Insurance Glossary

Industry jargon and unfamiliar terminology can be confusing.

No insurance resource would be complete without a helpful menu of terms and concepts. This information-rich list will help you make sense of the solutions you are considering.

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Deferred Annuities

Accumulation vehicles that grow as tax-deferred earnings. Taxes are due when the contract owner withdraws money or annuitizes. The owner can also surrender the annuity amount in a lump sum.

Deferred Compensation Plan

Also known as Salary Continuation Plan, this is a method of rewarding senior management and key employees of a company with special financial incentives. It is a written agreement between an employer and an employee that allows the employee to defer tax now so the funds can be withdrawn and taxed at a specified point in the future (usually at a lower rate). High cash value life insurance policies (with company as owner and beneficiary) with minimal death benefit are popular in these plans because the cash values grow tax-deferred and the death proceeds are income tax-free if the employee dies before receiving payments.

Deferred Compensation Plan: Employee Benefits

Additional deferral opportunities not subject to qualified plan limits and penalties
Can provide pre-retirement survivor benefits
Supplements retirement income not available through 401(k) or profit-sharing plans
Based on commencement date established in the agreement, employer can begin distribution of the deferred compensation
May provide access to funds in the event of financial hardship

Deferred Compensation Plan: Employer Benefits

Provides income tax-free death benefit and accumulates tax-deferred cash value for the employer
Employer can use accumulated net cash value to pay the deferred compensation (through withdrawals or policy loans)
Minimal ERISA requirements (provided only a select group of management or highly-compensated employees are covered)
Provides select employees with additional deferral opportunities different from those available to other employees
Helps recruit, retain, and reward talented staff
Income tax deductions for benefits payment
Each agreement can be tailored to an individual employee
If the employee leaves, the company can recover the premiums paid by surrendering the policy or can continue to hold the policy

Double Indemnity

This is a rider sometimes referred to as Accidental Death Benefit, and may be added to some life insurance contracts. It provides that double or triple the face amount of insurance is payable if the death of the insured is caused by an accident. There is an extra charge for the ADB. However, ADBs can be appealing because of their relatively low premium and the belief most people have that their death will be accident-related. But if double the coverage is actually needed, LLIS recommends doubling the face amount of the insurance since most deaths are not, in reality, accidental.