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