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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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An existing life insurance policy is exchanged for a new life insurance policy or an annuity. In both cases, the owner and insured may not change (or the annuity remains payable to the same person). Per tax code, the policyholder may not receive any money from the exchange; cash value must go directly from former insurance company to new insurance company.
The transfer of ownership and all policy rights from the existing policy owner to another person or entity. If there is an irrevocable beneficiary or collateral assignment, that person must consent to the assignment since he/she has an irrevocable vested interest in the policy.
A living benefit rider available with life insurance policies. Allows the policy holder to receive cash advances as a pre-payment of the death benefit if diagnosed with a terminal illness. Enables individual to pay for treatments and comfort while also protecting his/her family after death.
A rider, sometimes referred to as Double Indemnity. 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.
Daily self-care activities: bathing, dressing, eating, continence, toileting, transferring. A person's ability or inability to perform these ADLs is used to measure his/her functional status. To receive benefits from a long term care insurance (LTCi) policy (or Hybrid Life/LTCi or hybrid Annuity/LTCi), most companies require that insureds be unable to perform at least two of the six ADLs.
One method insurance companies use to determine the age of the individual. In this case, the applicant is that age for the 12 months following his/her birthday. For example, for a June 15th birthday: actual age would be until June 14th of the following year.
Allows the policy owner to adjust the face value, premium, and coverage period without a change of policy. It may also offer a conversion option (i.e., from Term to Whole life).
One method insurance companies use to determine the age of the individual. In this case, the person's age is assigned six months before the applicant's birthday to six months after the applicant's birthday. For example, for a June 15th birthdate: age nearest would be considered a year older after December 14th of the same year.
The Society of Actuaries says that alcohol abuse can take off 10 to 15 years of your life. It is also widely known that excessive drinking can lead to certain medical conditions. Therefore, insurance companies include alcohol usage in the standard application questionnaire. If it is found that the proposed insured uses alcoholic beverages in large amounts, he/she may be declined, postponed, or offered higher rates, depending on the degree of use and other related factors such as DWIs on the driving record or elevated enzyme levels from a blood test. Use of alcohol in moderation is considered normal. A person applying for insurance with a history of treatment for substance abuse may be eligible for standard rates after seven years with some companies. After 10 years, preferred rates may be available. These requirements differ widely among insurance companies.
Also known as Yearly Renewable Term (YRT), this insurance provides a guaranteed rate for a period of one year only. The policy owner may renew the policy each year at an increasingly higher premium. This insurance is very low cost in the first, second, and third years, but if insurance is needed for more than three years, a guaranteed level term contract may be less expensive.
Owners of insurance contracts (Life, Disability, Hybrid, Annuity) receive an annual statement (report) within 30 days of the policy anniversary date. It provides pertinent information relative to the policy type (name of the policy owner, name of the insured, coverage amount, optional benefits, and payment and expense history of the past policy year). This is the basis for completing a policy review.
Converting an annuity from the accumulation phase to the payout phase.
A report by a physician, hospital, or medical facility who has treated, or who is currently treating, a proposed insured. In traditional underwriting, an APS is one of the most frequently ordered additional sources of medical information for applicants requesting life insurance, and considered by many as the single most important source of underwriting information. Because of professional ethics and medical records privacy (HIPAA), the proposed insured is required to complete an authorization providing written consent, which is provided to the physician prior to information sharing.
A rider available with Disability insurance policies. Increases the total monthly disability benefit automatically each year for five to six years (varies among insurance companies). Premium will go up with this rider each year because more coverage is being provided. There is no additional charge for this rider. Also known as Automatic Benefit Enhancer.
If the insurance company perceives a hazard due to aviation activities (not including flights as a fare-paying passenger or pilot on regularly scheduled commercial airlines), they may charge an extra premium to compensate for that hazard. A policy may be issued with an aviation exclusion, in which upon death from an aviation incident, the company is liable only for return of premiums paid or the reserve accumulated on the policy.
With more individuals seeking excitement and thrills in their non-professional lives, hobbies and avocations have become important underwriting factors. Scuba diving, mountain climbing, competitive racing, hang gliding, rodeos, and sky diving clearly can involve a significant additional hazard to the insurance company. If such risk is perceived, the insurance company will typically charge the proposed insured a flat extra premium commensurate with the risk. In states permitting, a rider excluding death from participation in the hazardous activity may be required.
Used to save a person's younger age, making premiums lower since they'll be based on the younger age. State laws generally prohibit backdating beyond six months. Most often when backdating, the policy date determines the date subsequent payments are due.
The person or entity chosen by the policy owner to receive death benefit proceeds from an insurance policy. There may be more than one beneficiary and there are many types of beneficiary designations.
The person or entity in line to receive death benefit proceeds in case the primary beneficiary pre-deceases or simultaneously dies with the insured. There can be more than one contingent beneficiary.
To carry out a policy owner's intentions effectively so that the correct individual(s)/entity(ies) receive the death benefit proceeds, policy language must be detailed and unambiguous. Here are a few beneficiary designations to avoid:
Minor children: this does not take into account the fact that the children will eventually reach adulthood Children: when undefined, this could mean many things: children from the current marriage, a previous marriage, adopted children, step-children, illegitimate children Dependents: this limits beneficiaries to those actually dependent upon the policy owner for support
A life insurance policy beneficiary who has a vested interest in the death benefits. The policy owner can't make any changes to the policy without obtaining the beneficiary's consent.
Minors cannot receive or control life insurance proceeds. State laws determine when children are entitled to receive the insurance proceeds, some as young as 16 or as old as 18. The solution: establish a trust to receive the life insurance proceeds. The advantages: the applicant establishes the trust, selects the trustee, and determines the terms under which assets can be used and distributed from the trust.
Life insurance benefits are divided among a class of beneficiaries. For example, children of the insured. The living members of the class and the descendants of any deceased members of the class share in the benefits equally.
The first person or entity in line to receive death benefits. There can be more than one primary beneficiary.
The length of time disability insurance or long term care insurance benefits will continue once they have begun. Policies with longer benefit periods are more costly than those with shorter benefit periods.
Build Factors (Height and Weight Ratios)
The height and weight recorded on the paramedical exam is a factor used in determining underwriting class. (For long term care insurance, it's the height and weight that appears in your medical records.)
According to the U.S. Census Bureau, blended families outnumber traditional nuclear families. These blended families pose particular estate planning challenges. Typical estate plans are designed to benefit the surviving spouse and minimize estate taxes. In this scenario, children from a prior marriage will inherit assets only upon the death of that surviving spouse, not necessarily of their parent, which causes conflict and disharmony within families. One way to alleviate such tension is through the use of life insurance. Insuring the life of the spouse with children from a previous marriage offers protection to that spouse's children (distributed in the manner the insured wishes), and, at the same time, preserves the estate for the surviving spouse.
Business owners have employees depending on them, family members, and sometimes entire industries. Business insurance can reimburse the business for the loss of a valuable employee, offer benefits to help retain key employees, fund retirement benefits, and more.
A rider available with Disability insurance policies. Provides a monthly benefit in addition to monthly disability benefit if insured becomes catastrophically disabled solely due to an injury or illness and loses the ability to perform two or more activities of daily living (ADLs) without assistance, or becomes cognitively impaired, or becomes presumptively disabled.
An optional benefit that provides life insurance coverage on additional insureds; in this case, children. Most children's riders cover all children (including children born after the policy issue date) up to age 18 or 21 for one premium.
A partial, temporary transfer of policy ownership rights to another, often used as collateral for loans. Not all policy rights are transferred, and they revert back to the policy owner upon repayment of the debt and release of the assignment. If death occurs while a policy is collaterally assigned, the assignee is the first to receive payment as their interest applies at time of death. It is possible to have multiple collateral assignees on one policy, with written authorization of the first assignee. At death claim payment, the first assignment holder gets paid first.
Fee paid to an agent or insurance marketing organization, calculated as a percentage of policy premium. This percentage varies depending on coverage, insurance company, and marketing methods. LLIS employees are salaried, non-commissioned agents, which allows us to be more objective.
A rider available with Long Term Care insurance policies. Increases the monthly or daily benefit and total pool of money each year on the policy anniversary by 3% or 5% of the previous year's amount.
Provides temporary insurance coverage upon receipt of an application and first premium payment. Ensures a claim would be paid if the proposed insured dies before policy documents are issued, assuming the applicant meets all requirements. Rules vary among insurance companies.
A rider available with Disability insurance policies. During a period of disability, COLA increases the monthly benefit once a year to offset inflationary effects. Adjustments are made only after the insured has become disabled.
Named after the litigant who fought for this kind of trust and won the battle with the IRS, Crummey Trusts allow a limited amount of cash withdrawals by the trust's beneficiary. The window for these transactions is usually 30-60 days, after which point, if the beneficiary does not make a withdrawal, the gift becomes final and is locked in the trust until its termination. The right to withdraw the contribution converts it into present interest, ensuring it qualifies for gift tax exclusion. The trustee can use these gifts to pay premiums on a life insurance policy for the donor and the policy death proceeds would not be included in the donor's gross estate upon his/her death, thereby avoiding both gift and estate tax liabilities.
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.
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.
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.
Somewhat of a hybrid between Term insurance and a pure endowment: it is paid out whether the insured lives or dies. The policy value is payable to the insured if he/she is living on the policy's maturity date or to a beneficiary if the insured is no longer living. Endowment insurance can be purchased to last for set durations (i.e., 15 years) or arranged to mature at certain ages (i.e., insured's age 65).
The accumulation and protection of an estate for the financial security of the individual (during retirement years) and his/her beneficiaries (family, loved ones, charities), and the distribution of those assets upon the individual's death. Life insurance and annuities are effective methods of providing liquidity needed for estate distribution. In the case of large estates, it is often wise to name the owner of the policy someone other than the insured or his/her spouse. A trust is one viable alternative.
Conditions that are not covered by an insurance contract.
A non-forfeiture option that uses the cash value of an ordinary life policy as a single premium to purchase Term life insurance for the full face amount of the original policy. The term of the new policy depends on the amount of cash value and the insured's attained age.
Because heredity often dictates the future health of an individual, life, disability, critical care and long term care insurance applications require medical history of the applicant and his/her parents and siblings. A potential insured in perfect health may not qualify for the best rates due to family history issues. Health factors considered vary among insurance types.
Meant to ensure that the amount of insurance applied for can be justified by the insurance need. Used in both personal and business insurance. It evaluates normal risk vs. abnormal risk and calculates any extra risk using mathematical formulas. Financial underwriting assesses factors like the insured's income and/or value of his/her estate and the insurable interest. It seeks to minimize speculation, guarantee that the company doesn't over-insure the individual, and eliminate any question of fraud.
A type of deferred annuity that increases in value according to a stated fixed interest rate established by the insurance company for a specified time period, allowing the owner to minimize risk during market declines. The insurance company accepts the investment risk for these products.
Allows an insurance company to offer a policy to a potential insured who might otherwise be declined. It is often used with people who have adverse health conditions or participate in hazardous sports or hobbies. The insurance company will assess an extra flat dollar amount per $1,000 of policy value, usually only for a set number of years.
Offers just what the name implies: flexibility. It allows the policy owner several options from which to choose in terms of premiums, face amounts, and investment strategies. These policies can be changed as the insured's needs and circumstances change.
While foreign travel has become the norm in both the business and personal lives of many in our global society, there is still considerable risk to some travel. It's open to interpretation, and the legislation varies by state. Most life insurance companies maintain their own country lists, however many exclude coverage for proposed insureds traveling to countries on the U.S. State Department's Travel Warnings List.
The period of time (typically 10 to 30 days, depending on the state) during which a policyholder may examine a newly-issued individual life insurance or annuity policy, cancel the contract, and receive a refund of premiums paid.
A rider available with Disability insurance policies. Protects future earnings without medical underwriting. Increases based upon income and other disability insurance in force.
A rider available with Disability insurance policies. Protects future earnings without medical underwriting. Increases based upon income and other disability insurance in force.
The time between the due date of a premium and policy lapse (typically 30 days). During the grace period, the insurance remains in force and payment may be made to keep the policy in good standing. If death occurs during the grace period, the death benefit would be paid (reduced by the amount of premium due) after company approval. Once the grace period has ended, the insurance has lapsed and coverage is no longer in force. Most policies provide for reinstatement of the insurance up to a specified period of time -- usually three years -- and cannot be any later than the expiration of the policy. The insured must provide proof of insurability, complete an application for reinstatement, and may have to submit to a new health examination. Payment in full of back premiums will also be required.
The person who establishes a trust and gives up all control over the trust assets.
Offers flexible premiums and an accumulation value, designed so that both death benefit and premiums are guaranteed. Premiums are used to fund the required reserves (which help to cover the long term guarantees), so cash values are lower than other types of policies. GUL policies are ideal for people who want guarantees but are not interested in cash value accumulation. Any change in GUL policies -- such as a policy loan or missed premium -- could result in a higher premium when recalculated.
Commonly referred to as carriers, insurance companies are classified into two distinct groups: Property/Casualty (homeowner's, auto, etc.), and Life (life insurance, annuities, and pension products). LLIS works only with life insurance companies, and only with those that meet our quality service standards and ratings criteria. All insurance companies doing business in the U.S. are regulated by state law, rated by several agencies for their financial strength, and backed by state guaranty funds.
A type of living trust, it generally constitutes a complete gift made that may have gift tax consequences. Control and ownership are relinquished to the trustee over any property placed in an irrevocable trust. Income and estate tax savings that are applicable to any gift of property or cash may also result.
The termination of an insurance policy due to non-payment of premium amount by due date.
Life insurance offers protection from financial loss resulting from death, and can be used to protect both personal and business interests. It is a contract between a policy owner and an insurance company in which the insurer agrees to pay a sum of money to a beneficiary(ies) at the insured's death, and the policy owner agrees to pay premiums at regular intervals or in a lump sum.
Life insurance policies are often used as gifting strategies for individuals. There are generally three types: gift of policy, gift of premiums, gift of insurance proceeds.
A trust created with property transferred during lifetime. With a living trust: the grantor can terminate the trust at will and regain ownership of the property, or he/she can give up ownership and control permanently. There are two types of living trusts: Revocable and Irrevocable.
Low-load insurance does not have the typical agent commissions, allowing for lower expenses for marketing, sales, and administration, and immediate cash values. When LLIS began in 1998, we offered just low-load life insurance and annuity policies that had lower expenses than traditional commission policies and no surrender charges. Through the years, financial advisors asked us to expand our list of insurance solutions to give their clients the same quality customer service for all their insurance needs (including traditional disability, long term care, and term life insurances). We’re now a one-stop shop for most types of insurance (excluding property and casualty, and health). Click here to learn more about low-load insurance solutions.
These are basically after-tax money contributions. Annuities purchased with non-qualified funds still accrue tax-deferred interest throughout your lifetime. The benefit: you're never required to take distributions at a certain age, as you are with a qualified account.
A rider available with Long Term Care insurance policies. If policy lapses after this benefit has been in place for three consecutive years, nonforfeiture benefit provides a reduced, paid-up pool of money equal to the greater of: the total of premiums paid for coverage, or an amount equal to one month (30 days) of nursing facility benefit at the time the coverage lapses.
A rider available with Disability insurance policies. Full disability benefit is paid if the insured incurs the total loss of use (without possibility of recovery) of: speech, hearing in both ears, sight in both eyes, or use of both hands, both feet, or one hand and one foot. Benefits begin accruing when the presumptive disability occurs and are paid as long as the loss continues, regardless of income-earning ability. There is no additional charge for this rider.
Qualified money is tax deductible and is often used with traditional IRAs, retirement plans, and annuities. Your benefit: deferred taxes on your contributed amount until you begin to take withdrawals from your qualified account. At age 70.5, if you have an annuity purchased as qualified contracts you must begin to take Required Minimum Distributions (RMDs), per the IRS. The entire distribution is taxed (at your current income tax rate) at the time of the withdrawal.
A rider available with Long Term Care insurance policies. If a policyholder dies before a specified age with the LTCI policy in place, the beneficiary will receive a refund of premiums (minus any claims paid). The age requirement and refund formula vary among companies.
The process of placing a previously terminated policy in force again. Typically requires proof of insurability and payment of missed premiums.
Minimum amounts that retirement plan account owners must withdraw annually beginning with the later of: the year he/she reaches age 70½ or the year he/she retires.
A rider available with Disability insurance policies. A partial benefit paid when the insured person suffers a loss of income due to a covered disability or if loss of income persists. The insured receives a percentage of his or her disability benefit based on the percentage of income loss the sickness or injury has caused. It may be paid up to the maximum benefit period.
A rider available with Long Term Care insurance policies. If the insured has been on claim, then goes off claim and stays off claim for 180 consecutive days, the insurance company will resort the amount of benefits paid.
A type of living trust, and an effective device to transfer assets directly to beneficiaries outside the probate estate, avoiding probate costs in estate settlement. Often considered a better vehicle than wills for ensuring individuals receive specific property. No income, estate, or gift tax savings exist under a revocable trust, and the transfer into the trust does not constitute a completed gift. Therefore, no gift tax is assessed, the trust property will be included in the taxable estate, and trust income is taxable to the grantor. Administration and management charges must also be paid, offsetting the savings generated from the formation of the trust.
An attachment to an insurance contract that amends the basic policy by supplementing or reducing the amount or type of coverage outlined.
A rider available with Long Term Care insurance policies. Both partners applying must purchase the rider and be issued identical policies. If one policyholder uses all of his/her pool of money, the Shared Care rider allows him/her access to the other's unused pool of money.
A rider available with Long Term Care insurance policies. Increases the monthly or daily benefit and total pool of money each year on the policy anniversary by 5% of the original amount.
Parents of children with special needs face unique challenges when planning for the future, since their death could leave the children 100% reliant on government benefits. This becomes about not only lifetime care, but quality of life. Creation of a special needs trust (aka supplemental needs trust) allows a trustee to pay for things not covered by Social Security (which covers essentials like food, clothing, shelter, and medication); like education, recreation, counseling, medical attention beyond life's simple necessities, or even spending money, vacations, movies, electronics, and other quality of life enhancing expenses. It allows the disabled beneficiary to receive gifts, lawsuit settlements, or other funds and not lose his/her eligibility for some government programs. Creation of special needs trusts requires special assistance. Some financial advisors offer special expertise in this area. It's also important to involve an attorney who is knowledgeable in state-specific laws, and in The Omnibus Budget Reconciliation Act of 1993 that established the rules for special needs trusts.
A fee charged for early withdrawal of funds from a life insurance policy or annuity, or for cancelling the agreement. This fee reflects the insurance company's expenses for sales, underwriting, issuing, and administering the policy.
A specified amount of time an annuity owner must keep the majority of his/her money in the contract to avoid surrender charges. Most last from five to 10 years, and allow the annuity owner to withdraw 10% of the accumulated value of the account per year, even during the surrender period.
A specified amount of time a policy owner is subject to surrender charges if he/she withdraws money from the policy.
An effective estate distribution and tax planning tool, Survivorship life (also known as second-to-die and last-to-die) is a policy that insures the life of two people (husband and wife, same-sex partners, business partners). Survivorship policies pay death proceeds to the beneficiary(ies) only upon the death of the second (last) insured. They can transfer wealth or assist in paying estate taxes, which are delayed until both individuals die. These types of policies are typically Guaranteed Universal Life, Whole Life, and Universal Life insurance. Premiums are generally lower than purchasing two individual policies.
Charges added to standard class when health issues exist that, in the eyes of the insurance company, require a higher premium. Most insurance companies will offer policies with table ratings up to Table 12.
Also known as a will trust, it involves retention of ownership until death when property is passed to a trust through a will. Testamentary trusts are driven more by the needs of the beneficiaries (particularly young beneficiaries) than by tax implications.
A rider available with Disability insurance policies. Allows the insured to continue receiving disability benefits if totally disabled in "Your Occupation" but working in another occupation.
A legal arrangement in which one party transfers property to another who holds the legal title and manages the trust property for the benefit of others. Trusts are effective estate planning tools, supplying elements not obtainable through a direct gift. Income, estate, and gift tax savings can also be realized through the use of trusts. They can eliminate the need for guardianship of property; provide a life income for family members, with the principal of the trust distributed to charity; protect assets from creditors. Trustees assume all control over the assets of the trust. The grantor relinquishes all control to the trustee.
Underwriting for a life insurance policy may begin before an Irrevocable Life Insurance Trust (ILIT) has been completed, signed, and dated. This enables financial advisors to make alternative arrangements in case the proposed insured is uninsurable, and enables the lawyer, insured, and trustee to finalize the trust details. After the ILIT has been signed, a new application is completed and signed by both the proposed insured and the trustee as owner/applicant. It must be dated after the date of the trust; otherwise, if the insured dies within three years of the policy issue date, the death benefit proceeds could be included in the taxable estate. This is referred to as the "three year anticipation of death" or the "three year look-back." The policy will be issued with the trust as owner and beneficiary of the policy. This process should take less than 30 days; otherwise, the insurance company may request additional requirements or a new exam.
The person who receives the legal title and manages the property and has a fiduciary responsibility to act in accordance with the law and provisions of the trust instrument. The grantor places confidence in the trustee to act solely on the beneficiary's behalf. When possible, the trustee of the insurance trust should be the original applicant and owner of the insurance.
The individual at an insurance company trained to evaluate risk and determine the underwriting class and financial justification of applicants.
The process insurance companies go through with each application to determine whether or not to insure an individual and, if so, what the terms, conditions, and rates will be (risk assessment). They typically examine several factors to ensure policy owners are treated equitably and not charged excessive or, conversely, inadequate rates for that insurance coverage. Special questionnaires may be required for specific avocations, travel, and health conditions.
Offer policy owners a flexible premium, adjustable death benefit (aka, face value), and cash accumulation. As cash values increase, the policy owner may make premium payments from that account, take withdrawals and loans, or cash in the policy for its current cash value.
A type of deferred annuity that can vary in value according to the performance of the underlying investment fund options. The policy owner accepts the investment risk for these products. Low Load variable annuities have no surrender charges and no sales loads.
*Securities offered through ProEquities, Inc., a Registered Broker/Dealer, and member FINRA and SIPC. LLIS is Independent of ProEquities, Inc.
Securities-based whole life policies for which the policy owner chooses how cash values will be invested. Each variable life policy has a set number of separate accounts. Typically, there are accounts (similar to mutual funds) that are equity based, bond fund, money market fund, possibly an indexed fund, and usually a general account (fixed interest rate). The policy owner may take withdrawals and loans or cash in the policy for its current cash value.
*Securities offered through ProEquities, Inc., a Registered Broker/Dealer, and member FINRA and SIPC. LLIS is Independent of ProEquities, Inc.
Also known as a testamentary trust, it involves retention of ownership until death when property is passed to a trust through a will. Will trusts are driven more by the needs of the beneficiaries (particularly young beneficiaries) than by tax implications.