Glossary · 67 terms
Insurance
All insurance terms in the EquitiesAmerica.com glossary — plain-English definitions for American investors.
1035 Exchange (Insurance)(1035 exchange)
A Section 1035 exchange is a tax-free transfer of funds from one life insurance policy, endowment contract, or annuity to another qualifying contract, allowing policyholders to replace an existing policy without triggering immediate income tax on accumulated gains.
Accelerated Death Benefit(ADB)
An Accelerated Death Benefit (ADB) is a life insurance policy feature that allows the insured to receive a portion of the death benefit while still alive upon diagnosis of a terminal illness, chronic illness, or other qualifying condition specified in the policy.
Actuarial Tables(mortality tables)
Actuarial Tables are statistical tables used by insurance companies and pension plan administrators to estimate the probability of death, disability, or other insurable events at various ages, forming the foundation for pricing premiums and setting reserves.
Annuity Ladder(annuity laddering)
An Annuity Ladder is a retirement income strategy that involves purchasing multiple annuity contracts at different times or with different start dates to spread purchasing-power risk and create a sequence of guaranteed income streams.
Annuity Payout Options(annuitization options)
Annuity payout options are the distribution choices available to an annuity contract holder when the accumulation phase ends and income begins, determining how payments will be structured, for how long they will continue, and whether a beneficiary receives any residual value.
Automatic Premium Loan(APL)
An automatic premium loan (APL) is a provision in a permanent life insurance policy that automatically advances a loan from the policy's cash value to pay an overdue premium, preventing the policy from lapsing when a payment is missed.
Bank-Owned Life Insurance (BOLI)(BOLI)
Bank-owned life insurance (BOLI) is a permanent life insurance policy purchased by a bank on the lives of its employees or officers, with the bank as beneficiary, used to generate tax-advantaged income that offsets the cost of employee benefit programs.
Beneficiary (Insurance)(insurance beneficiary)
In insurance, a beneficiary is the person, trust, estate, or organization named by the policyholder to receive the death benefit or insurance proceeds upon the occurrence of the insured event, most commonly the death of the insured. Properly designating and maintaining accurate beneficiary designations is a critical component of insurance planning.
Buy-Sell Agreement (Insurance)(business succession insurance)
An insurance-funded buy-sell agreement is a legally binding contract among business co-owners that specifies the terms under which one owner's interest must be purchased upon a triggering event — such as death, disability, or retirement — with life or disability insurance providing the liquidity to fund that purchase.
Captive Insurance(captive insurer)
A captive insurance company is a licensed insurance subsidiary formed by a business or group of businesses to insure the risks of its parent or affiliated entities, allowing the parent to fund its own insurance risks in a more controlled, potentially tax-advantaged structure.
Cash Value(policy cash value)
Cash value is the savings or investment component of a permanent life insurance policy that accumulates over time as a portion of each premium payment is credited to the account, growing on a tax-deferred basis. It represents the policy's living benefit — the amount the policyholder can access through loans or withdrawals while the insured person is still alive.
Cash Value Accumulation Test(CVAT)
The Cash Value Accumulation Test (CVAT) is one of two alternative compliance methods under IRC Section 7702 that qualifies a contract as life insurance for tax purposes, requiring that the policy's cash surrender value never exceed the net single premium needed to fund all future policy benefits.
Catastrophe Modeling(cat modeling)
Catastrophe modeling is the use of computer-based simulation systems — incorporating hazard science, engineering vulnerability functions, and financial loss estimation — to quantify the probability and magnitude of insurance losses from low-frequency, high-severity events such as hurricanes, earthquakes, floods, and wildfires, enabling insurers and reinsurers to price, manage, and transfer catastrophe risk.
Corporate-Owned Life Insurance (COLI)(COLI)
Corporate-owned life insurance (COLI) is a life insurance policy purchased by a corporation on the life of an employee or executive, with the corporation named as the beneficiary, typically used to fund employee benefit obligations, recover benefit costs, or provide tax-advantaged returns on corporate assets.
Corridor Test(corridor requirement)
The corridor test is a requirement under Section 7702 of the Internal Revenue Code that a life insurance policy maintain a minimum death benefit exceeding its cash value by a prescribed percentage at each attained age, ensuring the contract retains sufficient insurance risk to qualify for favorable tax treatment.
Cost of Insurance(COI)
Cost of insurance (COI) is the monthly charge deducted from the cash value of a universal life insurance policy to cover the pure mortality risk, calculated by multiplying the applicable mortality rate by the policy's net amount at risk.
Deductible(insurance deductible)
A deductible is the amount of money a policyholder must pay out of pocket toward a covered loss before the insurance company begins to pay its portion of the claim. Deductibles apply across multiple lines of insurance including health, auto, homeowners, and commercial policies, and are a fundamental mechanism for sharing risk between the insurer and the insured.
Disability Insurance(income protection insurance)
Disability insurance is a form of income protection coverage that replaces a portion of a policyholder's earned income if they become unable to work due to illness, injury, or a disabling medical condition. It is often described as insurance for your paycheck rather than your life, and it covers both short-term and long-term disabling events.
Errors and Omissions Insurance(E&O insurance)
Errors and Omissions (E&O) insurance is a form of professional liability coverage that protects businesses and professionals from claims arising out of mistakes, negligent acts, or failures to perform a professional service that cause a client financial harm.
Extended Term Insurance(ETI)
Extended term insurance is a nonforfeiture option in permanent life insurance that uses a policy's accumulated cash value to purchase paid-up term insurance for the original face amount, extending coverage for as long as the cash value can sustain it without further premium payments.
Facultative Reinsurance(fac reinsurance)
Facultative reinsurance is a form of reinsurance in which the primary insurer and reinsurer negotiate and agree on the terms for each individual risk separately, with neither party obligated to cede or accept any particular risk, providing flexible supplemental capacity for large, unusual, or high-value exposures that fall outside existing treaty arrangements.
Guaranteed Issue Life Insurance(guaranteed acceptance life insurance)
Guaranteed Issue Life Insurance is a type of whole life policy that accepts all applicants within a specified age range without requiring a medical exam or health questionnaire, making it accessible to individuals who cannot qualify for standard coverage.
Guideline Premium Test(GPT)
The Guideline Premium Test (GPT) is one of two methods under IRC Section 7702 that a life insurance contract can use to qualify for favorable income tax treatment, establishing both a maximum limit on premiums paid and a minimum death benefit corridor relative to cash value.
Incurred But Not Reported (IBNR)(IBNR)
Incurred But Not Reported (IBNR) is an actuarial reserve held by an insurance company to cover the estimated cost of losses that have already occurred but have not yet been reported to the insurer, as well as the additional development expected on claims that have been reported but whose ultimate cost is not yet fully known.
Indexed Universal Life(IUL)
Indexed Universal Life (IUL) insurance is a form of permanent life insurance in which the cash value growth is linked to the performance of a market index such as the S&P 500, subject to a cap on upside and a floor that protects against market losses.
Insurance-Linked Securities(ILS)
Insurance-linked securities (ILS) are financial instruments whose value and investment returns are tied to insurance or reinsurance risk events — most commonly natural catastrophes — allowing insurance companies to transfer peak risk to capital markets and giving institutional investors access to a risk premium that has historically exhibited low correlation with traditional asset classes.
Internal Cost Ratio(ICR)
The internal cost ratio (ICR) is a measure of the total internal expenses embedded within a life insurance policy, typically expressed as the annualized percentage drag on cash value growth attributable to mortality charges, administrative fees, and other policy expenses.
Irrevocable Life Insurance Trust (ILIT)(ILIT)
An Irrevocable Life Insurance Trust (ILIT) is a trust that owns a life insurance policy on the grantor's life, structured so that the policy proceeds are excluded from the grantor's taxable estate at death while remaining available to provide liquidity to heirs or to pay estate taxes.
Joint and Survivor Annuity(J&S annuity)
A joint and survivor annuity is an annuity payout option that provides income for the lifetimes of two named individuals — typically spouses — continuing until the death of the last survivor, usually with a specified percentage of the original payment continuing after the first death.
Key Person Insurance(key man insurance)
Key person insurance is a life or disability insurance policy purchased by a business on the life or earning capacity of an employee whose skills, relationships, or expertise are critical to the company's operations, with the business named as the policy beneficiary.
Life Expectancy Factor(life expectancy)
A life expectancy factor is an actuarially derived estimate of the average number of additional years a person of a given age is expected to live, used in insurance pricing, annuity calculations, and required minimum distribution rules for retirement accounts.
Life Settlement(senior life settlement)
A Life Settlement is the sale of an existing life insurance policy by the policyholder to a third-party investor for a lump sum greater than the cash surrender value but less than the death benefit.
Life with Period Certain(life and period certain)
Life with period certain is an annuity payout option that combines lifetime income for the annuitant with a minimum guaranteed payment period, ensuring that if the annuitant dies before the certain period expires, a beneficiary continues receiving payments for the remainder of that period.
Long-Term Care Insurance(LTC insurance)
Long-term care insurance is a type of insurance policy that covers the cost of extended care services — such as assistance with daily living activities, home health care, adult day care, or nursing home care — when a person can no longer independently perform basic functions of daily life due to aging, chronic illness, or cognitive impairment. It is designed to protect personal savings and assets from the potentially catastrophic costs of extended care.
Longevity Insurance(longevity annuity)
Longevity insurance is a type of deferred income annuity that begins making income payments at an advanced age — typically 80 or 85 — in exchange for a lump-sum premium paid years or decades earlier, providing protection against outliving one's assets in the later stages of retirement.
Loss Development(claims development)
Loss development is the actuarial process by which reported insurance claims grow over time from their initially recorded values to their ultimate settled amounts, reflecting the time lag between the occurrence of a loss, its reporting to the insurer, and the final resolution of the claim through settlement, litigation, or judgment.
Modified Endowment Contract(MEC)
A modified endowment contract (MEC) is a life insurance policy that has been funded with premiums exceeding the IRS seven-pay test limit, causing the policy to lose certain tax advantages and subjecting distributions to income tax and a 10% penalty on gains withdrawn before age 59½.
Mortality Table(life table)
A mortality table is a statistical chart used by life insurers and actuaries that shows the probability of death at each age within a given population, forming the foundational data set for pricing life insurance premiums and projecting policy reserves.
Net Amount at Risk(NAR)
Net amount at risk (NAR) is the difference between a life insurance policy's death benefit and its accumulated cash value, representing the pure insurance exposure the insurer bears at any given point in time.
Period Certain Annuity(term certain annuity)
A period certain annuity is an annuity payout option that guarantees income payments for a specified number of years — such as 10, 15, or 20 years — regardless of whether the annuitant is alive, with remaining payments going to a designated beneficiary if the annuitant dies before the term ends.
Policy Illustration(life insurance illustration)
A policy illustration is a computer-generated projection provided by a life insurance company that shows how a policy is expected to perform over time under specified assumptions about premiums, interest crediting rates, cost of insurance charges, and other policy mechanics.
Policy Loan(life insurance loan)
A policy loan is a loan made by a life insurance company to a policyholder using the policy's accumulated cash value as collateral, allowing access to funds without surrendering the policy or triggering a taxable event on gains, provided the policy remains in force.
Premium (Insurance)(insurance premium)
An insurance premium is the amount of money a policyholder pays to an insurance company in exchange for coverage under an insurance policy, typically charged on a monthly, quarterly, semi-annual, or annual basis. The premium represents the insured's primary cost of maintaining the insurance contract and is determined by the insurer based on the assessed risk profile of the applicant.
Premium Financing(life insurance premium financing)
Premium financing is a strategy in which a borrower takes out a loan from a third-party lender to pay the premiums on a large life insurance policy, using the policy's cash value and death benefit as collateral, with the intention that policy growth will outpace the cost of borrowing.
Reduced Paid-Up Insurance(RPU)
Reduced paid-up insurance is a nonforfeiture option in a permanent life insurance policy that allows a policyholder who stops paying premiums to convert the contract's existing cash value into a fully paid-up policy with a smaller death benefit, with no future premium obligations.
Reinsurance(risk transfer)
Reinsurance is a contractual arrangement in which one insurance company — the ceding insurer or cedent — transfers a portion of the risk it has underwritten to another insurer — the reinsurer — in exchange for a share of the original premium, thereby reducing the cedent's net exposure to large individual losses or catastrophic aggregate claims.
Reserving (Insurance)(loss reserves)
Insurance reserving is the actuarial and accounting process of estimating and recording the liabilities an insurance company owes for losses that have occurred but not yet been fully paid, ensuring that the company holds sufficient funds to meet its future claim obligations to policyholders.
Retrocession(retro)
Retrocession is the process by which a reinsurer cedes a portion of the reinsurance risk it has accepted to another reinsurer — known as a retrocessionaire — thereby reducing its own net exposure to large or concentrated reinsurance portfolios, effectively creating a secondary market for the spreading of catastrophe and peak risk across the global reinsurance industry.
Return of Premium Rider(ROP rider)
A Return of Premium (ROP) rider is an optional add-on to a term life insurance policy that refunds all or a portion of the premiums paid if the insured outlives the policy term, effectively making the coverage cost-free if no death benefit is ever collected.
Rider(insurance endorsement)
An insurance rider is an amendment or addition to an existing insurance policy that modifies the terms of coverage, adds new benefits, or excludes specific risks — typically for an additional premium. Riders allow policyholders to customize their base policy to address specific needs without purchasing an entirely separate policy.
Risk-Based Capital (Insurance)(RBC)
Risk-based capital (RBC) in the insurance context is a regulatory solvency framework developed by the National Association of Insurance Commissioners (NAIC) that requires U.S. insurers to hold minimum capital proportional to the riskiness of their assets, liabilities, and underwriting exposures, with graduated regulatory intervention triggered when a carrier's actual capital falls below defined multiples of the required minimum.
Second-to-Die Policy(survivorship life insurance)
A second-to-die life insurance policy, also called survivorship life insurance, covers two lives — typically a married couple — and pays the death benefit only when the second insured person dies, making it a cost-effective tool for estate planning and wealth transfer.
Section 7702 Compliance(7702 test)
Section 7702 compliance refers to a life insurance policy's adherence to the Internal Revenue Code requirements that define what constitutes a life insurance contract for tax purposes, ensuring that policy death benefits are income-tax-free and cash value growth remains tax-deferred.
Solvency II (Comparison)(Solvency II)
Solvency II is the European Union's comprehensive insurance regulatory framework, effective since January 2016, that establishes risk-sensitive capital requirements, governance standards, and disclosure obligations for EU insurance and reinsurance companies — offering a useful comparative benchmark for U.S. investors assessing the regulatory environments in which domestically focused versus internationally active insurers operate.
Split-Dollar Life Insurance(split dollar arrangement)
Split-dollar life insurance is an arrangement in which two parties — typically an employer and an employee — share the costs, benefits, and ownership of a life insurance policy, with each party receiving defined rights to specific policy values according to a written agreement.
Stranger-Originated Life Insurance (STOLI)(STOLI)
Stranger-originated life insurance (STOLI) is an arrangement in which a third party with no insurable interest in the insured's life finances the purchase of a life insurance policy with the intent of acquiring or profiting from the policy's death benefit, circumventing the insurable interest doctrine.
Surplus Lines Insurance(E&S lines)
Surplus lines insurance is coverage placed with non-admitted insurers — carriers not licensed in a given U.S. state — when the admitted market is unable or unwilling to provide the required coverage at commercially acceptable terms, allowing unique or high-hazard risks to access specialized capacity from domestic and foreign specialty insurers.
Surrender Value(cash surrender value)
Surrender value is the actual amount of money a policyholder receives from a permanent life insurance company if they voluntarily terminate or surrender their policy before the insured event occurs or before the policy matures. It equals the policy's accumulated cash value minus any outstanding policy loans and applicable surrender charges.
Term Life Insurance(term insurance)
Term life insurance is a type of life insurance policy that provides a death benefit to the policyholder's named beneficiaries if the insured person dies within a specified coverage period, typically ranging from 10 to 30 years. It is generally the most affordable form of life insurance because it carries no cash value component.
Treaty Reinsurance(reinsurance treaty)
Treaty reinsurance is a standing reinsurance arrangement in which a reinsurer agrees in advance to accept a defined category of risks ceded by a primary insurer over a specified policy period, obligating both parties to honor the terms for all qualifying business without individual risk-by-risk negotiation.
Umbrella Insurance(personal umbrella policy)
Umbrella insurance is a form of personal liability coverage that provides an additional layer of protection above and beyond the liability limits of underlying policies such as homeowners, auto, and watercraft insurance. It is designed to cover large liability claims and lawsuits that exceed the limits of those base policies, as well as certain claims not covered by standard home or auto insurance.
Underwriting (Insurance)(insurance underwriting)
Underwriting in the insurance context is the process by which an insurer evaluates an applicant's risk profile to decide whether to offer coverage and, if so, at what premium and under what conditions.
Universal Life Insurance(UL insurance)
Universal life insurance is a type of permanent life insurance that offers flexible premium payments and an adjustable death benefit, with a cash value component that earns interest based on current market rates or a specified index. It combines the lifelong coverage of permanent insurance with greater flexibility than traditional whole life policies.
Variable Universal Life(VUL)
Variable Universal Life (VUL) is a type of permanent life insurance that combines flexible premiums and an adjustable death benefit with a cash value component that can be invested in sub-accounts resembling mutual funds.
Viatical Settlement(life settlement)
A viatical settlement is a transaction in which a person with a terminal or life-limiting illness sells their life insurance policy to a third-party buyer for a lump sum that is less than the face value but greater than the cash surrender value, providing immediate liquidity to the policyholder.
Waiver of Premium Rider(premium waiver rider)
A Waiver of Premium rider is an optional provision on a life insurance policy that exempts the policyholder from paying premiums if they become totally disabled for a specified period, keeping the policy in force without premium payments during the disability.
Whole Life Insurance(whole life)
Whole life insurance is a form of permanent life insurance that provides a death benefit for the insured's entire lifetime as long as premiums are paid, while simultaneously building a cash value account that grows at a guaranteed rate. It is the oldest and most traditional form of permanent life insurance in the United States.