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Benchmarks: The practice of benchmarking is well-established and quite common in the financial services industry where the performance of a financial instrument is frequently compared to a standard, independent point of reference (e.g., the Dow Jones Industrial Average, the S&P 500, the NASDAQ, and the Wilshire 5000). Since comparable benchmarks are not available for comparing permanent life insurance products, the CPE uses actuarially determined representative costs and performance levels for competitive products of a specified product type.

Cash surrender value (CSV) or cash value: The value available to the policy holder if the policy is surrendered. If no loans are outstanding, this amount is generally available in cash. If loans have been made, the amount available on surrender is equal to the total cash value less the outstanding loan.

Cost of insurance charges (COI): Charges to cover the insurer’s cost of paying death benefits. Current or expected COI charges are based on current or expected mortality experience, often including a margin for expenses or adverse deviations. These COI charges are analogous to current term insurance premiums for the amount at risk. Contracts also specify guaranteed maximum COI charges.

Death benefit: The total amount payable to the beneficiary upon the death of the insured. If loans are outstanding at the time of death, the actual cash payment is equal to the death benefit less the amount of the outstanding loan. The death benefit may include amounts in addition to the initial face amount of the policy such as accumulated dividends, the accumulation value of universal life policies, or increases forced by the death benefits corridor.

Endowment: The point at which a policy’s cash value equals its face amount. For policies satisfying the definition of life insurance under IRC §7702, endowment/maturity can occur no sooner than age 95. [Also see maturity.]

Expense charges: Charges made on accumulation-type policies to reimburse the insurer for a portion of its costs of issuing and maintaining the policy. Some expense charges are deducted from the gross premiums paid. Other are monthly charges deducted from the accumulation value.

Experience-rated pricing: A pricing method that bases prices for insurance products on the actual expenses and claims experience for the pool being insured. Because selective pools who enjoy healthier lifestyles and better health care tend to live longer, products priced for these pools have lower COI costs and lower premiums.

Face amount: The death benefit provided by a life insurance policy. This term most often applies to the amount of insurance specified on the “face” of the policy at the time of issue. In this case, “face amount” does not include post-issue changes in total death benefits such as those arising from paid-up additions or death benefit increases caused by growth in account values. However, some illustration use “face amount” to apply to the total policy death benefit at any give time.

Fixed premium: Payments of a fixed, equal amount paid to an insurance company for insurance or an annuity.

Flexible premium: For universal life policies, non-fixed payments designed to adapt premiums to the policy holder’s changing needs and financial conditions. [See universal life.]

General account: All the assets of a life insurance company other than those held in separate accounts. Separate accounts, or sub-accounts, are typically used for variable products, which pass actual investment experience including all capital gains and losses through to policy cash values. The assets backing all other products are held in the general account. The general account may be “segmented” to allocate certain investments to certain blocks of business for the purpose of setting current crediting rates. However, whether or not the general account is segmented, all general account assets are available when any line of business needs additional cash to pay current benefits. Thus, the safety of any general account product depends on the financial strength of all the company’s product lines.

Health profile: The collection of health indicators insurers use to rate a policy buyer’s mortality risks. [Also see preferred, preferred plus, standard, substandard, and uninsurable.]

Institutional pricing: The pricing style that reflects the volume discounts and economies of scale available from large transactions and large groups of policies. Qualifying transactions typically require face amounts in excess of $1 million, policies with reduced or levelized load/expense structures, or policies with low or no surrender charges or cancellations fees.

Insurance Banking™: The practice of assembling and managing portfolios of insurance, typically with policies of larger than average face amounts, often in excess of a single insurer’s retention limits. The ability to provide high quality Insurance Banking™ services depends upon negotiating and placing large blocks of insurance and requires lead underwriting experience and established relationships with many insurers.

Investment management fee: A charge made as a percentage of a variable policy separate account fund value to pay the investment advisor for the selection and management of investments. These fees are set in advance and typically vary by fund. Although no comparable explicit charge is made with fixed-interest products, insurers deduct the expenses of investment management for these general account products before setting their declared interest or dividend rates.

Lapse rate: The percentage of policies that terminate with no value or are voluntarily surrendered each year. Because insurers typically lose money on a statutory basis in the first year a policy is in force (i.e., their mortality, reserve, expense, sales compensation, and underwriting costs are greater than the premiums they receive), they rely on renewal premiums to repay these initial costs. In most cases, if lapse rates are greater than expected, the insurer will either not recoup or delay the recoupment of it s initial excess expenses. An insurer with a low lapse rate, everything else being equal, can price its policies more competitively because it will have more margins available from the greater renewal premiums.

Life expectancy: The actuarially projected period of time a person is expected to live. Life expectancies are averages based on factors such as the sex and current age of an individual. Although illustrations may sometimes be provided for durations only up to “life expectancy,” roughly half the population would be expected to live beyond life expectancy.

Liquidity ratio: The cash surrender value for a give policy year divided by the cumulative premiums paid through the end of that policy year.

Maturity: The point at which a policy’s cash value equals its face amount. For policies satisfying the definition of life insurance under IRC §7702, endowment/maturity can occur no sooner than age 95. [Also see endowment.]

Maximum accumulation: An insurance funding strategy where the policy buyer specifies the contribution amount and the insurer determines the value that will be accumulated, referred to as “defined contribution” design.

Minimum premium: An insurance funding strategy where the policy buyer specifies the amount of the death benefit desired and the insurer determines the minimum premium needed to fund the policy, referred to as “defined-benefit” design.

Mortality and expense (M&E) risk charges: A separate charge made on variable products as a percentage of the account value to cover the insurer’s potential deficiencies in the explicit cost of insurance and expense charges. In the absence of poor experience, the M&E risk charge contributes to insurer profits. No comparable explicit charges is made with general account products; on those products, similar loads are part of the undisclosed spread between credited and earned interest rates.

Mortality table: A table that presents expected death rates by individual age. The death rates vary from one mortality table to another depending upon the type of experience on which the data is based. Large insurance companies will often develop their own mortality tables based on experience under their own policies.

Never smoked: A health profile designation for policy buyers who have never used tobacco products. [Also see tobacco use.]

Nonsmoker: A health profile designation for policy buyers who have not used tobacco products for at least two years. [Also see tobacco use.]

Paid to age X: A policy funding strategy where premiums are paid until the policy holder attains a pre-determined age.

Paid for X years: A policy funding strategy where premiums are paid for a pre-determined number of years.

Paid over the life of the policy: A policy funding strategy where premiums are paid throughout the life of the policy.

Permanent life insurance: Insurance intended to provide life insurance protection for the entire life of the insured. Permanent insurance differs from term insurance in that its premium structure includes a “savings component.” Permanent insurance policy premiums have two components, the insurance cost (mortality cost, administrative fees, sales loads, etc.) and the “savings component.” The “savings component” typically is referred to as cash value. The policyholder may use the cash value to make the minimum premium payments necessary to maintain the death benefit protection, may access the cash value by taking out loans or making partial surrenders, or may use any combination of these techniques. If permanent insurance is surrendered before death, a surrender charge may be assessed against the cash value. Generally, surrender charges are assessed if the policy is surrendered within the first 10 or 15 years. The amount of money a policyholder will receive upon surrendering a policy is referred to as the cash surrender value (CSV).

Preferred: A risk class designation for nonsmokers whose health profiles are likely to result in better than average mortality risks. [Also see risk class and health profile.]

Preferred plus: A risk class designation for policy buyers whose superior health profiles are likely to result in lower than average mortality risks. [Also see super-select, risk class, health profile.]

Premium duration: The period during which premiums are paid.

Retail pricing: The pricing style used for large, non-selective pools of individual policy holders that relies on the “Law of Large Numbers” and averages costs for high- and low-risk segments of the pool.

Risk class: The level of cost of insurance charges assessed against the policy or the gross premium rate. Based on the information submitted with the application, the policy is categorized into a preferred (nonsmoker), standard (smoker), or substandard (impaired) risk class. Policies can also be issued in super-select classifications. These generally mean that the insured demonstrates superior health characteristics in addition to being a nonsmoker, such as frequent exercise or having a family history of both parents being long-lived.

Separate accounts: Insurance company assets that support only cash values of specific policy forms and are completely separated from the general account investments that back the rest of the company’s products. Separate accounts are typically used for variable products, which pass actual investment experience including all capital gains and losses through to policy cash values. [Also see general account.]

Smoker: A health profile designation for policy buyers who have used tobacco products within the last two years. [Also see tobacco use.]

Standard: A risk class designation for smokers whose health profiles are likely to result in average mortality risks. [Also see risk class and health profile.]

Substandard: A risk class designation for policy buyers whose impaired health profiles are likely to result in higher than average mortality risks. [Also see risk class and health profile.]

Super-select: A risk class designation for policy buyers whose superior health profiles are likely to result in lower than average mortality risks. [Also see preferred plus, risk class, and health profile.]

Surrender charge: An amount deducted from the accumulation value of an accumulation-type product to yield its cash surrender value. These charges, typically found in the first 7 to 15 policy years, enable the insurer to cover a portion of unrecouped issue costs on policies that surrender early. Interest credits are based on the higher accumulation value in the early years, which benefits the long-term, persisting policy.

Target premium: The amount of premium on flexible premium policies on which full commissions are paid. Policies that allow flexible premiums often achieve much of their competitive posture in high-premium scenarios by having lower commission rates apply to the excess premiums paid above the target premium.

Temporary life insurance: Various forms of term life insurance that provide life insurance protection for a specified time period. [Also see term life insurance.]

Term life insurance: Temporary insurance that provides life insurance protection for a specified time period. Death benefits are payable only if the insured dies during the specified period. If a loss does not occur during the specified term, the policy lapses and provides no further protection. All premiums are retained by the insurance company. Typically, term insurance premiums do not have a “savings component”; thus, term insurance does not usually create cash value.

Tobacco use: A health indicator insurers use to describe a policy buyer’s use of tobacco products. [Also see nonsmoker, never smoked, and smoker.]

Uninsurable: A risk class designation for policy buyers whose health profiles render than unsuitable for life insurance purposes. [Also see risk class and health profile.]

Universal life: A form of permanent insurance designed to provide flexibility in premium payments and death benefit protection. The policyholder can pay maximum premiums and maintain a very high cash value. Alternatively, the policyholder can make minimal payments in an amount just large enough to cover mortality and other expense charges.

Variable life/Variable Universal Life: A whole life or universal life insurance policy for which cash values are invested in separate account funds that provides a death benefit dependent on market value of the policy’s underlying investments at the time of death. The policy owner chooses among various funds offered by the insurer, permitting investments concentrating in common stock and other assets that are more volatile, but may provide higher long-term returns, than an insurer’s general account. Actual investment fund performance, both net investment income and capital gains and losses, pass directly through to policy cash values after reduction for investment expenses and fund operating costs.

Whole life: A traditional form of permanent insurance that guarantees a continued death benefit for the insured’s entire life upon payment of fixed annual premiums, which are usually level for life, based on the insured’s age at issue.


1 Mortality cost represents the cost imposed on the policyholder by the insurance company to cover the amount of pure insurance protection for which the insurance company is at risk. With term insurance, the insurance company is generally exposed to risk of loss for the entire face amount of the policy. With permanent insurance, the net amount at risk for the insurance company is the difference between the policy's death benefit and the cash value.

2 Many of the definitions used in this Glossary were previously published in the second edition of The Insurance Counselor: Life Insurance Due Care prepared and researched by Richard A. Schwartz and Catherine R. Turner for M Financial Group and published in 1994 by the American Bar Association.

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