Glossary of Insurance Terms

The definitions appearing in this Glossary are provided solely for general informational purposes. They are not intended to be complete descriptions of all terms As well, in the case of any inconsistency between the definitions in this Glossary and the definitions appearing in the actual policy, the definitions contained in the actual policy shall govern.

[A]

Advanced Care Directive: This is a will which specifically expresses the testator’s desire not to be kept alive on life support machines, should the occasion arise. Templates for this are on the Health Authority websites as VCH and FVH

Annuity:A contract which provides an income for a specified period of time, such as a certain number of years or for life. An annuity is like a life insurance policy in reverse. The purchaser gives the life insurance company a lump sum of money and the life insurance company pays the purchaser a regular income, usually monthly.

Accrued Income: Income that has been earned but not yet received. For instance, if you have a non-registered Guaranteed Investment Certificate (GIC), Mutual Fund or Segregated Equity Fund, growth accrues annually or semi-annually and is taxable annually even though the gain is only paid at maturity of your investment.

Annuitant: This is the person during whose life an annuity is payable.

Application: A signed statement of facts made by a person applying for life insurance and then used by the insurance company to decide whether or not to issue a policy. The application becomes part of the insurance contract when the policy is issued.

Assignment: This is the legal transfer on one person’s interest in an insurance policy to another person or entity, such as to a bank to qualify for a loan

Attribution Rules Legislation under which interest, dividends, or capital gains earned on assets you transfer to your spouse will be treated as your own for tax purposes. Interest or dividends relating to property transferred to children under 18 also will be attributed back to you. The exception to this rule is that capital gains relating to property transferred to children under 18 will not be attributed back to you.

 

Authorization – The power or right to act on behalf of another.

[B]

Backdating: A procedure for making the effective date of a policy earlier than the application date. Backdating is often used to make the age of the consumer at policy issue lower than it actually was in order to get a lower premium.

Back To Back Annuity:

This term refers to the simultaneous issue of a life annuity with a non-guaranteed period and a guaranteed life insurance policy [usually whole life or term to 100]. The face value of the life insurance would be the same amount that was used to purchase the annuity. This combination of life annuity providing the highest payout of all types of annuities, along with a guaranteed life insurance policy allowed an uninsurable person to convert his/her RRSP into the best choice of annuity and guarantee that upon his/her death, the full value of the annuity would be paid tax free through the life insurance policy to his family members. However, in the early 1990’s, the Federal tax authorities put a stop to the issuing of standard life rates to rated or uninsurable applicants. Insuring a life annuity in this manner is still an excellent way to provide guaranteed tax free funds to family members but the application for the annuity and the application for the life insurance are separate transactions and today, most likely conducted through two different insurance companies so that there is no suspicion of preferential treatment given to the life insurance application.

Beneficiary:

This is the person who benefits from the terms of a trust, a will, an RRSP, a RRIF, a LIF, an annuity or a life insurance policy. In relation to RRSP’s, RRIF’s, LIF’s, Annuities and of course life insurance, if the beneficiary is a spouse, parent, adopting parents, offspring, adopted child, children of adopted children or grand-child, they are considered to be a preferred beneficiary. If a policy was issued in Canada prior to July 1, 1962, then the signature of the preferred beneficiary named in that policy is required to release any rights to that preferred beneficiary. If the insured has named a preferred beneficiary, the death benefit is invariably protected from creditors. There have been some court challenges of this right of protection but so far they have been unsuccessful. See “Creditor Protection” below. A beneficiary under the age of 18 must be represented by an individual guardian over the age of 18 or a public official who represents minors generally. A policy owner may, in the designation of a beneficiary, appoint someone to act as trustee for a minor. Death benefits are not subject to income taxes. If you make your beneficiary your estate, the death benefit will be included in your assets for probate. Probate filing fees are different in each province.

Another way to avoid probate fees or creditor claims against life insurance proceeds is for the insured person to designate and register with his/her insurance company’s head office an irrevocable beneficiary. By making such a designation, the insured gives up the right to make any changes to his/her policy without the consent of the irrevocable beneficiary. Because of the seriousness of the implications, an irrevocable designation should only be made for good reason and where the insured fully understands the consequences.

Binder – A temporary or preliminary agreement, which provides coverage until a policy can be written or delivered.

Broker – An independent person or firm who acts on behalf of the insured in placing business with the insurance company. Responsible for the collection of premiums but having no authority to give coverage on the insurance company’s behalf without their specific agreement. Compensation is on a commission basis.

Buy/Sell Agreement:

This is an agreement entered into by the owners of a business to define the conditions under which the interests of each shareholder will be bought and sold. The agreement sets the value of each shareholders interest and stipulates what happens when one of the owners wishes to dispose of his/her interest during his/her lifetime as well as disposal of interest upon death or disability. Life insurance, critical illness coverage and disability insurance are major considerations to help fund this type of agreement.

 

[C]

Cancellation– Termination of an insurance coverage during the policy period by the voluntary act of the insurance company or insured, effected in accordance with provisions in the contract or by mutual agreement.

Cash Surrender Value: This is the amount available to the owner of a life insurance policy upon voluntary termination of the policy before it becomes payable by the death of the life insured. This does not apply to term insurance but only to those policies which have reduced paid up values and cash surrender values. A cash surrender in lieu of death benefit usually has tax implications.

Captive Agent: A licensed insurance agent who sells insurance for only one company.

Co-insurance :In medical insurance, the insured person and the insurer sometimes share the cost of services under a policy in a specified ratio, for example 80% by the insurer and 20% by the insured. By this means, the cost of coverage to the insured is reduced.

Compound Interest: Interest earned on an investment at periodic intervals and added to principal and previous interest earned. Each time new interest earned is calculated it is on a combined total of principal and previous interest earned. Essentially, interest is paid on top of interest.

Contingent Beneficiary:This is the person designated to receive the death benefit of a life insurance policy if the primary beneficiary dies before the life insured. This is a consideration when husband and wife make each other the beneficiary of their coverage. Should they both die in the same car accident or plane crash, the death benefits would go to each others estate and creditor claims could be made against them. Particularly if minor children could be survivors, then a trustee contingent beneficiary should be named.

Contingent Owner:This is the person designated to become the new owner of a life insurance policy if the original owner dies before the life insured.

Conversion Right:Term life insurance products are offered as non-convertible or convertible to a certain time in the future. The conversion right has a time limit, usually to the policy holder’s age 60 or possibly even age 70. This right means that the policy holder has the right to convert their existing policy to another specific different plan of permanent insurance within the specified time period, without providing evidence of insurability. There is a slightly higher cost for a term policy with the conversion privilege but it is a valuable feature should a policy holder’s health change for the worst and continued insurance coverage becomes a necessity.

Most often this right is also granted to individuals covered under employee group benefit policies where individuals leaving the employee group have a limited amount of time, usually anywhere from 30 to 90 days, to convert to a specific permanent individual policy without evidence of insurability.

Creditor Proof Protection:The creditor proof status of such things as life insurance, non-registered life insurance investments, life insurance RRSPs and life insurance RRIFs make these attractive products for high net worth individuals, professionals and business owners who may have creditor concerns. Under most circumstances the creditor proof rules of the different provincial insurance acts take priority over the federal bankruptcy rules.

The provincial insurance acts protect life insurance products which have a family class beneficiary. Family class beneficiaries include the spouse, parent, child or grandchild of the life insured, except in Quebec, where creditor protection rules apply to spouse, ascendants and descendants of the insured. Investments sold by other financial institutions do not offer the same security should the holder go bankrupt. There are also circumstances under which the creditor proof protections do not hold for life insurance products. Federal bankruptcy law disallows the protection for any transfers made within one year of bankruptcy. In addition, should it be found that a person shifted money to an insurance company fund in bad faith for the specific purpose of avoiding creditors, these funds will not be creditor proof.

 

 

[D]

Declaration– A term used in insurance for the portion of the contract which contains information such as the name and address of the insured, , the policy period, the amount of insurance coverage, applicable premiums, and supplemental representations by the insured.

  • the types of coverage you have elected;
  • the limit for each coverage;
  • the cost for each coverage;
  • other information applicable to the policy.

Deferred Annuity: An annuity providing for income payments to commence at a specified future time.

Deemed Disposition: Under certain circumstances, taxation rules assume that a transfer of property has occurred, even though there has not been an actual purchase or sale. This could happen upon death or transfer of ownership.

Disability Insurance: Insurance that pays you an ongoing income if you become disabled and are unable to pursue employment or business activities. There are limits to how much you can receive based on your pre-disability earnings. Rates will vary based on occupational duties and length of time in a particular industry. This kind of coverage has a waiting period before you can begin collecting benefits, usually 30, 60 or 90 days. The benefit paying period also varies from 2 years to age 65. A short waiting period will cost more that a longer waiting period. As well, a long benefit paying period will cost more than a short benefit paying period.

Diversification:Investing so that all your eggs are not in the same basket. By spreading your investments over different kinds of investments, you cushion your portfolio against sudden swings in any one area. Segregated equity funds have become a popular and secure way for average investors to get the benefits of greater diversification.

Dividend:As the term dividend relates to a corporation’s earnings, a dividend is an amount paid per share from a corporation’s after tax profits. Depending on the type of share, it may or may not have the right to earn any dividends and corporations may reduce or even suspend dividend payments if they are not doing well. Some dividends are paid in the form of additional shares of the corporation. Dividends paid by Canadian corporations qualify for the dividend tax credit and are taxed at lower rates than other income.

As the term dividend relates to a life insurance policy, it means that if that policy is “participating”, the policy owner is entitled to participate in an equitable distribution of the surplus earnings of the insurance company which issued the policy. Surpluses arise primarily from three sources: (1) the difference between anticipated and actual operating expenses, (2) the difference between anticipated and actual claims experience, and (3) interest earned on investments over and above the rate required to maintain policy reserves. Having regard to the source of the surplus, the “dividend” so paid can be considered, in part at least, as a refund of part of the premium paid by the policy owner.

(1) take the dividend in cash,

(2) apply the dividend to reduce current premiums,

Dollar Cost Averaging: A way of smoothing out your investment deposits by investing regularly. Instead of making one large deposit a year into your RRSP, you make smaller regular monthly deposits. If you are buying units in a mutual fund or segregated equity fund, you would end up buying more units in the month that values were low and less units in the month that values were higher. By spreading out your purchases, you don’t have to worry about buying at the right time.

[E]

Effective Date – The date on which an insurance policy or bond goes into effect, and from which protection is furnished.

Endorsement – Amendment to the policy used to add or delete coverage. It is also referred to as a “rider.”

Endowment:Life insurance payable to the policyholder, if living on the maturity date stated in the policy, or to a beneficiary if the insured dies before that date. For example, some Term to age 100 policies offer the option of taking the face amount of the policy as a cash payout at age 100 if the policyholder is still alive and paying all required income taxes on the amount received or leaving the policy to pay out upon death whereupon the payout is tax free.

Errors and Omissions Insurance:Insurance coverage purchased by the agent/broker which provides protection against loss incurred by a client because of some negligent act, error, oversight, or omission by the agent/broker.

Exclusions – Certain causes and conditions, listed in the policy, which are not covered.

Expiration – The date upon which a policy will end.

[F]

First To Die Coverage: This means that there are two or more life insured on the same policy but the death benefit is paid out on the first death only. If two or more persons at the same address are purchasing life insurance at the same time, it is wise to compare the cost of this kind of coverage with individual policies having a multiple policy discount.

Forgery – In general, any false writing with intent to defraud. FORM – An insurance policy itself or riders and endorsements attached to it.

[G]

GRACE PERIOD – A period after the premium due date, during which an overdue premium may be paid without penalty. The policy remains in force throughout this period.

Group Life Insurance: This is a very common form of life insurance which is found in employee benefit plans and bank mortgage insurance. In employee benefit plans the form of this insurance is usually one year renewable term insurance. The cost of this coverage is based on the average age of everyone in the group. Therefore a group of young people would have inexpensive rates and an older group would have more expensive rates.The coverage is not portable and cannot be taken with you if you change jobs. If you have a change in health, you may not qualify for new coverage at your new place of employment.

 

[H]

 

[I]

Incontestable Clause: This clause in regular life insurance policy provides for voiding the contract of insurance for up to two years from the date of issue of the coverage if the life insured has failed to disclose important information or if there has been a misrepresentation of a material fact which would have prevented the coverage from being issued in the first place. After the end of two years from issue, a misrepresentation of smoking habits or age can still void or change the policy.

Income Splitting:This is a tax planning strategy of arranging for income to be transferred to family members who are in lower tax brackets than the one earning the income, thus reducing taxes. Even though attribution rules limit income splitting, there are still a number of legitimate ways to do so, such as through the use of spousal RRSPs.

Independent Broker:This is a provincial government licensed independent businessperson who usually represents five or more life insurance companies in a sales and service capacity and who is paid a commission by those life insurance companies for sales and service of life insurance products. We for example, have been in business for 12 years and regularly place new business with over twenty different life insurance companies.

In-force – Insurance on which the premiums are being paid or have been fully paid. In life insurance, usually refers to insurance by face amount. In health, usually refers to premium volume being paid to insurance company or insurance companies in aggregate.

Insurable Interest:Life Insurance companies will not, issue unlimited amounts of coverage to an individual. The amount of life insurance which will be approved has to approximate the loss caused by the death of the individual and must not result in a windfall for the beneficiary.

Inspection Report:This is a telephone interview of the person applying for life insurance conducted by someone from the underwriting department of the insurance company. Some insurance companies only sporadically contact applicants and some contact every applicant. On average the interview lasts between 15 to 30 minutes. The questions asked relate to personal habits (like smoking and alcohol consumption) and finances, including income and net worth, confirmation of employment, duties and the nature of the applicant’s business. In addition, there are questions about driving, sports, aviation and currently held insurance. All information obtained is strictly confidential and is submitted solely to the underwriter for review.

Insurance A formal social device for reducing risk by transferring the risks of several individual entities to an insurer. The insurer agrees, for a consideration, to assume, to a specified extent, the losses suffered by the insured.

Insurance Policy – Legal document issued to the insured setting out the terms of the contract of insurance.

Insured:This is the person covered by the life insurance policy. Upon this person’s death, a tax free benefit will be paid to that person’s estate or a named beneficiary.

Insured Mortgage:An insured mortgage protects only the mortgage lender in case you do not make your mortgage payments. This coverage is provided by CMHC [Canada Mortgage and Housing Corporation] and is required if a person has a high-ratio mortgage. [A mortgage is high-ratio if the amount borrowed is more than 75% of the purchase price or appraised value, whichever is less.]

Insured Retirement Plan:This is a recently coined phrase describing the concept of using Universal Life Insurance to tax shelter earnings which can be used to generate tax-free income in retirement. The concept has been described by some as “the most effective tax-neutralization strategy that exists in Canada today.”

Intestate:This means dying without a will, in which case the provincial laws of the province in which the death occurred apply to the manner in which assets will be distributed. In other words, if you don’t write your own will, the government will do it for you after your death and it may not be as you would have wished.

[J]

JOINT TENANCY – Ownership of property shared equally by two or more parties under which the survivor assumes complete ownership. This is different from a tenancy in common where the heirs of a deceased party to the tenancy inherit his or her share.

[K]

 

[L]

Lapse: This refers to the termination of an insurance policy due to the owner of the policy failing to pay the premium within the grace period [Usually within 30 days after the last regular premium was required and not paid]. It is possible to re-instate the coverage with the same premium and benefits intact but the life insured will have to qualify for this coverage all over again and bring up to date all unpaid premiums.

Lapse subsidized: This refers to the practice of some life insurance companies to offer policies which are lower in price because they have assumed a high probability that the policies will be cashed in by their owners for one reason or another before the death benefit becomes available. It is a bold and risky offer by the insurance company because sometimes the purchasers of these policies simply don’t lapse them.

Last To Die Coverage: This means that there are two or more life insured on the same policy but the death benefit is paid out on the last person to die. The cost of this type of coverage is much less than a first to die policy and it is generally used to protect estate value for children where there might be substantial capital gains taxes due upon the death of the last parent. This kind of policy is also valuable when one of two people covered has health problems which would prohibit obtaining individual coverage.

Level Premium Life Insurance: This is a type of insurance for which the cost is distributed evenly over the premium payment period. The premium remains the same from year to year and is more than actual cost of protection in the earlier years of the policy and less than the actual cost of protection in the later years. The excess paid in the early years builds up a reserve to cover the higher cost in the later years.

Life Expectancy :The average number of years of life remaining for a group of people of a given age and gender according to a particular mortality table.

Life Income Fund: Commonly known as a LIF, this is one of the options available to locked in Registered Pension Plan (RPP) holders for income payout as opposed to Registered Retirement Savings Plan (RRSP) holders choice of payout through Registered Retirement Income Funds (RRIF). A LIF must be converted to a unisex annuity by the time the holder reaches age 80.

Living Benefit: Some insurance companies include this benefit option at no cost to their policy holders. The insurer considers on a case to case basis, the need for insurance funds before death. If the insured can demonstrate a shortened life of less than two years and with some insurers one year, the insurer will consider releasing up to 50% or a maximum of $100,000 of the life insurance coverage held by the insured. Not all insurers offer this benefit for free. The need has resulted in specific stand alone living benefit/critical illness policies coming into existence.

Living Will or Advanced Care Directive:This is a will which specifically expresses the testator’s desire not to be kept alive on life support machines, should the occasion arise.

[M] Money Laundering :This is the process by which “dirty money” generated by criminal activities is converted through legitimate businesses into assets that cannot be easily traced back to their illegal origins.

Mortality Tables :This is a statistical table used by life insurance companies showing the probability of death of male and females at all ages.

Morbidity Tables: These are statistical tables used by life insurance companies showing the probability of disease of male and females at all ages.

Medical Information Bureau:

This organization was established in 1902. The Medical Information Bureau (M.I.B.) is a non-profit association of life insurance companies. Its purpose is to detect and deter fraud by providing warnings called, alerts, to member companies. For example, if an insurance applicant advised one insurance company of a heart attack and then applied to another insurance company omitting this history, codes, reported by the first insurance company, indicating a heart attack would alert the second insurance company to the undisclosed history. It is a rarity, however, that the alert is the only notice of a specific medical impairement as most applicants completely disclose their history.

Mortgage Insurance

Commonly sold in the form of reducing term life insurance by lending institutions, this is life insurance with a death benefit reducing to zero over a specific period of time, usually 20 to 25 years. In most instances, the cost of coverage remains level, while the death benefit continues to decline Mortgage insurance purchased from a life insurance company, is priced, based on gender, smoking status, health and lifestyle of the purchaser. Once obtained, it is a unilateral contract in your favour, which cannot be cancelled by the insurance company unless you say so or unless you stop paying for it. It pays upon the death of the life insured to any “named beneficiary” you choose, tax free. If, instead of reducing term life insurance, you have purchased enough level or increasing life insurance coverage based on your projection of future need, you can buy as many new homes in the future as you want and you won’t have to worry about coverage you might loose by renewing or increasing your mortgage.

Mortagee – The creditor to whom a mortgage is given and who lends money on the security of the value of the property mortgaged.

Mortgagor– The debtor who receives money and in turn grants a mortgage on his property as security for a loan.

 

[N]

 Non-Smoker Discount: Savings to non-smokers can be up to 50% of regular premium depending on age and insurance company. Most life insurance companies offering non-smoker rates insist that the person applying for coverage have abstained from any form of tobacco or marijuana for at least twelve months, some companies insist on longer periods, up to 15 years.

Non-Medical Limit:This is the maximum value of a policy that an insurance company will issue without the applicant taking a medical examination, although medical questions are invariably asked during the application process. When a non-medical issue is made through group insurance, in most cases, medical data is not requested at all.

Named Insured – The first person in whose name the insurance policy is issued.
[O]

 Owner: This is the person who owns the insurance policy. It is usually the same person as the insured but it could be someone else who has the permission of the insured to be the owner, like a spouse, a common-law-spouse, an offspring, a parent, a corporation with insurable interest or a business partner with insurable interest. In order for someone else to be an owner of your policy, they have to have a legitimate insurable interest in you.

 

[P]

Policy – Legal document issued to the insured setting out the terms of the contract of insurance.

Policyholder– The person (or persons) whose risk of financial loss from an insured peril is protected by the policy.

Policy Fee: This is an administrative fee which is part of most life insurance policies. It ranges from about $40 to as much as $100 per year per policy. It is not a separate fee. It is incorporated in the regular monthly, quarterly, semi-annual or annual payment that you make for your policy. Knowing about this hidden fee is important because some insurance companies offer a policy fee discount on additional policies purchased under certain conditions. Sometimes they reduce the policy fee or waive it altogether on one or more additional policies purchased at the same time and billed to the same address. The rules are slightly different depending on the insurance company. There could be enormous savings if several people in the same family or business were intending to purchase coverage at the same time.

Policyholder: This is the person who owns a life insurance policy. This is usually the insured person, but it may also be a relative of the insured, a partnership or a corporation. There are instances in marriage breakup (or relationship breakup with dependent children) where appropriate life insurance on the support provider, owned and paid for by the ex-spouse receiving the support is an acceptable method of ensuring future security.

Preferred Rates: A number of insurance companies are offering better rates which go beyond simply looking at gender or smoking habits. Other health related factors such as physical build, lifestyle, avocation and personal and family health history indicating longer life expectancy can add up to significant cost savings to new life insurance applicants. Make certain to ask about these new preferred rates.

Premium: This is your payment for the cost of insurance. You may pay annually, semi-annually, quarterly or monthly. The least expensive method is annually. Using any of the other payment modes will cost you more money. For example, paying monthly will cost about 17% more. If you pay annually and terminate your coverage part way through the year, you may not receive a refund for the remaining months to the annual renewal date.

The cost of life insurance varies by age, sex, health, lifestyle, avocation and occupation. Generally speaking, the following is true at the time of applying for coverage; the older you are, the more will be the cost; of a male and female of the same age, the female will be considered 4 years younger; health problems will increase the cost of insurance and may result in rejection altogether; dangerous hobbies such as SCUBA diving, private flying, bungi jumping, parachuting, etc. may increase the cost of insurance and may result in rejection altogether; abuse of alcohol or drugs or a poor driving record will make getting coverage difficult.

Probate: Letters of probate represent judicial certification of the validity of a Will and judicial confirmation of the authority of the personal representative who is to administer the Will. Essentially, probate fees are a tax on a person’s estate and except for the provinces of Quebec and Alberta, there is no limit to this tax.

[Q]

QUOTE – An estimate of the cost of insurance, based on information supplied to the insurance company by the applicant.

 

[R]

Rate – The per unit cost of insurance. (See also Premium).

Rated– Usually used in combination, rated-up or rated policy. A policy issued with an extra premium charge

Registered Pension Plan:

Commonly referred to as an RPP this is a tax sheltered employee group plan approved by Federal and Provincial governments allowing employees to have deductions made directly from their wages by their employer with a resulting reduction of income taxes at source. These plans are easy to implement but difficult to dissolve should the group have a change of heart. Employer contributions are usually a percentage of the employee’s salary, typically from 3% to 5%, with a maximum of the lessor of 20% or $3,500 per annum. The employee has the same right of contribution. Vesting is generally set at 2 years, which means that the employee has right of ownership of both his/her and his/her employers contributions to the plan after 2 years. It also means that all contributions are locked in after 2 years and cannot be cashed in for use by the employee in a low income year. Should the employee change jobs, these funds can only be transferred to the RPP of a new employer or the funds can be transferred to an individual RRSP (or any number of RRSPs) but in either scenario, the funds are locked in and cannot be accessed until at least age 60. The only choices available to access locked in RPP funds after age 60 are the conversion to a Life Income Fund or a Unisex Annuity.

Registered Retirement Savings Plan:

Commonly referred to as an RRSP, this is a tax sheltered and tax deferred savings plan recognized by the Federal and Provincial tax authorities, whereby deposits are fully tax deductable in the year of deposit and fully taxable in the year of receipt. The ability to defer taxes on RRSP earnings allows one to save much faster than is ordinarily possible. The new rules which apply to RRSP’s are that the holder of such a plan must convert it into income by the end of the year in which the holder turns age 69. The choices for conversion are to simply cash it in an pay full tax in the year of receipt, convert it to a RRIF and take a varying stream of income, paying tax on the amount received annually until the income is exhausted, or converting it into an annuity with guaranteed payments for a chosen number of years, again paying tax each year on moneys received.

Registered Retirement Income Fund: Commonly referred to as a RRIF, this is one of the options available to RRSP holders to convert their tax sheltered savings into taxable income.

Reinstatement: This is the restoration of a lapsed life insurance policy. The life insurance company will require evidence of continuing good health and the payment of all past due premiums plus interest.

Renewal – The continuation in full force and effect of something that is about to expire. With an insurance policy it is made either by the issuance of a new policy or renewal receipt or certificate, to take effect upon the expiration of the old policy

Replacement: This subject of replacement of existing policies is covered because sometimes existing life insurance policies are unnecessarily replaced with new coverage resulting in a loss of valuable benefits. If someone suggests replacing your existing coverage, insist on having a comparison disclosure statement completed.

Rider: Usually known as an endorsement, a rider is an amendment to the policy used to add or delete coverage.

Rule of 72: This is a very important rule to know. The rule is that the number 72 divided by the rate of return of your investment equals the number of years it takes for your investment to double.

For example:

  • At 1% your money will double in 72 years.
  • At 2% your money will double in 36 years.
  • At 3% your money will double in 24 years.
  • At 4% your money will double in 18 years.
  • At 5% your money will double in 14.4 years.
  • At 6% your money will double in 12 years.
  • At 7% your money will double in 10.3 years.
  • At 8% your money will double in 9 years.
  • At 9% your money will double in 8 years.
  • At 10% your money will double in 7.2 years.

{S}

Settlement : Usually, a policy benefit or claim payment. It connotes an agreement between both parties to the policy contract as to the amount and method of payment.

Spousal Registered Retirement Savings Plan: This is an RRSP owned by the spouse of the person contributing to it. The contributor can direct up to 100% of eligible RRSP deposits into a spousal RRSP each and every year. Contributing to a spouses RRSP reduces the amount one can contribute to one’s own RRSP, however, if the spouse is a lower income earner, it is an excellent way in which to split income for lower taxation in retirement years.

Split Dollar Life Insurance: The split dollar concept is usually associated with cash value life insurance where there is a death benefit and an accumulation of cash value. The basic premise is the sharing of the costs and benefits of a life insurance policy by two or more parties. Usually one party owns and pays for the insurance protection and the other owns and pays for the cash accumulation. There is no single way to structure a split dollar arrangement. The possible structures are limited only by the imagination of the parties involved.

Segregated Fund: Sometimes called seg funds, segregated funds are the life insurance industry equivalent to a mutual fund with some differences. The term “Mutual Fund” is often used generically, to cover a wide variety of funds where the investment capital from a large number of investors is “pooled” together and invested into specific stocks, bonds, mortgages, etc.

Since Segregated Funds are actually deferred annuity contracts issued by life insurance companies, they offer probate and creditor protection if a preferred beneficiary such as a spouse is named. Mutual Funds don’t have this protection.

Unlike mutual funds, segregated funds offer guarantees at maturity (usually 10 years from date of issue) or death on the limit of potential losses – at times up to 100% of original deposits are guaranteed which makes them an attractive alternative for the cautious and/or long term investor. On the other hand, with regular mutual funds, it is possible to have little or nothing left at death or plan maturity.

Subrogation: Conditional payments may be made by an insurance company to a disability insurance claimant who has a loss of income claim against a third party who caused or contributed to their disability, however, the insurance company has a right to seek reimbursement of any payments they made to the claimant either from the third party or from any judgment or settlement received by the claimant from the third party.

Suicide Clause: Generally, a suicide clause in a regular life insurance policy provides for voiding the contract of insurance if the life insured commits suicide within two years of the date of issue of the coverage.

 

[T]

Temporary Life Insurance: Temporary insurance coverage is available at time of application for a life insurance policy if certain conditions are met. Normally, temporary coverage relates to free coverage while the insurance company which is underwriting the risk, goes through the process of deciding whether or not they will grant a contract of coverage.

Term Life Insurance: A plan of insurance which covers the insured for only a certain period of time and not necessarily for his or her entire life. The policy pays a death benefit only if the insured dies during the term.

Yearly Renewable Term Insurance:

Sometimes, simply called YRT, this is a form of term life insurance that may be renewed annually without evidence of insurability to a stated age.

Beaton Insurance Services 15310 Pacific Avenue

[U]

Underwriter:

  1. A person trained in evaluating risks and determining the rates and coverages that will be used for them.
  2. An agent, especially a life insurance agent, who might qualify as a “field underwriter.” In theory, the agent is supposed to do some underwriting before submitting the case to the home office underwriter; i.e., to make a decision on the basis of facts known to him on whether or not the risk is sound and to report all facts known to him that might affect the risk.

Underwritting ;The process of evaluating a risk for the purpose of issuing insurance coverage on it.

 

[V] Vanishing Premium: This term relates to participating whole life insurance and the use of the dividend to reduce or completely eliminate the need for future premiums

Viatical Settlement:. The selling of one’s own life insurance policy to another in exchange for an immediate percentage of the death benefit. The person or in many cases, group of persons buying the rights to the policy have high expectation of the imminent death of the previous owner. The sooner the death of the previous owner, the higher the profit.

 

[W]

Waiver of Premium: This is an option available to the applicant for life insurance which sets certain conditions under which an insurance policy will be kept in full force by the insurance company without the payment of premiums. Very specifically, a life insured would have to become totally disabled through injury or illness for a period of six months before the benefit kicks in. When it does, the insurance company retroactively pays premiums from the beginning of the disability until the time the insured is able to perform some form of regular activity. ‘Totally disabled’ is highlighted here, because that is what is required to receive this benefit.

Will: This is a legal document detailing how you want your assets to be distributed upon your death. You may also stipulate how you wish to be buried or who you would like to take care of any surviving dependent family members.