NAIC Model Life Insurance Solicitation Regulation primarily because it ignores the time value of money.

training allowances Subsidy or salary plans that are used to compensate new, inexperienced agents. Also known as development allowances.

travel accident benefit An accidental death benefit often included in group insurance policies issued to employer-employee groups. This benefit is payable only if an accident occurs while an employee is traveling for the employer.

treaty See reinsurance treaty.

Trend Analysis Program (TAP) An ACLI research program which studies emerging social and other trends in the United States that may be significant to the life and health insurance business.

trial application See preliminary inquiry form.

triple indemnity A type of accidental death benefit coverage that pays an additional benefit equal to twice the policy's basic death benefit if the accident is sustained while the insured is a passenger in a public conveyance operated by a licensed common carrier, such as a bus, train, or airplane.

trust agreement In a trusteed pension plan, the contract between the plan sponsor and the trustee that describes the trustee's authority and responsibilities for investing and administering plan assets. Trust agreements are also found when group insurance is provided through a multiple-employer trust (MET).

trusteed pension plan A pension plan in which the plan sponsor chooses a trustee to be responsible for investing the plan's assets or for choosing an investor for the plan's assets. Also known as a pension trust.

trust fund plan A pension plan under which employer and employee contributions are forwarded to a trustee, who is responsible for investing the contributions and is often responsible for making benefit payments to plan participants. The duties of the trustee, who may be an individual or an institution such as a bank trust department, are spelled out in a trust agreement. A trustee generally does not guarantee that the trust fund will be adequate to pay current and future pension benefits.

TSA See Section 403(b) Plan.

twisting A form of misrepresentation in which an agent induces a policyowner to cancel an insurance policy and use the cash value of that policy to buy a new policy. In the process, the agent does not inform the policyowner of the differences between the two policies nor the financial consequences of the replacement. Twisting involves a misleading or incomplete comparison of the policies to the disadvantage of the policyowner. Twisting is a prohibited insurance sales practice.

ultimate cost The total net cost, including the cost of all benefits and expenses, incurred by a pension plan over the life span of the plan.

ultimate mortality table A mortality table that starts where the select mortality table ends. An ultimate mortality table excludes the experience of an assumed select period, such as five years. The mortality rates shown in an ultimate mortality table are higher than those in a select table. See also mortality tables and select mortality table.

unallocated funding A method of funding a pension plan in which the pension funds as a whole are held and managed by a funding agency, often an insurance company, and are not allocated to specific plan participants. When a participant retires, the funding agency either purchases an annuity for the retiree or pays periodic benefits directly from the fund. However, the funding agency makes no contractual promises that it will pay any specific benefit amounts. Contrast with allocated funding.

usual, customary, and reasonable (UCR) The maximum dollar amount of a covered expense that is considered eligible for reimbursement under a major medical policy.

unappropriated earned surplus In Canada, the amount of an insurer's surplus remaining after determination of an insurer's reserves, capital, and other surplus amounts.

unassigned surplus The amount of surplus remaining after the creation of any special surplus funds.

unbundled insurance product An insurance product in which the mortality, investment, and expense factors used to calculate premium rates and cash values are each identified in the policy. Some nontraditional products, such as universal life insurance, are unbundled. See also bundled insurance product.

unclaimed benefits Policy benefits for which no payee can be found. Under typical state statutes for unclaimed property, when an insurer cannot locate anyone entitled to policy benefits, the insurer will hold the unclaimed benefits for seven years and then turn them over to the state. Usually, the unclaimed property statute of the state of the beneficiary's last known address applies. If no address is known, the statute of the insurer's state of domicile will govern.

unclaimed property statutes Statutes that regulate the disposition of funds for which no owner can be found. Insurers typically hold unclaimed property for seven years. If the rightful owner is not found during this time, the property is turned over to the state. Also known as escheat laws. See also unclaimed benefits.

uncollected premiums Life insurance premiums and annuity considerations that are due on or before the statement date but that have not been received by that date.

underlying In reinsurance, the amount of insurance assumed on a risk before the next layer of reinsurance comes into effect. See layering.

underwriter (1) The person who assesses and classifies the potential degree of risk that a proposed insured represents. (2) The person or organization that guarantees that money will be available to pay for losses that are insured against. In this sense, the insurance company is the underwriter.

underwriting (1) The process of assessing and classifying the potential degree of risk that a proposed insured represents. Also called selection of risks. (2) Providing guarantees that money will be available to pay for losses that are insured against.

underwriting at point of sale See immediate underwriting.

underwriting department The department in a life and health insurance company that selects the risks that the company will insure. The underwriting department tries to make sure that the actual mortality or morbidity rates of the company's insureds do not exceed the rates assumed when premium rates were calculated. The underwriter considers an applicant's age, weight, physical condition, personal and family medical history, occupation, financial resources, and other selection factors to determine the degree of risk represented by the proposed insured. This department also participates in the negotiation and management of reinsurance agreements, through which an insurance company transfers some or all of an insurance risk to another insurance company. Also called the new business department.

underwriting impairments Factors that tend to increase an individual's risk above that which is normal for his or her age.

underwriting manual A summary of the methods used by a particular insurer to evaluate and rate risks. The underwriting manual provides underwriters with background information on underwriting impairments and serves as a guide to suggested underwriting actions when various impairments are present. See also risk class.

underwriting requirements Printed instructions that indicate what evidence of insurability is required for a given situation and which of several optional information sources will be needed to provide underwriters with necessary information. Sources of information may include medical records and the results of physical examinations. Underwriting requirements are graduated based on the proposed insured's age and the amount of coverage requested.

unearned premium reserve (1) The portion of a group insurance policy's last premium that has not been used to provide insurance coverage as of the effective date of the Annual Statement, which is December 31. (2) The potential obligation that property and liability insurers have to policyowners for that portion of the premium--premiums are always paid in advance--which must be returned in the event that the policy is cancelled before its expiration. (3) A liability equal to the portion of the premium which is not yet "used up" as of the date of the financial statement.

Unemployment Insurance Act In Canada, a federal statute that provides unemployment insurance to almost all persons who are employed in Canada. Benefits are provided to covered employees who are laid off or unable to work due to accidental injury, sickness, or pregnancy.

Uniform Accident and Sickness Insurance Act In Canada, model legislation governing health insurance contracts agreed upon by the Canadian Council of Insurance Regulators (CCIR) and enacted with minor variations by all the common law jurisdictions.

Uniform Life Insurance Act In Canada, model legislation governing life insurance contracts agreed upon by the Canadian Council of Insurance Regulators (CCIR) and enacted with minor variations by all of the common law jurisdictions.

Uniform Pension Plan (UPP) In Canada, a prototype pension plan (see prototype plan) developed by members of the Canadian Life and Health Insurance Association and approved by the appropriate Canadian regulatory authorities, including Revenue Canada.

unilateral contract A contract in which only one party promises to do something. A life insurance policy is a unilateral contract.

uninsurable risk class The group of people with a risk of loss so great that an insurance company will not offer them insurance.

union welfare fund or union welfare trust A fund organized by a union and one or more employers to which contributions are made by the employer(s) so that group benefits can be made available to the union's members.

unit-benefit formula A method of calculating benefits for a defined benefit pension plan based on years of service. The formula may take into account only years of service (for example, $50 per month for each year of service) or years of service and compensation.

universal life insurance An unbundled whole life insurance product in which the mortality, investment, and expense factors used to calculate premium rates and cash values are expressed separately in the policy. In a universal life insurance policy, any applicable expense charges are deducted from the premium and the remainder of the premium is then credited to the policy's cash value. Each month the insurer deducts the mortality costs from the cash value and credits the remainder of the cash value with interest.

The owner of a universal life policy can specify the premium amount he or she will pay, as long as this amount falls within the minimum and maximum specified by the company. If the renewal premium is insufficient to pay the policy's mortality and expense charges, the balance is taken from the policy's cash value. If the premium exceeds the maximum level specified by the company, then the policy's cash value may grow too large in proportion to the policy's death benefit and the policy will be considered an investment contract rather than an insurance contract. The difference in size that must be maintained between the cash value and the death benefit is called the corridor.

In a universal life policy, the policyowner is permitted to change the policy's death benefit after the policy has been issued, although this right is subject to restrictions. First, if a policyowner wishes to increase the policy's death benefit the insurer may require evidence of insurability. Second, any decrease in the policy's death benefit must not violate the corridor guidelines.

A universal life insurance policy describes the mortality rate assumptions that the company is using to calculate the mortality charges. In addition, a maximum mortality charge per thousand dollars of coverage at each age is listed, and the insurer guarantees not to exceed this charge.

Most universal life insurance policies guarantee a minimum interest rate of 4 percent or 4 1/2 percent on the money in the policy's cash value. If economic conditions warrant, the interest rate may be higher, but it can be no lower. Normally, insurers state that the interest rate paid on the cash value will reflect current interest rates in the economy.

The cash value of a universal life insurance policy may be used as collateral for a policy loan in much the same way that the cash value of a traditional whole life policy may be used. The money in a universal life policy's cash value may also be withdrawn, rather than used as collateral for a policy loan. The cash value is reduced by the amount withdrawn plus any applicable cash withdrawal fees, but the policy remains in force. In contrast, the owner of a traditional whole life insurance policy can withdraw the cash value only by cancelling the policy.

For other information about universal life insurance, see also back-loaded policy, corridor, front-loaded policy, group universal life insurance (GUL), option A plan, and option B plan. See also bundled insurance product and unbundled insurance product.

universal life II See variable universal life insurance.

unregistered reinsurer In Canada, a reinsurer who is not licensed to accept reinsurance in a given jurisdiction. Contrast with registered reinsurer.

UPP See Uniform Pension Plan (UPP).

utilization review A method of claims review whereby the insurer analyzes a case, either prospectively, concurrently, or retrospectively, to determine if the treatment given is necessary and appropriate. See also managed care.

validation period The amount of time that it takes for a life insurance policy to become profitable or to begin adding to surplus. Also called the break-even period.

validation point The point at which a life insurance policy is neither profitable nor unprofitable. After reaching the validation point, the insurance policy begins to make a profit or add to the insurer's surplus. Also called the break-even point.

validation schedule A new agent financing plan which outlines the sales (production) requirements that an agent must meet in order to continue to qualify for financing payments and, in some cases, to avoid termination of his or her contract.

valuation mortality tables Mortality tables developed and published as industry-wide standards for computing the values of policy reserves. These tables usually have wide margins of safety, indicating much higher rates of mortality than do the tables that insurers use for calculating premiums.

valuation premium The net annual premium used to calculate reserves. The valuation premium is most often used to describe the GAAP net premium.

valued contract A contract under which the amount of the benefit is set in advance. A life insurance policy is a valued contract. See also contract of indemnity.

variable annuity A form of annuity policy under which the amount of each benefit payment is not guaranteed and specified in the policy. The amounts of the benefit payments fluctuate according to the earnings of a separate account fund.

variable life insurance A form of whole life insurance under which the death benefit and the cash value of the policy fluctuate according to the investment performance of a separate account fund. Most variable life insurance policies guarantee that the death benefit will not fall below a specified minimum. A minimum cash value is seldom guaranteed. Because the policyowner assumes investment risk under variable life insurance policies, these products are considered securities contracts. In the United States, variable life insurance policies must be registered with the Securities and Exchange Commission (SEC), and only agents who have passed the National Association of Securities Dealers (NASD) examination may sell this product. In Canada, variable life insurance policies are considered life insurance contracts, and agents do not need a special license to sell these products. See also investment-sensitive life insurance.

variable premium life insurance See indeterminate premium life insurance.

variable universal life insurance A form of whole life insurance that combines the premium and death benefit flexibility of universal life insurance with the investment flexibility and risk of variable life insurance. Because the policyowner assumes investment risk under variable universal life insurance policies, these products are considered securities contracts. In the United States, variable universal life insurance policies must be registered with the Securities and Exchange Commission (SEC), and only agents who have passed the National Association of Securities Dealers (NASD) examination may sell this product. In Canada, variable universal life insurance policies are considered life insurance contracts, and agents do not need a special license to sell these products. Also called flexible premium variable life insurance and universal life II. See also investment-sensitive life insurance.

VEBA See 501(c)(9) trust.

vested benefit In pension and employee-benefit terms, a benefit that a plan participant is entitled to receive if the participant leaves the plan. By contrast, nonvested benefits would be forfeited by the participant upon leaving the plan. A participant's benefits become vested after a certain number of years of participation in a plan.

vested commissions The commissions that the insurer guarantees to pay to the soliciting agent, even if the agent's contract is later terminated. Renewal commissions are often vested.

void contract A contract that is not valid. For example, a life insurance contract that lacks insurable interest is void for reasons of public policy.

voluntary employees' beneficiary association (VEBA) See 501(c)(9) trust.

voluntary plan termination The curtailment or termination of a pension plan with the curtailment or termination being initiated by the plan sponsor. Contrast with involuntary plan termination. See also distress termination and standard plan termination.

voluntary termination rate See lapse rate.

Voluntary Trade Association An association composed of several employers from the same industry. Often the association will seek group insurance for the employees of its various member organizations.

waiting period (1) In medical expense insurance, a prescribed amount of time following policy issue during which the insured's medical expenses are not covered by the policy. Such waiting periods usually last from 14 to 30 days following policy issue and normally apply only to medical expenses arising from sickness, not from accidents. (2) In disability income insurance, a specified amount of time, beginning with the onset of the disability, during which benefits are not payable. Such waiting periods may last from seven days to six months. The waiting period in a disability income insurance policy is sometimes called the elimination period or the probationary period. (3) In a group insurance plan, the length of time that a new group member must wait before being eligible to join the group plan. Also called a probationary period.

waiver of deductible provision A provision found in some major medical coverages that waives a claimant's initial deductible if the claimant's medical expenses are the result of an accidental injury.

waiver of premium for disability (WP) benefit A rider or a policy provision under which the insurer promises to give up its right to collect the policy's premium if the policyowner becomes unable to work because of an accident or injury. The waiver of premium for disability benefit remains in effect as long as the policyowner is disabled.

waiver of premium for payor benefit A rider or provision often included in juvenile policies which provides that the insurer will give up its right to collect the policy's premiums if the adult policyowner, not the insured child, dies or becomes disabled.

war exclusion provision A life insurance policy provision that limits an insurer's liability to pay a death benefit if the insured's death is connected with war or military service. See result clause and status cause.

weekly indemnity plan A type of short-term disability income insurance plan which typically pays a weekly benefit equal to a stated dollar amount or a percentage, such as 60 percent, of the insured person's earnings.

well-written business Business on which (1) the specific needs of a customer have been identified by the company (or agent) and the customer has recognized that those needs are important, (2) the insurance product actually meets those needs, and (3) the customer is financially capable of paying the premiums. Also known as quality business.

whole life annuity A mathematical term for a series of regular periodic payments, each of which is made only if a designated payee is then alive, with the payments continuing for that payee's entire life.

whole life insurance Life insurance that remains in force during the insured's entire lifetime, provided premiums are paid as specified in the policy. Whole life insurance also builds a savings element (called the cash value) as a result of the level premium approach to funding the death benefit. For descriptions of traditional whole life products see continuous-premium whole life insurance, graded-premium whole life insurance, joint whole life insurance policy, limited-payment whole life insurance, modified-premium whole life insurance, and single-premium whole life insurance. For descriptions of nontraditional whole life products see adjustable life insurance policy, current assumption whole life insurance, indeterminate premium life insurance, universal life insurance, variable life insurance, and variable universal life insurance.

with benefit of survivorship See benefit of survivorship.

withdrawal Voluntary termination of an insurance contract by the policyowner. See also lapse.

withdrawal provision A life insurance policy provision that permits the policyowner to reduce the amount in the policy's cash value or accumulated value by taking up to that amount in cash. This provision is often included in universal life policies and annuity policies. Also known as a partial surrender provision.

withdrawal rate See lapse rate.

WLC See supplementary contract with life contingencies (WLC).

WOLC See supplementary contract without life contingencies (WOLC).

workers' compensation Government-mandated insurance that provides benefits to covered employees and their dependents if the employee suffers job-related injury, disease, or death.

worksheet In underwriting, a printout of all available information about a proposed insured and, in some companies, pertinent information about the agent who submitted the application.

WP See waiver of premium for disability (WP) benefit.

yearly renewable term (YRT) insurance Term life insurance that gives the policyowner the right to continue the coverage at the end of each year. This renewal right continues for a specified number of years or until the insured reaches the age specified in the contract. Also called annually renewable term (ART) insurance.

yearly renewable term (YRT) reinsurance A type of reinsurance in which the ceding company purchases yearly renewable term insurance from the reinsurer. The amount of reinsurance coverage is equal to the net amount at risk on that portion of the original policy being reinsured. Also called risk premium reinsurance (RPR). See also net amount at risk.

year of service As defined by ERISA in the United States, a 12-month period during which an employee completes at least 1,000 hours of service to the employer. See also hour of service.

Year's Basic Exemption (YBE) As defined by the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) in Canada, the first 10 percent of an employee's annual earnings up to the amount of the Year's Maximum Pensionable Earnings (YMPE).

Year's Maximum Pensionable Earnings (YMPE) In Canada, the maximum amount of employment earnings that, after deducting the Year's Basic Exemption, can be used to determine an individual's benefits under the Canada Pension Plan and Quebec Pension Plan. The YMPE is adjusted annually according to increases in wage levels.

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