The Basics

GLOSSARY OF TERMS

1035 Exhange—a tax-free method of exchanging an existing life insurance or annuity policy for a new policy with a different company. This procedure is often exercised when it is beneficial for the policyowner to move to a more favorable contract that offers rates or features they don’t currently have (1035 refers to the tax code number).

A

Annuitize—to take the cash surrender value or death benefit of a life insurance policy and transition it into a periodic distribution of funds..

B

Base policy—the primary coverage that pays out upon the death of the insured.

Beneficiary—the person or legal entity that the policyowner has designated to receive the policy benefit when the insured dies.

Broker/Dealer—as defined by the SEC Act of 1934, a broker is “any person engaged in the business of effecting transactions in securities for the account of another.” A dealer means “any person engaged in the business of buying or selling securities for his own account.” Accordingly, a broker/dealer trades for his or her own account and for the accounts of others.

C

Cash Surrender Value—the amount that an insurance policyholder is entitled to receive should he or she discontinue the coverage.

Consumer Price Index (CPI)—the government’s method of measuring the price of goods and services bought by urban wage earners and clerical workers.

D

Death Benefit—the sum amount paid by the insurance company to the policyowner upon death of the insured person.

Dividends—a non-guaranteed element of a participating policy, which is considered a return of premiums paid; policyowner’s share in the insurance company’s divisible surplus with a dividend on a life insurance contract, unlike dividends that are earned from ownership of stock.

Dow Jones EURO STOXX 50—Europe’s leading Blue-chip index for Eurozone; a stock indicator that covers 50 stocks from 12 Eurozone countries.

Dow Jones Industrial Average (DJIA)—a stock indicator calculated each trading day that tracks the market value of 30 leading industrial stocks.

Due Diligence—research conducted by insurance agents and other financial advisors on the legal and economic soundness of an investment or product.

E

Executor—the person named in a will to carry out the decedent’s wishes for the distribution of his or her assets; the executor fulfills his or her duties under court supervision.

Expenses—charges on a Universal Life policy that an insurance company imposes to cover costs it has incurred for administering a policy.

Extended No-Lapse Guarantee—a benefit that guarantees that some life insurance policies will not terminate, regardless of interest rate performance, as long as a stated premium level is paid

F

Financial Industry Regulatory Authority (FINRA)—the nonprofit self-regulatory organization of brokers and dealers in the over-the-counter securities business, under supervision of the SEC.

Free Look Period—an life insurance policy provision that varies by state, and dictates that the policyowner has approximately 10 to 20 days to examine the contract immediately after purchase, with the option of returning it to the insurer for a full refund.

H

Hang Seng—is a freefloat-adjusted market capitalization-weighted stock market index in Hong Kong; used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong.

I

Illustrated Rate—a hypothetical rate, which the insurance carrier believes to be a realistic expectation of future performance based on current Indexed Life rates, that is used to illustrate future policy values on an Indexed Universal Life or Indexed Whole Life policy. Illustrated rates are not guaranteed and usually based on past performance of an index, which is not indicative of future policy performance.

Illustrated Rate Lookback Method—the method that an insurance carrier uses to determine their Indexed Life illustrated rate (i.e. 20-Year Lookback); while most carriers look at the past performance of the index upon which they are basing their indexed crediting method, some choose not to use a lookback at all and to simply select a rate which they believe is reasonable to them.

Independent Marketing Organization (IMO)—an establishment that serves as a distributor of many carrier’s insurance products, and may perform many of the functions traditionally provided by an insurance carrier (recruiting/licensing of agents, marketing, and sales support). Typically these services are provided to independently contracted agents, in exchange for a percentage of their commission.

Indexed Universal Life—a permanent type of unbundled, flexible life insurance that builds cash value, and earns interest based on the performance of an external index such as the S&P 500 ®; Indexed Universal Life has guaranteed cash values and provides lifetime coverage on the insured as long as premiums are paid, or there are sufficient cash values.

Indexed Whole Life—a permanent type of interest-sensitive life insurance that builds cash value, and earns interest based on the performance of an external index such as the S&P 500 ®; Indexed Whole Life has guaranteed cash values and provides lifetime coverage on the insured as long as premiums are paid, or there are sufficient cash values.

Insurable Interest—being in a position to suffer a loss, should the insured person die. Insurable interest is a requirement for applying for life insurance on any person other than one’s self (whom you automatically have an insurable interest in).

Insured—the person whose life is insured against dying on a life insurance policy.

Interest-Sensitive Whole Life—permanent life insurance that builds cash value, and earns interest rather than dividends; provides lifetime coverage on the insured as long as premiums are paid, or there are sufficient cash values.

J

Joint Owner—a person who shares ownership of a life insurance policy and would have the same right as the second policyowner to approve any decisions made about the policy.

L

Lehman Brothers Aggregate Bond Index—a broad base index often used to represent investment grade bonds being traded in United States.

M

MEC—Modified Endowment Contract, in 1988 the Internal Revenue Code was amended to stipulate that if a policy was over-funded (whether at issue or at a later date), it would be a MEC; any distribution representing a gain from the policy would be taxed thereafter. The seven-pay test was established to place limits on the amount of premiums that can be paid within a seven-year period for MEC testing.

Monthly Policy Fees—expense charges on a Universal Life policy that an insurance company imposes on a monthly basis to cover costs it has for administering a policy.

Mortality Charges—charges on a Universal Life policy that cover the cost for the life insurance coverage, a.k.a. Cost of Insurance charges or COIs.

N

NASDAQ—National Association of Securities Dealers Automated Quotation. The automated quotation system for the Over-the-Counter (OTC) market, showing current bid-ask prices for thousands of stocks.

NASDAQ-100—a stock market index of 100 of the largest domestic and international non-financial companies listed on the NASDAQ stock exchange, it is a modified market value-weighted index.

New Money Rates—when an insurance carrier credits rates based on the insurance carrier’s current investments; generally more attractive, and a better choice when rates are going up; less predictable and subject to change.

Non-Forfeiture Provision—benefits that prevent a cash value policy from lapsing due to non-payment of premiums.

O

Option A Death Benefit—an option on a Universal Life insurance contract that pays out only the face amount of the policy (Also referred to as a Level Death Benefit option, or Option 1).

Option B Death Benefit—an option on a Universal Life insurance contract that pays out the face amount of the policy as well as the cash value; note that insurance charges are adjusted accordingly (Also referred to as a Increasing Death Benefit option, or Option 2).

Option C Death Benefit—an option on a Universal Life insurance contract that pays out the face amount of the policy as well as the premiums paid; note that insurance charges are adjusted accordingly (Also referred to as a Return of Premium Death Benefit option, or Option 3).

Options—calls (puts) that give the holder the right to buy (sell) 100 shares of stock within a specified period at a specified price.

P

Payor—the person or entity that pays the premiums on a life insurance policy.

Partial Surrender—an insurance provision on Universal Life contracts that grants the owner the right to withdraw a portion of the cash value; will proportionately reduce the death benefit and the cash value on some contracts as well.

Per 1,000 Charges—expense charges on a Universal Life policy that an insurance company imposes for a stated number of years, to cover costs it has incurred for administering a policy; these charges normally vary by age, sex and issue class.

Percent (%) of Fund Charge—expense charges on a Universal Life policy that an insurance company deducts from the Account Value of a life insurance policy to cover costs it has incurred for administering a policy.

Period Certain—an income option offered by an immediate annuity where the contract owner can select to receive periodic payments for a specified period of time. The payout amount is determined by the contract value and the length of the period selected.

Policyowner—the person or entity who owns a life insurance policy and has the ability to make changes on the policy.

Portfolio-Based Rates—when an insurance carrier credits rates based on their investment portfolio; generally more conservative, but a better choice when interest rates are headed down because of the broad portfolio with varying maturities.

Premium Bonus—additional money credited to a life insurance contract, by the company, as a percentage of the amount deposited.

Premium Load—expense charges on a Universal Life policy that an insurance company imposes each time a premium is paid to cover costs it has incurred for administering a policy.

Prospectus—a written document federal regulations require be given to any prospective Variable Life or Variable Universal Life buyer before the sale. It describes the investment objectives of any separate accounts, past performance of subaccounts, as well as any fees or expenses.

R

Rider—an endorsement that either limits policy benefits, or adds supplemental benefits to the policy, and becomes a part of the insurance contract.

Risk Averse—a client or investor who will not assume a given level of risk unless there is an expectation of adequate compensation for having done so.

Rule of 72—a simple method for approximation the number of years it takes an investment to double at a given compound interest rate; divide the interest rate into 72.

Russell 2000—a stock market index consisting of 2000 small cap US stocks.

S

S&P 500 Composite Index (S&P 500)—market value index of stock market activity covering 500 leading stocks.

S&P 400 MidCap Index—a stock market index from Standard & Poor's; it covers roughly the mid-cap range of US stocks.

Second-to-Die Insurance—a type of life insurance plan that does not pay out until the second insured person on the policy passes away, also known as survivorship life. Often, the death benefits from these plans are meant to be used to pay outstanding taxes.

Securities and Exchange Commission (SEC)—federal regulatory and enforcement agency that oversees public investment trading activities.

Separate Account—insurance company's investment portfolio that supports a Variable Life and Variable Universal Life; kept separate from the insurance company's regular investment accounts.

State Guaranty Funds—each of the 50 states has enacted legislation to protect the contract owners of that state should an insurance company be faced with insolvency. Most state guaranty funds assess their admitted insurers an extra charge to cover any carrier insolvencies within the state. Different states have different limits of protection. All guaranty associations are funded by insurance companies and administered by the states.

Sweep—how frequently an indexed life insurance carrier allows an indexed life policy’s account value to be directed to an indexed strategy for an indexed bucket to be created; may differ from daily to annually, depending on the company.

Subaccount—the investment portfolios offered in Variable Life and Variable Universal Life contracts, where premiums may be allocated.

Surrender Charge—a penalty imposed by the insurance company for partially or fully withdrawing funds from a life insurance contract prematurely; usually applies during the first 9 -20 years.

T

TEFRA—The Tax Equity & Fiscal Responsibility Act of 1982, it was the first legislation to stipulate the required difference between a policy’s face amount and the cash value in its definition of life insurance contracts.

Term Life Insurance—temporary life insurance that does not build cash value, and where premiums increase after each term renews (if it is renewable); provides a benefit that is payable only in the event that the insured dies during the policy term and the policy is also in force.

U

Underwriting—the process of assessing how much risk someone or something presents to an entire group when applying for life insurance.

Universal Life—a permanent type of unbundled, flexible life insurance that builds cash value, and earns interest rather than dividends; Universal Life has guaranteed cash values and provides lifetime coverage on the insured as long as premiums are paid, or there are sufficient cash values.

V

Variable Life—a permanent type of Whole Life plan where cash values and death benefits fluctuate based on the investment performance of stocks, bonds, mutual funds, and other investments; provides lifetime coverage on the insured as long as premiums are paid, or there are sufficient cash values. Very few insurance carriers offer Variable Life today; it must be sold via a prospectus like the more widely-sold Variable Universal Life.

Variable Loan Interest (VLI)—a type of policy loan interest that fluctuates, and is based on an external index such as Moody’s Corporate Bond Yield Average.

Variable Universal Life—a permanent type of unbundled, flexible life insurance that builds cash value, and earns interest based on the performance of stocks, bonds, mutual funds, and other investments; Variable Universal Life has no guaranteed cash values but does provide lifetime coverage on the insured if performance warrants.

W

Whole Life—a permanent type of life insurance that is inflexible and builds cash value as long as premiums are paid, and may earn dividends; Whole Life has guaranteed cash values and provides lifetime coverage on the insured as long as premiums are paid, or there are sufficient cash values.

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