Get Acquainted with Life and Health Insurance


Table of Contents
I. Glossary of Life and Health Terms
II. Do You Need Life Insurance?
III. What Are the Basic Life Insurance Plans?
IV. Life Insurance Policy Riders
V. Conditional Receipt
VI. Participating vs. Non-Participating
VII. Dividend Options
VIII. Non-Forfeiture Options
IX. Settlement Options
X. Business Uses of Life Insurance

Get Acquainted with Life and Health Insurance

Life and health insurance are complex subjects which have their own language, and it would be helpful for you to be familiar with some key terms. A quick review of the following glossary and occasional reference to it should familiarize you with technical life and health insurance terms often used.

Accidental Death - Death resulting from an injury that happens suddenly, unexpectedly, and without the insured's intent.

Accidental Death Benefit - A rider or endorsement that can be added to an individual life (and group life) policy that provides the face amount will be double if death results from an accident or if death occurs within 90 days from an accident. Some carriers provide for tripled benefits if death is caused while occupying a common carrier.

Activities of Daily Living (ADL) - The "triggering device" used in many Long Term Care (Nursing Home Insurance) policies to activate coverage. Normal ADLs activities are "the ability to perform: bathing; dressing; toileting or maintaining continence; transferring; and feeding." A treatment plan is completed by a physician to determine the functional dependence on each ADL. Most ADLs have three categories for each activity --- independent, assisted and dependent --- and these further define the level of coverage or benefit provided.

Agent - One who sells and services life insurance policies for one or more life insurance companies. The agent is paid a commission or salary by the company, but as a rule, earnings depend primarily on the amount of insurance sold. Life insurance agents may sometimes be referred to as life underwriters.

Annuity - Unlike life insurance which protects against the risk of insureds dying before their economic potential is attained, the annuity protects against annuitants running out of income prior to the expiration of the need for that income. For example, retired people often use their available cash to purchase life annuities which guarantee them monthly income for as long as they live.

Application - The statement of information given when one applies for life, health or disability insurance. This information is used by the insurance company' s underwriter to determine whether the applicant qualifies for acceptance by the company' s guidelines. Applications are attached to and made part of, all individual insurance contracts.

Assignment - The transfer of all or part of a policy owner's legal rights under the policy to another person or entity (such as a bank).

Attending Physician Statements - Otherwise known as APS, is used when the individual application or medical examiner' s report reveals conditions or situations, past or present, about which more information is desired. Because of the Physician-Patient confidentiality, the applicant must sign an authorization which allows the physician to release information to the company underwriter.

Backdating - A procedure for making the effective date of a policy earlier than the application date. Backdating is often used to make the age at issue lower than it actually was in order to get a lower premium. State laws often limit to six months the time to which policies can be backdated. Backdating is not allowed to variable contracts due to the nature of investments.

Beneficiary - The person(s) named by the policy owner to receive policy death benefits.

Cancellable - A policy that can be cancelled at any time or at specified times by the insurance company.

Cash (Surrender) Value - The amount the insurer will pay the policy owner if the life insurance policy is surrendered before the death of the insured.

Co-pay Provision - Often used with major medical policies. The co-pay provision states what percentage of a claim the company will pay and what percentage the insured will pay. For example, an 80 percent co-pay provision would provide that the insurer pay 80 percent of covered claims and the insured pay 20 percent.

Conditional Receipt - A form, normally required to be signed by the writing agent, and given to the owner at the time of a new application is completed. This signed form is only given to the owner when an initial premium is collected by the agent. Conditional Receipts only apply to application of individual life or disability insurance (and sometimes medical insurance). This form usually grants some form of limited coverage, under specified conditions, prior to issuance.

Consideration - Something of value given up by the parties when entering into a contract. May be money or a promise to perform.

Convertibility - The right of a policyholder to exchange an existing policy for other policies offered by the insurance company. Owners of term life insurance policies often have a contractual right to "convert" their term policies to any permanent plan the company sells. Some group disability plans allow conversion to individual policies under certain conditions.

COBRA - The Consolidated Omnibus Budget Reconciliation Act is a federal statute that prescribes certain legal responsibilities that some employers offering group health plans have to their employees. COBRA applies to most employers of twenty or more employees. Generally, covered employers must continue to make group coverages available to terminated employees and their dependents for up to 18 months after termination. Current law also mandates that coverage must be provided for 29 months if the employee qualifies for Social Security Disability. Coverage for employee dependents generally must continue to be available for 36 months if coverage would otherwise stop due to death of or divorce from the employee, a dependent child losing eligibility due to plan provisions (for example, reaching a minimum age), or coverage ending due to the employee reaching Medicare eligibility. Life insurance and income replacement coverages are not required to be continued. Employers are not required to contribute to the cost of continuing coverage.

Coordination of Benefits - A provision in group health policies specifying that benefits will not be paid for amounts reimbursed by other group health insurers.

Disclosure Statement - A comparison form required to be given to every applicant considering replacing one life insurance policy with another.

Disability - The definition of disability will vary from policy to policy. The strictest form will state that the insured is unable to do any occupation, while a more liberal policy will state that the insured is unable to perform his/her own occupation to qualify for disability benefits.

Dividends - Returns of overcharges of premium on participating policies. From the premiums that policyholders pay, the company deducts its mortality charges and its operating expenses. Any amount that collected premiums exceed these charges and expenses is returned to policy owners in the form of dividends.

Elimination Period - The length of time that an insured must be disabled under a disability income policy before he/she starts drawing benefits.

Evidence of Insurability - Any statement of health, finances or occupation made by applicants that underwriters use in deciding if the applicants are acceptable risks for insurance.

Expense - A policy's share of the company's operating costs, fees for medical examinations and inspection reports, underwriting, printing costs, commissions, advertising, agency expenses, premium taxes, salaries, rent, etc. Such costs are important in determining dividends and premium rates.

Face Amount - The dollar amount to be paid to the beneficiary upon death or to the policy owner upon maturity. It does not include other amounts that may be paid from insurance purchased with dividends or from any policy riders. The face amount will be reduced by any policy loans made to the insured and not repaid, plus any unpaid interest on these loans.

Guaranteed Renewable - A policy that is non-cancellable by the company. However, premium rates may be raised by class.

HIPC - An acronym for Health Insurance Purchasing Co-operative that functions as a purchasing agent of health care services for small employers, self-employed, unemployed, and other individuals to band together to purchase health care services at competitive rates.

Health Maintenance Organizations - HMOs are a form of prepaid medical care. Insureds pay monthly premiums and receive medical care at no additional charges except for nominal amounts per visit to physicians.

Incontestable Clause - A clause in life policies which provides that after the policy has been in force for two years, during the lifetime of the insured, the company may not challenge the validity of the policy.

Insurability - Attributes that applicants possess that qualify them as insurable risks. Such attributes, in addition to good health, include acceptable occupations, finances and personal living standards.

Insurable Interest - The relationships that may exist between parties that justify one owning life insurance on the other. A person is said to have an unlimited insurable interest in his/her own life. Generally, a person would have an insurable interest in the life of another person if he/she stood to lose financially or emotionally at the other's death. In life insurance, insurable interest must exist at the time the contract is formed.

Interest - In the calculation of premium, it is the rate of return on the company's investment of premium dollars over the lifetime of the policy. Insurance company investment experience will affect life insurance cost.

Internal Limits - Maximums found in most hospital and major medical policies that insurers will pay for specified expenses. Common examples include psychiatric care, room charges, drug costs and maternity care.

Lapse Rate - The rate at which life insurance policies terminate because of failure to pay the premiums. When policies are lapsed before enough premium payments are made to cover early policy expenses, the company must make up this loss from the remaining policyholders. Therefore, the lapse rate will affect the cost of the policy.

Maturity - The date at which the face value of a whole life or an endowment policy becomes payable if the insured is still living.

Minimum Premium - Also, known as Minimum Continuation premium is a premium that guarantees the policyholder of a Universal Life policy that the policy will remain in force even with no (or even with negative) cash value, provided this stipulated minimum premium is paid.

Morbidity - Morbidity is the product of the annual frequency of a particular event and the average claim when such an event occurs.

Mortality - The measure of the probability of surviving or dying at each age. Mortality rates usually reflect the actual experience of an insurance company with its insureds, adjusted for expected future changes. The rates may differ from company to company depending on the risks each company accepts.

Non-Cancellable - A policy that can neither be cancelled nor can the premium be increased by the company, additionally no policy provision can be changed.

Non-Forfeiture Options - Choices that owners of life insurance policies have regarding the disposition of cash values when they surrender their policies. (See page 11.)

Ownership - All rights, benefits and privileges under life insurance policies are controlled by their owners. Policy owners may or may not be the insureds. Ownership may be assigned or transferred by written request of the current owner.