Anniversary Date
The annual recurrence of the insurance policy's effective date. Some policy options that may be exercised may be tied to the anniversary date.
Annual Return
The percentage increase in the value of an investment during a 12-month period or a series of 12-month periods, taking into account compounding of investment dividends or capital gains.
Asset
Any item of economic value owned by an individual or corporation. Usually refers to items that can be sold and converted to cash. Examples are cash, securities, financial accounts, a house, a car, jewelry and other property.
Asset Allocation
The process of dividing investor funds among several classes of investments to coincide with the investor's goals, investment period and tolerance for risk. Investments with the highest potential return often have correspondingly high risk of loss. Conversely, investments offering the lowest risk usually have the lowest returns. By allocating assets among different classes of assets the investor seeks to maximize return while managing the associated risk within the comfort level of the investor.
Beneficiary
The party who will receive the death benefit of a life insurance policy or annuity contract upon the insured's death.
Cash Equivalents
Investments that are highly liquid and safe, and considered equal to cash. Examples are treasury bills, money market funds and short-term CDs and bonds (maturities of six months or less).
Cash Surrender Value
The value a policyholder receives upon termination of a "permanent" life insurance policy for any reason other than death of the insured. The cash surrender value of a life insurance policy is equal to the cash value less any surrender charge imposed by the insurance company. Cash surrender values are typically not available during the early years of the policy's life. Usually, the policyholder is allowed to take the cash surrender value in the form of cash, a reduced amount of paid-up life insurance, or extended term life insurance protection.
Cash Value of Life Insurance
The "savings" element of universal life insurance policies. The cash value is the amount of money accruing within the policy. The cash value of a fixed universal life policy depends on the amount and timing of premium payments, the expense and risk charges the insurance company charges for providing benefits and the interest rate the company credits. Increases in cash values are not taxable until withdrawn. Some policies may allow the owner to borrow against the cash value or use them to pay future premiums. Amounts borrowed may become taxable if a policy with an outstanding loan is surrendered.
Conversion Period
The period of time during which the owner of a term life insurance policy may convert it to another life insurance policy without evidence of insurability.
Convertible
A provision in a term life insurance policy that allows the policyholder to convert the term policy to another life policy without evidence of insurability.
Emergency Fund
An emergency fund is money set aside to allow you to weather any unexpected events or expenses in your life. Emergency funds are often used to pay for expenses not incorporated into the budget such as property losses or medical expenses not covered by insurance, or living expenses during a period of unemployment. It is generally recommended that your emergency fund equal three to six months of your living expenses.
Estate Planning
The process of planning for the efficient transfer of assets at one's death. Estate planning begins with preparing a will and may also include naming a power of attorney, establishing trusts and making pre-death gifts. For high net worth individuals, it may also include estate and gift tax planning.
Estate Tax
Tax imposed by a state or the federal government on the transfer of property from a deceased to his/her heirs.
Evidence of Insurability
Answers to health and lifestyle related questions, medical exam results, medical records or other documentation that allow the insurance company to evaluate whether you are an acceptable risk.
Executor
An individual or institution that is tasked with the settling of an estate for the deceased. Activities may include gathering the assets, paying the taxes and distributing the estate in accordance with the will.
Face Amount
The named dollar amount of coverage provided by a life insurance policy. Generally, the face amount is the same as the death benefit - the amount paid to the named beneficiary upon the insured's death. However, the death benefit may vary over time if the policyholder elects to exercise an increase option or borrows against any policy cash value.
Final Expenses
Expenses that occur at the death of an individual that must be paid before concluding the probate process. Examples include estate taxes, medical bills, funeral expenses, legal fees, probate costs, outstanding debts, appraisal fees and the like.
Human Life Value
The value of the tasks a family member provides to the rest of the family. The economic value for a non-working spouse would be equal to the cost the family would incur to hire someone to complete the tasks in the absence of the non-working spouse less the cost of that spouse's personal maintenance. These costs usually include childcare and housekeeping but may also include transportation, the cost of eating out more often, tutoring and the like.
Illustrations of Life Insurance Policies
The printed projections of a life insurance policy's performance based on certain return and premium payment assumptions. Life insurance illustrations show both guaranteed and non-guaranteed values of a life insurance policy assuming no change over time in premium payments, death benefits, etc. Since interest rates applied to cash values will fluctuate over time and cannot be predicted, illustrations should not be viewed as a true projection of future policy values.
Insurable
An individual is insurable if he or she is able to obtain life insurance under the insurance company's underwriting criteria. Insurability is usually based upon the individual's age, health, occupation and lifestyle.
Licensed Insurance Agent
Agents must be licensed by the state(s) where they sell insurance products. Many are trained to assist you in determining your insurance needs for life, health, disability, long term care, auto, and home insurance as well as annuity contracts. Many insurance agents are also registered representatives and are allowed to sell life insurance and annuity contracts.
Insurer Risk
The risk that an insurance company will be unable to meet its obligations to policyholders.
Irrevocable Trust
A trust usually established by an individual that may not be changed or revoked in the future. The individual setting up the trust is usually referred to as the grantor. The grantor surrenders control over the property by transferring it to the trust. Thereafter, the trust assets are controlled by the trustee of the trust who manages and distributes assets to the trust beneficiaries according to the terms spelled out in the trust document. Since the property that is transferred to the trust is no longer owned or controlled by the grantor, it does not pass through probate and is no longer subject to federal estate taxes. However, the transfer of property to an irrevocable trust may cause gift tax liability. Before you transfer property to an irrevocable trust, you should ensure that you understand the full ramifications of your action by consulting your tax advisor.
Joint Beneficiaries
Parties that share in any death benefits payable under the life insurance policy or annuity contract. If no beneficiary has been named on the policy, the benefits usually pass directly to the estate of the deceased owner, and thereby fail to avoid probate.
Liability
A financial obligation, debt or claim against a person or institution.
Life Insurance
An insurance policy that pays a death benefit to the beneficiaries when the insured dies.
Liquidity
The ability of an asset to be converted into cash quickly and without significant loss of value.
Living Trust
A trust established during the lifetime of the person creating the trust, rather than under the person's will. Also known as an inter vivos trust.
Minimum Rate Guarantee
The minimum fixed interest rate an insurance company pays on the cash value of a universal life insurance policy. The minimum rate guaranteed is stated in the insurance policy.
Mutual Fund
An investment account that invests in a variety of securities selected according the fund's objective. Managed by a professional portfolio manager, a mutual fund may invest in any combination of cash equivalents, stocks, or bonds. Rather than having a single investor, mutual funds pool the money of many investors each of whom owns a proportionate share of the fund. Each investor shares in the fund's income or capital gains or losses in proportion to the investor's ownership interest.
Net Worth
Total assets minus total liabilities of an individual or company.
Policyholder
The individual or entity that owns the life insurance policy. The policyholder may be different from the insured. For example, a grandparent (the policyholder) may own a life insurance policy on a grandchild (the insured).
Policy Value
A universal life insurance policy's equivalent of a cash value. The policy value is built by the accumulation of premiums plus interest less charges for expenses and mortality costs and other risk charges.
Power of Attorney (POA)
Authority given to a person to act in one's behalf on most required activities.
Premium
The money the owner of an insurance policy or annuity contract pays to the insurance company in order to obtain insurance protection or receive certain benefits
Probate
The judicial process of proving the validity of a will under state law. The goal of these laws is to ensure that the decedent's estate is settled correctly and that those entitled to the decedent's property both under the will and under state law receive that property.
Risk Tolerance
An investor's ability to withstand declines in the value of his/her portfolio, financially and emotionally.
Surrender Charge
The fee an insurance company would assess against the cash value of a life insurance policy if the owner were to surrender the policy and during the surrender charge period. The amount of the surrender charge may be highest in the first few years and decrease over time until eventually it is zero.
Surrender Charge Period
The number of years during which the insurance company would charge the owner a fee if the owner chooses to surrender the life insurance policy or annuity contract.
Surrender Charge Schedule
A schedule showing the fee the insurance company charges for making early withdraws from the annuity contract.
Survivors
Individuals, usually family members, who face emotional and sometimes financial setbacks because of your death.
Trust
A legal arrangement that one party (the grantor or settlor) uses to transfer assets to a second party (the trustee). The assets are held and invested for the benefit of one or more third parties (the beneficiaries). See living trust and revocable trust.
Trustee
The institution or individual that is named to hold, manage, and distribute a trust's assets.
Underwriter
Makes the determination of who can be insured and at what rate.
Uninsurable
An individual who is unable to obtain insurance coverage due to the high risk he or she represents to the insurance company. For example, most insurance companies would consider an individual with a serious life-threatening disease to be uninsurable for purposes of purchasing life insurance.
Universal Life Insurance
A flexible life insurance policy that provides death benefits and the potential to build cash values within the policy on a income tax deferred basis. Universal life offers flexibility in the amount and timing of premium payments and the ability to vary the death benefit (subject to certain restrictions).
Will
A legally enforceable document allowing an individual to direct the distribution of his/her property after death.
