1035 exchange

See IRS Form 1099.

1099

See Section 1035 Exchange.

20 percent rule

See percentage-of-income rule.

401(k) plan

In the United States, a special type of profit-sharing plan, savings plan, or retirement plan that is established by employers for the benefit of employees and that allows both employers and employees to make specified contributions to the plan on a tax-deferred basis.

403(b) plan

In the United States, an arrangement that allows not-for-profit employers and their employees to make contributions to a tax-deferred retirement savings plan established for the benefit of employees.

457 plan

In the United States, an arrangement that allows state and local governments and their employees to make contributions to a tax-deferred retirement savings plan established for the benefit of employees.

5498

See IRS Form 5498.

AADLs

See advanced activities of daily living.

ABC

See activity-based costing.

absolute assignment

An irrevocable transfer of complete ownership of a life insurance policy or an annuity from one party to another. Contrast with collateral assignment.
See also assignment.

ACB

See adjusted cost basis.

Accelerated Benefits Model Regulation

In the United States, a National Association of Insurance Commissioners (NAIC) model regulation designed to regulate accelerated death benefit provisions and to impose disclosure standards on insurers that provide such benefits.

accelerated death benefit

A benefit included in a life insurance policy or added to a life insurance policy through a policy rider that gives the policyowner the right to receive a portion-usually between 50 and 80 percent-of the policy's death benefit during the insured's lifetime when the insured is terminally ill as defined in the policy. Also known as terminal illness (TI) benefit.

acceptable alternative mechanism

For purposes of the Health Insurance Portability and Accountability Act (HIPAA) in the United States, a state-approved plan that provides health insurance coverage to all eligible individuals without imposing preexisting conditions exclusions and gives eligible individuals a choice of health insurance coverage.

accident insurance

A type of health insurance coverage that only provides benefits for an insured’s death, dismemberment, disability, or medical care that results from the insured being in an accident. See also health insurance.

accidental death and dismemberment (AD&D) benefit

A supplementary life insurance policy benefit that provides for an amount of money in addition to the policy’s basic death benefit. This additional amount is payable if the insured dies as the result of an accident or if the insured loses any two limbs or the sight in both eyes as the result of an accident.

accidental death benefit (ADB)

A supplementary life insurance policy benefit that provides a death benefit in addition to the policy’s basic death benefit if the insured’s death occurs as the result of an accident. See also double indemnity benefit.

account

The basic tool that a company uses to record, group, and summarize similar types of financial transactions.

account fee

In unbundled variable insurance products, an annual charge to customers generally expressed as the lesser of a specified dollar amount or a percentage, such as 2 percent of the account value.

account form

The presentation format of a balance sheet in which asset accounts appear on the left side and liabilities and owners’ equity accounts appear on the right side.

account payable

A liability account that represents a contractual promise of payment by the holder of the account to another party.

account receivable

An asset account that represents a contractual promise by another party to pay an amount to the holder of the account.

accounting

A system or set of rules and methods for collecting, recording, summarizing, reporting, and analyzing a company’s financial information.

accounting controls

The policies and procedures used to authorize financial transactions, safeguard assets, and provide reliable, timely, and fairly presented financial information about a company.

accounting entry

A record of a financial transaction that includes at least one debit and one credit and shows the monetary value of the transaction in balance on a specified date. See also credit and debit.

accredited reinsurer

A reinsurance company that is not licensed in the ceding company’s jurisdiction, but meets specified financial and reporting requirements of that jurisdiction and holds a license in and is domiciled in at least one other jurisdiction.

accrual-basis accounting

An accounting system in which a company records revenues when they are earned and expenses when they are incurred, even if the company has not yet received the revenues or paid the expenses.

accrued income

(1) In accounting, income that has already been earned, but which is not receivable until a specified date in the next accounting period. (2) In investments, the amount of interest that has been earned on a bond, but which is not yet payable to the bondholder as of the financial reporting date.

accumulated cost of insurance

For a life insurance product at a specified point in time, the total amount the insurer has paid in benefits, accumulated at interest.

accumulated value

The total of an amount of money invested plus the interest earned by that money.

accumulated value of an annuity

At any given date during the accumulation period of a fixed deferred annuity, the net amount paid for the annuity, plus interest earned, less the amount of any withdrawals or surrender charges. The accumulated value of a variable, deferred annuity is calculated based on the value of the contract owner’s interest in the separate accounts used to fund the annuity. Also known as accumulation value of an annuity and account value of an annuity.

accumulated value of net premiums

For a life insurance product at a specified point in time, the total of the net premiums collected, accumulated at interest.

accumulation at interest dividend option

An option, available to the owners of participating insurance policies, that allows a policyowner to leave policy dividends on deposit with the insurer and earn interest. See also dividends and policy dividend options.

accumulation period

For a deferred annuity contract, the time period between the date that the contract owner purchases the annuity and either (1) the date that periodic income payments begin or (2) the date that the contract’s surrender value is paid. During the accumulation period, the accumulation value of the annuity account grows.

accumulation unit

A unit of measurement that represents an ownership share in a selected subaccount of a variable deferred annuity during its accumulation period. After the accumulation period ends, the accumulation units are used to buy annuity units. See also accumulation period and annuity units.

ACLF

See adult congregate living facility.

ACLI

See American Council of Life Insurers.

acquisition-cost concept

See cost concept.

acquisition expenses

Costs that are directly attributable to the production of new business. See also policy acquisition expenses.

actively-at-work provision

A group insurance policy provision which states that, in order to be eligible for coverage, an employee must be actively at work—rather than ill or on leave—on the day the coverage is to take effect. If the employee is not actively at work on that day, the group insurance coverage does not become effective until the next day that the employee is actively at work.

active management strategy

An investment strategy in which an asset manager views any security in a portfolio as potentially tradable, if doing so would improve the portfolio’s performance. See also portfolio and security.

activities of daily living (ADLs)

In long-term care insurance, activities such as eating, bathing, and dressing that an insured must be unable to perform in order to demonstrate a need for long-term care and, thus, qualify for long-term care benefits.

activity-based costing (ABC)

An accounting method for estimating the price of a product or service that links costs to products based on the activities consumed in producing the products or services. See also activity cost.

activity cost

In activity-based costing (ABC), the cost attributable to a specified activity, such as telephone charges in an insurer’s customer call center. See also activity-based costing (ABC).

activity ratios

Financial ratios, measuring the speed with which various assets are converted into sales or cash, that gauge the productivity and efficiency of a company. Also known as operating efficiency ratios.

actual cash value insurance

A type of homeowner’s insurance that pays the policyholder an amount equal to the replacement cost of the property minus an amount for depreciation.

actual net debt

For purposes of determining the benefit payable under a consumer credit insurance policy, the lump-sum amount needed on any given date to pay off the debt, excluding unearned interest and any other unearned finance charges.

actuarial assumptions

The estimated values—for such elements of insurance product design as mortality rates, investment earnings, expenses, and policy lapses—on which an insurer bases its product pricing and policy reserve calculations.

actuarial cost method

A formal approach used for preparing valuations of defined benefit pension plan liabilities in order to ensure that the plan is adequately and systematically funded. Also known as actuarial funding method and pension plan valuation method.

actuarial function

The area of an insurance company responsible for seeing that the company’s operations are conducted on a mathematically sound basis. In conjunction with other departments, it designs and revises a company’s insurance products, establishes premium and dividend rates, determines what a company’s reserve liabilities should be, and establishes nonforfeiture, surrender, and loan values. It also does the research needed to predict mortality and morbidity rates, to establish guidelines for selecting risks, and to determine the profitability of the company’s products.

actuarial funding method

See actuarial cost method.

actuarial liabilities

See reserves.

actuarial memorandum

A report, required in many U.S. policy form filings, which demonstrates that the policy in question complies with all state insurance laws and regulations that apply to the actuarial (mathematical) soundness of the policy.

Actuarial Opinion and Memorandum Regulation (AOMR)

Under the Standard Valuation Law in the United States, a requirement for insurers to (1) submit an actuarial opinion to state in essence that the insurer’s reserves and associated assets make adequate provision for anticipated cash flows arising from the insurer’s contractual obligations and (2) prepare an actuarial memorandum in support of the opinion. This memorandum is not submitted unless requested by an insurance department.

actuarial opinion statement

In the United States, a separate document that must be submitted along with the Annual Statement by insurance companies that issue interest-sensitive products; this document represents an independent analysis of an insurance company’s financial data.

actuarial valuation of pension plan benefits

The outcome or process of finding the actuarial present value, as of a specified valuation date, of a defined benefit pension plan’s future benefit payments.

actuarial valuation

A determination by an actuary, based on statistical probability, of the value of assets and/or liabilities.

actuary

A technical expert in insurance, annuities, and financial instruments who applies mathematical knowledge to industry and company statistics to calculate an insurance company’s mortality rates, morbidity rates, lapse rates, premium rates, policy reserves, and other financial values. See also product actuary, valuation actuary, and appointed actuary.

ADA

See Americans with Disabilities Act.

ADB

See accidental death benefit.

AD&D

See accidental death and dismemberment benefit.

additional insured rider

See second insured rider.

additional term insurance option

An option available to owners of participating insurance policies under which the insurer uses a policy dividend as a net single premium to purchase one-year term insurance on the insured’s life. Also known as fifth dividend option. See also dividend and policy dividend options.

ADEA

See Age Discrimination in Employment Act.

adjustable life insurance

A form of life insurance that allows policyowners to vary the type of coverage provided by their policies as their insurance needs change.

adjusted cost basis (ACB)

A measure of the cost of a life insurance policy at a given time.

adjusted premium

An amount used in the calculation of cash values for life insurance; this amount is equal to the policy’s valuation net annual premium plus an amount added to account for an insurer’s expenses.

adjusting entry

An accounting entry that a company makes to record internal financial transactions or correct errors that occur in one or more accounting periods.

adjustment methods provision

In an annuity contract, a written statement describing the steps the insurer will take to correct any material misstatement of age or sex. See also misstatement of age or sex provision.

ADLs

See activities of daily living.

administrative fee

For annuities, a fee charged by insurers to cover costs such as issuing a fixed or variable annuity, making administrative changes to the annuity contract, and preparing the contract owner’s statement. In the case of some fixed annuity contracts, fees are not charged separately but have been included in the premiums charged for the contract. In other cases, a stated, flat dollar amount is automatically deducted from the customer’s annuity account value each year. For variable annuities, the fee may be expressed as a percentage of the assets in the investment subaccounts. Also known as administration charge, administration expense fee, and contract fee.

administrative services only (ASO) contract

A contract under which an insurer or other organization, such as a third-party administrator, agrees to provide administrative services for an employer that is self-funding an insurance benefit plan rather than purchasing group insurance. See also third-party administrator (TPA).

Administrative Supervision Model Act

In the United States, a National Association of Insurance Commissioners (NAIC) model law that authorizes the insurance commissioner of an insurer’s state of domicile to place the insurer under administrative supervision. See also administrative supervision.

administrative supervision

A legal condition under which an insurer in the United States may be required to obtain the permission of the insurance commissioner of its domiciliary state before the insurer takes any of a variety of specified actions. See also Administrative Supervision Model Act.

admitted assets

For an insurer, assets whose full value can be reported on the Assets page of the U.S. Annual Statement. Contrast with nonadmitted assets.

admitted reinsurer

See authorized reinsurer.

adult congregate living facility (ACLF)

In long-term care insurance, a type of assisted living facility designed mostly for middle- to lower-income groups, with less spacious living quarters than continuing care retirement communities and meals served in a central dining room.

adult day care

In long-term care insurance, care provided to adults in a group setting during hours when primary caregivers are working.

advance and arrears system

A premium accounting method used in the home service distribution system under which the home service company charges the individual agent with the amount of all premiums due on the policies the agent services. When the agent sends the collected premiums, the company credits the agent with the amount of premiums collected. See also home service system and industrial insurance.

advanced activities of daily living (AADLs)

In long-term care insurance, vocational, social, or recreational activities that reflect personal choice and add meaning and richness to a person’s life. The AADLs include working; attending church; going out to dinner, a theater, or a concert; playing cards; participating in physical recreational activities; and driving an automobile.

advanced underwriting department

A department within an insurance company that assists agents with estate planning and business insurance cases; this department prepares proposals based on the information the agent has collected; accompanies the agent, if requested, on sales presentations; provides computer support services; and conducts seminars and counsels agents regarding tax laws and methods of using insurance products to solve estate planning problems.

adverse action

According to the Fair Credit Reporting Act in the United States, (1) a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested; or (2) a denial or cancellation of insurance, an increase in any charge for insurance, a reduction in coverage, or any other adverse or unfavorable change in the terms or amount of existing insurance or coverage applied for by a consumer.

adverse deviation

In insurance product design, a difference between actual and assumed product values that produces a decrease in actual product profitability relative to assumed product profitability. Contrast with favorable deviation.

adverse selection

See antiselection.

adverse underwriting decision

An underwriting decision in which an insurer refuses to issue insurance coverage to an applicant, terminates existing coverage, or offers to provide an applicant with insurance at higher than standard premium rates.

advertisement

According to the National Association of Insurance Commissioners (NAIC) Rules Governing the Advertising of Life Insurance, any material designed (1) to create public interest in life insurance or annuities, an insurer, or an insurance producer or (2) to induce the public to purchase, increase, modify, reinstate, borrow on, surrender, replace, or retain a policy.

affiliate reinsurer

A type of captive reinsurer that is established for use by a group of affiliated insurers. See also captive reinsurer.

after-tax dollars

Money after taxes have been paid on it.

Age Discrimination in Employment Act (ADEA)

A United States federal law that protects workers age 40 and older from being discriminated against because of their age.

age provision

An annuity contract provision that specifies a maximum issue age for annuitants, typically between 70 and 85 years old.

agency

A legal relationship in which one party, known as the principal, authorizes another party, known as the agent, to act on the principal’s behalf. See also agent and principal.

agency administration

All of the activities performed by an insurer’s home office employees or by field office personnel to provide support and service to the insurer’s field force. See also field force.

agency agreement

A written contract that spells out the rights and duties of a principal and an agent and the scope of the agent’s actual authority. Also known as agency contract. See also agent and principal.

agency-building distribution system

A type of insurance sales distribution system wherein companies recruit and train their salespeople, and provide them with financial support and office facilities. Four general types of agency-building distribution systems are ordinary agency distribution systems, multiple-line agency (MLA) systems, salaried sales distribution systems, and location-selling distribution systems. Contrast with nonagency building distribution system. See also location-selling
distribution systems, multiple-line agency (MLA) systems, ordinary agency distribution systems, and salaried sales distribution systems.

agency contract

See agency agreement.

agency distribution plan

A document that describes an insurance company’s goals and objectives for product distribution and serves as a guide for each field office’s own operating plan.

agency system

See agency-building distribution system.

agent

(1) In agency law, a party who is authorized by another party, the principal, to act on the principal’s behalf in contractual dealings with third parties. See also principal. (2) In insurance, any person or entity representing an insurance company and selling insurance. See also agent-broker, broker, general agent (GA), and personal producing general agent (PPGA).

agent-broker

A career insurance agent who places business with a primary company and with other insurance companies.

agents’ debit balances

Amounts that sales agents have collected from customers and owe to an insurer.

agent’s statement

A portion of the insurance application that contains the agent’s comments about or impressions of the proposed insured and the risk involved; this statement is usually not made a part of the policy contract.

aggregate level cost allocation methods

Pension plan valuation methods that measure costs directly for an entire pension plan without attribution to individual plan participants. Also known as aggregate level-premium cost methods. Contrast with individual level cost allocation methods.

aggregate level-premium cost methods

See aggregate level cost allocation methods.

aggregate stop-loss coverage

A type of stop-loss insurance coverage purchased by self-insured employers that provides benefits to the employer when total group health claims exceed a stated dollar amount within a stated period of time. See also individual stop-loss coverage.

aggregation rule

A United States federal income tax rule stating that all deferred annuity contracts that were entered into after October 21, 1988, and that were issued by the same insurer to the same contract owner during the same calendar year, will be treated as one contract for purposes of determining the amount of any withdrawal that is included in income.

aggressive financial strategy

A financial management strategy that places an unusually strong emphasis on profitability and de-emphasizes solvency.

AICPA

See American Institute of Certified Public Accountants.

AIR

See assumed investment return.

aleatory contract

A contract in which one party provides something of value to another party in exchange for a conditional promise, which is a promise that the other party will perform a stated act upon the occurrence of an uncertain event. Insurance contracts are aleatory because the policyowner pays premiums to the insurer, and in return the insurer promises to pay benefits if the event insured against occurs. Contrast with commutative contract.

alien corporation

From the point of view of any state in the United States, a company that is incorporated under the laws of another country. Contrast with domestic corporation.

allied medical practitioner

A licensed health care provider who is not a licensed medical doctor; for example, chiropractors, osteopaths, or nurse midwives.

allocated pension funding contract

A type of pension plan contract in which all of the plan sponsor’s contributions are credited to individuals in a manner that gives the individual-participants a legally enforceable claim to the benefits attributable to those contributions. Contrast with unallocated pension funding contract.

allowable expenses

According to the coordination of benefits provision included in most group medical expense insurance policies, those reasonable and customary expenses that the insured incurred and that are covered under at least one of the insured’s group medical expense plans.

allowance

In a reinsurance arrangement, the reinsurer’s proportionate share of the agent commissions, underwriting costs, administration costs, policy issue costs, and other expenses that an insurer incurs in acquiring a policy.

all-risk policy

A type of homeowner’s insurance that covers losses caused by all perils other than those excluded in the policy.

ALM

See asset/liability management.

alpha split

See alphabetic split.

alphabetic split

A method insurance companies use to transfer excess risk to two or more reinsurers by assigning cases to each reinsurer according to policyowners’ last names. Also known as alpha split. See also reinsurance.

alternate care benefits

In long-term care insurance (LTC) plans, benefits for nonconventional services developed cooperatively by a physician and an insurer to substitute for more expensive nursing home care. May include special medical care and treatments, different sites of care, or even medically necessary modifications to an insured person’s home.

amendment

A provision added to a contract that modifies an existing provision.

American Academy of Actuaries

A professional organization of actuaries in the United States.

American Council of Life Insurers (ACLI)

A U.S. organization that collects and disseminates data on life insurance markets.

American Institute of Certified Public Accountants (AICPA)

A professional association of U.S. Certified Public Accountants (CPAs) that directly influences accounting practice in the United States in a variety of ways, including the development of generally accepted auditing standards (GAAS).

Americans with Disabilities Act (ADA)

A U.S. federal law that protects disabled individuals against all types of discrimination, including employment discrimination.

amortized cost

An asset’s historical cost, less any adjustment, such as depreciation or amortization, to the asset’s book value.

analytical phase of IRIS.

The second phase of the Insurance Regulatory Information System (IRIS) used in the United States to monitor the financial condition of insurers. IRIS was established and is operated by the National Association of Insurance Commissioners (NAIC). During this phase, NAIC examiners apply qualitative and quantitative standards to further analyze the Annual Statement data of insurers that had a number of unusual ratios during the first phase of IRIS analysis. See also Insurance Regulatory Information System (IRIS) and statistical phase of IRIS.

annual annuity

An annuity that provides for a series of annual benefit payments.

annual percentage rate (APR)

See effective interest rate.

annual policy report

A statement an insurer issues at the end of each policy year to a policyowner to provide a summary of policy transactions that year.

annual report

(1) A financial document that an incorporated business issues to its stockholders, and other interested parties, to report the business’s activities and financial status for a specified period, which is usually the preceding year. (2) A report that an insurer must provide to variable insurance contract owners describing the investment performance of subaccounts for the preceding year.

annual reset method

A method for crediting excess interest to an equity-indexed annuity that involves comparing the value of the index at the start of the contract year with its value at the end of the contract year. The starting value for the next year is reset to the value of the index at the end of the current contract year. The insurer determines the amount of excess interest by averaging the results for each contract year of the contract term. Also known as ratchet method.

Annual Return

In Canada, an accounting report that presents information about an insurer’s operations and financial performance which every company subject to federal regulation must file with the Office of the Superintendent of Financial Institutions.

Annual Statement

A financial report that every insurer in the United States must file at least annually with the National Association of Insurance Commissioners (NAIC) and the insurance regulatory organization in each state in which the insurer conducts business. Regulators use the information in the report to evaluate an insurance company’s solvency and its compliance with insurance laws.

annualized premium

In the home service insurance distribution system, the amount of premium scheduled to be paid to an insurer for all the insurance policies in an agent’s book of business during the course of one year.

annually renewable term (ART) insurance

See yearly renewable term (YRT) insurance.

annuitant

The person whose lifetime is used to measure the length of time periodic income payments are payable under an annuity contract and who usually receives the annuity benefit payments.

annuitization period

See payout period.

annuitization

An annuity contract payout option that provides annuity benefit payments that are tied to the life expectancy of the annuitant.

annuity

(1) A series of periodic payments. (2) A financial contract between an insurer and a customer under which the insurer promises to make a series of periodic benefit payments to a named individual—the payee—in exchange for the contract owner’s payment of a premium or series of premiums to the insurer. See also annuity certain, annuity due, deferred annuity, ordinary annuity, and straight life annuity.

annuity beneficiary

The person or party named to receive any survivor benefits that are payable during the accumulation period of a deferred annuity. See also survivor benefits.

annuity certain

A type of annuity contract that pays periodic income benefits for a stated period of time, regardless of whether the annuitant lives or dies. Also known as period certain annuity. Contrast with straight life annuity. See also payout options.

annuity contract

See annuity.

annuity conversion cost

The amount that a deferred annuity contract owner pays to obtain a specified dollar amount of periodic income payment upon annuitization of the contract. Contrast with annuity purchase cost.

annuity cost

A monetary amount that is equal to the present value of future periodic income payments under an annuity. See also gross annuity cost, net annuity cost, and income date.

annuity cost factor

A factor provided for use in determining the price or cost for a given amount of periodic income payment under an annuity payout option. An annuity conversion factor is the type of annuity cost factor used for converting a deferred annuity to an immediate annuity. An annuity purchase factor is the type of annuity cost factor used when a new customer purchases an immediate annuity.

annuity date

See income date.