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 Page iii

Dictionary of Insurance Terms

Fourth Edition

Harvey W. Rubin, Ph.D., CLU, CPCU

Professor/Chair of Insurance
Department of Economics and Finance
Louisiana State University
Shreveport, Louisiana
 Page iv
© Copyright 2000 by Barron's Educational Series, Inc.
Prior editions © Copyright, 1995, 1991, 1987 by Barron's
Educational Series, Inc.
All rights reserved.
No part of this book may be reproduced in any form, by photostat,
microfilm, xerography, or any other means, or incorporated into
any information retrieval system, electronic or mechanical, without
the written permission of the copyright owner.
All inquiries should be addressed to:
Barron's Educational Series, Inc.
250 Wireless Boulevard
Hauppauge, NY 11788
[Link]
Library of Congress Catalog Card No. 99-46788
International Standard Book No. 0-7641-1262-7
Library of Congress Cataloging in Publication Data
Rubin, Harvey W.
Dictionary of insurance terms / Harvey W. Rubin. 4th ed.
p. cm.
ISBN 0-7641-1262-7
1. Insurance Dictionaries. I. Title.
HG8025.R83 2000
368'.003dc21 99-46788
CIP
PRINTED IN THE UNITED STATES OF AMERICA
987654321
 Page v

Contents
Preface vii
Acknowledgments ix
How to Use This Book Effectively xi
Terms 1
Abbreviations and Acronyms 571
 Page vii

Preface
Insurance is a financial instrumentnothing more, nothing lessthat
plays a critical role in both personal and business financial
planning.
On the personal level, the money an individual spends for
insurance over a lifetime surpasses all other types of
expenditures including the purchase of a home. Any doubt
concerning this statement can be dispelled by adding up the
premium payments made yearly for life insurance, health
insurance, pension plan, social security, individual retirement
account or Keogh Plan, automobile insurance, homeowners or
tenants insurance, professional liability insurance, and umbrella
liability insurance. Yet, the individual makes these expenditures
usually without adequate knowledge of the insurance product
purchased.
Essentially the same situation exists in the business world.
Contributions paid into various insurance coverages in most
instances exceed other business operating expenses. Employee
benefit plan contributions alone have been estimated to range
between 30-45 cents for each dollar of salary paid to an employee.
When added to the cost of other business related insurance
expenditures such as workers compensation, buy-sell insurance
funded agreements, key person insurance, business property
coverage, business liability insurance, and other business specialty
insurances coverages, the total cost can be overwhelming. And,
astonishingly, the business insurance purchase decision is also
frequently made without sufficient basic knowledge of the various
insurance products available.
Thus, one function of Barron's Dictionary of Insurance Terms is to
serve as a reference source for individuals making personal and
business insurance planning decisions. The Dictionary provides
concise definitions and examples of those terms most likely to
confront the insurance consumer on all levels. The insurance field
is rapidly changing. More new insurance products have reached the
marketplace in the last few years than in all previous years
combined. The Dictionary contains definitions and illustrative
examples of these "state of the art" offerings as well as of the
traditional products. Cross references allow the reader to research
variations of the terms to be defined and other relevant definitions.
Another reason for the existence of Barron's Dictionary of
Insurance Terms is to provide a reference source for practitioners
who require succinct, technically accurate answers to insurance and
risk management terminology questions. Professionals in the field
will find the Dictionary to be a readily accessible reference source
for virtually all terms that are used in the everyday conduct of
business. The spectrum of insurance activities that is covered
 Page viii
ranges from the home office underwriting of the risk to the actual
marketing and distribution of the insurance product to protect the
risk.
The insurance agent may even find the Dictionary to be useful in
marketing and servicing insurance products. Many clients have
numerous questions concerning the characteristics of the various
insurance products on the market, both new and traditional. The
Dictionary can be used as a supplement to the sales literature to
answer these questions as well as inquiries about servicing. Fast,
accurate responses to these questions can sometimes mean the
difference between closing and not closing a sale.
 Page ix

Acknowledgements
The author would like to acknowledge the contributions made by
the reviewer, Diane Orvos of the American Council of Life
Insurance. Her many in-depth comments have been of great
importance to the technical accuracy of the manuscript. Milton
Amsel smoothed and sharpened the author's prose and suggested
many meaningful changes that have greatly enhanced the final
work. Barron's editors, in particular Max Reed, have been
invaluable in bringing the manuscript to its final form. Cheryl
Lagersen's highly professional commitments to typing and
correcting the author's many errors along the way has made the
presentation of the manuscript possible. Finally, the author wishes
to thank his wife Ofie and son Jack, for continuing to be an
inspiration.
HARVEY W. RUBIN
 Page xi

How to Use This Book Effectively

Alphabetization: All entries are alphabetized by letter rather than
by word, so that multiple-word terms are treated as single words.
For example, AGE SETBACK follows AGENT OF RECORD, and
ALL RISKS follows ALLOCATION OF ASSETS. In some cases
(such as NAIC acts and regulations), abbreviations appear as
entries in the main text, in addition to appearing in the back of the
book in the separate listing of Abbreviations and Acronyms. This
occurs when the short form, rather than the formal name,
predominates in the common usage of the field. For example,
NAIC is commonly used in speaking of the "National Association
of Insurance Commissioners"; thus, the entry is at NAIC. Numbers
in entry titles and the ampersand are alphabetized as if they were
spelled out.
Many words have distinctly different meanings, depending upon
the context in which they are used. The various meanings of a term
are listed by numerical or functional subheading. Readers must
determine the context that is relevant to their purpose.
Abbreviations and Acronyms: A separate list of abbreviations and
acronyms follows the Dictionary.
Cross-References: To add to your understanding of a term, related
or contrasting terms are sometimes cross-referenced. The cross-
referenced term will appear in SMALL CAPITALS either in the body of the
entry (or subentry) or at the end. These terms will be printed in
SMALL CAPITALS only the first time they appear in the text. Where an
entry is fully defined by another term, a reference rather than a
definition is providedfor example: PRODUCER see AGENT.
Italics: Italic type is generally used to highlight the fact that a word
or phrase has a special meaning to the trade. Italics are also used
for the titles of publications.
Parentheses: Parentheses are used in entry titles for two reasons.
The first is to indicate that another term has a meaning identical or
very closely related to that of the entry word; for example,
BENEFITS OF BUSINESS LIFE AND HEALTH INSURANCE
(KEY PERSON INSURANCE). The second reason is to indicate
that an abbreviation is used with about the same frequency as the
term itself; for example, FEDERAL TRADE COMMISSION
(FTC).
Special Definitions: Organizations and associations that play an
active role in the field are included in the Dictionary along with a
brief statement of their mission.
 Page 1

A
AAM see ASSOCIATE IN AUTOMATION MANAGEMENT (AAM).
ABANDONMENT AND SALVAGE legal status giving an
insurance company all rights to an insured's property. The
ABANDONMENT CLAUSE is usually found in MARINE INSURANCE and not in other

property insurance policies such as the HOMEOWNERS INSURANCE POLICY and

the SPECIAL MULTIPERIL INSURANCE (SMP) policy. An insured may wish to
abandon the hull of a ship if the cost of protecting it exceeds its
value. The insured must notify the insurance company of its intent
to abandon property but the company is under no obligation to
accept the abandoned property.
ABANDONMENT CLAUSE in marine insurance, clause giving an
insured the right to abandon lost or damaged property and still
claim full settlement from an insurer (subject to certain
restrictions). Two types of losses are provided for under
abandonment clauses.
1. Actual total lossproperty so badly damaged it is unrepairable or
unrecoverable; causes include fire, sinking, windstorm damage,
and mysterious disappearance. For example, until the 1980s the
Titanic, which sank off Newfoundland in 1912, was deemed to be
unrecoverable and the Commercial Union Insurance Company had
paid its owners for their loss due to sinking. Owners of ships that
mysteriously disappeared in the Bermuda Triangle have been able
to collect insurance proceeds. Disappearance of pleasure craft due
to drug pirates has resulted in indemnification of owners through
insurance proceeds.
2. Constructive total lossproperty so badly damaged that the cost of
its rehabilitation would be more than its restored value. For
example, a ship and/or its cargo is damaged to such a degree that
the cost of repair would exceed its restored value. The insured can
abandon the property if (a) repair costs are greater than 50% of the
value of the property after it has been repaired and (b) the
insurance company agrees to the insured's intent to abandon.
ABSOLUTE ASSIGNMENT see ASSIGNMENT CLAUSE.
ABSOLUTE BENEFICIARY see BENEFICIARY; BENEFICIARY CLAUSE.
ABSOLUTE LIABILITY liability without fault; also known as
liability without regard to fault or strict liability. Absolute liability
is imposed in various states when actions of an individual or
business are deemed contrary to public policy, even though an
action may not have been intentional or negligent. For example, in
product liability, manufacturers and retailers have been held strictly
liable for products that have caused injuries and have been shown
to be defective, even though the manufacturer or retailer was not
proven to be at fault or negligent. In many states the owner of an
animal is held strictly liable
 Page 2
for injuries it may cause, even though it does not have a past
history of violence.
ABUSIVE TAX SHELTER illegal tax deduction (as determined by
the Internal Revenue Service) taken under the auspices of a limited
partnership. One abuse of taxes is inflating the value of purchased
assets far beyond their fair market value. Once the IRS determines
that tax deductions are illegal, participants in the limited
partnership are subject to the payment of back taxes, interest due
on the back taxes, and penalties.
ACCELERATED DEPRECIATION method in which larger
amounts of depreciation are taken in the beginning years of the life
of an asset and smaller amounts in later years. The objective is to
defer taxes legally, thereby allowing funds to be retained by a
business to finance growth.
ACCELERATED OPTION life insurance POLICY PROVISION under which
the POLICYHOLDER may apply the accumulated cash value, in the form
of a single premium payment, to pay up the policy or to mature the
policy as an endowment.
ACCELERATION LIFE INSURANCE policy under which a
portion of the DEATH BENEFIT (generally 25%) becomes payable to the
insured for a specified medical condition prior to death. The
purpose of the accelerated death benefit is to provide funds
necessary to finance medical costs to extend the life of the insured.
Upon proof of a specified medical condition, the insurance
company will pay 25% of the death benefit. When the insured dies,
the remainder of the death benefit is paid to the BENEFICIARY, just as
under a traditional life insurance policy.
ACCELERATIVE ENDOWMENT life insurance policy option
under which the DIVIDENDS that have ACCRUED may be applied to mature
the policy as ENDOWMENT INSURANCE.
ACCEPTANCE agreement to an offer, in contract law, thus
forming a contract. For insurance contracts, the insurer usually
acknowledges willingness to underwrite a risk by issuing a policy
in exchange for a premium from an applicant.
ACCIDENT unexpected, unforeseen event not under the control of
the insured and resulting in a loss. The insured cannot purposefully
cause the loss to happen; the loss must be due to pure chance
according to the odds of the laws of probability. For example,
under a PERSONAL AUTOMOBILE POLICY (PAP) if an accident occurs, the insured
is covered for loss due to his/her negligent act or omissions
resulting in bodily injury or property damage to another party.
ACCIDENTAL DEATH AND DISMEMBERMENT
INSURANCE form of accident insurance that indemnifies or pays
a stated benefit to insured or his/her beneficiary in the event of
bodily injury or death due to accidental means (other than natural
causes). For example, an insured's arm is severed in an accident. A
predetermined schedule of payments is used to compensate the
insured for this particular loss.
 Page 3
The schedule also lists the sums payable for other parts of the body
that may be lost, or for death by accident.
ACCIDENTAL DEATH BENEFIT see ACCIDENTAL DEATH CLAUSE; RIDERS, LIFE
POLICIES.

ACCIDENTAL DEATH CLAUSE in a life insurance policy,

benefit in addition to the death benefit paid to the beneficiary,
should death occur due to an accident. In double indemnity, twice
the face value of the policy will be paid to the beneficiary; in triple
indemnity, three times the face value is payable. Accidental death
caused by war, aviation except as a passenger on a regularly
scheduled airline, and illegal activities is generally excluded. Time
and age limits are usually applicable, as for example, the insured
must die within 90 days of the accident and be age 60 or less.
ACCIDENTAL DEATH INSURANCE coverage in the event of
death due to accident, usually in combination with dismemberment
insurance. If death is due to accident, payment is made to the
insured's beneficiary; if bodily injury is the result of an accident
(such as the loss of a limb), the insured receives a specified sum.
See also ACCIDENTAL DEATH CLAUSE.
ACCIDENTAL MEANS unexpected, unforeseen event not under
the control of the insured that results in bodily injury.
ACCIDENT AND HEALTH INSURANCE coverage for
accidental injury, accidental death, or sickness; also called Accident
and Sickness Insurance. Benefits include paid hospital expenseyys,
medical expenses, surgical expenses, and income payments. See
also GROUP HEALTH INSURANCE; HEALTH INSURANCE.
ACCIDENT AND SICKNESS INSURANCE phrase formerly used
to describe coverage for perils of accident and sickness. For
descriptions of current terms, see also ACCIDENT AND HEALTH INSURANCE;
DISABILITY INSURANCE; GROUP DISABILITY INSURANCE; GROUP HEALTH INSURANCE; HEALTH

MAINTENANCE ORGANIZATION (HMO).

ACCIDENT FREQUENCY number of times an accident occurs.

Used in predicting losses upon which premiums are based.
ACCIDENT INSURANCE coverage for bodily injury and/or death
resulting from accidental means (other than natural causes). For
example, an insured is critically injured in an accident. Accident
insurance can provide income and/or a death benefit if death
ensues.
ACCIDENT PREVENTION see ENGINEERING APPROACH; HUMAN APPROACH.
ACCIDENT RATE see ACCIDENT FREQUENCY.
ACCIDENT SEVERITY extent of the loss caused by accidents.
Used in predicting the dollar amount of losses upon which the
premiums are based.
 Page 4
ACCIDENT-YEAR STATISTICS record of losses and premiums
received for accident coverage within a 12-month period. These
statistics show the percentage of each premium received that is
being paid out in claims and enables the establishment of a basic
premium reflecting the pure cost of protection. The trend line
generated by the record of losses is an important statistical tool for
predicting future losses.
ACCOMMODATION LINE agreement by an insurance company
to underwrite business submitted by an AGENT or BROKER even though
that business is substandard. The object is to continue to attract
profitable business of that agent.
ACCOUNTANTS LIABILITY INSURANCE see ACCOUNTANTS
PROFESSIONAL LIABILITY INSURANCE.

ACCOUNTANTS PROFESSIONAL LIABILITY INSURANCE

insurance for accountants covering liability lawsuits arising from
their professional activities. For example, an investor bases a
buying decision on the balance sheet of a company's annual
statement. The figures later prove fallacious and not according to
GENERALLY ACCEPTABLE ACCOUNTING PRINCIPLES (GAAP). The accountant could be

found liable for his professional actions, and would be covered by

this policy. However, if the accountant ran over someone or
damaged property with a car, this policy would not provide
coverage.
ACCOUNTANTS REPORT see STATEMENT OF OPINION (ACCOUNTANTS REPORT,
AUDITORS REPORT).

ACCOUNT CURRENT financial statement, issued by the INSURANCE

COMPANY on a monthly basis to its agents, showing for each agent his
or her commissions earned, premiums written, policy cancellations,
and any policy endorsements.
ACCOUNTING see GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP).
ACCOUNTS RECEIVABLE INSURANCE coverage when
business records are destroyed by an insured peril and the business
cannot collect money owed. The policy covers these uncollectible
sums plus the expense of record reconstruction and extra collection
fees. It does not insure the physical value of the records themselves
such as the paper or computer disks and tapes.
ACCREDITED ADVISOR IN INSURANCE (AAI) professional
designation earned after the successful completion of three national
examinations given by the INSURANCE INSTITUTE OF AMERICA (IIA). Covers such
areas of expertise as insurance production (insurance sales,
exposure identification, legal liability, personal lines insurance,
commercial lines insurance); multiple-lines insurance production;
and agency operations and sales management. Program of study is
recommended for individuals who have production responsibilities.
 Page 5
ACCRUE to accumulate. For example, under one of the dividend
options of a participating life insurance policy, dividends can
accumulate at interest by leaving them with the insurance
company; cash values of life insurance accumulate at a given rate;
employee retirement credits for pension benefits accumulate at a
stipulated rate.
ACCRUED BENEFIT COST METHOD actuarial method of
crediting retirement benefits earned and the costs associated with
these earned retirement benefits. An increment (unit) of benefit is
credited for each year of recognized service that an employee has
earned. Then the present value of these benefits (including the
employee's life expectancy) is calculated and assigned to the year
earned. The benefit earned by the employee can take the form of a
flat dollar amount or a percentage of compensation. For example,
this may work out to 1 1/2% of an employee's compensation being
credited to the employee's account for each year of recognized
service.
ACCRUED INTEREST interest earned but not yet paid for a
period of time that has elapsed since the last interest payment.
ACCUMULATED AMOUNT amount to which the original
investment sums build at a stipulated interest rate.
ACCUMULATED VALUE total of the number of ACCUMULATION UNITS
times the ACCUMULATION UNIT VALUE for a VARIABLE ANNUITY. Similar procedure
is followed in the calculation of the current market value of a
mutual fund found by multiplying the number of accumulation
units times its net asset value.
ACCUMULATION BENEFITS accrual or addition to life
insurance benefits. See also ACCRUE.
ACCUMULATION PERIOD time frame during which an ANNUITANT
makes premium payments to an insurance company. The
obligations of the company to the annuitant during this period
depend on whether a PURE ANNUITY or REFUND ANNUITY is involved.
Many factors enter an annuity purchase, but some experts suggest a
pure annuity to minimize cost and if there are no dependents. In
other circumstances a refund annuity might be considered. See also
ANNUITY.

ACCUMULATION UNIT measure of policyholder interest in a

VARIABLE ANNUITY policy prior to the ANNUITY DATE. This measure is similar

to a unit in a mutual fund.

ACCUMULATION UNIT VALUE worth of each ACCUMULATION UNIT at
the end of each VALUATION PERIOD for a VARIABLE ANNUITY. This value is
similar to that of the NET ASSET VALUE for a mutual fund.
ACQUIRED IMMUNODEFICIENCY SYNDROME (AIDS)
condition characterized by illnesses indicative of reduced immune
responsiveness in otherwise healthy individuals. Viral organisms
dubbed HTLVIII (for human T lymphotrophic virus type III) and
LAV (for
 Page 6
lymphadenopathy associated virus), respectively, are the putative
causative agents of this destruction of bodily defenses. Together,
these viral organisms have become known as human
immunodeficiency virus (HIV). The HIV infection is the initial
event in the course of a disease that culminates in AIDS in some of
its victims.
HIV is a member of the class of RNA viruses known as
retroviruses, identifiable by their use of the enzyme reverse
transcriptase. This enzyme permits retroviruses to replicate their
own genetic information, utilizing mammalian host cell DNA to
produce the new viral RNA necessary for the assembly of new
organisms. Reverse transcriptase also allows the virus to
incorporate its genetic material into that of the host. In this manner
the virus may immortalize itself by lying dormant within the host
genome while remaining capable of producing new viral organisms
at a future time.
HIV infection begins with viral penetration of lymphocytes and
monocytes, the white blood cells involved in immune defense. The
first phase of the infection frequently causes an illness with
symptoms similar to those produced by infectious mononucleosis.
After days or weeks of mild illness, some patients appear to
recover. In the others, the viral destruction of host cells continues
unabated with the virus infecting other tissues, including cells in
the brain. After a latent phase, which varies with age, degree of
immune responsiveness, and the number of viral particles
producing the initial infection, the patient begins to manifest signs
and symptoms of immune system damage. These late sequelae of
HIV infection include unexplained fevers, lymph node
enlargement, persistent infections with fungi or viruses, and
unexplained weight loss. When these symptoms fulfill specific
criteria, they are referred to as the AIDS-related complex, or ARC.
Only the patients who develop the most severe immune system
damage, resulting in infections such as Pneumocystis carinii
pneumonia (PCP) or unusual cancers like Kaposi's sarcoma, are
classified as having AIDS.
The direct impact of the AIDS virus is and will be felt by both the
property and casualty insurance and the life and health insurance
branches.
Property and Casualty Insurance
From a property and casualty insurance perspective, the AIDS
issue could impact the liability sections of the homeowners
insurance policy, automobile insurance policies (both personal and
business), commercial general liability (CGL) policy, and workers
compensation policy:
1. HOMEOWNERS INSURANCE POLICY. The INSURANCE SERVICES OFFICE (ISO) homeowners
insurance policy form has a communicable disease endorsement
EXCLUSION. Most property and casualty companies use this form either

in total or with minor modification. Since this exclusion to date has

not been subject to an adverse ruling by a court of law, it may be
that the homeowners policy does not have an AIDS EXPOSURE.
 Page 7
2. AUTOMOBILE INSURANCE policies (both personal and business). An AIDS
exposure could result (these policies do not have a communicable
disease endorsement exclusion) because of negligent acts and/or
omissions of a driver resulting in:
(a) an injured party contracting AIDS through a blood
transfusion necessitated by an accident and then bringing suit
against the driver, who is found negligent under the TORT LIABILITY
system. In a similar circumstance, an injured party's open wound
comes into contact with an open wound of another injured party
who has AIDS, with an ensuing suit against the negligent driver.
Certainly, the wounds would not have come into contact if the
accident had not occurred.
(b) the activation of a previously dormant AIDS virus (as
discussed above, the virus may ''immortalize" itself by lying
dormant within the host genome while remaining capable of
producing new viral organisms at a future time) in an injured
party, with the injured party bringing suit against the driver
whose acts and/or omissions are deemed to be negligent by a
court of law. Had the catalyst accident not occurred, the AIDS
virus would have remained dormant.
3. COMMERCIAL GENERAL LIABILITY (CGL) form. An AIDS exposure may arise
because of negligent acts of employees or circumstances occurring
on a business' property:
(a) An AIDS exposure could result in the event that an AIDS-
infected employee contaminates a product and/or service being
provided to a customer or fellow employee, and the customer or
fellow employee brings suit against the business. For example,
 the infected employee may have a cut finger and drops of his or
her blood may accidentally become mixed with the food being
consumed by a customer or fellow employee. Or the infected
employee could intentionally contaminate the food with his or
her body fluid as a vengeful act.
(b) An AIDS exposure could result in the event that a sexual
assault by an AIDS-infected assailant (regardless of whether or
not the assailant is an employee) is incurred by a customer while
visiting the premises of the business and the injured customer
brings suit against the business. It is the responsibility of the
business to render its premises safe for the invited customer. The
Connie Francis case is the precedent sexual assault case for this
exposure. A similar circumstance could result if an AIDS-
infected assailant assaults an employee.
(c) An AIDS exposure could result in the event that a business
fails to maintain the confidentiality of an AIDS-infected
employee's personnel file and the employee brings suit against
the business for the tort acts of libel, slander, and invasion of
privacy.
4. WORKERS COMPENSATION policy. An AIDS exposure could result if an
employee injured at work receives a blood transfusion from a
fellow employee who has AIDS. Is the transmission of AIDS in
this
 Page 8
manner a job-related injury, thus qualifying the injured employee
for benefits under workers compensation? Certainly the injured
employee would not have required the blood transfusion had the
injury not occurred at work.
In another situation, two or more employees may be injured in a
common accident, resulting in open wounds of various employees
coming into contact. If at least one of the injured employees is a
carrier of the AIDS virus, several employees could become
infected. The AIDS virus is most likely to be spread as the result of
close contact with blood, blood products, or semen from an
infected person. Is this scenario not a classic case for a workers
compensation claim?
In each of the two preceding examples, assume that the employer
was aware of the AIDS condition of the employee(s) prior to the
accident and kept this information confidential so as not to invade
the privacy of the employee(s). In this instance, could not the
newly AIDS-infected employee(s) seek damages for benefits
against the employer beyond that provided by workers
compensation? Certainly the employer was aware of an inherently
potentially dangerous situation in the workplace and took no
actions to alleviate the situation or render it harmless. Is not a
similar circumstance the basis for the employer tort cases for job-
related injuries resulting from exposure to asbestos?
Life and Health Insurance
AIDS-related deaths could have a significant impact on the LIFE
INSURANCE and HEALTH INSURANCE industries as these deaths affect the

normal claims pattern for GROUP LIFE INSURANCE and INDIVIDUAL LIFE INSURANCE:
1. Group Life, Medical, and Disability Insurance. If the insurance
policy is a true group policy, all applicants must be accepted during
the open enrollment period. Thus a person who has AIDS would
automatically be insured.
If, however, there are a significant number of claims under the
group policy, the insurance company can reflect this adverse
experience in next year's premium rates. The insurance company
also has the option of not renewing the group's coverage.
There is also a limit on the DEATH BENEFIT available under group
policies. For example, employee group life policies limit the
coverage per employee to a multiple (usually twice) of the
employee's annual salary. This limitation reduces somewhat the
ADVERSE SELECTION associated with the AIDS-infected employee opting

for higher limits of coverage.

2. Individual Life, Medical, and Disability Insurance. In
underwriting individual coverages (unlike group insurance, where
the factors of age, sex, and industry classification only are
considered) numerous factors are evaluated, to include age, sex,
personal health record, family health, occupation, vocation,
hobbies, habits such as chemical abuse, life-style, and so forth.
These factors undergo close
 Page 9
scrutiny, especially when the higher limits of coverage are applied
for. However, after the applicant becomes an INSURED, he or she could
contact AIDS, an eventuality that was not included in the PREMIUM
rate. Individual life insurance contracts (ordinary policies and even
term insurance, which can be renewed and converted at the option
of the insured) are contracts for life. Thus, once the insurer accepts
the applicant for coverage, the insurer is at the mercy of any future
AIDS epidemic.
Some life insurance policies have POLICY PURCHASE OPTIONS (PPO), whereby
the insured can automatically increase the limits of coverage when
certain events occur, such as every fifth policy anniversary. The
AIDS patient then could automatically increase his or her coverage
over various periods of time. Also, for dividend paying policies the
AIDS patient could use the dividends to automatically purchase
paid-up additions to his or her policy without having to take a
physical or answer any medical-related questions (in essence, this
is GUARANTEED INSURABILITY). Once again, the insurer has no control over
these events or distributions.
For life insurance policies already in existence, AIDS-related
questions were not asked on the APPLICATION. Thus, many companies
have huge blocks of business that may be susceptible to the effects
of the AIDS epidemic.
ACQUISITION COST expense of soliciting and placing new
insurance business on a company's books. It includes agent's
commissions, underwriting expenses, medical and credit report
fees, and marketing support services. Because of competition,
significant efforts are made by insurance companies to lower
acquisition costs. Traditional captive agent companies have often
turned to brokerage as additional distribution or sole distribution
channels for this reason.
ACTIVE RETENTION see SELF INSURANCE.
ACT OF GOD natural occurrence beyond human control or
influence. Such acts of nature include hurricanes, earthquakes, and
floods.
ACTS performance of a deed or function. Certain acts are
prohibited from coverage in insurance. For example, if the insured
commits a felony, the insured's beneficiary cannot collect under the
accidental death provision of a life insurance policy. Intentional
destruction of an insured's property by the insured or someone
hired by an insured to destroy the property is a prohibited act under
property insurance, and an insurance policy will not indemnify the
insured for losses incurred.
ACTUAL AUTHORITY (EXPRESS AUTHORITY) specific
powers granted by the principal (the insurance company) to the
AGENT in the contract.

ACTUAL CASH VALUE cost of replacing damaged or destroyed

property with comparable new property, minus depreciation and
obsolescence. For example, a 10-year-old living room sofa will not
be
 Page 10
replaced at current full value because of a decade of depreciation.
The actual cash value clause is common in property insurance
contracts. In some instances artistic or antique property may
appreciate over time. To receive full coverage such items must be
specifically scheduled in a policy.
ACTUAL TOTAL LOSS see TOTAL LOSS.
ACTUARIAL see ACTUARIAL SCIENCE; ACTUARY.
ACTUARIAL ADJUSTMENT modification in premiums,
reserves, and other values to reflect actual loss experience and
expenses and expected benefits to be paid.
ACTUARIAL CONSULTANT independent advisor to insurance
companies, corporations, federal, state, and local governments, and
labor unions on actuarial matters. These include evaluation of the
liabilities of small insurance companies, estimates of pension plan
liabilities and the design of such plans, appearance as an expert
witness giving testimony concerning lost income due to an
accident, and the design of information systems. See also ACTUARIAL
SCIENCE; ACTUARY.

ACTUARIAL COST METHODS system for calculating the

relation-ship between a pension plan's present cost and its present
future benefits. This relationship shows the extent to which a
pension plan's benefits are funded. The objective is to identify on a
year-by-year basis the cost of benefits accrued for the particular
year. To illustrate, a relationship of 1.0 shows that there is 100%
funding available for the pension plan's benefits.
ACTUARIAL EQUITY calculation of the PREMIUM based on such
factors as the APPLICANT'S age, sex, health record, family history, and
type of insurance plan applied for.
ACTUARIAL EQUIVALENT mathematical determination based
on the expectation of loss and the benefits to be paid in such an
eventuality. The premium charged will vary directly with the
probability of loss.
ACTUARIAL GAINS AND LOSSES experience as it relates to
the annual costs associated with a pension plan. In calculating
premiums due under a pension plan, basic assumptions must be
made concerning future loss experience and expenses. Actual loss
experience can prove to be better or worse than envisioned. If the
experience is better, the result is an actuarial gain. If the
experience is worse, the result is an actuarial loss.
ACTUARIAL RATE rate based on historical loss experience, from
which future loss experience is predicted. See also ACTUARIAL EQUIVALENT;
ACTUARIAL SCIENCE; RATE MAKING.

ACTUARIAL SCIENCE branch of knowledge dealing with the

mathematics of insurance, including probabilities. It is used in
ensuring that risks are carefully evaluated, that adequate premiums
are charged for
 Page 11
risks underwritten, and that adequate provision is made for future
payments of benefits.
ACTUARY mathematician in the insurance field. Actuaries
conduct various statistical studies; construct MORBIDITY and MORTALITY
TABLES; calculate premiums, reserves, and dividends for participating

policies; develop products; construct annual reports in compliance

with numerous regulatory requirements; and in many companies
oversee the general financial function. The successful actuary has a
strong general business background as well as mathematical ability.
Professional actuarial associations provide actuarial qualification
examinations.
ACTUARY, ENROLLED individual who has met professional
standards of the Internal Revenue Service and the Department of
Labor for signing the actuarial reports required by the Employee
Retirement Security Act of 1974Title II. An enrolled actuary may
certify annually that benefit cost and funding requirements of a
pension plan have been calculated according to accepted actuarial
principles as a best estimate of expected experience of the pension
plan.
ACV see ACTUAL CASH VALUE.
ADDENDUM addition to a written policy. See also ENDORSEMENT; RIDER.
ADDITIONAL CAR automobile purchased or leased by the
insured or the insured's spouse that is in addition to the insured or
the insured spouse's present car as covered under the PERSONAL
AUTOMOBILE POLICY (PAP). In order for this car to be insured, the car must be

a private passenger car and the insurance company must insure all
of the insured and insured spouse's other private passenger cars. If
it is a pickup or van with less than 10,000 lb. gross vehicle weight
and not used in business or farming, the insurance company also
must insure all the other cars owned by the insured or the insured's
spouse for that car to be covered. See also REPLACEMENT CAR.
ADDITIONAL DEATH BENEFIT extra layer of life insurance
coverage. This term is often applied to double indemnity. For
example, some life insurance policies provide a death benefit of a
multiple of the face value if the insured dies between certain ages
when dependent children may still be living at home. See also
ACCIDENTAL DEATH CLAUSE.

ADDITIONAL DEPOSIT PRIVILEGE clause in some CURRENT

ASSUMPTION WHOLE LIFE INSURANCE policies such as UNIVERSAL LIFE INSURANCE that

allows unscheduled premiums to be paid at any time prior to the

policy's maturity date, provided there is no outstanding loan. If
there is a loan, additional deposits will be first applied against the
loan. Most policies have a minimum that will be accepted as an
additional deposit, such as $1000.
ADDITIONAL INSURED individual added to a life insurance
policy other than the insured named in the policy. For example, an
insured father can
 Page 12
have a dependent son and daughter added to the policy as
additional insureds. In many instances, adding an additional
insured to an existing policy is less expensive than purchasing a
separate policy for that insured.
In property and liability insurance: another person, firm, or other
entity enjoying the same protection as the named insured.
ADDITIONAL INTEREST see ADDITIONAL INSURED.
ADDITIONAL LIVING EXPENSE INSURANCE coverage under
a Homeowners, Condominium, and Renters policy, that reimburses
costs of residing in a temporary location until the insured's home
can be made whole again. It usually provides living expenses of
from 10-20% of the structural coverage on the home.
ADDITIONAL LIVING EXPENSE LOSS see ADDITIONAL LIVING EXPENSE
INSURANCE.

ADD TO CASH VALUE OPTION new DIVIDEND OPTION under which

the POLICYOWNER allows the dividends from the PARTICIPATING policy to be
applied for the purposes of accumulating CASH VALUES.
ADEQUACY see RATE MAKING.
ADEQUACY, LIFE INSURANCE see HUMAN LIFE VALUE APPROACH (EVOIL);
NEEDS APPROACH.

ADHESION INSURANCE CONTRACT agreement prepared by

an insurance company and offered to prospective insureds on a
take-it-or-leave-it basis. If the contracts are misinterpreted by
insureds, courts have ruled in their favor since the insureds had no
input into the contract. All insurance contracts have been deemed
by courts to be contracts of adhesion.
AD INFINITUM continuing on an indefinite basis.
ADJACENT that which adjoins. Most property insurance policies
such as the HOMEOWNERS INSURANCE POLICY provide structural coverage on an
adjacent building on the same basis as the primary building.
ADJOINING see ADJACENT.
ADJUSTABLE LIFE INSURANCE coverage under which the face
value, premiums, and plan of insurance can be changed at the
discretion of the policyowner in the following manner, without
additional policies being issued:
1. face value can be increased or decreased (to increase coverage,
the insured must furnish evidence of insurability). The resultant
size of the cash value will depend on the amount of face value and
premium.
2. premiums and length of time they are to be paid can be increased
or decreased. Unscheduled premiums can be paid on a lump sum
basis. Premiums paid on an adjusted basis can either lengthen or
shorten the time the protection element will be in force, as well as
 Page 13
lengthen or shorten the period for making premium payments. For
example, assume that John, who is 28, buys a $100,000 adjustable
term life policy to age 65 with an annual premium of $1250. As his
career prospers, he finds at age 32 that he can double the annual
premium payment to $2500. This increase may change the original
term amount to a fully paid-up life policy at age 65. With time,
John might experience economic hardship and have to decrease his
annual payment by two thirds. This could result in changing the
paid-up-at-65 policy back to a term policy to age 65. Thus, at any
time the policy can be either ordinary life or term. See also UNIVERSAL
LIFE INSURANCE.

ADJUSTABLE PREMIUM premium that can vary up or down.

Some life insurance policies permit the company to change the
premiums after the policy is in force, depending on mortality
experience, expenses, and investment returns. If profits are
sufficient, premiums can be reduced; if not, they can be raised to
specific maximums.
ADJUSTABLE RATE MORTGAGE (ARM) mortgage agreement
that provides initial monthly payments of a relatively low amount
(compared with a fixed rate mortgage). This initial amount is
subject to periodic changes based on a stipulated index. Index
usually used is the change in the rates of United States Treasury
bills. Homebuyers considering an ARM should compare ARMs
offered by the various lending institutions in the following manner:
(1) first-year rates; (2) how the interest rate is calculated in future
years; (3) what the one-year and lifetime caps are on the maximum
rate; and (4) rules for conversion to a fixed rate mortgage.
ADJUSTED LIABILITIES statutory liabilities minus the INTEREST
MAINTENANCE RESERVE minus the ASSET VALUATION RESERVE.
ADJUSTED NET WORTH value of an insurance company or
other company that consists of capital and surplus and an estimated
value for business on the company's books.
ADJUSTED PREMIUM premium that equals the NET LEVEL PREMIUM
plus the modification of the NET LEVEL PREMIUM to reflect the cost
associated with paying for the first year initial acquisition
expenses. The modification is derived by dividing the first year
initial acquisition expenses by the present value of a LIFE ANNUITY DUE
(thereby amortizing these expenses over the premium paying
period). This is the premium used to generate a minimum CASH
SURRENDER VALUE required by the NONFORFEITURE PROVISION.

ADJUSTED PREMIUM METHOD method of calculating the life

insurance policy's cash surrender value (CSV) not contingent upon
the calculation of the policy's RESERVE such that the CSV will
approximate the ASSET SHARE VALUE of the policy as required by the
STANDARD NON-FORFEITURE LAW. According to this method of determining the

CSV, the following steps are taken: (1) arriving at the first year
expense
 Page 14
allowance; (2) arriving at the ADJUSTED PREMIUM; and (3) substituting the
adjusted premium for the NET LEVEL PREMIUM used in the equation for
arriving at the PROSPECTIVE RESERVE.
ADJUSTED SURPLUS statutory surplus plus the INTEREST MAINTENANCE
RESERVE plus the ASSET VALUATION RESERVE.

ADJUSTED UNDERWRITING PROFIT see UNDERWRITING GAIN (LOSS).

ADJUSTER individual employed by a property and casualty
insurance company to settle on its behalf claims brought by
insureds. The adjuster evaluates the merits of each claim and
makes recommendations to the insurance company. See also
INDEPENDENT ADJUSTER.

ADJUSTER, AVERAGE see AVERAGE ADJUSTER.

ADJUSTER, INDEPENDENT see INDEPENDENT ADJUSTER.
ADJUSTER, PUBLIC see PUBLIC ADJUSTER.
ADJUSTER, STAFF employee of an insurance company who
assesses insurance coverage for property claimed to be damaged
and determines the insurance proceeds that might be payable for
the claim. A fee adjuster works for himself and does claims
adjustments on a fee basis.
ADJUSTMENT BUREAU company organized with the business
objective of providing claims adjustment services to insurance
companies that do not have an internal claims department. See also
ADJUSTER, STAFF.

ADJUSTMENT INCOME income payable to a surviving spouse or

other beneficiary upon the death of the primary wage earner to
bridge the gap until the beneficiary is self-sufficient. For example,
income can be provided for a limited period of time until a widow
can regain emotional stability, receive career guidance, as well as
training, to establish a permanent career if necessary. The need for
adjustment income is a significant consideration in deciding how
much life insurance to purchase.
ADJUSTMENT PROVISION provision in an Adjustable Life
Insurance policy that permits the structure of the policy to be
changed by: (1) increasing or decreasing the premium; (2)
increasing or decreasing the FACE AMOUNT; (3) lengthening or
shortening the period of protection; and (4) lengthening or
shortening the period of premium payments.
ADMINISTERING AGENCY employer using a self-administered
insurance plan; or an insurer that administers a group employee
benefit plan. In an employer administered plan, the employer
maintains all required administrative records based on
demographic and other information from the employer's monthly
reports.
ADMINISTRATION performance of management functions
associated with administering an EMPLOYEE BENEFIT INSURANCE PLAN, to
include
 Page 15
actuarial services, booklet and contract plan designing, billing,
accounting, and establishing evidence of insurability for the plan
participants. See also ADMINISTERING AGENCY; ADMINISTRATIVE CHARGE; ADMINISTRATIVE
SERVICES ONLY (ASO).

ADMINISTRATION BOND coverage that guarantees that the

executor or administrator of an estate will conduct his or her duties
according to the provisions of the will and the legal requirements
of the jurisdiction. If dishonest acts by the executor or
administrator result in financial loss to the estate, the bond will act
as an INDEMNITOR to the estate. This bond is posted by the executor or
administrator of the estate.
ADMINISTRATIVE CHARGE billing by an ADMINISTERING AGENCY for
expenses associated with administering a group employee benefit
plan.
ADMINISTRATIVE EXPENSES costs associated with the general
administration of the insurance organization to include such items
as utilities, rent, salaries, postage, furniture, and housekeeping
charges.
ADMINISTRATIVE LAW law created by government regulatory
agencies, such as the office of the COMMISSIONER OF INSURANCE, through
decisions, orders, regulations, and rules. For example, RATE MAKING
hearings conducted by the insurance commissioner are common.
Based on the findings of the hearings, rate increases may or may
not be granted.
ADMINISTRATIVE SERVICES ONLY (ASO) services provided
in an employee benefit plan such as a PENSION PLAN. An employer
provides the clerical staff to operate the plan, in effect acting as
custodian. The trustee provides direction for investment of the
plan's funds, usually in a self-directed investment account. Trustee
plans are gaining in popularity as both the employer and employees
seek more control over pension funds investments. In a self-insured
property or liability plan the group may have an ASO contract with
an insurance company or a third-party administrator to handle
claims processing and administration.
ADMINISTRATOR court-appointed person to manage the estate
of a deceased individual who declared no EXECUTOR or EXECUTRIX. This
person so appointed acts in a FIDUCIARY capacity with regard to that
estate.
ADMIRALTY LIABILITY maritime acts resulting in a LIABILITY
circumstance falling under COMMON LAW and statutory law. See also
JONES ACT (MERCHANT MARINE ACT).

ADMIRALTY PROCEEDING conducting of maritime suits

involving OCEAN MARINE INSURANCE policy claims before an admiralty
court.
ADMITTED ASSETS assets permitted by state law to be included
in an insurance company's ANNUAL STATEMENT. These assets are an
important factor when regulators measure insurance company
solvency. They include mortgages, stocks, bonds, and real estate.
Historically, a large part of admitted assets consisted of long term
mortgages, but
 Page 16
with the advent of CURRENT ASSUMPTION WHOLE LIFE INSURANCE policies, short
term financial instruments can be used to make up a large part of
admitted assets.
ADMITTED COMPANY life insurance company or property and
casualty insurance company licensed by a particular state to
conduct business there. The company is subject to the state
insurance code governing such aspects as company reserves and
advertising. If an insurance company is not licensed by a given
state or if its license is terminated, the company can no longer
conduct insurance business in that state.
ADMITTED INSURANCE insurance purchased from an insurance
company that has been licensed in the state in which the policy is
purchased. This insurance is purchased through an agent or broker
who are licensed by that particular state, and, that state regulates
the marketing of the insurance and the policy forms used.
AD VALOREM property taxes assessed according to the value of
that property.
ADVANCED FUNDED PENSION PLAN retirement plan in
which money is currently allocated to fund an employees' pension.
See also ALLOCATED FUNDING INSTRUMENT; UNALLOCATED FUNDING INSTRUMENT.
ADVANCED LIFE UNDERWRITING process of analyzing
complex personal and business cases according to tax and estate
planning requirements to determine life insurance needs. The
family life agent or underwriter normally does not become
involved in complex business or personal cases, but draws on the
expertise of the advanced life underwriter when needed.
ADVANCE FUNDING payment of premiums before their due
date. In pension plans, premium payments are allocated to the
payment of future benefits prior to benefits becoming payable. See
also ADVANCED FUNDED PENSION PLAN.
ADVANCE PAYMENTS payments made to the insured by the
insurance company before the settlement date. For example, a
claim is scheduled to be settled on June 1, 2000, but the insurance
company pays the claimant prior to that date.
ADVANCE PREMIUM premium paid before the due date. For
example, a premium is due on July 1, 2000, but the insured actually
makes the premium payment on January 1, 2000, receiving a
premium discount.
ADVANCE PREMIUM MUTUAL see DIVIDEND OPTION; MUTUAL INSURANCE
COMPANY; PARTICIPATING INSURANCE.

ADVERSE FINANCIAL SELECTION process in which the POLICY-

HOLDER surrenders the policy when: (1) cash proceeds can be invested

elsewhere at a higher return than that being earned on the CASH VALUE
 Page 17
within the policy; and (2) economic recession or depression exists
and the cash is required to meet other financial obligations. If the
policy-holder exercises the CASH SURRENDER VALUE option during these
economic circumstances, the company may have to sell assets at a
''fire sale" and will have fewer funds to invest at advantageous rates
of return.
ADVERSE SELECTION process in life insurance by which an
applicant who is uninsurable, or is a greater than average risk,
seeks to obtain a policy from a company at a standard premium
rate. Life insurance companies carefully screen applicants for this
reason, since their premiums are based on policyholders in average
good health and in non-hazardous occupations.
ADVERTISERS LIABILITY INSURANCE coverage for an
advertiser's negligent acts and/or omissions in advertising (both
oral and written) that may result in a civil suit for libel, slander,
defamation of character, or copyright infringement.
ADVERTISING, INSURANCE COMPANY highly visible form of
marketing communication with the public with these objectives: (1)
encourage agents and brokers to sell insurance company products,
(2) predispose customers to be receptive to sales calls, (3) enhance
an insurance company's public image, (4) support introduction of
new products, and (5) influence public and legislative opinions on
issues of importance to the insurance industry. Product advertising
describes particular products and why they would be beneficial.
Institutional advertising describes the financial strength and the
stability of a company. Depending on target market and size,
company advertising may be national, local, or cooperative (a joint
venture using both company and agency dollars).
ADVISORY COMMITTEE group that advises on employee
benefit plans as to amount of benefits to be paid, how benefits are
to be financed, and how employees are to qualify for benefits
(VESTING requirements). An advisory committee only suggests; it does
not have line authority.
AFFILIATED COMPANIES associated insurers that are under
common stock ownership or interlocking directorates. Such an
arrangement makes it easier to exchange insurance products for
sale to the consumer, reduces duplication of efforts, and lowers
product research and development costs.
AFFIRMATIVE WARRANTY see WARRANTY.
AGE CHANGE date, in insurance, on which a person becomes one
year older. Depending on the insurance company, premiums in life
and health insurance manuals are figured to the age-nearest-
birthday or age-last-birthday.
AGE DISCRIMINATION IN EMPLOYMENT ACT (ADEA) act
that prohibits employers from requiring employees to retire at age
70.
 Page 18
Also, the act prohibits EMPLOYEE BENEFIT PLANS from discriminating
against employees in the 40 to 70 age group as to contributions or
benefits.
AGE LIMITS maximum age of an applicant or insured beyond
which an insurance company will not initially underwrite a risk or
continue to insure it. For example, under some forms of RENEWABLE
TERM LIFE INSURANCE, coverage will not be renewed beyond age 60.

AGENCY individuals under common management whose goal is

to sell and service insurance. Office may be managed by a GENERAL
AGENT or branch manager. See also CAPTIVE INSURANCE COMPANY; INDEPENDENT

AGENCY SYSTEM.

AGENCY AGREEMENT written document containing

instructions on managing one's assets during one's lifetime. The
document may be revoked (unless made irrevocable at creation),
terminated, or amended at any time by the creator of the agreement
provided that person is competent to make the decision. The power
the agent has to make decisions for the creator of the agreement
may be broad or narrow. The agent is prohibited from disclosing
information about the assets held under agreement to anyone
without the creator's permission. The power of an agent to act
under the agency agreement terminates if the creator becomes
incompetent unless the creator has signed a durable power of
attorney. Upon the death of the creator, the agency agreement
terminates, which requires that all of the assets under the
agreement must be probated before they can be distributed to the
creator's beneficiaries.
AGENCY BY ESTOPPEL see ESTOPPEL.
AGENCY BY RATIFICATION confirmation by an insurance
company of the acts of its AGENT, regardless of whether or not these
acts were committed within the limit of authority granted the agent
by the company. By so ratifying the agent's acts, the company
becomes responsible for consequences arising from these acts. For
example, if the insurance company, with full knowledge of the
agent's misdeeds in soliciting the application and the premium from
the PROSPECT, accepts the premium for the policy from the agent, this
acceptance constitutes ratification of the act of the agent.
AGENCY CONTRACT (AGENCY AGREEMENT) rules of
conduct and commissions paid to agents. For example, under the
rules of conduct agents may be required to submit all of their
business to only that agency. The contract also lists commission
schedules.
AGENCY MANAGER individual in charge of an insurance
company agency. The manager is an employee of the company and
is usually compensated on a salary-and-bonus basis, the latter
relating to premium volume production of all the agents in the
agency. He or she is responsible for hiring and training agents.
AGENCY PLANT insurance company's total number of agents.
 Page 19
AGENCY SYSTEM see AGENT; INDEPENDENT AGENCY SYSTEM.
AGENT individual who sells and services insurance policies in
either of two classifications:
1. Independent agent represents at least two insurance companies
and (at least in theory) services clients by searching the market for
the most advantageous price for the most coverage. The agent's
commission is a percentage of each premium paid and includes a
fee for servicing the insured's policy. See also AMERICAN AGENCY SYSTEM.
2. Direct writer represents only one company and sells only its
policies. This agent is paid on a commission basis in much the
same manner as the independent agent.
AGENT COMMISSION see COMMISSION.
AGENT, GENERAL see GENERAL AGENT (GA).
AGENT, INDEPENDENT see INDEPENDENT AGENT.
AGENT LICENSE see LICENSING OF AGENTS AND BROKERS.
AGENT OF RECORD individual who has a contractual agreement
with a policyowner. The agent of record has a legal right to
commissions from the insurance policy.
AGENT, POLICYWRITING agent with the authority from an
insurance company to prepare and to place into business an
insurance policy.
AGENT, RECORDING see AGENT OF RECORD.
AGENT, RESIDENT see RESIDENT AGENT.
AGENT'S AUTHORITY authority derived from an agent's
contract with an insurance company. See also APPARENT AGENCY (AUTHORITY).
AGENT'S BALANCE statement showing the amount of money
owed the agent by the insurance company, according to the
contract he or she has with the insurance company.
AGENT, SPECIAL see SPECIAL AGENT.
AGENT'S QUALIFICATION LAWS legislation establishing the
minimum education and experience level required by the state as a
prerequisite for a person to become a licensed AGENT. See also LICENSE;
LICENSING OF AGENTS AND BROKERS.

AGENT, STATE see STATE AGENT.

AGE SETBACK subtraction of a number of years from a standard
table of life insurance rates under the assumption that a particular
group womenoutlive men and presumably will be paying premiums
for a longer time. For example, a 38-year-old woman may pay the
same premiums as a 35-year-old man. Age setback is a women's
rights issue, with at least one state having legislated that men and
women
 Page 20
the same age must be charged the same rates for the life insurance
they buy.
AGE-WEIGHTED PROFIT-SHARING PLAN plan that combines
the simplicity and flexibility of the traditional PROFIT-SHARING PLAN with
the best features of the DEFINED BENEFIT PLAN and the TARGET BENEFIT PLAN. By
age-weighing the plan, higher contributions are permitted by the
IRS for older plan participants. Under traditional profit-sharing
plans, younger employees will have a larger contribution made by
the employer on their behalf, but they are the least likely to be
concerned with retirement and would rather have the cash.
Age-Weighted Plans offer more flexibility in making contributions.
Under defined benefit plans and target benefit plans, a minimum
contribution has to be made each year in contrast to the profit-
sharing plan. Age-Weighted Plans, as in the case with the
traditional profit-sharing plans, limit the employer's maximum
deductible contribution to 15% of the participant's compensation.
The maximum annual contribution of any plan participant is equal
to the lesser of 25% of compensation, or $30,000. There are no
minimum required annual contributions or maintenance costs to
reflect fees paid for the PENSION BENEFIT GUARANTY CORPORATION (PBGC) premiums,
federal, or actuarial valuations. A significantly smaller contribution
made on behalf of a younger employee will ultimately equal a
significantly larger contribution on behalf of an older employee.
Because of the effect of COMPOUND INTEREST, the contribution on behalf
of the younger employee will purchase the same retirement benefit
as the contribution on behalf of the older employee.
AGGREGATE ANNUAL DEDUCTIBLE deductible that applies
for the year. For example, a business pays for the first $40,000 of
losses incurred during the year and the insurance company pays for
all losses above that amount up to the LIMIT OF RECOVERY stated in the
policy.
AGGREGATE EXCESS CONTRACT policy in which an insurer
agrees to pay property or liability losses (generally 80-100%) in
excess of a specific amount paid on all losses during a POLICY YEAR.
AGGREGATE EXCESS OF LOSS RETENTION see EXCESS OF LOSS
REINSURANCE; STOP LOSS REINSURANCE.

AGGREGATE INDEMNITY total limit of coverage under all

policies applicable to the covered loss for which an insured can be
indemnified. For example, if two health insurance policies are in
force on the same person, the total limit of coverage is that
provided by the primary policy in combination with the secondary
policy. See also AGGREGATE LIMIT PRIMARY INSURANCE AMOUNT; SECONDARY PLAN.
AGGREGATE LEVEL COST METHOD actuarial method of
calculating benefits and their costs for all the employees as a group
rather than for each individual employee. The costs of the benefits
are measured in the form of a percentage of the total payroll for the
employee group.
 Page 21
AGGREGATE LIMIT maximum dollar amount of coverage in
force under a health insurance policy, a property damage policy, or
a liability policy. This maximum can be on an occurrence basis, or
for the life of the policy. The following are examples.
1. Health insurance. The insured was billed $107,000 for a serious
illness, but the aggregate limit of the policy was $100,000 for the
life of the policy, so the most that the insured could be reimbursed
is $100,000. The insured would have to pay $7000. Any medical
expenses arising from future illness would now have to be paid by
the insured.
2. Liability insurance. The insured is at fault in an automobile
accident (single occurrence) causing injury to four individuals of
$100,000, $150,000, $85,000 and $115,000, respectively, a total of
$450,000. The aggregate limit of the policy is $400,000. The
insured would have to pay the remaining $50,000.
AGGREGATE MORTALITY TABLE type of mortality table that
is based on combined statistics from both the ULTIMATE MORTALITY TABLE
and the AGGREGATE MORTALITY TABLE. It shows total statistics for the
probability of living and dying throughout the entire life cycle.
AGGREGATE PRODUCTS LIABILITY LIMIT maximum sum of
money that the insurance company will pay, during the time
interval that the PRODUCT LIABILITY INSURANCE coverage is in effect, for all
product liability-related claims arising that are covered under the
policy.
AGGREGATE STOP LOSS INSURANCE coverage that goes into
effect when an employer who has SELF INSURANCE has its total group
health insurance claims attain a certain level, which is usually
125% of its annual projected group health claims costs.
AGREED AMOUNT CLAUSE in PROPERTY INSURANCE, a stipulated
agreement between the insurance company and the insured that the
amount of insurance coverage under the policy is sufficient to be in
compliance with the COINSURANCE requirement.
AGREED AMOUNT FORM see AGREED AMOUNT CLAUSE.
AGREEMENT see INSURING AGREEMENT.
AGRICULTURAL EQUIPMENT INSURANCE property damage
coverage for mobile agricultural equipment and machinery,
including harness, saddles, blankets, and liveries. Perils insured are
fire, lightning, vandalism, malicious mischief, and removal.
Additional perils can be added at extra charge. Excluded from
coverage are crops, aircraft, watercraft, feed, hay, and grass.
(Crops, aircraft, and watercraft can be covered under other types of
insurance policies.)
AIA see AMERICAN INSURANCE ASSOCIATION (AIA).
AIAF see ASSOCIATE IN INSURANCE ACCOUNTING AND FINANCE (AIAF).
AIC see ASSOCIATE IN CLAIMS (AIC).
 Page 22
AIM see ASSOCIATE IN MANAGEMENT (AIM).
AIR CARGO INSURANCE coverage for an air carrier's legal
liability for damage, destruction, or other loss of a customer's
property while being shipped. Coverage is on an ALL RISKS basis
subject to specific perils excluded in the policy. Air cargo insurance
is a form of MARINE INSURANCE, which at one time only covered goods in
transit over waterways. Today, goods in transit can be insured
regardless of the means of transportation.
AIRCRAFT HULL INSURANCE coverage on an ALL RISKS basis
whether the airplane is on the ground or in the air; also called hull
aircraft insurance. Exclusions, although none are standard, include
illegal use of an aircraft; using an aircraft for purposes other than
that described in the policy; wear and tear; piloting the aircraft by
someone not named in the policy; operating an aircraft outside
stipulated geographical boundaries; and damage or destruction of
an aircraft resulting from war, riots, strikes, and civil commotions,
mechanical breakdown loss, structural failure loss, and conversion.
The hull value includes instruments, radios, autopilots, wings,
engines, and other equipment attached to or carried on the plane as
described in the policy.
AIRCRAFT LIABILITY INSURANCE coverage for the insured in
the event that the insured's negligent acts and/or omissions result in
losses in connection with the use, ownership, or maintenance of
aircraft. Liability coverage can be provided for bodily injury and/or
property damage to passengers and also to individuals who are not
passengers. MEDICAL PAYMENTS INSURANCE may be included on an optional
basis. See also AVIATION INSURANCE.
AIRPORT LIABILITY COVERAGE insurance for owners and
operators of private, municipal, or commercial airports, as well as
fixed-base operators, against claims resulting from injuries to
members of the general public or physical damage to the property
of members of the general public, provided that these individuals
are on the premises of the airport or its related facilities. The policy
may include any or all of the following coverage's: (1) PREMISES AND
OPERATIONS LIABILITY INSURANCE; (2) PERSONAL INJURY; (3) PREMISES MEDICAL PAYMENTS

INSURANCE; and (4) contractual. The policy can be tailored to meet the

particular requirements of the INSURED.

ALASKA TRUST ACT enacted on April 1, 1997; provides
protection against creditors for IRREVOCABLE TRUSTS provided that the
trust has a GRANTOR who is a discretionary beneficiary. In order for
the statute of the Alaska Trust to be applicable, the following
requirements must be met:
1. At least one if the trustees must reside in Alaska or have his or
her principal place of business in Alaska.
2. A percentage of the assets of the trust is required to be on
deposit in a checking account, brokerage account, or other similar
account.
 Page 23
3. The records of the trust must be physically located in Alaska and
a percentage of the administration of the trust must take place in
Alaska.
ALCM see ASSOCIATE IN LOSS CONTROL MANAGEMENT (ALCM).
ALCOHOLIC BEVERAGE CONTROL LAWS see DRAM SHOP LAW.
ALCOHOLIC BEVERAGE LIABILITY INSURANCE see DRAM
SHOP LIABILITY INSURANCE.

ALEATORY CONTRACT contract that may or may not provide

more in benefits than premiums paid. For example, with only one
premium payment on a property policy an insured can receive
hundreds of thousands of dollars should the protected entity be
destroyed. On the other hand, an insurance company can collect
more in premiums than it ever pays out in benefits, as in a fire
insurance policy under which the protected property is either
damaged or destroyed. Most insurance contracts are aleatory in
nature.
ALIEN INSURER insurance company formed according to the
legal requirements of a foreign country. In order for an alien insurer
to be able to carry on general operations and sell its products in a
particular state in the United States, it must conform to that state's
rules and regulations governing insurance companies.
ALIMONY SUBSTITUTION TRUST agreement in which spouse
X (the spouse who is mandated by the court to make alimony
and/or child support payments to spouse Y) must put assets (the
principal) in a TRUST, from which the payments are made to spouse
Y. Under this trust, the payments made from the income generated
by the principal is taxable income to spouse Y, but any sums paid
from the corpus of the principal is not taxable income to spouse Y.
Spouse X does not receive a tax deduction for payments made from
the trust's corpus of principal, nor does spouse X pay income taxes
on the income generated by the principal in the trust.
ALLIANCE OF AMERICAN INSURERS (AAI) membership
organization, based in Chicago, Illinois, consisting principally of
property and casualty insurance companies. Its objectives are to
influence the public and the legislators on matters concerning the
property and casualty insurance industry, to publish materials, and
to conduct research and various educational programs for member
companies.
ALLIED LINES property insurance closely associated with fire
insurance and usually purchased in conjunction with a Standard
Fire Policy. Allied lines include DATA PROCESSING INSURANCE, DEMOLITION
INSURANCE, EARTHQUAKE INSURANCE, INCREASED COST OF CONSTRUCTION CLAUSE, RADIOACTIVE

CONTAMINATION INSURANCE, SPRINKLER LEAKAGE INSURANCE, STANDING TIMBER INSURANCE,

VANDALISM AND MALICIOUS MISCHIEF INSURANCE, WATER DAMAGE INSURANCE.

 Page 24
ALL LINES INSURANCE combination of coverages from
property, liability, health, and life insurance into a single insurance
policy from one insurance company. See also MULTIPLE LINE INSURANCE.
ALLOCATED BENEFITS payments in a DEFINED BENEFIT PLAN. Benefits
are allocated to the pension plan participants as premiums are
received by the insurance company. Since the benefits purchased
are paid up, the employee is guaranteed a pension at retirement,
even if the firm goes out of business.
ALLOCATED FUNDING INSTRUMENT insurance or annuity
contract used in pension plans to purchase increments of retirement
benefits through contributions for each employee paid into a fund.
Benefits are guaranteed to employees at retirement; the insurance
company is legally obligated to pay all benefits for which it has
received premiums. Pension plans, in which no funds are available
to purchase benefits prior to retirement involve UNALLOCATED FUNDING
INSTRUMENTS (benefits were not purchased at the time premium

payments were made).

ALLOCATION OF PLAN ASSETS see ALLOCATION OF PLAN ASSETS ON
TERMINATION.

ALLOCATION OF PLAN ASSETS ON TERMINATION

distribution of assets if a pension plan is terminated. The allocation
is made by either (1) refunding all of an employee's contributions,
plus interest, or (2) establishment of classes of employees and their
beneficiaries according to entitlement to benefits.
ALLOWED ASSETS see ADMITTED ASSETS.
ALL RISK INSURANCE see ALL RISKS.
ALL RISKS insurance that covers each and every loss except for
those specifically excluded. If the insurance company does not
specifically exclude a particular loss, it is automatically covered.
This is the broadest type of property policy that can be purchased.
For example, if an insurance policy does not specifically exclude
losses from wind damage, or from a meteor falling on the insured's
house, the insured is covered for such losses. See also NAMED PERIL
POLICY; SPECIFIED PERIL INSURANCE.

ALTERNATIVE DISPUTE RESOLUTION (ADR) many different,

unofficial, and voluntary nonlitigation processes employed by
insurance companies to resolve contractual disputes with their
insureds. Examples would include nonbinding arbitration, simple
negotiations between the insurance company and its insured, and
mediation by a neutral third party. The objective of this type of
dispute resolution is to avoid the substantial expenses that
protracted litigation would generate.
 Page 25
ALTERNATIVE MINIMUM COST METHOD means of funding
permitted under the EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA). The
administrator of a pension plan can comply with required minimum
funding standards by electing an alternative cost method under
which the normal cost is the lesser of the normal cost (1) according
to the actuarial cost method of the plan, or (2) according to the
accrued benefit cost method without benefit projections.
ALTERNATIVE MINIMUM TAX see CORPORATE ALTERNATIVE MINIMUM TAX:
IMPLICATIONS FOR CORPORATE-OWNED LIFE INSURANCE.

ALTERNATIVE RISK FINANCING arrangement by which the

insured agrees to incur a given degree of variability in the ultimate
total costs associated with financing its losses.
ALTERNATIVE RISK FINANCING FACILITIES provide
mainstream coverage to their members that include corporations,
public entities, and professionals. These facilities were originally
established and capitalized by organizations and individuals with
common requirements for insurance who could not obtain coverage
on the commercial markets; could not obtain coverage at an
acceptable price; could not effectively act as a CAPTIVE INSURANCE COMPANY;
or could not act as a SELF-INSURER. Coverages written include property
insurance, WORKERS COMPENSATION INSURANCE, DIRECTORS AND OFFICERS LIABILITY INSURANCE,
MEDICAL MALPRACTICE LIABILITY INSURANCE, and primary and excess liability

insurance. Insureds include a broad range of organizations and

individuals: medical personnel, banks, manufacturers, public
entities, nonprofit entities, contractors, and transportation
companies and systems. The major portion of the facilities is
domiciled in Bermuda.
AMBIGUITY language in the insurance policy that can be
considered unclear or subject to different interpretations. Under
these circumstances, the courts have generally ruled in favor of
insured individuals and against insurance companies since
insurance policies are deemed to be contracts of adhesion, and also
that insurance companies have sufficient legal talent at their
disposal to make policy language clear.
AMENDMENT provisions added to an original insurance policy
that alter or modify benefits and coverages of the contract. For
example, a HOMEOWNERS INSURANCE POLICY can be endorsed to cover a
secondary dwelling; perils can be added for coverage. See also
ENDORSEMENT; RIDER.

AMERICAN ACADEMY OF ACTUARIES professional

association that sets standards of performance for those engaged in
actuarial functions. Members are entitled to use the professional
designation MAAA (Member, American Academy of Actuaries).
The U.S. Department of Labor and the Internal Revenue Service
requires that documents filed with these governmental agencies be
signed by a member of the American Academy of Actuaries
attesting to the validity of actuarial
 Page 26
calculations concerning benefits to be paid and their funding. The
academy is located in Chicago, Illinois.
AMERICAN AGENCY SYSTEM marketing of insurance through
independent agents; also called independent agency system.
Independent agents usually represent several insurance companies
and try to insure the risk according to availability of coverage and
most favorable price. Independent agents are paid a commission in
the form of a percentage of the premiums generated by the policy
sold. They own all the records of the policies sold and have the
right to solicit renewals. They are not restricted to maintaining
business with just one company and can transfer the business upon
renewal to another company.
AMERICAN ANNUITY TABLE, 1955 historical MORTALITY TABLE used
to calculate PREMIUM rates for DEFERRED ANNUITIES and OPTIONAL MODES OF
SETTLEMENT for LIFE INSURANCE policies. This table was subsequently

replaced by the 1983 Table-a (mortality table for annuity rates for
males).
AMERICAN COLLEGE (Formerly the American College of Life
Underwriters) accrediting body for the CLU (Chartered Life
Underwriter) and the ChFC (Chartered Financial Consultant)
designations. Provides undergraduate, graduate and continuing
education in life insurance and financial services courses on both a
residence and correspondence basis. Courses include life insurance,
pensions, economics, finance, investments, business evaluations,
tax planning, and estate planning. The college, which also confers
the Master of Science in Financial Services degree, is located in
Bryn Mawr, Pennsylvania.
AMERICAN COUNCIL OF LIFE INSURANCE association of
life insurance companies focusing on legislation and public
relations that may affect the life insurance business on federal,
state, and local levels. Membership is composed of both stock and
mutual life insurance companies. The council lobbies to voice the
views of the life insurance business in order to influence public
opinion and legislation. It also acts as a control source of
information on the life insurance business for the public. Located
in Washington, D.C.
AMERICAN EXPERIENCE TABLE chart published in 1868 by
Sheppard Homans, an actuary with the Mutual Life Insurance
Company of New York, based on insured lives from 1843 to 1858.
Historically, it was widely used for life insurance premium and
reserve calculations. It was replaced by the C.S.O. Table. See also
COMMISSIONERS STANDARD ORDINARY MORTALITY TABLE (CSO).

AMERICAN INSTITUTE FOR PROPERTY AND LIABILITY

UNDERWRITERS accrediting body for the CPCU (Chartered
Property and Casualty Underwriter) designation. The institute
provides undergraduate and continuing education in property and
casualty
 Page 27
insurance courses on a correspondence basis. Courses include risk
management and insurance, commercial property risk management
and insurance, commercial liability risk management and
insurance, personal risk management and insurance, insurance
company operations, legal environment of insurance, management,
accounting, finance, and economics. Located in Malvern,
Pennsylvania.
AMERICAN INSURANCE ASSOCIATION (AIA) membership
organization of property and liability insurance companies. The
association promotes the economic, legislative, and public standing
of its members through its attention to accounting procedures,
catastrophe and pollution problems, auto insurance reform, and
other activities. Located in New York City, New York.
AMERICAN LIFE CONVENTION see AMERICAN COUNCIL OF LIFE INSURANCE.
AMERICAN LLOYD'S see LLOYD'S ASSOCIATION.
AMERICAN MUTUAL INSURANCE ALLIANCE see ALLIANCE OF
AMERICAN INSURERS (AAI).

AMERICAN RISK AND INSURANCE ASSOCIATION

membership organization of companies, academics, and individuals
in the insurance business whose interest is to further education and
research in insurance and risk management. The association
publishes The Journal of Risk and Insurance, which is devoted to
scholarly articles on insurance, risk management, and allied fields
of study.
AMERICANS WITH DISABILITIES ACT (ADA) act that
prevents employers from rejecting disabled job applicants on the
grounds that hiring such an applicant would result in higher
employee health care cost. Additionally, if the job applicant has a
disabled spouse, child, or other dependent, regardless of whether or
not the job applicant is also disabled, the employer cannot reject
the job applicant on those grounds. Thus, the employer cannot
exclude disabled employees and their dependents from its health
plan on the ground that providing such coverage would increase the
cost of health care. Title I of the act became effective for all
employers with 25 or more employees on July 26, 1992.
A disability is defined by the ADA as: ''A physical or mental
impairment which substantially limits one or more major life
activities; or a record of such impairment; or being regarded as
having such an impairment." Title I mandates that: "All personnel
actions must be unrelated to either the existence or consequence of
disability to include recruitment and selection of employees;
compensation of employees; training and all terms, conditions, and
privileges of employment. If there are any conflicts with state laws,
ADA takes precedence."
AMIM see ASSOCIATE IN MARINE INSURANCE MANAGEMENT (AMIM).
 Page 28
AMORTIZATION the systematic liquidation of a sum owed. A
payment is charged at specific time intervals which will reduce the
outstanding debt to zero at the end of a given period of time.
AMORTIZATION SCHEDULE method of paying a sum due
whose value has been discounted, according to a predetermined
schedule. Each periodic payment includes part of the principal and
interest due thereon.
AMORTIZED VALUE see AMORTIZATION; AMORTIZATION SCHEDULE.
AMOUNT AT RISK
1. difference between the face value of a permanent life insurance
policy and its accrued cash value. The pure cost of protection is
based on this difference. For example, if the face value of a life
insurance policy is $100,000 and the cash value is $80,000 then the
net amount at risk is $20,000. From the Internal Revenue Service
perspective, a corridor of protection or net amount of risk must be
apparent in a life insurance policy if the policy is to retain its tax
advantaged treatment.
2. in property and liability insurance, the lesser of the policy limit
or the maximum possible loss to the insured.
AMOUNT FOR WHICH LOSS SETTLED see LOSS SETTLEMENT AMOUNT.
AMOUNT OF INSURANCE TO VALUE proportion of the sum
insured to the total property value. See also COINSURANCE.
AMOUNT SUBJECT see MAXIMUM PROBABLE LOSS (MPL).
AMT see CORPORATE ALTERNATIVE MINIMUM TAX: IMPLICATIONS FOR CORPORATE-OWNED LIFE
INSURANCE.
ANALYSIS see ANALYSIS OF PROPERTY AND CASUALTY POLICY; RISK CLASSIFICATION.
ANALYSIS OF PROPERTY AND CASUALTY POLICY
determination of (1) property covered, property excluded; (2) perils
covered, perils excluded; (3) location covered, location excluded;
(4) time period the policy is in force; (5) persons covered, persons
excluded; (6) policy limits; and (7) coinsurance requirements.
ANALYTIC SYSTEM see DEAN ANALYTIC SCHEDULE.
ANCILLARY BENEFITS health insurance coverage for
miscellaneous medical expenses associated with a hospital stay.
Benefits provided in individual and group health insurance include
ambulance service to and from a hospital, drugs, blood, surgical
dressings, operating room, medicines, bandages, X-rays, diagnostic
tests, and anesthetics. Ancillary benefits are expressed as a
multiplier of the daily hospital benefits (10, 15, or 20 times).
ANIMAL HEALTH INSURANCE see LIVESTOCK MORTALITY (LIFE) INSURANCE;
LIVESTOCK TRANSIT INSURANCE.
 Page 29
ANIMAL LIFE INSURANCE see LIVESTOCK INSURANCE.
ANNIVERSARY see POLICY ANNIVERSARY.
ANNUAL AGGREGATE LIMIT pre-determined dollar amount up
to which an insurance policy will cover an insured each year,
regardless of the number of claims submitted or defense costs
associated with these claims. For example, if the policy limit was
established at $1,000,000, the insurance company would pay only
up to $1,000,000 regardless of the number of claims during a
particular year.
ANNUAL CONVENTION BLANK see ANNUAL STATEMENT.
ANNUAL EXPECTED DOLLAR LOSS over a long period of
time, the AVERAGE loss an individual, individuals, or an organization
can expect to incur from a particular EXPOSURE.
ANNUAL INSURANCE POLICY see ANNUAL POLICY.
ANNUAL POLICY contract remaining in force for up to 12
months unless canceled earlier. After 12 months the policy can
either be renewed or not renewed by the insurance company or the
insured. The policy need not be paid for on an annual basis.
ANNUAL PREMIUM ANNUITY series of premium payments
made to purchase an ANNUITY. This is the same method of purchase
used for LEVEL PREMIUM INSURANCE.
ANNUAL RENEWAL AGREEMENT agreement in which the
insurer promises to renew the policy provided certain conditions
have been met by the insured.
ANNUAL REPORT statement of the financial condition of the
insurance company, as well as significant events during the year in
which the company has been involved and/or that have affected the
company. This statement is furnished to the stockholders (if a STOCK
INSURANCE COMPANY) or POLICYHOLDERS (if a MUTUAL INSURANCE COMPANY).

ANNUAL STATEMENT report that an insurance company must

file annually with the State Insurance Commissioner in each state
in which it does business. The statement shows the current status of
reserves, expenses, assets, total liabilities, investment portfolio, and
employees earning over $40,000 per year. It provides information
needed to assure that an insurance company has adequate reserves,
and that assets are available to meet all benefit payments for which
the company has received premiums. The form used is agreed upon
by the National Association of Insurance Commissioners (NAIC).
This form is also known as Annual Convention Blank.
ANNUALIZED accounting method of establishing data on an
annual basis.
ANNUITANT person who receives an income benefit from an
ANNUITY for life or for a specified period.
 Page 30
ANNUITY contract sold by insurance companies that pays a
monthly (or quarterly, semiannual, or annual) income benefit for
the life of a person (the annuitant), for the lives of two or more
persons, or for a spec-ified period of time. The annuitant can never
outlive the income from the annuity. While the basic purpose of life
insurance is to provide an income for a beneficiary at the death of
the insured, the annuity is intended to provide an income for life
for the annuitant. There are variations in both the way that
payments are made by a buyer during the accumulation period, and
in the way payments are made to the annuitant during the
liquidation period.
An annuity may be bought by means of installments, with benefits
scheduled to begin at a specified age such as 65; or, it may be
bought by means of a single lump sum, with benefits scheduled to
begin immediately or at a later date. No physical examination is
required. For variations in methods of payment, see CASH REFUND ANNUITY;
FIXED DOLLAR ANNUITY; INSTALLMENT REFUND ANNUITY; JOINT-LIFE AND SURVIVORSHIP ANNUITY; JOINT

LIFE ANNUITY; LIFE ANNUITY CERTAIN; PURE ANNUITY; VARIABLE DOLLAR ANNUITY.

ANNUITY ANALYSIS includes rate of return, how long the

annuity's interest rate is guaranteed, loads (front, middle and back),
financial ranking of the insurance company offering the annuity,
the monthly income factor per $1000 of cash value on deposit. For
example, for the last item, if the monthly income factor is $6.18 per
$1000 of cash value on deposit and the size of the cash value on
account is $100,000, a male annuitant would receive a monthly
income benefit of $618 at age 65.
ANNUITY, CASH REFUND see CASH REFUND ANNUITY.
ANNUITY, CD product that guarantees the initial interest rate for
funds on deposit for the length of the maturity, whether it is for a
period of 1, 3, 5, 10, or 15 years. At maturity, the POLICYHOLDER has
two choices: (1) withdraw the funds without having to pay a
SURRENDER CHARGE (it is important to note that taxes must be paid on the

interest earned and there is a 10% penalty on the earnings if the

policyholder is less than age 59 1/2); or (2) roll the funds over into
another annuity for a limited number of years or a product of
longer duration. In contrast to certificates of deposit (CDs), interest
earned through this ANNUITY accumulates on a tax-deferred basis.
This type of annuity provides liquidity, preserves principal, and
stipulates a fixed rate of return.
ANNUITY CERTAIN see LIFE ANNUITY CERTAIN.
ANNUITY CONSIDERATION single payment or periodic
payments that are made to purchase an annuity.
ANNUITY DATE date of the initial annuity payment.
ANNUITY, DEFERRED see DEFERRED ANNUITY.
ANNUITY DUE annuity under which payments are made in the
beginning of each period (month, quarter, or year).
 Page 31
ANNUITY FORMS see ANNUITY, ANNUITY DUE; LIFE ANNUITY CERTAIN; CASH REFUND
ANNUITY; INSTALLMENT REFUND ANNUITY; VARIABLE DOLLAR ANNUITY.

ANNUITY, GROUP see GROUP ANNUITY.

ANNUITY, INSTALLMENT REFUND see INSTALLMENT REFUND ANNUITY.
ANNUITY, JOINT LIFE see JOINT LIFE ANNUITY.
ANNUITY, JOINT LIFE AND SURVIVORSHIP see JOINT LIFE AND
SURVIVORSHIP ANNUITY.

ANNUITY PAYMENT OPTION series of payments made on

either a FIXED DOLLAR ANNUITY basis or VARIABLE DOLLAR ANNUITY basis.
ANNUITY RENT periodic payments to an ANNUITANT.
ANNUITY, RETIREMENT see ANNUITY; GROUP DEFERRED ANNUITY; GROUP DEPOSIT
ADMINISTRATION ANNUITY; GROUP IMMEDIATE PARTICIPATION GUARANTEED (IPG) CONTRACT ANNUITY;

PENSION PLAN FUNDING.

ANNUITY, REVERSIONARY see SURVIVORSHIP ANNUITY.

ANNUITY, SURVIVORSHIP see SURVIVORSHIP ANNUITY.
ANNUITY TABLE, 1949 table that replaced the STANDARD ANNUITY TABLE,
1937. It reflected the fact that more people were living longer in its
statistics. This table was subsequently replaced by the INDIVIDUAL
ANNUITY TABLE, 1971 and, to some extent, the AMERICAN ANNUITY TABLE, 1955.

ANNUITY TABLES chart showing for a group of people (1) the

number living at the beginning of a designated year and (2) the
number dying during that year. Yearly probabilities are used in
calculating premium payments for future income payments to
annuitants.
ANNUITY, TAX DEFERRED see TAX DEFERRED ANNUITY.
ANNUITY UNIT share of a VARIABLE DOLLAR ANNUITY paid to an ANNUITANT
as an income payment.
ANTICOERCION LAW section of the "Unfair Trade Practices
Code" of most states that declares the use of coercion to be in
violation of the state code. See also UNFAIR TRADE PRACTICE.
ANTIFREEZE provision of the 1987 Tax Act that excludes life
insurance owned by a third party or an irrevocable trust from FEDERAL
ESTATE TAXES. Life insurance, as well as the deceased's personal

residence, was exempted because neither is considered to be an

"enterprise" as defined by the Internal Revenue Service (IRS). The
IRS defines an enterprise as "any arrangement, relationship, or
activity that has significant business or investment aspects."
 Page 32
ANTIREBATE LAW statute that makes it illegal in most states for
an agent to rebate (return) any portion of his COMMISSION as an
inducement for an applicant to purchase insurance from him.
ANTISELECTION see ADVERSE SELECTION.
APP see APPLICATION.
APPARENT AGENCY (AUTHORITY) situation wherein the
agent's conduct causes a client or prospective insured reasonably to
believe that the agent has the authority to sell an insurance policy
and contract on behalf of the insurance company. For example, if
an agent continues to use insurance company documents, such as
its application forms, rate manuals, stationery, and emblems on the
door, the client has every reason to believe that the agent does in
fact continue to represent the insurance company.
APPARENT AUTHORITY see APPARENT AGENCY (AUTHORITY).
APPARENT AUTHORITY (PERCEIVED AUTHORITY) specific
powers that a prospective insured believes the insurance company
has granted to its AGENT. For example, if the insurance company has
furnished the agent a rate book, application forms, stationery with
the company logo, and sales literature, the prospective insured has
reason to believe that an agency relationship exists between the
insurance company and the agent. According to the doctrine of
ESTOPPEL, the insurance company is prohibited from denying the

relationship.
APPEAL BOND guarantee of payment of the original judgment of
a court. When a judgment is appealed, a bond is usually required to
guarantee that if the appeal is unsuccessful, funds would be
available to pay the original judgment as well as costs of the
appeal. This serves to discourage an individual from appealing
merely to stall for time or for frivolous reasons.
APPLETON RULE regulation named after a former
Superintendent of Insurance of New York State, and instituted in
the early 1900s. It requires every insurer admitted to New York to
comply with the New York Insurance Code and even in other states
where that insurer does business. This rule has had a nationwide
impact on the insurance industry. New York State is known for its
leadership role in insurance regulation. Thus, if an insurance
company is admitted to conduct business in New York, it is a sign
that it has met exacting requirements.
APPLICANT prospective insured who completes and signs a
written form containing personal statements about himself/herself.
See also APPLICATION.
APPLICATION written statements on a form by a prospective
insured about himself, including assets and other personal
information. These statements and additional information, such as a
medical report, are used by an insurance company to decide
whether or not to insure the
 Page 33
risk. Falsification or nondisclosure of information may give the
insurance company grounds for rescinding a policy that has been
issued. Statements in the application are also used to decide on an
applicant's underwriting classification and premium rates.
APPOINTED ACTUARY ACTUARY, appointed by the life insurance
company, required by the NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)
under the NAIC: STANDARD VALUATION LAW to provide an opinion as to the
compliance of the insurance company's statutory statement with the
law and the level of assets needed to support the statement of
liabilities of the insurance company. In essence, this actuary is
responsible for documenting the adequacy of the liability reserves
according to the RESERVE LIABILITIES REGULATION as established by the NAIC.
APPOINTMENT act by a company that authorizes an AGENT to act
on its behalf.
APPOINTMENT OF TRUSTEES FOR TERMINATED PLAN
plan initiated by the PENSION BENEFIT GUARANTY CORPORATION (PBGC) upon the
involuntary termination of a pension plan. With the concurrence of
the United States District Court, the PBGC appoints a trustee(s) to
administer the terminated plan. The trustee(s) safeguards the
remaining assets of the pension plan, protects the assets from being
further depicted, limits further increases in liabilities, and in
general acts as protector of the benefits for the pension plan's
participants.
APPOINTMENT PAPERS documents completed by the AGENT to
effect authorization to act on behalf of the company.
APPORTIONMENT division of a loss among insurance policies in
the proportion that each policy bears to the total coverage
applicable to the loss. For example, assume Policies A, B, C, and D
have $50,000, $60,000, $70,000 and $80,000 of insurance in force,
respectively: a total of $260,000 of coverage. Under the
apportionment clause found in many property insurance policies,
Policy A's percentage of any loss is 19.23%, Policy B's is 21.43%,
Policy C's is 26.92%, and Policy D's is 30.77%.
APPORTIONMENT CLAUSE clause in a PROPERTY INSURANCE policy
that requires the insurance coverage in that policy to be allocated in
the proportion that it bears to the total insurance coverage in force
from all policies covering that particular property. See also
APPORTIONMENT.

APPRAISAL valuation of property for damage resulting from an

insured peril or for establishing the base amount of insurance
coverage to be purchased. If an insured and an insurance company
cannot agree on the amount of an insurer's liability for a property
loss, the policy may specify that, upon written request, the dispute
is submitted to appraisal. Usually, each party selects an appraiser
and the two appraisers select a disinterested umpire. Disagreements
by the appraisers go to the umpire, whose decisions typically are
binding.
 Page 34
APPRAISAL CLAUSE clause in a PROPERTY INSURANCE policy that
stipulates that either the insurer or the insured has the right to
demand an APPRAISAL in order to determine the monetary damage or
loss to an insured property.
APPROVAL acceptance of an application for an insurance policy
by the insurance company, indicated by the signature of an officer
of the company on the policy. The officer, who must have signature
authority, is usually the president or the secretary of the company.
The agent who sells the policy normally does not have signature
authority to approve the policy.
APPROVAL CONDITIONAL PREMIUM RECEIPT insurance
policy in force only after the insurance company approves the
APPLICATION. Today, most companies use the INSURABILITY CONDITIONAL PREMIUM

RECEIPT.

APPROVED ROOF roof used in construction that is composed of

fire resistive materials such as slate as approved by the UNDERWRITERS
LABORATORIES INC. (UL).

APPURTENANT STRUCTURES coverage for additional

buildings on the same property as the principal insured building.
Most property insurance contracts such as the HOMEOWNERS INSURANCE
POLICY cover appurtenant structures. For example, under the

homeowners policy a separate garage on an insured's premise

would be covered up to 10% of the home's structure amount.
ARBITRATION see ARBITRATION CLAUSE.
ARBITRATION CLAUSE provision in a property insurance policy
to the effect that in the event the insured and insurer cannot agree
on the amount of a claim settlement, each appoints an appraiser.
The appraisers select a disinterested umpire. When at least two of
the three, appraisers and umpire, agree on the settlement amount, it
is binding on both the insured and the insurer.
ARIA see AMERICAN RISK AND INSURANCE ASSOCIATION.
ARM see ASSOCIATE IN RISK MANAGEMENT (ARM).
ARMORED CAR AND MESSENGER INSURANCE coverage
during the transfer of securities and monies, precious metals, and
other specified types of valuables by armored guard services.
Policies are specifically designed to fit an insured's requirements.
Standard coverage is available on an ALL RISKS basis, excluding perils
of war, nuclear disaster, and dishonest acts of shipper and/or
consignee.
ARMSTRONG INVESTIGATION inquiry conducted by a
committee of the legislature of the State of New York in 1905 that
looked at abuses of life insurance companies operating in the state.
This study led to stricter supervision by New York and other state
insurance departments. For example, many of the policies sold at
that time contained
 Page 35
language that made the receipt of benefits very difficult to obtain.
As a result of the investigation, standard provisions were
introduced into life insurance policies. While actual language is not
dictated word for word by state regulatory authorities, a policy
must provide minimum benefits (such as nonforfeiture provisions)
expressed in acceptable language.
ARP see ASSOCIATE IN RESEARCH AND PLANNING (ARP).
ARREARS insurance policy under which premiums are past due
but the GRACE PERIOD has not expired.
ARSON actual or attempted malicious and deliberate burning of a
physical asset owned by another party. Coverage against arson is
provided under property insurance, but only if the insured has not
committed the arson. The property insurance business has long
worked to dis-courage arson and to prosecute arsonists.
ASO see ADMINISTRATIVE SERVICES ONLY.
ASSAILING THIEVES individuals other than the crew of a ship
who forcefully steal the ship and/or its cargo. This event is an
INSURED PERIL under OCEAN MARINE INSURANCE.

ASSAULT threatening act, physical and/or verbal, which causes a

person to reasonably fear for life or safety. For example, if a boxing
champion said he was going to hit someone, this would probably
cause a reasonably prudent person to fear serious bodily injury. An
insured's liability for assault is excluded from all standard liability
policies such as the SPECIAL MULTIPERIL INSURANCE (SMP) and the HOMEOWNERS
INSURANCE POLICY.

ASSESSABLE INSURANCE coverage in which an initial

premium is charged, with the stipulation that an additional
premium can be charged later if the loss experience of the
insurance company warrants it; that is, if losses exceed premium
income. See also ASSESSMENT COMPANY.
ASSESSABLE MUTUAL assessment mutual company that
operates on a statewide basis or in more than one state. Assessable
or assessment mutuals operate by taking a cash deposit, or
premium, from members in exchange for insurance protection. If
the company's losses and expenses exceed these deposits, the
company can assess members for additional monies to cover losses.
These companies are commonly used by a group of local farmers
or merchants in a small geographical area. Some states have
specific laws governing these mutuals. For example, they might be
limited to a certain type of business or have a maximum dollar
limit for each risk.
ASSESSED VALUE monetary worth of real or personal property
as a basis for its taxation. This value, established by a government
agency, is rarely used as a means to determine indemnification of
an insured
 Page 36
for property damage or destruction. See also INDEMNITY; REPLACEMENT COST
LESS PHYSICAL DEPRECIATION AND OBSOLESCENCE.

ASSESSMENT COMPANY insurance company that has the

authority to assess or charge its policyholders for losses that the
company is incurring. This company is sometimes called stipulated
premium company or assessment association. These companies
were relatively common in the 1800s and early 1900s but have
since become rare. Most insurance companies cannot assess
policyholders for losses. See also ASSESSMENT INSURANCE; ASSESSMENT PERIOD.
ASSESSMENT INSURANCE contract under which an assessment
insurance company can charge policyowners additional sums if the
company's loss experience is worse than had been loaded for in the
premium. This insurance is sometimes called stipulated premium
and natural premium insurance. See also ASSESSMENT COMPANY; ASSESSMENT
PERIOD.

ASSESSMENT PERIOD time during which an assessment life

insurance company has the right to assess policyholders if losses
are worse than anticipated in the premium charged. See also
ASSESSMENT COMPANY; ASSESSMENT INSURANCE.

ASSESSMENT PLAN see ASSESSMENT COMPANY; ASSESSMENT INSURANCE;

ASSESSMENT PERIOD.

ASSET entity with exchange or commercial value, such as the

book value of property owned by an insurance company as listed
on its balance sheet.
ASSET ADEQUACY TESTED RESERVE required RESERVE to
satisfy all life insurance policy obligations and expenses according
to the APPOINTEDACTUARY's best estimate assumptions. Numerous interest
rate scenarios are tested and based on the projections. The amount
of asset adequacy tested reserve is established.
ASSET ALLOCATION long-term investment plan strategy under
which all of the investor's investable assets are divided into
predetermined proportions among several different types of
securities. In theory, since these investments are placed into
different classifications, each classification is subject to a different
market cycle; therefore, the value of all investments should not
incur a steep decline at the same time. Thus, such a portfolio
approach should always have winners. Some specialized VARIABLE
DOLLAR ANNUITIES offer such an approach.

ASSET DEPRECIATION RISK one of four types of risks affecting

the life insurance company as identified by the SOCIETY OF ACTUARIES.
This risk is associated with losses that the life insurance company
may incur as the result of default on the payment of interest
(dividends) or principal on bonds, mortgages, general real estate
investments, and stocks, as well as the loss in value of these
investments resulting from a loss in their MARKET VALUE. See also GENERAL
BUSINESS RISK; INTEREST RATE CHANGE RISK; PRICING INADEQUACY RISK.
 Page 37
ASSET QUALITY RISK see ASSET DEPRECIATION RISK.
ASSETS AND VALUATION actuarial evaluation of the assets of a
pension plan according to the fair market value of the assets.
ASSET SHARE VALUE policyholder's equity share of the life
insurance company's assets. The share is based on the
policyholder's contribution to assets (the company's gross
premiums minus cost of insurance, expenses and dividends for the
classification to which the policy belongs). This computation is
derived from the actual experience of the insurance company
instead of the assumptions initially used in calculating premiums
and reserves. The actual experience may or may not deviate
significantly from the expected experience.
ASSET SUFFICIENCY OR INSUFFICIENCY computation of the
ASSET SHARE VALUE, surrender value, and reserve and the comparison of

the three computations in order to judge the adequacy and equity of

the tentative GROSS PREMIUM scale to be utilized.
ASSET TRANSFER direct payment to a new custodian for a
retirement plan. This payment is not a taxable event since it is not a
distribution. The payment must be between like plans; for example,
one INDIVIDUAL RETIREMENT ACCOUNT (IRA) to another Individual Retirement
Account.
ASSET VALUATION excess or deficit of gross premium above
the pure cost of insurance and expenses. The result becomes the
valuation of the asset share of the policyholder at the end of a given
year. The valuation of the asset share reflects the policyowner's
share of the asset of the insurance company.
ASSET VALUATION RESERVE (AVR) explicit liability RESERVE,
required by the NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC),
established for all invested asset classes. Specific reserves are
established for real estate and mortgages. In essence, the purpose of
this reserve is to provide a back-up sum for potential equity and
credit losses. To accomplish this objective, reserves are maintained
for stocks, bonds, real estate, mortgages, and similar types of
invested assets. Realized and unrealized equity and credit capital
gains and losses are credited to or debited against this reserve.
Amount of reserves required to be maintained for each invested
asset is determined by ACTUARIAL formula.
ASSIGNED CLAIMS see AUTOMOBILE ASSIGNED RISK INSURANCE PLAN.
ASSIGNED RISK see AUTOMOBILE ASSIGNED RISK INSURANCE PLAN.
ASSIGNED RISK PLAN see AUTOMOBILE ASSIGNED RISK INSURANCE PLAN.
ASSIGNEE see COLLATERAL CREDITOR (ASSIGNEE).
ASSIGNMENT transfer of rights under an insurance policy to
another person or business. For example, to secure a debt, it is not
uncommon for the policyowner to transfer to the creditor his rights
to borrow on
 Page 38
the cash value. Life insurance policies are freely assignable to
secure loans and notes (property and casualty insurance policies are
not). Creditors such as banks often have printed assignment forms
on hand at the time of making loans.
ASSIGNMENT CLAUSE, LIFE INSURANCE feature in a life
insurance policy allowing a policyowner to freely assign (give,
sell) a policy to another or institution. For example, in order to
secure a loan, a bank asks to be assigned the policy. If the insured
dies before repayment of the loan, the bank would receive a portion
of the death benefit that equals the outstanding loan, the remainder
of the death benefit being payable to the insured's beneficiary. The
fact that life insurance is freely assignable makes it a useful
financial instrument through which to secure a loan. The insurance
company does not guarantee the validity of the assignment.
ASSIGNOR person who transfers rights under an insurance or
mortgage contract.
ASSISTIVE TECHNOLOGY items, equipment, or systems used to
increase, improve, or maintain the capabilities of people with
disabilities. These devices range from simple, such as penholders
or cup holders, to complex, such as computer voice communication
or robots. This technology is playing an increasing role in WORKERS
COMPENSATION BENEFITS in returning insured workers to their jobs.

ASSOCIATE IN AUTOMATION MANAGEMENT (AAM)

professional designation earned after the successful completion of
three national examinations given by the INSURANCE INSTITUTE OF AMERICA (IIA).
Covers such areas of expertise as essentials of automation (how
computers work, automation terminology, and software);
automation in insurance; and managing automated activities.
Program of study is recommended for individuals involved in
automated activities within the insurance organization.
ASSOCIATE IN CLAIMS (AIC) professional designation earned
after the successful completion of four national examinations given
by the INSURANCE INSTITUTE OF AMERICA (IIA). Covers such areas of expertise as
the claims person and the public, principles of property, liability
claims adjusting, property insurance adjusting, and liability
insurance adjusting. Program of study is recommended for
experienced adjusters, claims supervisors, and examiners who have
in-depth knowledge of the claims area but have not undertaken
formal study of the claims principles.
ASSOCIATE IN INSURANCE ACCOUNTING AND FINANCE
(AIAF) professional designation earned after the successful
completion of four national examinations given by the INSURANCE
INSTITUTE OF AMERICA (IIA). Covers such areas of expertise as insurance

company operations (marketing, underwriting, rate making, claims

adjusting, reinsurance, and loss control); statutory accounting for
property and
 Page 39
liability insurers; insurance information systems; and insurance
company finance. Program of study is recommended for
individuals involved in the accounting, statistical, and financial
areas of an insurance company.
ASSOCIATE IN LOSS CONTROL MANAGEMENT (ALCM)
professional designation earned after the successful completion of
five national examinations given by the INSURANCE INSTITUTE OF AMERICA (IIA).
Covers such areas of expertise as accident prevention, property
protection, industrial and environmental hygiene, principles of risk
management and insurance, insurance company operations, and
management. Program of study is recommended for individuals
involved in the area of loss control.
ASSOCIATE IN MANAGEMENT (AIM) professional designation
earned after the successful completion of four national
examinations given by the INSURANCE INSTITUTE OF AMERICA (IIA). Covers such
areas of expertise as the process of management, management and
human resources, and managerial decision making. Program of
study is recommended for individuals who perform management
functions within an insurance organization.
ASSOCIATE IN MARINE INSURANCE MANAGEMENT
(AMIM) professional designation earned after the successful
completion of six national examinations given by the INSURANCE
INSTITUTE OF AMERICA (IIA). Covers such areas of expertise as ocean marine

insurance, inland marine insurance, principles of risk management

and insurance, insurance company operations, legal environment of
insurance, and management. Program of study is recommended for
individuals involved in the areas of ocean marine and inland
marine insurance.
ASSOCIATE IN PREMIUM AUDITING (APA) professional
designation earned after the successful completion of six national
examinations given by the INSURANCE INSTITUTE OF AMERICA (IIA). Covers such
areas of expertise as premium auditing applications, principles of
premium auditing, principles of risk management and insurance,
commercial property risk management and insurance, commercial
liability risk management and insurance, and accounting and
finance. Program of study is recommended for individuals involved
in the area of premium auditing for an insurance company.
ASSOCIATE IN RESEARCH AND PLANNING (ARP)
professional designation earned after the successful completion of
six national examinations given by the INSURANCE INSTITUTE OF AMERICA (IIA).
Covers such areas of expertise as business research methods,
strategic planning for insurers, principles of risk management and
insurance, insurance company operations, economics, and ethics.
Program of study is recommended for individuals involved in the
areas of corporate planning, research, product development, and
forecasting for an insurance company.
 Page 40
ASSOCIATE IN RISK MANAGEMENT (ARM) professional
designation earned after the successful completion of three national
examinations given by the INSURANCE INSTITUTE OF AMERICA (IIA). Covers such
areas of expertise as essentials of risk management (identification
and measurement of loss exposures, and analyzing various
techniques to deal with the exposure); essentials of risk control;
and essentials of risk financing (risk retention and commercial
insurance). Program of study is recommended for individuals
involved in the areas of risk management for noninsurance
companies, as well as insurance producers who want to provide
risk management counseling to their clients.
ASSOCIATE IN UNDERWRITING (AU) professional designation
earned after the successful completion of four national
examinations given by the INSURANCE INSTITUTE OF AMERICA (IIA). Covers such
areas of expertise as principles of property and liability
underwriting, personal lines underwriting, commercial liability
underwriting, and commercial property and multiple lines
underwriting. Program of study is recommended for individuals
who have experience as under-writers or producers.
ASSOCIATION see POOL; SYNDICATE.
ASSOCIATION CAPTIVE insurance company established by a
trade group or other association to provide selected types of PRIMARY
INSURANCE and/or LIABILITY INSURANCE for members of the association and

access to REINSURANCE markets. For example, the American Newspaper

Publishers Association has established an association captive to
provide LIBEL INSURANCE for member newspapers, and the American
Bankers Association sponsors a captive that provides DIRECTORS AND
OFFICERS LIABILITY INSURANCE for member banks.
ASSOCIATION GROUP bona fide organization that purchases
insurance on a group basis on behalf of members. However, a
group cannot be formed for the purpose of purchasing insurance
since adverse selection would take place. Group selling permits
economies of scale to operate, so that the cost of insurance to a
member is appreciably less than an individual policy. The
insurance company/agent is able to benefit through individual sales
to the group's members. See also ADVERSE SELECTION.
ASSOCIATION GROUP INSURANCE see ASSOCIATION GROUP.
ASSOCIATION OF GOVERNMENTAL RISK POOLS (AGRIP)
association formed to address the requirements of government risk
pools. Web site is [Link]
ASSOCIATION OF INSURANCE AND RISK MANAGERS IN
INDUSTRY AND COMMERCE (AIRMIC) primarily a British
association whose membership includes risk managers and
insurance buyers, with the emphasis on risk management.
 Page 41
ASSUME to accept by a REINSURER, part or all of a RISK transferred to it
by a primary INSURER or another reinsurer. See also CEDE; REINSURANCE.
ASSUMED INTEREST RATE/ASSUMED INVESTMENT
RETURN (AIR) percentage return appropriated by the insurer for
an IMMEDIATE VARIABLE ANNUITY when the insurer calculates the initial
income payment to the ANNUITANT. If the variable annuity's underlying
portfolio has a net return greater than or less than the AIR, the
income payments will increase or decrease accordingly.
ASSUMED LIABILITY see CONTRACTUAL LIABILITY.
ASSUMED LOSS RATIO projected percentage of the EARNED PREMIUMS
that will be required by the insurance company to pay for the
INCURRED LOSSES plus the LOSS ADJUSTMENT EXPENSE.

ASSUMPTION acceptance by a REINSURER of part or all of a RISK that

has been transferred to it by a primary INSURER or another reinsurer.
See also CEDE; REINSURANCE.
ASSUMPTION CERTIFICATE see CUT-THROUGH ENDORSEMENT (ASSUMPTION OF
RISK).

ASSUMPTION OF RISK technique of risk management (better

known as retention or SELF INSURANCE) under which an individual or
business firm assumes expected losses that are not catastrophic
losses through the purchase of insurance. For example, a business
firm assumes the risk of its employees being absent because of
minor illness, but buys disability insurance to cover absences due
to extended illness. Also refers to (1) situations where insureds
place themselves in situations that they realize pose a danger, and
(2) the acceptance of risks by an insurance company.
ASSUMPTION OF RISK RULE see ASSUMPTION OF RISK.
ASSUMPTION REINSURANCE form of insurance whereby the
buyer (REINSURER) assumes the entire obligation of the CEDENT company,
effected through the transfer of the policies from the cedent to the
books of the reinsurer. Several thousand policies are transferred
annually among insurance companies. Generally, life, health, and
investment type policies such as annuities are the policies most
likely to be transferred since they are of longer duration and in
many instances cannot be canceled by the insurance company.
ASSUMPTIONS circumstances taken for granted. For example, in
calculating annuity values, a particular interest rate is assumed.
This assumption is critical to CURRENT ASSUMPTION WHOLE LIFE INSURANCE
policies since projections of future cash values ultimately being
realized are determined by the validity of the underlying
assumptions.
ASSURANCE see INSURANCE.
ASSURED see INSURED.
 Page 42
ASSURER see INSURER.
ASYMMETRIC RISK EXPOSURE gain when the underlying
asset that moves in one direction is significantly different from the
loss when the underlying asset moves in the opposite direction; for
example, when gains and losses associated with purchasing a call
option on a stock are significantly different. Under a call option,
when a stock price goes down, the loss incurred is limited to the
purchase price of the option. If the stock price goes up, the
purchaser of the call gains in proportion to the rise in the stock's
value.
ATOMIC ENERGY COMMISSION see NUCLEAR REGULATORY COMMISSION.
ATOMIC ENERGY REINSURANCE see MUTUAL ATOMIC ENERGY
REINSURANCE POOL.

ATTACHMENT addition to a basic insurance policy to further

explain coverages, add or exclude perils and locations covered, and
add or delete positions covered. For example, an endorsement to
the Standard Fire Policy might add coverage for vandalism and
malicious mischief. This form has largely been replaced by an
ENDORSEMENT or RIDER.

ATTACHMENT POINT critical point in the total amount of claims

paid above which the EXCESS INSURANCE policy pays a percentage
(generally 80-100%) of the claims for any POLICY YEAR EXPERIENCE.
ATTAINED AGE insured's age at a particular point in time. For
example, many TERM LIFE INSURANCE policies allow an insured to convert
to permanent insurance without a physical examination at the
insured's then attained age. Upon conversion, the premium usually
rises substantially to reflect the insured's age and diminished life
expectancy. Since later in life rates become prohibitive, many
insureds do not make an attained age conversion. See also ORIGINAL
AGE.

ATTAINED AGE CONVERSION see ATTAINED AGE.

ATTENDING PHYSICIAN STATEMENT document providing
additional medical information on an APPLICANT. This statement is
requested by the insurance company when the medical examination
and/or application points to medical conditions that require greater
explanations.
ATTESTATION CLAUSE clause listed after the general provisions
of the insurance policy that requires the officers of the insurance
company to sign their names in order for the contract to be
completed. Most insurance policies list the printed signatures of the
officers of the insurance company and only the authorized
representative of the company will actually sign the contract prior
to its delivery to the POLICY-OWNER.
ATTORNEY-IN-FACT see RECIPROCAL EXCHANGE.
 Page 43
ATTORNEYS PROFESSIONAL LIABILITY INSURANCE see
LAWYERS LIABILITY INSURANCE.

ATTRACTIVE NUISANCE property that is inherently dangerous

and particularly enticing to children. For example a swimming pool
has a strong attraction to children and could lead to a liability
judgment against the pool's owner. The owner must take all
necessary steps to prevent accidents, such as building an adequate
fence around the pool.
AU see ASSOCIATE IN UNDERWRITING.
AUDIT in WORKERS COMPENSATION INSURANCE policies and several business
property and liability policies, review of the payroll of a business
firm in order to determine the premium for coverage. Premiums in
workers compensation are based on units of payroll.
AUDITORS REPORT see STATEMENT OF OPINION (ACCOUNTANTS REPORT, AUDITORS
REPORT).

AUTHORITY TO TERMINATE PLAN means of ending a pension

plan only for reasons of business necessity, following IRS
regulations. If the IRS determines that the plan was terminated for
other reasons, employee and employer contributions become
taxable. Reasons acceptable to the IRS include bankruptcy,
insolvency, and the inability of a business to continue to make its
contributions because of adverse financial conditions.
AUTHORIZATION maximum amount of insurance coverage that
an underwriter will write on a particular class of property or risk
exposure.
AUTHORIZED CONTROL LEVEL RISK-BASED CAPITAL
insurance company's theoretical capital amount and surplus that it
should maintain.
AUTHORIZED INSURER insurance company that is licensed by a
state to market and service particular lines of insurance in that
state.
AUTOMATIC BUILDERS RISK FORM see BUILDERS RISKS FORMS.
AUTOMATIC COST OF LIVING ADJUSTMENT see COST OF LIVING
ADJUSTMENT.

AUTOMATIC COVERAGE policy that comes into existence or

adjusts the amount of coverage to provide protection for newly
acquired or increasing values of an insured's real or personal
property.
AUTOMATIC INCREASE IN BENEFIT PROVISION clause in a
DISABILITY INCOME INSURANCE POLICY that will adjust the amount of the

monthly income payment upwards according to a stipulated annual

percentage for a given number of consecutive years. The annual
premium payment will also increase on an ATTAINED AGE basis and
reflect the increase in the cost of the increasing benefit.
 Page 44
AUTOMATIC INCREASE IN BENEFITS optional provision in a
DISABILITY INCOME policy that allows the POLICYOWNER to increase the

monthly income sum at an approximate rate of 6%.

AUTOMATIC INCREASE IN INSURANCE ENDORSEMENT
see INFLATION ENDORSEMENT.
AUTOMATIC NONPROPORTIONAL REINSURANCE
automatic protection for an INSURER against losses that exceed a
predetermined loss limit. This reinsurance may be subdivided into
three primary types: EXCESS OF LOSS, CATASTROPHE LOSS, and stop loss. See
also REIN-SURANCE.
AUTOMATIC PREMIUM LOAN PROVISION life insurance
policy clause. If at the end of the GRACE PERIOD the premium due has
not been paid, a policy loan will automatically be made from the
policy's cash value to pay the premium. The primary purpose is to
prevent unintentional lapse of the policy. Funds in the cash value
must at least be equal to the loan amount plus one year's interest.
Many experts recommend this provision because under some
circumstances the premium may go unpaid because of illness,
vacations, or inadvertence.
AUTOMATIC PROPORTIONAL REINSURANCE form of
coverage in which an insurer automatically reinsures individual
risks with its reinsurer. The insurer must transfer (cede) the risks to
its reinsurer and its reinsurer must accept this transfer (cession).
Losses and premiums are shared; the reinsurer shares them in the
same proportion as it does that total policy limits of the risks. The
insurer receives from the rein-surer a transfer commission
reflecting the so-called equity in the unearned premium reserve of
the insurer. This provides for acquisition expenses, premium taxes,
and the insurer's cost of servicing the business. Automatic
proportional reinsurance may be subdivided into two primary
types: quota share and surplus. See also REINSURANCE.
AUTOMATIC REINSTATEMENT CLAUSE provision in a
property or liability policy stating that after a loss has been paid,
the total original limits of the policy are once again in effect. For
example, assume a loss of $40,000 has been paid under a $100,000
property damage coverage HOMEOWNERS INSURANCE
POLICY. After payment of the loss, the original $100,000 is
reinstated.
AUTOMATIC REINSURANCE automatic reinsuring of individual
risks by an insurer with a reinsurer. The insurer must transfer the
risks to its reinsurer and its reinsurer must accept this transfer. See
also REINSURANCE.
AUTOMATIC SPRINKLER CLAUSE see SPRINKLER LEAKAGE INSURANCE;
SPRINKLER LEAKAGE LEGAL LIABILITY INSURANCE.

AUTOMATIC SPRINKLER SYSTEM see SPRINKLER LEAKAGE INSURANCE;

SPRINKLER LEAKAGE LEGAL LIABILITY INSURANCE.
 Page 45
AUTOMOBILE ASSIGNED RISK INSURANCE PLAN coverage
in which individuals who cannot obtain conventional automobile
liability insurance, usually because of adverse driving records, are
placed in a residual insurance market. Insurance companies are
assigned to write insurance for them, at higher prices, in proportion
to the premiums written in a particular state. These plans protect
motorists who suffer injury or property damage through the
negligence of bad drivers who otherwise would not have insurance.
AUTOMOBILE, BOAT, AND AIRCRAFT INSURANCE
coverage for motorized vehicles, each of which requires separate
policies for property damage and liability exposures. Motorized
vehicles are not covered under a HOMEOWNERS INSURANCE POLICY for property
damage and/or bodily injury liability situations when operated
away from an insured's premises.
AUTOMOBILE COLLISION see COLLISION INSURANCE.
AUTOMOBILE COMPREHENSIVE see COMPREHENSIVE INSURANCE.
AUTOMOBILE FLEET see FLEET POLICY.
AUTOMOBILE INSURANCE see BUSINESS AUTOMOBILE POLICY (BAP); PERSONAL
AUTOMOBILE POLICY (PAP).

AUTOMOBILE INSURANCE PLAN see AUTOMOBILE ASSIGNED RISK

INSURANCE PLAN.

AUTOMOBILE LIABILITY INSURANCE coverage if an insured

is legally liable for bodily injury or property damage caused by an
automobile. The PERSONAL AUTOMOBILE POLICY (PAP) and the BUSINESS AUTOMOBILE
POLICY (BAP) cover the judgment awarded (up to the limits of the

policy) and the court cost and legal defense fees. Experts advise
against driving an automobile without automobile liability
insurance as a matter of common sense, and because state laws
require such a policy or evidence of financial responsibility.
Passengers in automobiles should assure themselves that drivers
are covered by this insurance.
AUTOMOBILE PHYSICAL DAMAGE INSURANCE coverage
in the event an insured's automobile is damaged, destroyed, or lost
through fire, theft, vandalism, malicious mischief, collision, or
windstorm. There are two kinds of property damage
coveragecollision insurance and COMPREHENSIVE INSURANCE. See also
BUSINESS AUTOMOBILE POLICY (BAP); PERSONAL AUTOMOBILE POLICY (PAP).

AUTOMOBILE REINSURANCE FACILITY see AUTOMOBILE ASSIGNED

RISK INSURANCE PLAN.

AUTOMOBILE SHARED MARKET see AUTOMOBILE ASSIGNED RISK

INSURANCE PLAN.

AUTOMOBILE THEFT see COMPREHENSIVE INSURANCE.

 Page 46
AVERAGE arithmetic mean; the sum of a series of numbers
divided by the number of numbers comprising the sum. For
example, given the following series of numbers: 1, 4, 5, 6, 8, 9 and
10, the arithmetic mean, or average,

The arithmetic mean is the EXPECTED LOSS that the insurance company
prepares itself to pay, as reflected in the BASIC PREMIUM.
AVERAGE ADJUSTER individual employed by an OCEAN MARINE
INSURANCE company to settle on its behalf ocean marine-related claims

brought by its insureds. The adjuster evaluates the merits of each

claim and makes recommendations to the insurance company.
AVERAGE CLAUSE see COINSURANCE; PRO RATA DISTRIBUTION CLAUSE.
AVERAGE, GENERAL see GENERAL AVERAGE.
AVERAGE INDEXED MONTHLY EARNINGS (AIME) method
of calculating the PRIMARY INSURANCE AMOUNT (PIA) for Social Security
benefits. Employees' covered monthly earnings are adjusted to
reflect changes in the national average annual earnings. Benefits
should rise in proportion to increases in national average annual
earnings.
AVERAGE LOSS CLAUSE see PRO RATA DISTRIBUTION CLAUSE.
AVERAGE MONTHLY EARNINGS (AME) see AVERAGE MONTHLY WAGE
(AMW).

AVERAGE MONTHLY WAGE (AMW) figure used in calculating

a worker's PRIMARY INSURANCE AMOUNT (PIA) to determine Social Security
benefits in the following manner:
1. calculate the number of years between the worker's twenty-first
birthday and the year prior to the worker reaching age 62 (a
maximum of 40 years).
2. exclude the five lowest years of earnings, thereby selecting the
35 highest years (420 months) of earnings.
3. divide the total of the 35 highest years of earnings by 420
months to calculate the Average Monthly Wage.
A Social Security Administration table shows the PIA for the
Average Monthly Wage calculated in Step 3. The PIA is then
increased to reflect the COST-OF-LIVING ADJUSTMENT (COLA) to determine the
actual benefit.
AVERAGE NET COST see INTEREST ADJUSTED COST.
AVERAGE, PARTICULAR see PARTICULAR AVERAGE.
AVERAGE RATE applicable rate, in property insurance, of each
location multiplied by the value of the real and/or personal property
at that
 Page 47
location, all of which is divided by the total value of all real and/or
personal property at all locations multiplied by their respective
rates.
AVERAGE SEMIPRIVATE RATE in HEALTH INSURANCE, the applicable
average rate charged for a semiprivate room in the geographical
area in which the charge is incurred.
AVERAGE WEEKLY WAGE wage rate used as the basis for
calculating benefits under WORKERS COMPENSATION INSURANCE. See also WORKERS
COMPENSATION BENEFITS.

AVIATION ACCIDENT INSURANCE life insurance policy

(individual or employee group basis) providing protection for a
passenger on a regularly scheduled airline. See also AVIATION TRIP LIFE
INSURANCE.

AVIATION EXCLUSION common exclusion in life and ACCIDENTAL

DEATH INSURANCE (double indemnity) policies, indicating that coverage

does not apply unless an insured is a passenger on a regularly

scheduled airline. For example, if an insured is killed while a
passenger in a private plane crash, the aviation exclusion would
apply, and the insured's beneficiary would not receive a death
payment.
AVIATION HAZARD additional HAZARD associated with aeronautics
other than that of being a passenger on a regularly scheduled
airline. An extra premium is charged, and/or there are usually
exclusions applied to certain benefits associated with this hazard.
For example, pilots of small private planes are subject to this
hazard.
AVIATION INSURANCE combination of PROPERTY INSURANCE on the
hull of an airplane and LIABILITY INSURANCE in the following manner.
1. property coverageprovided on an ALL RISKS basis or on a specified
perils basis for the hull, autopilots, instruments, radios, and any
other equipment in the airplane as described in the policy.
2. liability coverageprovided in the event that the insured's
negligent acts and/or omissions result in bodily injury and/or
property damage to passengers and individuals who are not
passengers.
AVIATION TRIP LIFE INSURANCE term life insurance, usually
purchased at an airport by an airplane passenger. It provides a death
payment to the passenger's beneficiary in the event of a fatal
accident on one or more specified flights. The term of coverage is
from the time that the passenger enters the airplane until the time
that he leaves. Ground transportation to and from the airport may
also be covered. With the advent of hijacking and terrorism, this
coverage is becoming more widely purchased.
AVOIDANCE technique of risk management. It ensures that an
individual or business does not incur any liability relating to a
given activity by avoiding the activity in question. For example, a
business that does not own computer equipment cannot incur
financial loss due to the destruction of the computer by fire.
However, in the real world, the risk control technique of avoidance
is rarely practical. A more realistic approach is self-insurance or
commercial insurance.
 Page 48

B
BACKDATING calculation of insurance premiums based on an
age less than the current age of the insured.
BACK LOAD expenses taken out when benefits are paid. For
example, a specific dollar amount is subtracted from a monthly
income payment for company expenses.
BACKUP WITHHOLDING RATE effective January 4, 1994, the
backup withholding rate on dividends, interest, and gross proceeds
distributions increased from 20% to 31%. Backup withholding
applies in the following situations: (1) if a United States citizen or
resident, United States corporation, partnership, trust, estate, or
other entity fails to certify their Taxpayer Identification Number
(TIN) on Form W-9 (Request for Taxpayer Identification Number
and Certification), or fails to provide documentation of their
exemption from these rules; (2) if a taxpayer receives notification
from the Internal Revenue Service (IRS) of a missing or invalid
TIN and fails to certify the TIN by providing the payor with the
required documentation; (3) if the taxpayer is notified by the IRS
that the taxpayer is not subject to backup withholding because of
underreporting of interest or dividends on the tax return and is not
notified that it no longer applies.
BAGGAGE INSURANCE see TOURIST BAGGAGE INSURANCE.
BAIL BOND monetary guarantee that an individual released from
jail will be present in court at the appointed time. If the individual
is not present in court at that time, the monetary value of the bond
is forfeited to the court (jumping bail). Personal automobile
policies commonly cover fees for an insured's bail bond.
BAILEE individual who has temporary rightful possession of
another's property. The bailee often furnishes a receipt in exchange
for the bailor's property. For example, a dry cleaner has temporary
custody of a suit to be cleaned and must exercise proper care to
safeguard it against physical loss. If the property is damaged, the
bailee's insurance policy often becomes the primary coverage and
must indemnify the loss.
BAILEE'S CUSTOMERS INSURANCE coverage for legal
liability resulting from damage or destruction of the bailor's
property while under the bailee's temporary care, custody, and
control. Includes property on or in transit to and from the bailee's
premises. Perils covered include fire, lightning, theft, burglary,
robbery, windstorm, explosion, collision, flood, sprinkler leakage,
earthquake, strike, and damage or destruction in the course of
transportation by a common carrier. The insurance is in effect when
the bailee issues a receipt to the bailor for the item. Coverage
excludes property belonging to the insured bailee and loss due to
vermin and insects. For example, a suit to be cleaned
 Page 49
is under the temporary control of the bailee (cleaner). The bailor
(owner) expects the suit to be returned in good condition. If the suit
is stolen from the cleaner, the insurance would cover the loss.
BAILMENT transfer of property from a bailor to a bailee; for
example, transferring a suit to be cleaned from the bailor (owner)
to the bailee (cleaners). See also BAILEE; BAILOR.
BAILOR individual who retains title to property that is being
transferred on a temporary basis to the care, custody, and/or control
of another. See also BAILEE.
BAIL-OUT PROVISION clause found in an ANNUITY contract that
enables the owner of that contract to withdraw his or her money
without surrender penalties, if the annual interest rate is lowered
below a certain predetermined minimum.
BALANCE SHEET accounting statement showing the financial
condition of a company at a particular date. Listed on the statement
are the company's assets and liabilities, and capital and surplus.
BALANCE SHEET RESERVES amount expressed as a liability on
the insurance company's balance sheet for benefits owed to
policyowners. These reserves must be maintained according to
strict actuarial formulas as they serve to guarantee that all benefit
payments for which the insurance company has received premiums
will be made.
BAND SYSTEM system of classifying FACE AMOUNT of policies
according to size within a given range. The premium rate per
$1,000 of face amount varies on a declining basis. As the face
amount increases, the premium rate per $1,000 of face amount
decreases.
BANK BURGLARY AND ROBBERY INSURANCE coverage on
the bank's premises for burglary of monies, securities, and other
properties from within the bank's safe(s); robbery of monies and
securities; loss of monies and securities as the result of vandalism
or malicious mischief; general damage due to vandalism and
malicious mischief resulting from burglary and/or robbery.
BANKERS BLANKET BOND coverage for a bank in the event of
loss due to dishonest acts of its employees or individuals external
to the bank. For example, if a teller goes to Mexico with the bank's
money, the bank would be indemnified for its loss.
BANKING ACT OF 1933 see GLASS-STEAGALL ACT.
BANK LOAN PLAN see FINANCED INSURANCE (MINIMUM DEPOSIT INSURANCE);
FINANCED PREMIUM.

BANK TRUST CUSTODIAL ACCOUNT type of INDIVIDUAL RETIREMENT

ACCOUNT (IRA) allowed by the EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA),

in which contributions are paid into the bank's interest-bearing

financial instruments or a SELF-DIRECTED ACCOUNT.
 Page 50
BARGAIN SALE charitable planning strategy in which a donor
sells an asset to the charity for an amount less than its fair market
value. Internal Revenue Service regulations require that the tax
basis for the property be established on a pro rata schedule between
the sale portion and the gift portion. The donor has a taxable gain
on the sale portion.
BARRATRY violation of duty in marine insurance, such as acts of
the master and crew of a ship that result in damage to the vessel
including purposefully running it aground, diverting it from its true
course of travel, stealing of its cargo, and abandoning the vessel.
BASELINE DATA statistics (such as health data from physical
examination of employees or other insureds) used as a benchmark
from which deviations and comparisons of expected losses, as well
as future actual losses, are measured.
BASE PREMIUM a CEDING COMPANY'S premium to which the
reinsurance premium factor is used to produce the reinsurance
premium.
BASIC BENEFITS, BASIC HOSPITAL PLAN minimum
payments provided under a health insurance policy. See also GROUP
HEALTH INSURANCE; HEALTH INSURANCE.

BASIC LIMIT minimum amount of coverage for which a company

will write a LIABILITY INSURANCE policy.
BASIC LIMITS OF LIABILITY required minimum amounts of
coverage that an insurance company will underwrite. For example,
for auto liability coverage the minimum that many companies will
write is $25,000. Most liability suits are not below this range.
BASIC MORTALITY TABLE MORTALITY TABLE that is a picture of the
actual living and/or dying of the population (the universe) upon
which the mortality table is based. No additions or subtractions are
made to these statistics to show a greater or lesser probability of
living or dying than is actually expected to occur.
BASIC PREMIUM premium applied in WORKERS COMPENSATION INSURANCE
and in life insurance. In the latter, it is the portion of a premium
that is loaded to reflect an insured's expectation of loss,
administrative expenses associated with putting the policy on the
company's books, and the agent's commission.
BASIC RATE see MANUAL RATE.
BASIC TIME FRAME time period, for a life insurance policy, in
which losses occur. This period must be determined to project the
FREQUENCY and severity of future loss experience.

BASIS POINT unit used to measure movements in interest rates. It

is the equivalent to one one-hundredth of 1%. One hundred basis
points equals 1%.
 Page 51
BATTERY unlawful application of force to another's person;
physical striking of another without permission.
BAUD RATE number of bits a MODEM can receive or send per
second.
BEAR MARKET market in which sellers dominate trading and
force financial asset prices down.
BENCH ERROR mistake made during the manufacturing process
of a product that results in an inherent defect in the product. This
mistake is covered under PRODUCTS AND COMPLETED OPERATIONS INSURANCE.
BENCHMARKING management tool through which a plan for
evaluation, measurement, and improvement is implemented. The
insurance entity can use this tool to analyze market trends, measure
sales performance, measure market penetration, and measure
product performance.
BENCHMARK SURPLUS additional amount of SURPLUS from an
additional amount of CAPITAL necessary to act as a supplement to the
cash flow in the event unforeseen contingencies occur that disrupt
or impair the cash flow necessary for the insurance company to
make future benefit payments for which it has received the
premiums.
BENEFICIARY designation by the owner of a life insurance policy
indicating to whom the proceeds are to be paid upon the insured's
death or when an endowment matures. Anyone can be named a
beneficiary (relative, non-relative, pet, charity, corporation, trustee,
part-nership). A primary beneficiary is the first-named beneficiary,
who must survive the death of the insured in order to collect the
proceeds. A contingent or secondary beneficiary will receive the
proceeds if the primary beneficiary does not survive the insured. A
revocable beneficiary (primary or secondary) can be changed by
the policyowner at any time. An irrevocable beneficiary (primary
or secondary) can be changed by the policyowner only with the
written permission of that beneficiary. Naming an irrevocable
beneficiary removes the policy from the estate of the insured, who
thereby gives up incidences of ownership for estate tax purposes.
If a beneficiary is convicted of murdering the insured, the
beneficiary cannot collect the death benefit. The insured's estate
would receive the benefit.
BENEFICIARY CLAUSE provision in a life insurance policy that
permits the policyowner to name anyone as primary and secondary
beneficiaries. The policyowner may change the beneficiaries at any
time by simply writing the insurance company and sending the
policy for endorsement if that is requested. See also BENEFICIARY.
BENEFICIARY OF TRUST person for whom the trust was created
and who receives the benefits thereof. In many instances a trust is
established to prevent the careless exhaustion of an estate. For
example, the
 Page 52
establishment of a trust for the benefit of a child seeks to guarantee
that the parent's estate will not be carelessly diminished.
BENEFIT monetary sum paid or payable to a recipient for which
the insurance company has received the premiums.
BENEFIT ALLOCATION METHOD method of funding a PENSION
PLAN under which a single premium payment is made to fund a

single unit of benefit for one year of recognized service with the
employer. For example, if the employee earned an $85 unit of
benefit for year X of recognized service to begin at age 60, a SINGLE
PREMIUM DEFERRED ANNUITY would be purchased for that employee's

account. Each year this procedure would be repeated as additional

single premium deferred annuities would be purchased for each
year of recognized service. At the time of retirement, the annuities
so purchased would be combined to provide a monthly income
benefit for the employee.
BENEFIT FORMULA procedure in employee benefit plans to
calculate life insurance and retirement benefits to which an
employee is entitled. See also DEFINED BENEFIT PLAN; DEFINED CONTRIBUTION PENSION
(MONEY PURCHASE PLAN); GROUP LIFE INSURANCE.

BENEFIT PERIOD in HEALTH INSURANCE, the number of days for which

benefits are paid to the NAMED INSURED and his or her dependents. For
example, the number of days that benefits are calculated for a
calendar year consist of the days beginning on January 1 and
ending on December 31 of each year.
BENEFITS OF BUSINESS LIFE AND HEALTH INSURANCE
(KEY PERSON INSURANCE) life insurance and long-term
disability income insurance on major employees, with benefits
payable to the business. Key person insurance has these
advantages: (1) enhances the ability of the business to continue
operations; (2) fosters smooth sale of a going business between an
estate and a purchaser by providing funds to buy out the interest of
a deceased key person; (3) encourages key employees to stay on
the job; (4) attracts new key employees; (5) provides funds for
expenses of hiring and training of a replacement key employee; (6)
provides a line of credit (A permanent life insurance policy has
cash values that are available for loans at advantageous rates.); (7)
policy proceeds, which are income free, are payable even if the key
person is no longer in the employ of the business at the time of
death; however, the business must continue to make the premium
payments after the key person leaves the employment; (8) a life
insurance policy can be surrendered for its cash value or sold to the
insured key person; thus, the business will usually at least receive
the return of premiums; (9) long-term disability income insurance
on a key person also provides funds for salary continuation to the
disabled key person. (For temporary disability, the business might
prefer to self insure because the expense of premiums for this
coverage is
 Page 53
generally excessive when compared with the potential income
benefits.)
BETTERMENT INSURANCE see IMPROVEMENTS AND BETTERMENTS INSURANCE.
BI see BODILY INJURY; BUSINESS INTERRUPTION.
BID price an investor is willing to pay for a financial asset.
BID AND ASK PRICE highest price investor is willing to pay for
a stock or mutual fund unit and lowest price a seller of a stock or
mutual fund is willing to accept.
BID BOND bond required of a contractor submitting the lowest bid
on a project. If the contractor then refuses to undertake the project,
the bid bond assures that the developer will be paid the difference
between the lowest bid and next lowest bid. The bid bond
encourages contractors to make serious bids and live up to their
obligations.
BILATERAL CONTRACT contract under which there is an
exchange of a promise for a promise. An INSURANCE POLICY is deemed to
be a UNILATERAL CONTRACT.
BILL OF LADING document used in the transportation of goods
that must be presented when a claim is made for a loss incurred.
This document establishes the fact that the goods were under the
care, custody, or control of the shipper at the time the loss
occurred.
BINDER temporary insurance contract providing coverage until a
permanent policy is issued. In property and casualty insurance,
some agents have authority to bind the insurance company to cover
until a policy can be issued. For example, the purchaser of an
automobile can call the agent, who can then bind the insurance
company to temporary coverage.
BINDING AUTHORITY see BINDER.
BINDING RECEIPT evidence of a temporary contract obliging a
property insurance company to provide coverage as long as the
premium accompanies the application. A property insurance agent
can bind a company to cover a specific risk. Some agents are
authorized to give an oral binder, which is generally followed with
a written binder. For life and health insurance, see also CONDITIONAL
RECEIPT.

BINOMIAL DISTRIBUTION statistical function that displays the

probability of determining a stated number of successes in a series
of trials in which the probability of success is the same in each
trial. In insurance, the binomial distribution is used to analyze
certain future events. Some chance events have only two possible
outcomes; the probability of occurrence p = 1 q and the probability
of nonoccurrence q = 1 p. (Note that p + q = 1; that is to say, the
probability of success plus the probability of failure is always equal
to 1.) The probability of
 Page 54
exactly x outcomes (x successes) in n independent repetitions is
given by the function

where x = 0,1,2, . . . ,n
For example, if a fair coin is tossed in the air a total of six times,
the probability of getting exactly five heads is:

BIRTH RATE number of people born as a percentage of the total

population in any given period of time.
BLACK LIST STATES states that preclude the placement of SURPLUS
LINES with particular insurance companies.

BLACKOUT PERIOD time interval between the date benefits end

under Social Security and the date these benefits resume. For
example, survivor benefits are paid only as long as the parent (if
less than age 60) cares for a child less than age 16. Once that child
reaches age 16, the surviving parent must wait until age 60 before
survivor benefits resume.
BLANKET BOND coverage for an employer in the event of
dishonesty of any employee. See also FIDELITY BOND.
BLANKET CONTRACT policy covering an insured's property at
several different locations. This coverage is used by business firms
that have several locations and may move property from location to
location.
BLANKET COVERAGE see BLANKET BOND; BLANKET CONTRACT; BLANKET CRIME
POLICY; BLANKET INSURANCE; BLANKET MEDICAL EXPENSE INSURANCE; BLANKET POSITION BOND.

BLANKET CRIME ENDORSEMENT see BLANKET CRIME POLICY.

BLANKET CRIME POLICY coverage usually provided as part of
the SPECIAL MULTIPERIL INSURANCE (SMP) policy, generally replaced by the
COMMERCIAL PACKAGE POLICY, through the attachment of the Blanket Crime

Endorsement. Perils covered include dishonesty of a business's

employees; loss of money both while inside as well as outside a
business's premises; lost money orders; forgery due to the acts of a
depositor; and counterfeit paper currency. Since this crime policy is
so comprehensive it is said to provide the insured with a blanket of
coverage. This policy has largely been replaced by the COMMERCIAL
CRIME COVERAGE FORM.

BLANKET FIDELITY BOND see BLANKET BOND.

 Page 55
BLANKET FLOATER see FLOATER.
BLANKET FORM see BLANKET INSURANCE.
BLANKET HONESTY BOND see COMMERCIAL BLANKET BOND.
BLANKET INSURANCE single policy on the insured's property
for (1) two or more different kinds of property in the same location;
(2) same kind of property in two or more locations; (3) two or more
different kinds of property in two or more different locations.
Blanket coverage is ideal for such businesses as chain stores, all of
whose property is covered with no specific limit on each particular
property regardless of its location (thereby enabling the business to
shift merchandise from store to store). This insurance can (but need
not) be written on an ALL RISKS basis subject to exclusions of war,
nuclear dis-aster, and wear and tear.
BLANKET LIMIT maximum amount of insurance coverage that
an insurance company will underwrite in a particular geographic
area.
BLANKET MEDICAL EXPENSE INSURANCE health insurance
policy providing coverage for an insured's medical expenses except
those that are specifically excluded. This may be the most
advantageous medical expense policy for an insured because unless
a specific medical expense is excluded it is automatically covered.
BLANKET POSITION BOND covers all employees of a business
on a blanket basis with the maximum limit of coverage applied
separately to each employee guilty of a crime. See also COMMERCIAL
BLANKET BOND, FIDELITY BOND.

BLANKET RATE premium charged (and applied on a uniform

basis) for property insurance covering properties at multiple
locations. This rate is used under a BLANKET INSURANCE policy instead of
using a specific rate for each location or type of property.
BLENDED/INTEGRATED INSURANCE PROGRAM insurance
programs that combine FINITE RISK INSURANCE, REINSURANCE, and traditional
insurance as an alternative to SELF INSURANCE. These programs are long-
term in duration. The objective is to incorporate the advantages of a
finite risk insurance program (management of cash flow,
smoothing of income and profit sharing) with the advantages of
transferring the risk through traditional insurance.
BLOCK LIMITS total amount of insurance that an insurer will
write on any specific city block. Such a limit will reduce the
insurer's exposure to a potential catastrophic occurrence, such as a
hurricane, tornado, or fire, which could destroy the entire block.
BLOCK OF POLICIES total number of INSURANCE POLICIES under-
written and issued by the INSURANCE COMPANY that uses the same policy
forms and rates.
 Page 56
BLOCK POLICY coverage on an ALL RISKS basis for goods in transit,
bailment, and while on the premises of others. See also JEWELERS BLOCK
INSURANCE POLICY.

BLUE CROSS independent, nonprofit, membership hospital plan.

Benefits provided include coverage for hospitalization expenses
subject to certain restrictions: for example, semiprivate room only.
A member hospital agrees to a predetermined schedule for
specified medical services. The hospital sends the bills directly to
the Blue Cross plan for reimbursement. Also covered are outpatient
services, and supplementary or extended care such as nursing home
care, as described in the contract.
BLUE SHIELD independent, nonprofit, membership medical-
surgical plan. Benefits cover expenses associated with medical and
surgical procedures. The physician and/or surgeon bills the Blue
Shield plan directly rather than the patient, who is responsible for
any difference between the scheduled rates and the doctor's fees.
BOARD INSURER see BUREAU INSURER.
BOBTAIL LIABILITY INSURANCE coverage of a common
carrier for liability on trucks that have delivered their cargo and are
on the way back to the terminal. The company that hires the truck
assumes liability while the truck is loaded, but after delivery, that
firm's liability ends. The carrier can be protected by bobtail liability
coverage for the return trip.
BODILY INJURY physical damage to one's person. The purpose
of liability (casualty) insurance is to cover bodily injury to a third
party resulting from the negligent or intentional acts and omissions
of an insured.
BODILY INJURY LIABILITY INSURANCE see LIABILITY INSURANCE.
BOILER AND MACHINERY INSURANCE covers losses
resulting from the malfunction of boilers and machinery. Most
property insurance policies exclude these losses, which is why a
separate BOILER AND MACHINERY POLICY or a COMMERCIAL PACKAGE POLICY is needed.
The insurance covers business property, other property involved,
and legal fees, if any.
BOND form of suretyship. For example, fidelity bonds reimburse
an employer for financial loss resulting from dishonest acts of
employees. See also BLANKET POSITION BOND; COMMERCIAL BLANKET BOND; CONTRACT
BOND; FIDELITY BOND; INDIVIDUAL FIDELITY BOND; JUDICIAL BOND; NAME SCHEDULE BOND.

BOND, BAIL see BAIL BOND.

BOND, BANKERS BLANKET see BANKERS BLANKET BOND.
BOND, BID see BID BOND.
 Page 57
BOND, BLANKET see BLANKET POSITION BOND.
BOND, COMPLETION see COMPLETION BOND.
BOND, CONTRACT see CONTRACT BOND.
BOND, COURT see JUDICIAL BOND.
BOND DEDICATION layering of a bond portfolio where bonds
are sold whose yield to maturity are low and bonds are bought
whose yield to maturity are high in order that reserve requirements
are met for future benefit payments by the insurance company.
BOND, FIDELITY see FIDELITY BOND.
BOND, FIDUCIARY see JUDICIAL BOND.
BOND (FINANCIAL) corporate or government security that pays
interest and obligates the corporation or government agency to pay
that interest at the end of specific time intervals, and to pay the
principal at maturity of the security.
BOND, FORGERY see DEPOSITORS FORGERY INSURANCE.
BOND, LICENSE see LICENSE BOND.
BOND, MAINTENANCE see MAINTENANCE BOND.
BOND, PENALTY see PENALTY.
BOND, PERFORMANCE see CONTRACT BOND.
BOND, PERMIT see PERMIT BOND.
BOND, POSITION see FIDELITY BOND.
BOND, PUBLIC OFFICIAL see PUBLIC OFFICIAL BOND.
BOND, SCHEDULE see NAME POSITION BOND; NAME SCHEDULE BOND.
BOND, SURETY see SURETY BOND.
BONUS RATE extra percent of interest credited to an ANNUITY during
the first year that it is in force. This extra amount is above the
interest rate to be credited beginning with the second year and the
remaining years that the annuity is in force. The extra rate is paid in
the first year as an effort to attract new ANNUITANTS.
BOOK OF BUSINESS total amount of insurance on an insurer's
books at a particular time. See also NET RETAINED LINES.
BOOK VALUE cost of the assets listed on the accounting records
of the company. These assets include the following: real estate (to
include any adjustments for depreciation), transportation
equipment (to include any adjustments for depreciation), policy
loans (limited to the unpaid principal balance plus any unamortized
premiums minus any accrued discounts), mortgage loans (limited
to the unpaid principal
 Page 58
balance plus any unamortized premiums minus any accrued
discounts), cash, and joint ventures. Not listed at book value are
securities.
BOOK VALUE PER COMMON SHARE value of a share of
common stock, derived by dividing the total common stockholders'
equity at the end of a period of time by the total number of shares
outstanding at the end of the same period of time.
BOOK VALUE PER SHARE total shareholders' equity divided by
total common shares outstanding.
BOOT property or money received as additional consideration in
regard to a tax-free exchange of property. If the POLICYHOLDER receives
money in an otherwise nontaxable life insurance policy exchange,
the money received will be taxable income to the policyholder.
Likewise, if the loan on an old policy is canceled by the insurer
when that policy is exchanged for a new policy, the loan amount so
canceled becomes taxable income to the policyholder. See also
MINIMUM DEPOSIT RESCUE; TAX-FREE EXCHANGE OF INSURANCE PRODUCTS.

BORDEREAU form of reinsurance that shows loss history and

premium history with respect to specific risks. The CEDING COMPANY
provides its reinsurer with that information. This information is
used by the rein-surance company in establishing the reinsurance
premium rates. See also REINSURANCE.
BORDERLINE RISK prospective insurance applicant who has
questionable UNDERWRITING characteristics.
BORROWING AUTHORITY OF PENSION BENEFIT
GUARANTY CORPORATION (PBGC) authorization to borrow
from the U.S. Treasury by the issuance of notes to the Treasury.
The Secretary of the Treasury must approve the notes and their
interest rates. The PBGC must be self supporting through the
premium it charges for various plans and thus its notes carry the
same obligations of any notes, in that they are expected to be
repaid.
BOSTON PLAN agreement named after the city of Boston under
which insurance companies insure real property in lower
socioeconomic neighborhoods if property owners correct any
hazards found upon inspection.
BOTH-TO-BLAME CLAUSE in OCEAN MARINE INSURANCE, provision
stipulating that upon the collision of two or more ships, when all
ships are at fault, all owners and shippers having monetary interests
in the voyage of the ships involved must share in all losses in
proportion to the monetary values of their interests prior to the
occurrence of the collision. This clause supercedes all other
provisions for the allocation of losses among owners and shippers
in ocean marine policies.
BOTTOMRY method of transferring pure risks that is perhaps the
seed of the modern day insurance policy. Ancient Greece held to
the concept
 Page 59
that a loan on a ship was canceled if the ship failed to return to its
port. This concept was adopted by Lloyd's of London in the 1600s
when insuring England's merchants for goods shipped to the
colonies. The formation of property and casualty insurance
companies worldwide began by insuring the transport of
merchandise over bodies of water.
BPPCF see BUSINESS AND PERSONAL PROPERTY COVERAGE FORM (BPPCF).
BRANCH MANAGER see AGENCY MANAGER.
BRANCH OFFICE local business headquarters of an insurance
company that markets and services its products and lines of
insurance. See also MANAGER.
BREACH OF CONTRACT failure of a party (not having a legal
excuse) to perform in accordance with a promise made. An INSURANCE
POLICY consists of legally enforceable promises made by the INSURANCE

COMPANY (INSURER) only. No such promises are made by the INSURED. This

is the reason why the insurance policy is a UNILATERAL CONTRACT.

BREAK IN SERVICE feature of pension plans whereby an
employee whose service has been interrupted can have that period
credited toward retirement.
BREEDER'S INSURANCE POLICY see LIVE ANIMAL INSURANCE; LIVESTOCK
FLOATER; LIVESTOCK INSURANCE; LIVESTOCK MORTALITY (LIFE) INSURANCE; LIVESTOCK TRANSIT

INSURANCE.

BRIDGE INSURANCE coverage for damage or destruction to an

insured bridge. Insures on an ALL RISKS basis subject to exclusions of
war, wear and tear, inherent defect, and nuclear damages. Coverage
is purchased by state and local governing bodies to limit exposures
to the expense of an immediate tax increase to rebuild a damaged
or destroyed bridge.
BRIDGE INSURANCE FOR BRIDGES UNDER
CONSTRUCTION provides coverage during the construction of a
bridge in the event of fire, lightning, collision, flood, rising water,
windstorm, ice, explosion, and earthquake. This coverage is
essential, since the value of destroyed labor and materials could
bankrupt a contractor without insurance protection.
BROAD EVIDENCE RULE rule that stipulates how to calculate
the ACTUAL CASH VALUE of property that has been damaged, destroyed, or
stolen. The thesis of this rule is that whatever evidence that can be
produced of the true value of the property is admissible; the factual
insurable value of the property can be ascertained by whatever
measures provide the most accurate picture of that property's real
value. Thus, this is a method of determining the true insurable
worth of a structure according to any measure that will provide the
most accurate analysis of that property's value. This method is
becoming more widely accepted as a means of measuring actual
cash value.
 Page 60
BROAD FORM INSURANCE coverage for numerous perils such
as that found in the BROAD FORM PERSONAL THEFT INSURANCE.
BROAD FORM PERSONAL THEFT INSURANCE coverage on
an ALL RISKS basis for loss due to theft or mysterious disappearance of
personal property; damage to premises and property within
resulting from theft; and vandalism and malicious mischief to the
interior of the premises as well as to other property of an insured
that is away from the insured's premises. Sublimits are in effect on
specialty property that is particularly susceptible to theft, such as
money, securities, paintings, coins, and jewelry. This insurance is
most often found in Part I Coverage C of the HOMEOWNERS INSURANCE POLICY
and is expressed as a percentage of the home's structure.
BROAD FORM PROPERTY DAMAGE ENDORSEMENT
attachment to a general liability policy thereby eliminating the
exclusion of property under the care, custody, and/or control of an
insured. Without this endorsement there would be no coverage
under the GENERAL LIABILITY INSURANCE policy in the event of damage or
destruction of property under the care, custody, and control of the
insured.
BROAD FORM STOREKEEPERS INSURANCE coverage
usually provided as part of the STOREKEEPERS BURGLARY AND ROBBERYINSURANCE in
the event merchandise, fixtures, equipment, and furniture are lost
due to theft and burglary.
BROKER insurance salesperson who searches the marketplace in
the interest of clients, not insurance companies. See also AGENT,
BROKERAGE DEPARTMENT.

BROKERAGE insurance coverage sold by a BROKER as contrasted

with insurance coverage sold by an AGENT. See also BROKERAGE FEE.
BROKERAGE BUSINESS insurance coverage placed by a BROKER
with an insurance company. See also BROKERAGE DEPARTMENT.
BROKERAGE DEPARTMENT section of an insurance company
that sells through brokers. Some brokerage departments are self-
contained in that they have their own underwriting and marketing
staffs. Brokerage departments have come into their own in recent
times as even captive agent insurance companies have sought
additional distribution channels that may be less expensive than the
captive agent field force. See also BROKER; CAPTIVE AGENT.
BROKERAGE FEE commission paid to a broker for selling an
insurance company's products. This fee may or may not include an
expense allowance depending on the amount of business the broker
places with the company.
BROKERAGE GENERAL AGENT independent contractor of the
insurance company who has the authority to appoint BROKERS on
behalf of the insurance company. This supervisor has the objective
and the
 Page 61
responsibility to sell the insurance company's products to the
appointed brokers who in turn sell these products to the general
public.
BROKER-AGENT independent insurance salesperson who
represents particular insurers but may also function as a broker by
searching the entire insurance market to place an applicant's
coverage to maximize protection and minimize cost. This person is
licensed as an agent and broker.
BROKERAGE SUPERVISOR employee of the insurance company
who has the authority to appoint BROKERS on behalf of the insurance
company. This supervisor has the objective and responsibility to
sell the insurance company's products to the appointed brokers who
in turn sell these products to the general public.
BROKER/DEALER business involved in buying and selling
securities and mutual funds.
BROKER OF RECORD see AGENT OF RECORD.
BROWSER software program that can be utilized for viewing
pages (web sites) on the WORLD WIDE WEB of the INTERNET.
BUDGET DEFICIT circumstance resulting when government
expenditures exceed government income. To finance this
difference, the United States Treasury will auction Treasury bills,
notes, and bonds. In order to attract investors such as insurance
companies, the Treasury will pay higher interest rates on the new
issues, resulting in a decline in bond (already issued) prices and the
increase in their rates.
BUILD to construct.
BUILDERS RISK COVERAGE FORM see BUILDERS RISKS FORMS.
BUILDERS RISK HULL INSURANCE property coverage for a
builder of ships until possession passes to the owners. Protects
against pre-launch and post-launch perils. Coverage can be
purchased on an ALL RISKS basis subject to the exclusions of war,
nuclear disaster, and inherent defects. The builder buys either
insurance that covers the startup value of the property, to be
adjusted upward to reflect additional construction (Reporting
Form); or insurance to cover the completed value of the property
(Completed Form).
BUILDERS RISK INSURANCE see BUILDERS RISKS FORMS.
BUILDERS RISKS FORMS types of contracts that insure building
contractors for damage to property under construction. The
completed value form requires a 100% coinsurance because
insurance carried must equal the completed value of the structure.
The reporting form allows coverage to be carried according to the
stage of completion of the structure. Perils insured against are fire,
lightning, vandalism, malicious mischief, riot and civil commotion,
smoke, sprinkler leakage, water damage, windstorm, and hail.
 Page 62
BUILDING AND PERSONAL PROPERTY COVERAGE FORM
see BUSINESS AND PERSONAL PROPERTY COVERAGE FORM (BPPCF).
BULLET GUARANTEED INVESTMENT CONTRACT (BGIC)
type of GUARANTEED INVESTMENT CONTRACT (GIC) under which a single payment
is made into an account of an insurance company where it will
remain for a stipulated number of years. Both the principal of the
account and the interest rate are guaranteed by the insurance
company. At an agreed upon future date, both principal and interest
are returned to the payor (usually a DEFINED BENEFIT PLAN).
BULL MARKET market in which buyers dominate trading and
force financial asset prices up.
BUMBERSHOOT POLICY liability insurance coverage, primarily
for shipyards for ocean marine risks, provided in much the same
manner as UMBRELLA LIABILITY INSURANCE for nonmarine risks. Coverages
may be provided in addition to liability include PROTECTION AND INDEMNITY
INSURANCE (P&I), LONGSHOREMEN AND HARBOR WORKERS ACT LIABILITY, collision, and

salvage expenses.
BUREAU INSURER insurance company that is a member of a
RATING BUREAU. The insurer usually joins such an organization when its

statistical experience in a given line of insurance is not sufficient

for it to accurately predict loss experience for that line.
BUREAU OF LABOR STATISTICS see LABOR STATISTICS, BUREAU OF.
BUREAU RATE see RATING BUREAU.
BURGLARY forced entry into premises. Coverage is provided
under various property insurance contracts such as HOMEOWNERS and
SPECIALMULTIPERIL INSURANCE (SMP).
BURGLARY INSURANCE coverage against loss as the result of a
burglary. Found as part of the COMMERCIAL PACKAGE POLICY that has
generally replaced the SPECIAL MULTIPERIL INSURANCE (SMP) policy and the
MERCANTILE OPEN STOCK BURGLARY INSURANCE policy. Covers loss of

merchandise, furniture, equipment, fixtures due to force and

violence to the exterior of a business's premises in order to gain
entry, and damage to the premises of the business as the result of
the burglary. There is a coinsurance requirement that ranges from
40 to 80%.
BURGLARY/THEFT INSURANCE see BURGLARY INSURANCE.
BURIAL INSURANCE small face amount life insurance policy.
See also FUNERAL INSURANCE.
BURNING COST RATIO (PURE LOSS COST) ratio of excess
losses to premium income. Excess losses are those that a reinsurer
is responsible for if its coverage is in effect during the period under
consideration. The premium income used for EXCESS OF LOSS and
CATASTROPHE
 Page 63
LOSSreinsurance is the gross premium less the expense of
reinsurance. The premium income used for STOP LOSS REINSURANCE is the
earned premium income. The excess losses are defined as the
incurred losses in excess of the cedent's retention up to the limits
specified in the reinsurance contract. See also REINSURANCE.
BURNING RATIO
1. actual fire losses divided by the total value of the property
exposed to the PERIL of fire.
2. actual losses resulting from fire divided by the total fire amount
of IN-FORCE BUSINESS.
See also BURNING COST RATIO (PURE LOSS COST).
BUSINESS in insurance, volume of premiums written. Also
describes commercial activities with the profit motive as the goal
of the organization. Commercial insurance companies are
organized with the profit motive as the normal business objective.
BUSINESS AND PERSONAL PROPERTY COVERAGE FORM
(BPPCF) provision for coverage for buildings and personal
property within the SIMPLIFIED COMMERCIAL LINES PORTFOLIO POLICY (SCLP). The
buildings and personal property coverage may be classified in three
ways:
1. Owned buildingsthese buildings are listed and described in the
DECLARATIONS SECTION of the policy. Also covered is anything that has

become a permanent part of the buildings, to include additions,

fixtures, extensions, and machinery and equipment.
2. Owned business personal propertyproperty covered is the
business personal property that is owned by the insured and is
common in the occupancy usage by the insured.
3. Nonowned business personal propertyproperties covered are
improvements and betterments (alterations made by the insured to
a building that he or she is leasing and that cannot be removed
upon the termination of the lease), and personal property of
someone other than the insured that is under the care, custody, or
control of the insured.
Extensions of coverage are available under the BPPCF to include:
1. outdoor propertytrees, shrubs, and plants; signs; radio and
television antennas; and fences. There is an overall limit of $1000
and a sublimit of $250 for each tree, shrub, or plant.
2. valuable papers and recordscost of replacing or restoring
information lost because of the damage or destruction of valuable
papers and records. There is a $1000 limit of coverage.
3. personal effects and property of otherspersonal effects of the
named insured, employees, and others that are under the care,
custody, or control of the insured.
4. business personal property on location at premises newly
acquired10% of the owned business personal property coverage
 Page 64
is applicable, subject to $100,000 limit for each building. Thirty
days after the acquisition of property, coverage terminates.
5. newly acquired buildings or additions25% of the owned building
coverage is applicable, subject to $250,000 limit for each building.
Within 30 days, newly acquired buildings or additions must be
reported by the insured.
6. off-premises propertyproperty on a temporary location (other
than a vehicle) not owned, leased, or operated by the insured.
PERILS insured against are available under three forms:
1. basic formincludes fire, lightning, windstorm, hail, explosion,
vandalism, smoke, sprinkler leakage, riot or civil commotion,
sinkhole collapse, volcano.
2. broad formincludes perils found under the basic form plus
falling objects causing exterior damage that results in interior
damage; weight of ice, sleet, and snow; accidental discharge of
water or steam from a system or appliance containing steam or
water, but not including an automatic sprinkler system; and
breakage of glass; subject to a $500 maximum limit.
3. special cause-of-loss formincludes all direct accidental losses
except those specifically excluded in the policy (such as flood, war,
wear and tear, and earth movement).
ENDORSEMENTS can be added to the BPPCF to include:
1. perils extensionadds earthquake, volcanic eruption, and
radioactive contamination.
2. limits of recovery extensionincrease maximum dollar amounts of
coverage for trees, shrubs, and plants; radio and television
antennas; and outdoor signs.
3. replacement cost endorsementchanges basis of recovery under
the BPPCF to a REPLACEMENT COST LESS PHYSICAL DEPRECIATION AND OBSOLESCENCE from
an ACTUAL CASH VALUE basis.
BUSINESS AUTO COVERAGE FORM type of COMMERCIAL FORM that
provides coverage for business vehicles regardless of whether they
are owned, leased, hired, or borrowed. The form's coverages are
divided into the following sections:
1. Section Icovers vehicles that are identified according to any one
of nine symbols:
a. Symbol #1any vehicle
b. Symbol #2owned vehicle only
c. Symbol #3owned private passenger vehicles only
d. Symbol #4owned vehicles other than private passenger
vehicles
e. Symbol #5owned vehicles subject to no-fault insurance
f. Symbol #6owned vehicle subject to compulsory uninsured
motorists laws
g. Symbol #7specifically described vehicles (only those listed
are covered)
h. Symbol #8hired vehicles only
i. Symbol #9non-owned vehicles only
 Page 65
Through the above forms, the business may select only the
coverages desired, thereby minimizing its insurance costs. For
example, if the business desired the most comprehensive coverage,
symbol #1 would be selected.
2. Section IIliability coverage in the event the business' negligent
acts and/or omissions result in bodily injury or property damage to
a THIRD PARTY as the result of operating a vehicle.
3. Section IIIphysical damage coverage for property damage to the
business' covered vehicles under three classifications:
a. Comprehensivepays for all physical damage to the business'
vehicles regardless of cause with the exception of collision with
another object or in the event the vehicle overturns.
b. Specified causes of loss coveragepays for physical damage to
the business' vehicle only resulting from fire, lightning,
explosion, theft, windstorm, hail, earthquake, flood, mischief, or
vandalism; or sinking, burning, collision, or derailment of any
conveyance transporting the business' vehicle.
c. Collisionpays for physical damage to the business' vehicle
resulting from contact with another object.
4. Section IVconditions that describe the insured business and the
insurance company's obligations if a loss should occur.
5. Section Vdefinitions discussing the critical terms in the vehicle
form such as the meanings of accident, insured, vehicle, or suit.
BUSINESS AUTOMOBILE POLICY (BAP) coverage for
automobiles used by a business when a liability judgment arises out
of the use of the automobile, or the automobile is subject to
damage or destruction. The business can select coverage for any
auto in use, whether business, personal, or hired. The policy is
organized as follows:
Parts I, II, and IIIdefine terms used in the policy, such as auto,
accident, insured bodily injury, property damage, territorial limits
of coverage.
Part IV LIABILITY INSURANCEin a liability judgment against the insured
business and/or individual, the insurance company will pay the
monetary damages up to the limit of the policy. Negligent acts
and/or omissions of the insured business and/or individual must
arise out of the ownership and operation of a covered auto, subject
to specific exclusions.
Part V physical damage insurancein the event of damage to an
auto, the insurance company will pay under one of two categories:
COMPREHENSIVEINSURANCEdamage resulting from fire, explosion, theft,

vandalism, malicious mischief, windstorm, hail, earthquake, or

flood; or collision insurancedamage resulting from colliding with
another object or the overturning of the insured auto.
Part VI CONDITIONstipulate what the policyholder must do in the event
of a loss, such as give notice to the insurance company; submit to
inspection of damaged property by
 Page 66
the company; cooperate with the company in the event of a liability
suit.
The BAP has been largely replaced by the BUSINESS AUTO COVERAGE FORM.
BUSINESS CONTINUATION INSURANCE see BUSINESS LIFE AND
HEALTH INSURANCE.

BUSINESS CRIME INSURANCE protection for the assets of a

business (including merchandise for sale, real property, money and
securities) in the event of robbery, burglary, larceny, forgery, and
embezzlement. Coverage is provided in package policies such as
SPECIAL MULTIPERIL INSURANCE (SMP) policy Section III, largely replaced by the

COMMERCIAL PACKAGE POLICY, and the BUSINESS-OWNERS POLICY (BOP) Section III. Or

coverage can be written under separate policies such as: BANK BURGLARY
AND ROBBERY INSURANCE, COMBINATION SAFE DEPOSITORY INSURANCE, MERCANTILE OPEN-STOCK,

BURGLARY INSURANCE, MERCANTILE ROBBERY INSURANCE, MERCANTILE SAFE BURGLARY INSURANCE,

MONEY AND SECURITIES BROAD FORM POLICY, OFFICE BURGLARY AND ROBBERY INSURANCE, PAYMASTER

ROBBERY INSURANCE, STOREKEEPERS BURGLARY AND ROBBERY INSURANCE.

BUSINESS DAY day on which the New York Stock Exchange is

open for transactions; used in calculating ACCUMULATION UNIT VALUES for
variable dollar insurance products.
BUSINESS HEALTH INSURANCE see BUSINESS LIFE AND HEALTH INSURANCE.
BUSINESS INCOME COVERAGE FORM type of COMMERCIAL
PROPERTY POLICY that provides coverage for a business' indirect losses

resulting from damages to the property of the business. Coverage

normally contains a COINSURANCE requirement. This form has replaced
the BUSINESS INTERRUPTION INSURANCE policy. Included in this coverage for
losses and expenses resulting from the interruption of normal
business operations are:
1. Business incomeloss of net business income plus continuing
expenses according to one of the following options is:
a. Option 1loss of business income to include rental value
b. Option 2loss of business income to exclude rental value
c. Option 3loss of business income derived only from rental
value
2. Extra expenseadditional expense generated because of the direct
loss to the property of the business.
3. Civil authorityloss of business income because a civil authority
denies access to the premises of the business due to direct property
losses at a location not at the premises of the business.
4. Alterations and new buildingsloss of business income because of
direct property damage to new buildings or structures. Also
covered is direct property damage to alterations or additions to
existing buildings or structures, machinery, equipment, building
materials, or supplies located within 100 feet of the premises of the
business resulting in a loss of business income.
 Page 67
5. Extended business incomeloss of business income beginning at
the date the property of the business is returned to operating status
and business operations actually start. This period of time is subject
to a maximum of 30 days.
BUSINESS INSURANCE coverage designed to protect against
loss exposures of business firms, as opposed to those of
individuals. See also BUSINESS AUTOMOBILE POLICY (BAP); BUSINESS CRIME INSURANCE;
BUSINESS INTERRUPTION INSURANCE; BUSINESS LIFE AND HEALTH INSURANCE; BUSINESSOWNERS POLICY;

BUY AND SELL AGREEMENT; CLOSE CORPORATION PLAN; PARTNERSHIP LIFE AND HEALTH INSURANCE;

SOLE PROPRIETOR LIFE AND HEALTH INSURANCE.

BUSINESS INTERRUPTION break in commercial activities due

to the occurrence of a peril. Coverage against business interruption
by various named perils can be obtained through insurance. See
also BUSINESS INTERRUPTION INSURANCE.
BUSINESS INTERRUPTION INSURANCE indemnification for
the loss of profits and the continuing fixed expenses. Business
interruption insurance is available in these forms: CONTINGENT BUSINESS
INTERRUPTION FORM, EXTRA EXPENSE FORM, GROSS EARNINGS FORM, PROFITS AND COMMISSIONS FORM,

AND TUITION FORM. This form has been replaced on a general basis by the
BUSINESS INCOME COVERAGE FORM.

BUSINESS INTERRUPTION INSURANCE, DEPENDENT see

DEPENDENT BUSINESS INCOME FORM.

BUSINESS LIABILITY INSURANCE coverage for liability

exposure resulting from the activities of a business; includes: (1)
DIRECT LIABILITYacts of the business resulting in damage or destruction

of another party's property or bodily injury to that party; (2)

CONTINGENT LIABILITYalthough the business may not have direct liability,

it may incur a secondary or contingent liability, for example

through the employment of an independent contractor; (3) MEDICAL
PAYMENTS TO OTHERS INSURANCEacts of the business resulting in injury to

another party, with the insurance company paying the medical

expenses to that party (up to the policy limits) without regard to
legal liability of the insured business. The policy has three
principal sections:
1. DECLARATIONS SECTION lists the insured, policy limits, premium, time
period of coverage, kind of policy, and endorsements, if any.
2. INSURING AGREEMENTS states that if any of the insured perils result in
damage or destruction of another party's property or injury to that
party, the company will pay (up to the limits of the policy) sums
which the business becomes legally obligated to pay. (a) Time
Period of the Losspolicy can be written either on a claims occur-
rence basis or a claims made basis; (b) BODILY INJURYdamage or
destruction of a body to include sickness, disease, and/or resulting
death (most liability insurance policies provide coverage for this
definition); (c) PERSONAL INJURYdefamation of character, libel
 Page 68
and slander, false arrest, malicious prosecution, and invasion of
privacy (many liability policies can be endorsed to provide these
coverages); (d) Property Damagesdamage or destruction of real
and personal property and the loss of use of this property; (e) DEFENSE
COSTS costs of defending the insured business to include

investigation, defense, and the settlement of claims that are paid in

addition to the limits of coverage under the policy; and (f) Policy
Limitsthe maximum that the insurance company is obligated to pay
on behalf of the insured business.
3. EXCLUSIONS to avoid duplications of coverage in other policies
and/or to eliminate certain kinds of coverage, including: property
under the care, custody and control of the insured business; liability
arising out of contractual obligations between the insured business
and another party; liability associated with recall of the insured
business's products; liability associated with the insured business's
pollution and contamination exposure; and liability that may arise
out of conflict with state liquor regulations.
4. Conditions stipulate that (a) the insured, after an accident, must
behave so as not to increase the severity of bodily injury and/or
property damage that has just occurred; (b) the insurance company
has the right to inspect the insured business's premises as well as its
operations; and (c) if there is more than one policy covering a
claim, each policy will pay an equal share of the loss.
BUSINESS LIFE AND HEALTH INSURANCE coverage
providing funds for maintenance of a business as closely to normal
as possible in the event of a loss of a key person, owner, or partner.
See also BENEFITS OF BUSINESS LIFE AND HEALTH INSURANCE; BUY-AND-SELL AGREEMENT; CLOSE
CORPORATION PLAN; PARTNERSHIP LIFE AND HEALTH INSURANCE.
BUSINESS LIFE INSURANCE see BUSINESS LIFE AND HEALTH INSURANCE.
BUSINESS OVERHEAD EXPENSE INSURANCE see BUSINESS
INTERRUPTION INSURANCE.

BUSINESSOWNERS POLICY (BOP) combination property,

liability, and business interruption policy. It is usually written to
cover expenses of small and medium size businesses resulting from
(1) damage or destruction of business's property or (2) when
actions or nonactions of the business's representatives result in
bodily injury or property damage to another individual(s).
Businesses that qualify under this heading include office buildings
three stories or under not to exceed 100,000 square feet; apartment
buildings six stories or under not to exceed 60 dwelling units; any
other buildings not to exceed 7500 square feet for mercantile space,
occupied principally as an apartment, office, or engaging in trade
or commerce. Properties that cannot be insured under this policy
include banks, condominiums, bars, restaurants, automobiles,
 Page 69
recreational vehicles, contractor functions, and manufacturing
operations. See also BUSINESSOWNERS POLICYSECTION I: PROPERTY COVERAGES;
BUSINESSOWNERS POLICYSECTION II: LIABILITY COVERAGES.

BUSINESSOWNERS POLICYSECTION I: PROPERTY

COVERAGES contract that details coverage for business property
losses in three specific areas:
1. Coverage A (Building). All buildings on the site are covered
with no coinsurance requirement and on a replacement cost basis to
include: the buildings themselves; the owner's personal property
used to maintain the building(s) and provided to tenants; permanent
fixtures, equipment and machinery; improvements and betterments
by tenants; removal of debris; and outdoor furniture and fixtures.
2. Coverage B (Personal Property of the Business). All personal
property used in the business on the premises, as well as personal
property of others under the care, custody and control of the owner
of the building used to operate the business; and limited coverage
for items temporarily away from the premises of the business as
well as for property purchased and placed at a new business
location.
3. Coverage C (Loss of Income). Reimbursement for loss of income
because of inability to collect business rent; interruption of normal
business functions; and extra expenses associated with resuming
normal business activities as the result of the damage or destruction
of business property by an insured peril. (Optionally, under Section
I, coverage can be extended to insure against burglary, robbery,
theft, employee dishonesty, and boiler and machinery explosion.
Earthquake damage can be covered through an endorsement.)
BUSINESSOWNERS POLICYSECTION II: LIABILITY
COVERAGES coverage that protects a business, up to the policy
limits, if actions or non-actions of the insured result in a legally
enforceable claim for bodily injury, property damage, or personal
injury. Included are coverages for: (1) nonowned automobiles used
by the business in its normal operations (owned automobiles are
excluded); (2) host liquor liability where the business is having a
social gathering. For example, liability at an office party would be
covered, since this social function is incidental to normal business
activity (excluded would be operation of a liquor store on the
premises of the business); (3) fire and explosion legal liability,
where the insured is renting business space in a building. If a fire or
explosion from business operations is proven to be of negligent
origin, the insurer of the owner of the building has subrogation
rights against the business; (4) products, for which completed
operations coverage is provided. Excluded from Section II
coverages are professional liability, owned automobiles of the
business, operation of airplanes and other aircraft, Workers
Compensation, liquor liability (other than that served as a host at
business social functions), and off-premises operation of boats.
 Page 70
BUSINESS PROPERTY AND LIABILITY INSURANCE
PACKAGE protection of the property of the business that is
damaged or destroyed by perils such as fire, smoke, and vandalism;
and/or if the actions (or nonactions) of the business' representatives
result in bodily injury or property damage to other individuals.
Many insurance policies provide such coverages, but the two most
often used are the COMMERCIAL PACKAGE POLICY and the BUSINESSOWNERS POLICY (BOP).
BUSINESS RISK investment risk associated with the changes in
the earnings capability of the company. If the earnings capability
declines, the company's ability to maintain the current dividend
level and to increase future dividends is diminished.
BUSINESS RISK EXCLUSION omissions from coverage found in
products liability insurance. The policy does not provide coverage
if the business manufactures a product that does not meet the level
of performance as advertised, represented, or warranted. For
example, an automobile antifreeze is advertised as being able to
withstand temperatures as low as 30° below zero. An engine block
containing the fluid freezes at a temperature of 10° above zero. In
this instance a products liability policy would not provide coverage
for the insured business.
BUSINESS STARTS INDEX statistical compilation that reports
the number of new incorporated and nonincorporated businesses
started during a single week. This index is published by Dun &
Bradstreet.
BUSINESS TRANSACTED WITH PRODUCER CONTROLLED
PROPERTY/CASUALTY INSURER ACT model act written and
published by the NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) whose
purpose it is to regulate BROKERS who control INSURANCE COMPANIES. The act
permits the insurance commissioners to institute civil actions in the
event they perceive broker violations (broker's conduct
contributing to the insolvency of a controlled insurance company
and the respective state insurance commissioner requires the broker
to make restitution to that state's guarantee fund).
BUY-AND-SELL AGREEMENT approach used for sole
proprietor-ships, partnerships, and close corporations in which the
business interests of a deceased or disabled proprietor, partner, or
shareholder are sold according to a predetermined formula to the
remaining member(s) of the business. For example, a partnership
has three principals. Upon the death of one, the two survivors have
agreed to purchase, and the deceased partner's estate has agreed to
sell, the interest of that partner according to a predetermined
formula for valuing the partnership to the survivors. Funds for
buying out the deceased partner's interest are usually provided by
life insurance policies, with each partner purchasing a policy on the
other partners. Each is the owner and beneficiary of the policies
purchased on the other partners.
When a sole proprietor dies, usually a key employee is the
buyer/successor. The sole proprietorship, partnership, and close
cor-
 Page 71
poration under the entity plan can buy and own life insurance
policies on the proprietor, partner, or shareholder and achieve the
same result as when an individual buys and owns the policies.
BUY-BACK DEDUCTIBLE DEDUCTIBLE eliminated through the
payment of an additional premium, resulting in FIRST-DOLLAR COVERAGE
under the policy.
BYPASS TRUST type of TRUST used to remove assets from a
surviving spouse's estate, thereby excluding such assets from FEDERAL
ESTATE TAX upon the death of the surviving spouse. This type of trust

allows for a lifetime benefit to be available to both spouses while

living, as well as to a single surviving spouse. A bypass trust
permits a maximum of $1.2 million transfer to heirs of the spouses
on a tax-free basis under the unified gift and estate tax credits.
 Page 72

C
CAFETERIA BENEFIT PLAN arrangement under which
employees may choose their own employee benefit structure. For
example, one employee may wish to emphasize health care and
thus would select a more comprehensive health insurance plan for
the allocation of the premiums, while another employee may wish
to emphasize retirement and thus allocate more of the premiums to
the purchase of pension benefits.
CAFETERIA PLANS see SECTION 125 PLANS (CAFETERIA PLANS).
CALCULABLE CHANGE OF LOSS see PROBABILITY.
CALENDAR YEAR ACCOUNTING INCURRED LOSSES
losses paid plus positive or negative changes in the year-end loss
reserves during that particular year. The total amount includes
payments for any old claims as well as new claims, plus any
reevaluation of claim amounts already on the books at the
beginning of the year, as well as required reserves for the new
claims.
CALENDAR YEAR EXPERIENCE paid loss experience for the
period of time from January 1 to December 31 of a specified year
(not necessarily the current year).
CALENDAR YEAR STATISTICS see CALENDAR YEAR EXPERIENCE.
CALL OPTION contract that gives the insurance company the
right, not the obligation, to buy a stipulated stock or bond at a
specified price (strike price) at or before the date of expiration of
the contract.
CAMERA AND MUSICAL INSTRUMENTS DEALERS
INSURANCE coverage on an ALL RISKS basis for the insured's own
property as well as property of others under the insured firm's care,
custody, and control. Exclusions are WEAR AND TEAR, MYSTERIOUS
DISAPPEARANCE, earthquake, flood, theft from an unlocked and

unattended vehicle, loss of market, and delay. For example, if a

dealer's personal flute is damaged by fire, or if a customer's camera
is stolen, the dealer would be covered for both occurrences up to
the limits of the policy.
CAMERA FLOATER camera and related equipment coverage
found in INLAND MARINE INSURANCE.
CANADIAN INSTITUTE OF ACTUARIES membership
organization representing professional actuaries in all insurance
fields in Canada including life and health, casualty, consulting and
fraternal actuaries. A member must reside in Canada and belong to
an approved actuarial organization, including the SOCIETY OF ACTUARIES
(SA).

CANCEL termination of a policy. Contract may be terminated by

an insured or insurer as stated in the policy. If the insurance
company
 Page 73
cancels a policy, any unearned premiums must be returned. If an
insured cancels the policy, an amount less than the unearned
premiums is returned, reflecting the insurance company's
administration costs of placing the policy on its books. Usually this
term is applied only in property and disability insurance.
CANCELLABLE see CANCEL; CANCELLATION PROVISION CLAUSE.
CANCELLATION see CANCELLATION PROVISION CLAUSE.
CANCELLATION, FLAT cancellation of a policy according to its
effective date excluding any premium charge.
CANCELLATION, PRO RATA see PRO RATA CANCELLATION.
CANCELLATION PROVISION CLAUSE provision permitting an
insured or an insurance company to cancel a property and casualty
or a health insurance policy (circumstances vary; see also COMMERCIAL
HEALTH INSURANCE) at any time before its expiration date. The insured

must send written notice to the insurance company, which then

refunds the excess of the premium paid above the customary short
rates for the expired term. If the insurance company cancels, it
sends written notice to the insured of cancellation and refunds the
unearned portion of the premium.
CANCELLATION, SHORT RATE see SHORT RATE CANCELLATION.
CAP see COINSURANCE.
CAPACITY maximum that an insurance company can underwrite.
The limits of coverage that a property and casualty company can
under-write are determined by its retained earnings and invested
capital. REINSURANCE is a method of increasing the insurance
company's capacity, in that a portion of the unearned premium
reserve maintenance requirement can be relieved. Commissions
earned are ceded, underwriting results are stabilized, and financing
of the expansion of the insurer's capacity can take place.
CAPACITY OF PARTIES legal capability of those involved in
mutual assent of making a contract, including an insurance
contract. Those who have been deemed to be incompetent to make
a valid contract include intoxicated and insane persons, and enemy
aliens. Minors can enter into a contract, but it is voidable at the
option of the minor. For example, if an agent sells an insurance
policy to a minor, and the insurance company agrees to underwrite
it, the policy can be voided at any time the minor wishes both
before and after the minor reaches the age of majority. The
insurance company cannot void the contract.
CAPITAL equity of shareholders of a stock insurance company.
The company's capital and SURPLUS are measured by the difference
between its assets minus its liabilities. This value protects the
interests of the company's policyowners in the event it develops
financial problems; the policyowners' benefits are thus protected by
the insurance
 Page 74
company's capital. Shareholders' interest is second to that of
policy-owners.
CAPITAL GAINS excess of the sales price of an asset over its
book value. Listed as part of the Annual Report in the summary of
the surplus account and/or in the Summary of Operations.
CAPITAL STOCK INSURANCE COMPANY company that has a
capital fund established by contributions from its stockholders in
addition to its SURPLUS ACCOUNTS and RESERVE ACCOUNTS.
CAPITAL SURPLUS PAID-IN SURPLUS, revaluation surplus, and donated
surplus. This surplus includes all sources of surplus with the
exception of EARNED SURPLUS.
CAPITATED CONTRACT health plan that pays a flat fee for each
patient it covers.
CAPITATION PAYMENTS payments made on a monthly basis by
users of the medical services of HEALTH MAINTENANCE ORGANIZATIONS (HMOs).
After this payment is calculated for a future period of time, usually
one year, the payment will remain fixed for that period, regardless
of the frequency of use of the HMO's services.
CAPTIVE AGENT representative of a single insurer or fleet of
insurers who is obliged to submit business only to that company, or
at the very minimum, give that company first refusal rights on a
sale. In exchange, that insurer usually provides its captive agents
with an allowance for office expenses as well as an extensive list of
employee benefits such as pensions, life insurance, health
insurance, and credit unions.
CAPTIVE INSURANCE COMPANIES ASSOCIATION (CICA)
trade association located in New York City, consisting of
approximately 200 CAPTIVE INSURANCE COMPANIES. The objective of the
association is to further the common interests of its members.
CAPTIVE INSURANCE COMPANY company formed to insure
the risks of its parent corporation. Reasons for forming a captive
insurance company include:
1. Instances when insurance cannot be purchased from commercial
insurance companies for a business risk. In many instances
companies within an industry form a joint captive insurance
company for that reason.
2. Premiums paid to a captive insurance company are deductible as
a business expense for tax purposes according to the Internal
Revenue Service. However, sums set aside in a self insurance
program are not deductible as a business expense.
3. Insurance can be obtained through the international reinsurance
market at a more favorable premium, with higher limits of
coverage.
4. Investment returns can be obtained directly on its invested
capital.
 Page 75
However, competent personnel to manage and staff the company
could be excessively expensive; and further, a catastrophic
occurrence or series of occurrences could bankrupt the company.
CARE, CUSTODY, AND CONTROL phrase in most liability
insurance policies that eliminates from coverage damage or
destruction to property under the care, custody, and control of an
insured. Such coverage is excluded from liability policies because
the insured either has some ownership interest in such property
(better covered through property not liability insurance) or is a
bailor of the property (and can better cover this bailment exposure
through an appropriate bailee policy).
CARGO INSURANCE shipper's policies covering one cargo
exposure or all cargo exposures by sea on ALL RISKS basis. Exclusions
include war, nuclear disaster, wear and tear, dampness, mold, losses
due to delay of shipment, and loss of market for the cargo. One
Cargo Exposure (Single Risk Cargo Policy) covers a single
shipment of goods and/or a single trip. All Cargo Exposure (Open
Cargo Policy) covers all shipments of goods and/or all trips
generally used by most shippers that require automatic coverage
for all of its shipments, subject to 30 days' notice of cancellation.
CARGO LIABILITY INSURANCE see CARGO INSURANCE.
CARGO MARINE INSURANCE see CARGO INSURANCE.
CARPENTER PLAN (SPREAD LOSS COVER, SPREAD LOSS
REINSURANCE) form of excess of loss reinsurance under which
each year's REINSURANCE premium is determined by the amount of the
cedent's excess losses for a given period of time, usually three or
five years. Upon renewal, the first year's initial rate is based on the
total of three or five years of previous experience, a form of
RETROSPECTIVE RATING. The Carpenter Plan is particularly relevant to

economic conditions in the way it handles the factor of inflation.

CARRIER insurance company that actually underwrites and issues
the insurance policy. The term is used because the insurance
company assumes or carries the risk for policyowners. The agent
usually has a primary carrier (the insurance company to which
most of the business is submitted) and secondary carriers (to
which lesser amounts are submitted). The primary carrier provides
the agent with commission schedules, expense allowance, and the
availability of markets for the agent's business.
CARVE-OUT COB see NON-DUPLICATION COORDINATION-OF-BENEFITS (CARVE-OUT COB).
CAS see CASUALTY ACTUARIAL SOCIETY (CAS).
CASH ACCUMULATION METHOD procedure used to compare
the costs of life insurance policies by having equal DEATH
BENEFITS of the policies held constant and accumulating the
differences in the premiums
 Page 76
paid among the policies at a given interest rate over a stipulated
period of time. At the end of that time period, that policy with the
largest accumulated value in the difference of the premiums paid is
the best cost effective policy.
CASH-BALANCE PLAN hybrid PENSION PLAN that provides for the
employer to contribute annually a hypothetical percentage, usually
4 to 5%, of the employee's salary to a hypothetical account. This
employee's account is then credited with a hypothetical annual
interest rate generally tied to the 30-year United States Treasury
rate. If the employee should change employment, the account
balance can be transferred to an INDIVIDUAL RETIREMENT ACCOUNT (IRA), subject
to certain restrictions peculiar to each employer. For example,
some employers restrict the withdrawal of a terminating employee
to an amount no greater than the employee's one-year salary with
the account's balance to be paid out as a monthly income benefit.
When the employee retires at age 65 most of these plans have a
five-year VESTING requirement.
CASH FLOW PLANS method of payment of an insurance
premium that allows an insured to regulate the amount and
frequency of the premium payments in accordance with cash flow
over a stipulated period of time. This enables the insured to
maintain control over the funds for a longer period of time and thus
reap benefits from their earnings.
CASH FLOW SURPLUS the SURPLUS resulting from an additional
amount of CAPITAL necessary to act as a supplement to the reserves in
the event of unforeseen contingencies that would impair the
insurance company's ability to make future benefit payments for
which it has received the premiums.
CASH FLOW UNDERWRITING pricing of the insurance product
below the necessary premium rate to reflect the costs of expected
losses. The thesis of this pricing strategy is to obtain large sums of
money to invest and earning a greater return on the investment than
the costs associated with the underpricing of the insurance product.
CASH OUT OF VESTED BENEFITS money withdrawn by an
employee from benefits owned. When an employee exercises this
right, future benefits purchased by the employer on behalf of the
employee are usually forfeited.
CASH REFUND ANNUITY (LUMP SUM REFUND ANNUITY)
if the annuitant dies before receiving total income at least equal to
the premiums paid, the beneficiary receives the difference in a
lump sum. If the annuitant lives after the income paid equals the
premiums paid, the insurance company continues to make income
payments to the annuitant for life. See also ANNUITY.
CASH SURRENDER VALUE money the policyowner is entitled
to receive from the insurance company upon surrendering a life
insurance policy with cash value. The sum is the cash value stated
in the
 Page 77
policy minus a surrender charge and any outstanding loans and
interest thereon.
CASH VALUE see CASH SURRENDER VALUE.
CASH VALUE LIFE INSURANCE policy that generates a savings
element. Cash values are critical to a permanent life insurance
policy. The size of a cash value buildup differs substantially from
company to company. In many instances there is no correlation
between the size of the cash value and premiums paid; in some
cases there is an inverse relationship. Everything that the
policyowner wishes to do with this policy while living is
determined by the size of the cash value. For example, at some
future time, a policyowner may wish to convert the cash value to a
monthly retirement income. Its size will depend on (1) the amount
of the cash value and (2) the attained age of the policy owner. See
also ANNUITY; NONFORFEITURE BENEFIT (OPTION).
CASH WITHDRAWALS removal of money from an individual
life insurance policy or an employee benefit plan. A cash
withdrawal from a life insurance policy reduces the death benefit
by the amount of the withdrawal plus interest thereon. When a cash
withdrawal is made from an employee benefit such as a pension
plan, the employee usually forfeits all benefits purchased on the
employee's behalf by the employer. See also CASH VALUE LIFE INSURANCE.
CASUALTY liability or loss resulting from an ACCIDENT. Such
liability or losses are covered under such policies as the following:
BUSINESS AUTOMOBILE POLICY (BAP), BUSINESS PROPERTY AND LIABILITY INSURANCE PACKAGE,

BUSINESSOWNERS POLICY (BOP), CASUALTY INSURANCE, COMMERCIAL GENERAL LIABILITY FORM (CGL),

CONDOMINIUM INSURANCE, HOMEOWNERS INSURANCE POLICY, PERSONAL AUTOMOBILE POLICY (PAP),

SIMPLIFIED COMMERCIAL LINES PORTFOLIO POLICY (SCLP), TENANTS INSURANCE, AND WORKERS

COMPENSATION INSURANCE.

CASUALTY ACTUARIAL SOCIETY (CAS) accrediting body for

the ACAS (Associate of the Casualty Actuarial Society)
designation and the FCAS (Fellow of the Casualty Actuarial
Society) designation. To earn these designations, members take a
series of examinations on actuarial mathematics and related topics
as they apply to the property and casualty insurance field. Passing
the examinations denotes a sound background in mathematics as
well as knowledge of business such as finance and economics.
Located in New York City.
CASUALTY CATASTROPHE casualty losses of high severity. See
also CASUALTY INSURANCE.
CASUALTY INSURANCE coverage primarily for the liability of
an individual or organization that results from negligent acts and
omissions, thereby causing bodily injury and/or property damage to
a third party. However, the term is an elastic one that traditionally
has included such property insurance as AVIATION INSURANCE, BOILER AND
 Page 78
MACHINERY INSURANCE and glass and crime insurance. See also BUSINESS
LIABILITY INSURANCE.

CATASTROPHE EXCESS REINSURANCE see EXCESS OF LOSS REIN-

SURANCE.

CATASTROPHE FUTURES financial instrument traded on the

Chicago Board of Trade (CBOT). By purchasing this future, the
insurance company can hedge its risk exposure against possible
future catastrophic losses. The CBOT releases a report each quarter
showing on a state-by-state basis the premium amount and the line
of insurance that has a catastrophic exposure. Each future contract
has a stated value of $25,000 multiplied by the catastrophe ratio for
that particular quarter. This multiplied result forms the basis for
beginning to trade the quarterly catastrophic futures contract on the
CBOT. If there is a high level of catastrophes such that the actual
catastrophic loss ratio is greater than the expected catastrophic loss
ratio, the futures contract increases in value and the insurance
company purchaser gains the difference between the initial
purchase price and the quarterly ending value of the contract.
Conversely, if there is a low level of catastrophes such that the
actual catastrophic loss ratio is less than the expected catastrophic
loss ratio, the futures contract decreases in value and the insurance
company purchaser loses the difference between the initial
purchase price and the quarterly ending value of the contract.
CATASTROPHE HAZARD circumstance under which there is a
significant deviation of the actual aggregate losses from the
expected aggregate losses. For example, a hurricane is a hazard that
is catastrophic in nature, since whole units or blocks of businesses
may be threatened. Catastrophic hazards often cannot or will not be
insured by commercial insurance companies either because the
hazard is too great or because the actuarial premium is prohibitive.
Where a void exists in the marketplace, a government agency may
subsidize the coverage with such programs as FEDERAL FLOOD INSURANCE
and SERVICE-MEN'S GROUP LIFE INSURANCE (SGLI).
CATASTROPHE INSURANCE see COMPREHENSIVE HEALTH INSURANCE; GROUP
HEALTH INSURANCE; MAJOR MEDICAL INSURANCE.

CATASTROPHE LOSS high severity loss that does not lend itself
to accurate prediction and thus should be transferred by the
individual or business to an insurance company. See also EXPECTED
LOSS; SELF INSURANCE.

CATASTROPHE REINSURANCE see AUTOMATIC NONPROPORTIONAL

REINSURANCE; AUTOMATIC PROPORTIONAL REINSURANCE; AUTOMATIC REINSURANCE; EXCESS OF LOSS

REINSURANCE; FACULTATIVE REINSURANCE; NONPROPORTIONAL REINSURANCE; PROPORTIONAL

REINSURANCE; QUOTA SHARE REINSURANCE; STOP LOSS REINSURANCE; SURPLUS REINSURANCE.

 Page 79
CATASTROPHIC COVERAGE ACT see MEDICARE CATASTROPHIC COVERAGE
ACT.

CATASTROPHIC HEALTH INSURANCE see MEDICARE CATASTROPHIC

COVERAGE ACT.

CATASTROPHIC ILLNESS INSURANCE see DREAD DISEASE INSURANCE.

CATASTROPHIC INSURANCE FUTURES AND OPTIONS first
exchange-traded RISK MANAGEMENT tool specifically developed for the
insurance industry by the Chicago Board of Trade as a way for the
primary insurance company to offset its underwriting exposures.
See also FUTURES TIED TO REINSURANCE. These contracts are designed to
provide the insurance company with a hedge against UNDERWRITING
LOSSES resulting from catastrophic occurrences. The futures contract

is an agreement to buy or sell a commodity or financial instrument

at a set price on a given date. The option permits the owner to
decide whether or not to exercise the option to buy or sell the
commodity or financial instrument by the stipulated exercise date.
The insurance option trading is based on the loss ratio concept
(losses incurred over a stipulated time period divided by premiums
earned over the same time period). For example, assume an
insurance company buys an option on the loss ratio that will fall
within the range of 50% to 70%. Should losses fall within that
range, the insurance company would then exercise the option and
sell the contract, thereby enabling the company to make a profit on
the option. This profit could then be used by the company to offset
losses. Should the loss portion not fall within the 50% to 70%
range, the option would expire at zero value.
CAT SPREAD type of DERIVATIVE traded on the Chicago Board of
Trade that takes the form of an option on a catastrophe futures
contract using a call-option spread as the basis for the contract. The
thesis of this kind of derivative is to simulate an artificial layer of
EXCESS OF LOSS REIN-SURANCE coverage. This derivative has the origin of its

value in the excess of loss reinsurance plan to be used as a

mechanism for the PRIMARY INSURER hedging its risk coverage. See also
CATASTROPHIC INSURANCE FUTURES AND OPTION; FUTURES CONTRACTS.

CAVEAT EMPTOR Latin expression meaning ''let the buyer

beware." The purchaser buys a product or service at his or her own
risk. This principle has been modified significantly as it relates to
an INSURANCE POLICY. See also ADHESION INSURANCE CONTRACT; FREE EXAMINATION "FREE
LOOK" PERIOD.

CCC see CARE, CUSTODY, AND CONTROL.

CD ANNUITY see ANNUITY, CD.
CEDE to transfer a risk from an insurance company to a
reinsurance company.
 Page 80
CEDENT see CEDING COMPANY.
CEDING COMPANY insurance company that transfers a risk to a
reinsurance company.
CENTRAL GUARANTEE FUND fund from which losses are paid
for the insolvent members of LLOYD'S OF LONDON. Each year, members of
Lloyd's of London contribute a percentage of their premium
volume to this fund to act as a reserve for losses that insolvent
members are unable to pay. See also GUARANTY FUND (INSOLVENCY FUND).
CENTRAL LIMIT THEOREM statistical approach stating that if a
series of samples is taken from a stable population, the distribution
of the means (averages) of these samples will form a normal
distribution whose mean approaches the population as the samples
become larger.
CENTRAL LOSS FUND see GUARANTY FUND (INSOLVENCY FUND).
CERTAIN ANNUITY see LIFE CERTAIN ANNUITY.
CERTIFICATE see CERTIFICATE OF INSURANCE.
CERTIFICATE OF ANNUITY (COA) see ANNUITY, CD.
CERTIFICATE OF AUTHORITY written statement by an
insurance company attesting to the powers it has vested in an agent.
CERTIFICATE OF INSURANCE document in life and health
insurance issued to a member of a group insurance plan showing
participation in insurance coverage. In property and liability
insurance, evidence of the existence and terms of a particular
policy.
CERTIFICATE OF NEED (CON) LAWS federal legislation passed
in 1974 that mandated that legislators in all states that are in receipt
of federal funds for health care review and approve any planned
capital expenditures to be undertaken by health care institutions.
Capital expenditures was defined as the purchase of major medical
equipment and/or the expansion of physical facilities.
CERTIFIED EMPLOYEE BENEFIT SPECIALIST (CEBS)
professional designation conferred by the International Foundation
of Employee Benefit Plans and the Wharton School of the
University of Pennsylvania. In addition to professional business
experience in employee benefits, recipients must pass national
examinations in pensions, Social Security, other retirement related
plans, health insurance, economics, finance, labor relations, group
insurance, and other employee benefit related plans. This program
responds to the information requirements of individuals responsible
for the operation of an employee benefit plan department in large
and medium size businesses. (It has been estimated that for every
dollar of salary an additional 40 cents is paid to cover employee
benefits.)
 Page 81
CERTIFIED FINANCIAL PLANNER (CFP) professional
designation conferred by the International Board of Standards and
Practices for Certified Financial Planners. In addition to
professional business experience in financial planning, recipients
must pass national examinations in insurance, investments,
taxation, employee benefit plans, and estate planning. This
program responds to the growing need for help with personal
financial planning.
CESSION see CEDE.
CESTUI QUE VIE person by whose life the duration of an
insurance policy, estate, trust, or gift is measured. This person is
generally referred as the INSURED in an insurance policy.
CHANGE IN CONDITIONS see DIFFERENCE IN CONDITIONS INSURANCE.
CHANGE IN OCCUPANCY OR USE CLAUSE CONDITION in which
the occupancy or the purposes for which the premises are being
used as described in the insurance policy change so as to result in
an increased RISK. The policy is void unless prior notice is furnished
to the insurance company. Once the company receives such
notification, the company can either cancel the policy, or apply a
surcharge to the premium to reflect this increased risk.
CHANGE OF BENEFICIARY PROVISION element of a life
insurance policy permitting the policyowner to change a
beneficiary as frequently as desired unless the beneficiary has been
designated as irrevocable. Here the written permission of that
beneficiary must be obtained in order to make a change.
CHANGE OF LOSS see PROBABILITY.
CHANNELING hospital insurance program that provides medical
professional liability insurance coverage to nonemployed hospital
physicians. The objective of this means of insurance coverage is to
increase the number of patients being admitted to the hospital by
tying staff physicians to that particular hospital through this
insurance plan. This insurance strategy could lead to lower
premiums resulting from loss control programs and joint legal
liability defense programs. (The hospital and physician jointly
defend against a patient's liability claim rather than each party
retaining an attorney, which would increase expenses and develop
an adversarial relationship between hospital and physician.) This
program can be implemented through a joint hospital and physician
program insuring both hospital and physician under the same
insurance policy or the hospital can purchase a separate insurance
policy for the physician.
CHARGEABLE describing automobile accidents that are
considered to be the results of the negligent acts of the insured
driver and are included in the driving record of that insured.
 Page 82
CHARITABLE AND GOVERNMENT IMMUNITY principle that
no liability exposure can result from the performance of proprietary
functions.
CHARITABLE GIFT ANNUITY donation of amount "A," made
by donor X to a charity. The charity agrees to pay donor X an
amount ("B") for the rest of donor X's life. Since the donation is
used to fund an annuity, only a percentage of the donation can be
taken as a tax-deductible gift in the year of the donation. The
percentage taken is based on the Internal Revenue Service tables at
the donor's age at the time of the donation. This gift is irrevocable.
Since the donor is dependent on the charity to make the income
payments, the donor should ascertain the financial ability of the
charity to make those income payments. Thus, such an annuity
permits the donor to transfer appreciated property to a charitable
organization in exchange for the organization's promise to pay a
continuous stream of income.
CHARITABLE GIFT LIFE INSURANCE life insurance policy
given by a donor to a charity; donor only relinquishes the CASH VALUE
and the cost of the PREMIUMS previously paid. The receiving charity's
future value of the life insurance policy is the DEATH BENEFIT. Since the
charity is the owner of the policy, it can: (1) borrow against the
cash value; (2) surrender the policy for its then cash value; or (3)
utilize its CONVERSION PRIVILEGES. The donor can enjoy an income tax
deduction for the value of the life insurance policy contributed to a
qualified charity, provided the donor does not retain any ownership
rights to that policy. If the donor makes an irrevocable transfer of
the life insurance policy to a qualified charity and all rights of
ownership have been forfeited to the charity, the death benefit will
not be included in the donor's estate, provided the donor survives
for at least three years after the date of transfer.
CHARITABLE LEAD TRUST trust in which a charity receives
income from a donated asset for a specified number of years that it
is held in that trust. After the specified period concludes, the
principal is transferred to the donor's beneficiaries. This vehicle is
used to keep wealth in the family by significantly reducing the
costs of transfer to beneficiaries. The charity has the use of the
income earned by that money, but the charity does not have use of
the principal. This distribution is a taxable gift.
CHARITABLE REMAINDER ANNUITY TRUST special type of
CHARITABLE REMAINDER TRUST (CRT) under which a designated beneficiary

(cannot be a charitable beneficiary) receives an annual fixed

income. The grantor of the trust is allowed an income tax deduction
of the amount of the present value of the charity's remainder
interest as of the date the asset(s) is contributed to the trust. If trust
income proves to be inadequate to meet the required payments to
the beneficiary, the selling-off of a portion of the trust's principal or
capital gains earned by the trust may be used to make up the
difference. Any excess amount
 Page 83
of income generated by the trust above that required to pay the
beneficiary is reinvested into the trust. Once this trust has been
created, additional assets cannot be transferred into the trust.
CHARITABLE REMAINDER TRUST (CRT) TRUST to which a
donor transfers assets and that distributes income to finance a
predetermined situation. After the trust expires, any remaining
assets are donated to the qualified charity that was previously
designated as the remainder beneficiary (BENEFICIARY OF TRUST). In the
year of transfer, the donor receives a tax deduction for the future
value of the assets that were transferred to the trust. Thus, under
this type of trust, the donor (person who creates the trust) simply
makes an irrevocable transfer of an asset(s) to a trustee. According
to the trust agreement, the trustee must: (1) invest the asset
contributed to the trust; (2) pay a predetermined annual income to
the donor and/or another designated beneficiary for life or
stipulated number of years; and (3) distribute the asset(s) to the
charity, either when the donor dies or when a specific designated
income beneficiary dies.
CHARITABLE REMAINDER UNITRUST trust under which the
beneficiary (cannot be a charitable beneficiary) receives a fixed
percentage (not less than 5% of the trust's annual value) of the net
fair market value of the trust on an annual basis. The annual
income paid to the beneficiary must be either for life or for 20 or
fewer years. The yearly payment will increase or decrease as the
value of the trust assets increases or decreases. Additional
contributions may be paid into the trust after it has been created.
CHARITABLE REVERSE SPLIT DOLLAR (CRSD) financial
technique for providing term death coverage for an entity. With this
procedure: (1) an individual purchases an ORDINARY LIFE INSURANCE POLICY
and completes an agreement with the entity for a reverse SPLIT DOLLAR
LIFE INSURANCE arrangement; (2) an individual endorses a policy's death

benefit to the entity; (3) an entity assigns its interest in the policy to
the charity; (4) an entity makes unrestricted gifts of cash to the
charity in the form of premium payments according to the split
dollar agreement; (5) an entity receives a charitable income tax
deduction for gifts of cash (premium payments); (6) the POLICYOWNER
(INSURED) is then entitled to make a tax-free withdrawal of all or a

portion of the CASH VALUE, or take out a POLICY LOAN.

CHARITABLE SPLIT DOLLAR INSURANCE PLAN
arrangement that provides for the reduction of estate taxes and the
payment of tax-deductible life insurance premiums. The procedure
is for a donor to present a charity with a gift of a sum of money that
is tax deductible to the donor. The charity then transfers this gift in
the form of a premium payment on an ORDINARY LIFE INSURANCE policy on
the donor's life (the INSURED). The beneficiaries under the policy are
the charity and the donor's heirs. Upon the death of the donor, the
charity and the donor's heirs share in the DEATH BENEFIT from the policy.
The donor's
 Page 84
heirs also receive the cash value accrued on a tax-deferred basis
within the policy.
CHARTERED FINANCIAL CONSULTANT (ChFC) professional
designation awarded by the American College. In addition to
professional business experience in financial planning, recipients
are required to pass national examinations in insurance,
investments, taxation, employee benefit plans, estate planning,
accounting, and management. This program responds to the
growing need for help in personal financial planning.
CHARTERED LIFE UNDERWRITER (CLU) professional
designation conferred by the American College. In addition to
professional business experience in insurance planning and related
areas, recipients must pass national examinations in insurance,
investments, taxation, employee benefit plans, estate planning,
accounting, management, and economics. This program responds
to a need by individuals for technically proficient help in planning
their life insurance.
CHARTERED PROPERTY AND CASUALTY UNDERWRITER
(CPCU) professional designation earned after the successful
completion of 10 national examinations given by the American
Institute for Property and Liability Underwriters. Covers such areas
of expertise as insurance, risk management, economics, finance,
management, accounting, and law. Three years of work experience
are also required in the insurance business or a related area.
CHERRY PICK practice of selling those securities whose price has
increased and retaining those securities whose price has declined.
The securities that have declined are listed at their amortized value
on the balance sheet resulting in a more positive profit picture for
the insurance company than is warranted.
CHRONOLOGICAL STABILIZATION PLAN see RETROSPECTIVE
RATING.

CICA see CAPTIVE INSURANCE COMPANIES ASSOCIATION (CICA).

CIVIL ACTION remedy imposed by a court of law, usually in the
form of a monetary award, as compensation to the insured party for
the CIVIL WRONG incurred. A civil action is initiated by the injured party
(the plaintiff) against the party causing the damages (the
defendant). The STATUTE OF LIMITATIONS applies to these actions. See also
CIVIL DAMAGES.

CIVIL DAMAGES sums payable to the winning plaintiff by the

losing defendant in a court of law; can take any or all of these
forms: general, punitive, and special.
CIVIL LIABILITY negligent acts and/or omissions, other than
breach of contract, normally independent of moral obligations for
which a remedy can be provided in a court of law. For example, a
person injured in someone's home can bring suit under civil
liability law.
 Page 85
CIVIL RIGHTS ACT OF 1964 act that prohibits employers from
discriminating against employees in EMPLOYEE BENEFIT PLANS, regarding
contributions or benefits based on race or gender.
CIVIL WRONG an act or violation that consists of two wrongs:
1. TORTnegligent act or omission by one or more parties against the
person or property or another party or parties. LIABILITY INSURANCE is
designated to cover an insured for unintentional tort.
2. Breach or violation of the provisions of a CONTRACT. See also CIVIL
LIABILITY.

CLAIM request by an insured for indemnification by an insurance

company for loss incurred from an insured peril.
CLAIM ADJUSTER see ADJUSTER.
CLAIM AGAINST EMPLOYERS NET WORTH claim by the
PENSION BENEFIT GUARANTY CORPORATION (PBGC) against an employer for

reimbursement of the PBGC's loss (for a terminated plan) up to

30% of the net worth of the employer. If this amount is not paid,
the PBGC may place a lien on all of the assets of the employer.
CLAIM AGENT person who has been authorized by the insurance
company to pay a loss(s) incurred by the INSURED.
CLAIMANT one who submits a claim for an incurred loss.
CLAIM DEPARTMENT section of an insurance company that
evaluates claims for their subsequent payment.
CLAIM EXPENSE cost incurred in adjusting a claim. Claim-
adjustment expenses include such items as attorneys' fees and
investigation expenses (e.g., witness interviews). The claim
settlement dollar amount awarded to the injured party is not
considered a claim expense item.
CLAIM, OBLIGATION TO PAY clause in liability insurance
policies stating that the insurance company has a legally
enforceable obligation to pay all claims and defend all suits (even
if groundless) up to the policy limits on behalf of the insured for
which the insured becomes legally obligated to pay.
CLAIM PROVISION clause in an insurance policy that describes
the administration and submission of claims procedure.
CLAIM REPORT report furnished by the ADJUSTER to the INSURANCE
COMPANY (INSURER) that documents the amount of payment the insurer is

legally obligated to pay to or on behalf of the INSURED under the terms

of the POLICY. This report includes the following items:
1. Is there an INSURABLE INTERESTdid the person who submitted the claim
have expectation of a monetary loss?
2. Is there a coverable cause of losswas the source of the loss an
INSURED PERIL?
 Page 86
3. Is the property coveredwas the damaged or destroyed property
insured?
4. What is the location of the losswas the occurrence of the insured
peril within the geographical scope of the policy?
5. What is the date of the lossdid the loss occur while the policy
was in effect?
6. What are the applicable EXCLUSIONSwas the loss caused by a peril
specifically excluded by the policy?
7. What are the applicable CONDITION(S) and WARRANTY(S)were the
condition(s) and warranty(s) under the policy complied with by the
insured?
8. What is the SALVAGE value of the damaged propertyis there a
portion of the damaged property that can be salvaged and how does
the value of the salvageable property affect the total dollar amount
of the loss?
9. What is the status of any OTHER INSURANCE in forceare there any other
insurance policies in force carried by the CLAIMANT covering the loss?
10. What is the status of SUBROGATIONare there any third parties
responsible for a covered loss against which the insurer can take
legal action?
11. Was there any MISREPRESENTATION (FALSE PRETENSE) and CONCEALMENT
involveddid the insured falsify or withhold material facts from the
insurer?
12. What is the status of the availability of documentationare there
photographs available of the damaged or destroyed insured
property? Does the insured have receipts or other pertinent records
relating to the damaged or destroyed insured property?
CLAIMS AND LOSS CONTROL see ENGINEERING APPROACH; HUMAN
APPROACH.

CLAIMS DEPARTMENT section of the INSURANCE COMPANY that

administers CLAIMS for the losses incurred by the INSURED.
CLAIMS MADE see CLAIMS MADE BASIS LIABILITY COVERAGE.
CLAIMS MADE BASIS LIABILITY COVERAGE method of
determining whether or not coverage is available for a specific
claim. If a claim is made during the time period when a liability
policy is in effect, an insurance company is responsible for its
payment, up to the limits of the policy, regardless of when the
event causing the claim occurred. Experts often advise that it is
extremely important, when purchasing a property and casualty
policy, to determine if claims are paid on a claims made basis or a
claims occurrence basis.
CLAIMS MADE FORM see CLAIMS MADE BASIS LIABILITY COVERAGE.
CLAIMS OCCURRENCE BASIS LIABILITY COVERAGE
method of determining whether or not coverage is available for a
specific
 Page 87
claim. If a claim arises out of an event during the period when a
policy is in force, the insurance company is responsible for its
payment, up to the limits of the policy, regardless of when the
business submits the claim. Experts often suggest that it is
extremely important, when purchasing a property and casualty
insurance policy, to determine if claims are paid on a claims made
basis or on a claims occurrence basis.
CLAIMS OCCURRENCE FORM see CLAIMS OCCURRENCE BASIS LIABILITY
COVERAGE.

CLAIMS REPRESENTATIVE see ADJUSTER.

CLAIMS RESERVE monetary fund established to pay for claims
that the insurance company is aware of (claims incurred or future
claims) but that the insurance company has not yet settled. This
reserve is critical since it is an accurate indication of a company's
liabilities. This reserve does not take into account INCURRED BUT NOT
REPORTED LOSSES (IBNR).

CLASH REINSURANCE type of EXCESS OF LOSS REINSURANCE in which the

insurance company (CEDENT) is reinsured in the event there is a
casualty loss resulting in at least two INSUREDS generating losses from
the single casualty occurrence.
CLASS group of insureds with the same characteristics, established
for rate-making purposes. For example, all wood-frame houses
within 200 feet of a fire plug in the same geographical area would
have similar probabilities of incurring a total loss. See also RATE
MAKING.

CLASSIFICATION see CLASS.

CLASSIFIED INSURANCE see SUBSTANDARD HEALTH INSURANCE; SUBSTANDARD
LIFE INSURANCE.

CLASS PREMIUM RATE see CLASS RATE.

CLASS RATE rate applied to risks with similar characteristics or to
a specified class of risk.
CLAUSE in an insurance policy, sentences and paragraphs
describing various coverages, exclusions, duties of the insured,
locations covered, and conditions that suspend or terminate
coverage.
CLAUSES ADDED TO A LIFE INSURANCE POLICY
provisions, usually requiring an additional premium, that are
appended to an insurance contract. These include WAIVER OF PREMIUM (WP),
DISABILITY INCOME (DI), ACCIDENTAL DEATH CLAUSE, policy purchase option (PPO).

The young family with children may wish to consider these clauses
since the breadwinner is seven to nine times more likely to become
disabled than to die at a young age.
CLEANUP FUND component of necessary coverage determined
by the "needs approach" to life insurance for a family. It is intended
to cover
 Page 88
last-minute expenses as well as those that surface after the death of
an insured, such as burial costs, probate charges, and medical bills.
CLEAR-SPACE CLAUSE in PROPERTY INSURANCE policies, a clause that
requires that a particular insured property be a specified distance
from like insured or noninsured property. For example, stored
dynamite should be at least 100 yards from an insured building.
CLIENT person who engages an AGENT or BROKER for advice and
possible purchase of insurance.
CLIFFORD TRUST up to 1986, arrangement to provide a personal
trust while the settlor is still alive. The income is paid to named
children, who enjoy lower income taxes. After 10 years and a day,
the property reverts to the original owner. The Internal Revenue
Service had ruled that the income from the property in trust is not
income to the original owner. The Clifford Trust was eliminated
under the TAX REFORM ACT OF 1986.
CLIFF VESTING see TEN YEAR VESTING (CLIFF VESTING).
CLOSE end of a sales presentation designed to prompt the PROSPECT
to purchase the insurance product.
CLOSE CORPORATION PLAN prior arrangement for surviving
stockholders to purchase shares of a deceased stockholder
according to a predetermined formula for setting the value of the
corporation. Often, the best source for its funding is a life insurance
policy in either of these forms: (1) Individual Stock Purchase Plan
(Cross Purchase Plan), much like the partnership cross purchase
plan. Each stockholder buys, owns, and pays the premium for
insurance equal to his/her share of the agreed purchase price for the
stock of the other stockholders. (2) Corporation Stock Purchase
Plan (Stock Redemption Plan), similar to the partnership entity
plan is a better choice if the number of stockholders is large. The
corporation purchases and pays the premiums on the amount of
insurance needed to purchase the decreased stockholder's interest at
the price set by the predetermined formula. These premiums are
not tax deductible as a business expense, but the death benefits are
not subject to income tax. Life insurance owned by the corporation
is listed as an asset on the corporation's balance sheet. Ownership
of life insurance on the stockholders thus increases the
corporation's net worth, and if permanent insurance is purchased,
its cash value would be available for loans in the event of business
emergencies.
CLOSING COSTS costs associated with the purchase of property
to include attorneys' fees, title recording fees, discount points, and
TITLE INSURANCE.

CLU see CHARTERED LIFE UNDERWRITER (CLU).

CODICIL amendment to a WILL that adds or modifies clauses in that
will, such as adding an additional BENEFICIARY or piece of property.
 Page 89
CODING placement of verbal descriptive information into
numerical form for the purposes of analysis.
COINSURANCE in PROPERTY INSURANCE, when the insurance policy
contains this clause, coinsurance defines the amount of each loss
that the company pays according to the following relationship:

Where:

Example:
Value of building = $100,000
Coinsurance Clause Percentage Amount of Insurance Required =
80%
Amount of Fire Damage to the Building = $60,000
Amount of Insurance Carried = $75,000
The insurance company would be required to pay $56,250 of the
$60,000 loss:

Note that the indemnification of the insured for a property loss can
never exceed (1) the dollar amount of the actual loss; (2) the dollar
limits of the insurance policy; (3) the dollar amount determined by
the coinsurance relationship. The lesser of the above three amounts
will always apply.
In commercial health insurance, when the insured and the insurer
share in a specific ratio of the covered medical expenses,
coinsurance is the insured's share of covered losses. For example,
in some policies the insurer pays 7580% of the covered medical
expenses and the insured pays the remainder. In other policies, after
the insured pays a deductible amount, the insurer pays 7580% of
the covered medical expenses above the deductible and the insured
pays the remainder until a maximum dollar amount is reached (for
example, $5000). The insurer pays 100% of covered medical
expenses over this dollar amount up to the limits of the policy.
COINSURANCE CLAUSE see COINSURANCE.
COINSURANCE FORMULA see COINSURANCE.
COINSURANCE LIMIT in a MERCANTILE OPEN-STOCK BURGLARY INSURANCE
policy, the dollar amount of coverage as required by the
 Page 90
COINSURANCEclause. This dollar amount is the MAXIMUM PROBABLE LOSS (MPL) of
merchandise that the insurer estimates could result from a single
burglary. The indemnification of the insured merchant cannot
exceed the lesser of this coinsurance limit or the COINSURANCE PERCENTAGE
of the total dollar value of the merchandise that has been insured.
COINSURANCE PENALTY reduction in the amount that the
insured receives from the insurer, after having incurred a property
loss, because the insurer failed to carry the amount of coverage
required by the COINSURANCE clause. See also COINSURANCE REQUIREMENT.
COINSURANCE PERCENTAGE in many PROPERTY INSURANCE policies,
a requirement that the insured carry insurance as a percentage of
the total monetary value of the insured property. If this percentage
is not carried, the insured is subject to the COINSURANCE PENALTY. See also
COINSURANCE; COINSURANCE REQUIREMENT.

COINSURANCE PLAN OF REINSURANCE type of PROPORTIONAL

REINSURANCE under which the CEDING COMPANY (PRIMARY INSURER) CEDES a portion of

the FACE AMOUNT of the life insurance policy it has underwritten to its
REINSURER. The reinsurer, in the event of the death of the insured, is

obligated to pay its PRO RATA share (thus the alternate name PRO RATA
REINSURANCE) of the DEATH BENEFIT to the ceding company that in turn must

pay the full death benefit to the insured's BENEFICIARY. Under this plan,
the reinsurer is also obligated to pay its pro rata share of all
settlement options under the life insurance policy to include the CASH
SURRENDER VALUE. The reinsurer receives from the ceding company a pro

rata share of the GROSS PREMIUMS paid on the policy to the ceding
company. In return, the ceding company receives a ceding
commission (to cover its expenses incurred in marketing,
underwriting, and distributing the life insurance policy) from the
reinsurer.
COINSURANCE REQUIREMENT amount of insurance that the
insured must carry in order to be indemnified for the total dollar
amount of the actual loss. If this requirement is met by the insured,
the COINSURANCE PENALTY will not go into effect. The amount of insurance
required is usually expressed as a percentage of the value of the
property insured at the time the loss is incurred; however, the
amount may also be expressed as a flat dollar amount. See also
COINSURANCE; COIN-SURANCE PERCENTAGE.

COINSURER party that shares in the loss under an insurance

policy or policies. See also COINSURANCE; COINSURANCE LIMIT; COINSURANCE PENALTY;
COINSURANCE PERCENTAGE; COINSURANCE REQUIREMENT.

COLD CALL (COLD CANVASSING) call on a prospective

insurance buyer without a prior appointment. Many salespeople
find this exercise the most threatening in their career development.
Some observers attribute the substantial failure rate among new
agents to their repugnance to cold calls.
COLD CANVASSING see COLD CALL (COLD CANVASSING).
 Page 91
COLLATERAL ASSIGNMENT designation of a policy's death
benefit or its cash surrender value to a creditor as security for a
loan. If the loan is not repaid, the creditor receives the policy
proceeds up to the balance of the outstanding loan, and the
beneficiary receives the remainder. Because life insurance is freely
assignable it is readily acceptable to lending institutions as security.
Also, the lender is certain to receive the money should death strike
the borrower before the loan can be repaid.
COLLATERAL BOND BOND that provides additional security
for a loan.
COLLATERAL BORROWER individual who assigns rights to a
benefit. For example, a life insurance policy may be assigned as
security for a loan made by the borrower. The policy protects the
COLLATERAL CREDITOR (ASSIGNEE) if the borrower does not pay the loan when

due. If a loan remains unpaid at the death of an insured, the loan

balance is subtracted from the death benefit and paid to the
creditor, with the balance going to the insured's beneficiary. On the
other hand, if the insured (the borrower) does not pay the loan
when due, the creditor can withdraw the amount due from the cash
value of the policy. When a loan is repaid, the assignment ends and
the policyowner is again vested with all rights to the policy.
COLLATERAL CREDITOR (ASSIGNEE) individual to whom
rights to a benefit are assigned. A life insurance policy is assigned
by the COLLATERAL BORROWER (assignor) to the collateral creditor
(assignee) as security for a loan. See also COLLATERAL BORROWER.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs)
bonds that are secured by mortgage securities classified as either
interest only or principal only strips (separate trading of registered
interest and principal of securities). Insurance companies find
CMOs desirable because of their predictable cash flow patterns.
COLLATERAL SOURCE RULE judicial rule of evidence under
which no reduction in damages awarded by a court is allowed for
bodily injury, sickness, illness, or accident merely because the
plaintiff has other financial sources paying benefits such as HEALTH
INSURANCE and DISABILITY INCOME INSURANCE.

COLLECTION BOOK record a debit (or other) agent makes for

premiums collected, time period for which the policy is paid, and
the week of collection or date the premium was paid. In essence,
the debit agent, through the collection book, becomes a bookkeeper
as well as a salesperson, since at the end of each week the agent
has to balance the debit book, which in some instances is time
consuming. See also DEBIT AGENT.
COLLECTION COMMISSION commission paid to an agent as a
percentage of the premiums he or she collects on DEBT INSURANCE (HOME
SERVICE INSURANCE, INDUSTRIAL INSURANCE).
 Page 92
COLLECTION EXPENSE INSURANCE see ACCOUNTS RECEIVABLE
INSURANCE.

COLLECTION FEE fee paid to an agent as compensation for his

or her collecting premiums for DEBIT INSURANCE (HOME SERVICE INSURANCE,
INDUSTRIAL INSURANCE).

COLLECTIVE MERCHANDISING OF INSURANCE see MASS

MERCHANDISING.

COLLEGE OF INSURANCE four-year institution of higher

learning. The degree programs include insurance, risk
management, actuarial science, and financial services. Web site is
[Link]
COLLEGE RETIREMENT EQUITIES FUND (CREF) entity
maintained by the Teachers Insurance Annuity Association. The
fund essentially serves college faculties and staff, who pay
premiums through salary deductions toward a tax-sheltered
retirement variable annuity.
COLLISION physical contact of an automobile with another
inanimate object resulting in damage to the insured car. Insurance
coverage is available to provide protection against this occurrence.
See also PERSONAL AUTOMOBILE POLICY (PAP).
COLLISION DAMAGE WAIVER special property damage
coverage purchased by an individual renting an automobile under
which the rental company waives any right to recover property
damage to the automobile from that individual, regardless of who
is at fault. A significant fee is paid by the individual to the rental
company for this waiver for coverage that may already be provided
by a PERSONAL AUTOMOBILE POLICY (PAP).
COLLISION INSURANCE in automobile insurance, coverage
providing protection in the event of physical damage to the
insured's own automobile (other than that covered under
COMPREHENSIVE INSURANCE) resulting from COLLISION with another inanimate

object. See also PERSONAL AUTOMOBILE POLICY (PAP).

COLLUSION agreement between two or more individuals to
commit fraud. For example, an insured hires someone to burn
down this house in order to collect the insurance proceeds.
COMBINATION AGENCY life insurance company AGENCY that
sells ORDINARY LIFE INSURANCE and INDUSTRIAL LIFE INSURANCE.
COMBINATION AGENT representative of an insurance company
who sells ordinary and industrial life insurance policies. In an
effort to move their field forces into the ordinary life business,
many industrial companies have systematically trained their agents
to sell ordinary life policies.
COMBINATION COMPANY life insurance company whose
agents sell ORDINARY LIFE INSURANCE and INDUSTRIAL LIFE INSURANCE.
 Page 93
COMBINATION POLICY (PLAN)
1. a contract in life insurance that includes elements of whole life
and term insurance.
2. in pensions, a combined life insurance policy and a side
(auxiliary) fund to enhance the amount of a future pension.
3. in automobile insurance, different coverages using policies of
two or more insurance companies (rare).
COMBINATION SAFE DEPOSITORY INSURANCE covers
property damage and theft coverage in two areas not subject to a
coinsurance requirement or a deductible.
Coverage A. If the bank becomes liable for loss to a customer's
property while that property is: (1) on the bank's premises in safe
deposit boxes in the vault; or (2) being deposited into or taken out
of the safe deposit boxes.
Coverage B. Loss to the bank customer's property due to burglary
or robbery, whether actual or attempted, even if the bank is not held
liable.
COMBINED RATIO in insurance, combination of the LOSS RATIO and
the EXPENSE RATIO:

The combined ratio is important to an insurance company since it

indicates whether or not the company is earning a profit on the
business it is writing, not taking into account investment returns on
the premiums received. The property and casualty insurance
business sometimes goes through cycles. During the 1980s, for
instance, it was not unusual to have a combined ratio of over 120%.
Obviously, the difference has to be made up from the company's
surplus, which in some instances even put the major companies
under severe financial strain.
COMBINED SINGLE LIMIT bodily injury liability and property
damage liability expressed as a single sum of coverage.
COMMENCEMENT OF COVERAGE date at which insurance
protection begins.
COMMERCIAL BLANKET BOND coverage of the employer for
all employees on a blanket basis, with the maximum limit of
coverage applied to any one loss without regard for the number of
employees involved. Both commercial and position blanket bonds
work the same way if only one employee causes the loss, or if the
guilty employee(s) cannot be identified. For example, five
identifiable employees as a team steal $50,000. A $10,000 BLANKET
POSITION BOND would cover the loss in full. A $50,000 commercial

blanket bond would be required to repay the insured business for

the same loss.
 Page 94
COMMERCIAL CREDIT INSURANCE coverage for an insured
firm if its business debtors fail to pay their obligations. The insured
firm can be a manufacturer or a service organization but it cannot
sell its products or service on a retail level to be covered under
commercial credit insurance. Under this form of insurance, the
insured firm assumes the expected loss up to the retention amount
and the insurance company pays the excess losses above that
amount, up to the limits of the credit insurance policy.
COMMERCIAL CRIME COVERAGE FORM type of commercial
insurance that provides coverage for the business under the
following policy forms:
1. Form Aemployee dishonesty involving money, securities, and
other properties and may be written on a BLANKET INSURANCE or SCHEDULED
POLICY basis.

2. Form Bforgery or alteration involving outgoing checks, drafts,

promissory notes, and other similar financial instruments.
3. Form Ctheft, disappearance, and destruction of money and
securities.
4. Form Drobbery and safe burglary (property excluding money
and securities) involving losses inside or outside the premises of
the insured business.
5. Form Epremises burglary involving property (excepting money
and securities) inside the premises of the insured business.
6. Form Fcomputer fraud involving money, securities, and property
other than money and securities.
7. Form Gextortion involving money, securities, and property that
does not include money and securities.
8. Form Hpremises theft and robbery outside premises other than
money and securities.
9. Form Ilessees of safe deposit boxes involving theft,
disappearance, or destruction of securities or property other than
money and securities while in a vault or during the deposit or
withdrawal from a safe deposit box on the premises of the insured.
10. Form Jsecurities deposited with others involving theft,
disappearance, or destruction of securities that are on the inside of
the premises of a custodian (party to which the insured has
transferred the securities), or while the securities are outside the
premises of the custodian in the possession of an employee of the
custodian, or while the securities have been deposited by the
custodian into a depository.
11. Form Kliability for guest's property in a safe deposit box
involving property damage or loss.
12. Form Lliability for guest's property while on the premises of
the business or in the possession of the business involving loss or
damage to that property.
13. Form Msafe depository liability involving loss, damage, or
destruction to the customer's property while on the premises of
 Page 95
the business in a safe deposit box, in a vault, or while being
transferred to and from safe deposit boxes or vaults. The legal
liability of the business for the customer's loss has to be
established.
14. Form Nsafe depository direct loss involving loss, damage, or
destruction of the customer's property while on the premises of the
business in a safe deposit box, in a vault, or while being transferred
to and from safe deposit boxes or vaults. The legal liability of the
business for the customer's loss does not have to be established.
15. Form Opublic employees' dishonesty for loss involving money,
securities, or property that does not include money and securities.
This form is usually written to provide coverages for public entities
such as schools and universities.
16. Form Ppublic employees' dishonesty for employee involving
money, securities, or property that does not include money and
securities. This form is usually written to provide coverages for
public entities such as cities, public utilities, and public hospitals.
17. Form Qrobbery and safe burglary of money and securities
when in the custody of the custodian inside the premises, or when
in the custody of a messenger outside the premises.
18. Form Rmoney orders and counterfeit paper currency involving
their acceptance in good faith by the business in exchange for
money, services, or merchandise.
The above 18 coverage forms can be combined in various ways to
produce numerous plans of insurance. For example, STOREKEEPERS
BURGLARY AND ROBBERY INSURANCE would combine forms D, E, and Q. OFFICE
BURGLARY AND ROBBERY INSURANCE would combine forms D, H, and Q.

COMMERCIAL FORGERY POLICY coverage for an insured

who unknowingly accepts forged checks. Coverage can be found
under the SPECIAL MULTIPERIL INSURANCE (SMP) policy (SECTION III CRIME COVERAGE
INSURING AGREEMENT 5DEPOSITORS FORGERY).

COMMERCIAL FORMS insurance policies covering various

business risks.
COMMERCIAL GENERAL LIABILITY FORM (CGL) liability
coverage section of a SIMPLIFIED COMMERCIAL LINES PORTFOLIO POLICY (SCLP).
Provides for separate limits of coverage for general liability, fire
legal liability, products and completed operations liability,
advertising and personal liability, and medical payments. An
AGGREGATE LIMIT of liability is in force for the general liability, fire legal

liability, advertising and personal liability, and medical payments

claims. When total claims for all of these areas exceed a given
annual aggregate limit of liability, the policy limits are said to be
exhausted and no more claims for that year will be paid under the
policy. There is also an aggregate limit of liability in force for
products and completed operations liability claims. This form has
replaced the COMPREHENSIVE GENERAL LIABILITY INSURANCE (CGL) form.
 Page 96
COMMERCIAL HEALTH INSURANCE coverage that provides
two types of benefits, DISABILITY INCOME (DI) and medical expenses. Sold
by insurance companies whose business objective is the profit
motive (as distinct from Blue Cross/Blue Shield) it can be
classified by its RENEWAL PROVISION, and types of benefits provided.
1. Renewal Provisions: (a) Optionally renewable. The insurance
company has the option to renew the policy at the end of the term
period (one year, six months, three months, or one month). If the
company renews the policy, it has the option to adjust the premium
up or down; limit the types of perils insured against; and limit some
or all of the benefits. (b) Nonrenewable for stated reasons only.
When the insured reaches a certain age or when all similar policies
are not renewed, the policy is said to be nonrenewable for the
reasons stated. (c) Noncancellable. The insurance company must
renew the policy and cannot change any of the provisions of the
policy nor raise the premium while the policy is in force. (d)
Guaranteed renewable. The company must renew the policy but the
company has the option to adopt a new rate structure for the future
renewal premiums.
2. Benefits Provided: (a) Disability income for total and partial
disability subject to a maximum dollar amount and maximum
length of time. Limitations include: pre-existing injury or
condition; elimination period beginning with the first day of
disability during which no benefits are paid; probationary period
during which no benefits are paid for a sickness contracted or
beginning during the first 15, 20, 25, or 30 days that the policy is in
force; a recurrent disability such that before the current disability
will be deemed to be a new disability, the insured must have
returned to full time continuous employment for at least six
months. (b) medical expense benefits for hospital charges for room,
board, nursing, use of the operating room, physicians and surgeons
fees; and miscellaneous medical expenses for laboratory tests,
drugs, medicines, X-rays, anesthetics, artificial limbs, therapeutics,
and ambulance service to and from the hospital.
COMMERCIAL INSURANCE insurance sold by privately formed
insurance companies with the objective of making a profit.
COMMERCIAL INSURANCE COMPANY privately formed
insurance company whose objective is to make a profit.
COMMERCIAL LINES insurance coverages for businesses,
commercial institutions, and professional organizations, as
contrasted with PERSONAL INSURANCE. See also BUSINESS AUTOMOBILE POLICY (BAP):
BUSINESS CRIME INSURANCE; BUSINESS INCOME COVERAGE FORM; BUSINESS LIFE AND HEALTH

INSURANCE; BUSINESSOWNERS POLICY (BOP); BUYAND-SELL AGREEMENT; CLOSE CORPORATION PLAN;

COMMERCIAL GENERAL LIABILITY FORM (CGL); PARTNERSHIP LIFE AND HEALTH INSURANCE; SIMPLIFIED

COMMERCIAL LINES PORTFOLIO POLICY (SCLP); SOLE PROPRIETOR LIFE AND HEALTH INSURANCE.
 Page 97
COMMERCIAL MULTIPLE PERIL POLICY see COMMERCIAL PACKAGE
POLICY (CPP)

COMMERCIAL PACKAGE POLICY (CPP) insurance policy that

is COMMERCIAL LINES in orientation and is composed of two or more of
the following coverages: COMMERCIAL PROPERTY, BUSINESS CRIME, BUSINESS
AUTOMOBILE, BOILER AND MACHINERY, COMMERCIAL GENERAL LIABILITY (CGL), INLAND MARINE

INSURANCE , and FARMOWNERS and RANCHOWNERS INSURANCE.

COMMERCIAL POLICY see COMMERCIAL HEALTH INSURANCE.
COMMERCIAL PROPERTY FLOATER means of providing
insurance protection for the property of a business that is not at a
fixed location.
COMMERCIAL PROPERTY FORM ENDORSEMENT to the STANDARD FIRE
POLICY increasing the insurance protection to an ALL RISKS basis.

COMMERCIAL PROPERTY POLICY coverage for business risks

including goods in transit, fire, burglary, and theft. A common
example is the COMMERCIAL PACKAGE POLICY (CPP).
COMMINGLED TRUST FUND pooling of assets of two or more
pension funds under common portfolio management.
COMMISSION fee paid to an insurance salesperson as a
percentage of the premium generated by a sold insurance policy.
COMMISSION, CONTINGENT COMMISSION that is paid based on
how profitable a particular type of business proves to be that is
written by an AGENT.
COMMISSIONER OF INSURANCE (INSURANCE
COMMISSIONER, SUPERINTENDENT OF INSURANCE) top
state regulator of the insurance business who is either elected to
office or appointed by a state to safeguard the interests of
policyowners.
COMMISSIONERS ANNUITY RESERVE VALUATION
METHOD (CARVM) term for statutory reserves for annuities that
can be calculated using various methods but at the minimum, the
reserve must be at least equal to the CARVM. The CARVM equals
the greatest present value of future guaranteed benefits to include
NONFORFEITURE BENEFITS in excess of future required premiums. Not

included in this calculation are expenses and policy lapses.

COMMISSIONERS STANDARD INDUSTRIAL MORTALITY
TABLE (CSI) table used in calculating various nonforfeiture values
for industrial life insurance policies. These tables give the
minimum values that must be generated to the policyowner. The
insured's life expectancy, according to the Commissioners Standard
Industrial Mortality Table, is shorter than the life expectancy given
in ordinary life tables such as the COMMISSIONERS STANDARD ORDINARY MORTALITY
 Page 98
. Thus the Industrial Mortality Table's premiums are
TABLE (CSO)

relatively higher than those based on the CSO Table. This is

because the life expectancy of purchasers of industrial policies
tends on average to be less than that of people who buy ordinary
life policies.
COMMISSIONERS STANDARD ORDINARY MORTALITY
TABLE (CSO) table used in calculating minimum nonforfeiture
values and policy reserves for ordinary life insurance policies.
These tables, which give minimum values that must be guaranteed
to policy-owners as approved by the NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS (NAIC), depict the number of people dying each year out of

the original population, not as individuals, but in age groups.

COMMISSIONERS VALUES specific values of securities
computed annually by the NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)
as guidelines and procedures for insurance companies in listing of
their securities in their annual statements. Values are the same for
all insurers. This gives insurance commissioners a basis for valuing
securities and ensuring that a company has sufficient assets to back
up the reserve requirements.
COMMISSION OF AUTHORITY powers of an AGENT delegated by
an insurance company and shown in the form of a document.
COMMITMENT insurance company's promise to insure particular
risks.
COMMON CARRIER transportation firm that must carry any
customer's goods if the customer is willing to pay. Common
carriers include trucking companies, bus lines, and airlines. See
also INLAND MARINE INSURANCE.
COMMON DISASTER CLAUSE (SURVIVORSHIP CLAUSE)
wording in life insurance policies to determine the order of deaths
when the insured and the beneficiary die in the same accident. For
example, if the insured is deemed to have died first, the proceeds
are payable to a named contingent beneficiary. Otherwise, the
proceeds are payable to the insured's estate and are subject to
probate and other legal fees.
COMMON LAW legal system in the United States, Great Britain,
and other countries. Inherited from England, it is based on case
decisions acting as the precedent, not on written law. See also
STATUTORY LIABILITY.

COMMON LAW DEFENSES arguments composed of ASSUMPTION OF

RISK, CONTRIBUTORY NEGLIGENCE, and FELLOW SERVANT RULE.

COMMON POLICY DECLARATIONS see DECLARATION; DECLARATIONS

SECTION.

COMMON STOCK INVESTMENTS allocation of monetary

resources to equities.
 Page 99
COMMON TRUST FUND see COMMINGLED TRUST FUND.
COMMUNITY PROPERTY all property acquired after marriage,
deemed to be the result of the joint efforts of both spouses
(regardless of whether or not only one spouse has earned income).
Each spouse is entitled to one half of the property. Community
property states are Arizona, California, Hawaii, Idaho, Louisiana,
New Mexico, Oklahoma, Texas, and Washington.
COMMUTATION in LIFE INSURANCE, the exchange of a series of
installment payments, as the result of an INSTALLMENT SETTLEMENT, for a
LUMP SUM DISTRIBUTION.

COMMUTATION RIGHT right of a BENEFICIARY of a LIFE INSURANCE POLICY

to exchange the future installments due that beneficiary for a LUMP
SUM DISTRIBUTION.

COMMUTE see COMMUTATION RIGHT.

COMMUTED VALUE see COMMUTATION RIGHT.
COMPANY ORGANIZATION see INSURANCE COMPANY ORGANIZATION.
COMPARATIVE INTEREST RATE METHOD see LINTON YIELD
METHOD.

COMPARATIVE NEGLIGENCE in some states, principle of tort

law providing that in the event of an accident each party's
negligence is based on that party's contribution to the accident. For
example, if in an auto accident both parties fail to obey the yield
sign, their negligence would be equal, and neither would collect
legal damages from the other.
COMPENSATING BALANCES PLAN premium paid by an
insured business to an insurance company from which the company
subtracts charges for the cost of putting a policy on its books,
premium taxes, and profit. The remainder of the premium is
deposited in the insured business's bank account from which the
insured business can make withdrawals.
COMPENSATORY DAMAGES see LIABILITY, CIVIL DAMAGES AWARDED.
COMPETENCE capacity of parties to an insurance contract to
under-stand the meanings of their action in order for the contract to
be valid.
COMPETITIVE STATE FUND see MONOPOLISTIC STATE FUND.
COMPLETED OPERATIONS INSURANCE coverage for a
contractor's liability for injuries or property damage suffered by
third parties as the result of the contractor completing an operation.
The contractor must take reasonable care in rendering a project safe
and free from all reasonable hazards. See also COMMERCIAL GENERAL
LIABILITY FORM (CGL).
 Page 100
COMPLETION BOND protection for a mortgagee guaranteeing
that the mortgagor will complete construction. The mortgagee
(such as a savings and loan association) lends money to the
mortgagor (the owner of the project) in order to pay the contractor
who is actually physically building the project. Upon completion,
the project then serves to secure the loan. Should the project not be
completed, the mortgagee is protected through the completion
bond.
COMPOUND INTEREST accumulation of interest yearly or more
frequently, including interest paid on interest.
COMPOUND PROBABILITY theory that the PROBABILITY that two
independent events will occur is equal to the probability that one
independent event will occur times the probability that a second
INDEPENDENT EVENT will occur. For example, on a single toss of two

dimes (each dime having a head and a tail), the probability that
both will land on their tails is equal to 1/4 (1/2 x 1/2).
COMPREHENSIVE AUTOMOBILE LIABILITY INSURANCE
see AUTOMOBILE LIABILITY INSURANCE; COMPREHENSIVE INSURANCE.
COMPREHENSIVE CRIME ENDORSEMENT attachment to a
COMMERCIAL PACKAGE POLICY to cover counterfeit currency, depositor's

forgery, employee dishonesty, and the loss of money, money

orders, and securities by the insured business. See also COMMERCIAL
PACKAGE POLICY for a listing of actual coverages available.

COMPREHENSIVE ENVIRONMENTAL RESPONCE,

COMPENSATION, AND LIABILITY ACT OF 1980 (ERCLA)
act that makes the liability cost for cleanup joint and several. Even
if a party is only partially responsible for losses inflicted, that party
may be liable for the payment of the total cost involved in the
cleanup. This liability is retroactive without stipulation as to time
limit.
COMPREHENSIVE GENERAL LIABILITY INSURANCE
(CGL) coverage against all liability exposures of a business unless
specifically excluded. Coverage includes products, completed
operations, premises and operations, elevators, and independent
contractors. This form has been replaced by the COMMERCIAL GENERAL
LIABILITY FORM (CGL).

Products coverage insures when a liability suit is brought against

the manufacturer and/or distributor of a product because of
someone incurring bodily injury or property damage through use of
the product. (The manufacturer of the prouct must use all
reasonable means to make certain that the product is free from any
inherent defect.)
Completed operations coverage for bodily injury or property
damage incurred because of a defect in a completed project of the
insured.
Premises and operations coverage for bodily injury incurred on the
premises of the insured, and/or as the result of the insured's
business operations.
 Page 101
Elevator coverage for bodily injury incurred in an elevator or
escalator on the insured's premises.
Independent contractors coverage for bodily injury incurred as the
result of negligent acts and omissions of an independent contractor
employed by the insured.
COMPREHENSIVE GLASS INSURANCE coverage on an ALL RISKS
basis for glass breakage, subject to exclusions of war and fire.
Thus, if a vandal throws a brick through a window of an insured's
establishment, the coverage would apply.
COMPREHENSIVE HEALTH INSURANCE complete coverage
for hospital and physician charges subject to deductibles and
coinsurance. This coverage combines basic medical expense policy
and major medical policy. See also GROUP HEALTH INSURANCE; HEALTH
MAINTENANCE ORGANIZATION (HMO).

COMPREHENSIVE INSURANCE coverage in automobile

insurance providing protection in the event of physical damage
(other than COLLISION) or theft of the insured car. For example, fire
damage to an insured car would be covered under the
comprehensive section of the PERSONAL AUTOMOBILE POLICY (PAP).
COMPREHENSIVE LIABILITY INSURANCE policy providing
businesses with coverage for negligence based civil liability in: (1)
Bodily injury and property damage liability, on an occurrence
basis, resulting from the ownership, use, and/or maintenance of the
premises, completed operations and products. (2) Bodily injury and
property damage liability for operation of an elevator. (3) Medical
expenses resulting from bodily injury incurred by a member of the
general public through the use of the premises or involvement in
the operations. Medical expense reimbursement of the business is
without regard to fault of the business.
COMPREHENSIVE MAJOR MEDICAL INSURANCE see GROUP
HEALTH INSURANCE; HEALTH INSURANCE; HEALTH MAINTENANCE ORGANIZATION (HMO).

COMPREHENSIVE MEDICARE SUPPLEMENT insurance

policy designed to provide coverage for the DEDUCTIBLE amount and
the COINSURANCE amount required to be paid by the MEDICARE recipient.
Some of these policies will also continue to provide coverage for
hospital and nursing home expenses for a substantial amount or an
unlimited amount per period of confinement after Medicare
benefits have been exhausted. See also MEDIGAP INSURANCE.
COMPREHENSIVE PERSONAL LIABILITY INSURANCE
coverage such as HOMEOWNERS INSURANCE POLICYSECTION II on an ALL RISKS basis
for personal acts and omissions by the insured and residents of the
insured's household. Included are sports activities, pet
 Page 102
activities, and miscellaneous events such as someone tripping in an
insured's cemetery plot.
COMPREHENSIVE POLICY combination of several coverages to
protect the insured. For example, the COMPREHENSIVE HEALTH INSURANCE
policy combines the basic hospital plan with MAJOR MEDICAL INSURANCE to
cover medical expenses (room, board, surgical, and physician
expenses) and miscellaneous expenses (surgical dressings, drugs,
ambulance services, blood, and operating room). Many policies
have a maximum lifetime limit of $1 million for the insured and for
each member of the insured's family who is a dependent resident of
the insured's household. The COMPREHENSIVE PERSONAL LIABILITY INSURANCE
policy covers the insured for just about any negligent act or
omission that results in property damage or bodily injury to another
party, subject to the exclusions of automotive liability and
professional liability. The SPECIAL MULTIPERIL INSURANCE (SMP) policy provides
the businessowner with comprehensive property damage coverage
on an ALL RISKS basis.
COMPREHENSIVE THEFT, DISAPPEARANCE, AND
DESTRUCTION INSURANCE see THEFT, DISAPPEARANCE, AND DESTRUCTION
POLICY (FORM C).

COMPREHENSIVE ''3-D" POLICY see DISHONESTY, DISAPPEARANCE, AND

DESTRUCTION POLICY (3-D POLICY).

COMPULSORY AUTOMOBILE LIABILITY INSURANCE see

COMPULSORY INSURANCE.

COMPULSORY INSURANCE coverage required by the laws of a

particular state. For example, many states stipulate minimum
amounts of automobile liability insurance that must be carried. See
also FINANCIAL RESPONSIBILITY LAW.
COMPULSORY RETIREMENT AGE mandatory age of
retirement.
CONCEALMENT intention to withhold or secrete information. If
an insured withholds information on a material fact, about which
the insurance company has no knowledge, the company has
grounds to void the contract. For example, the insured neglects to
tell the company that, within a week of the policy issue date, the
manufacture of gunpowder in the insured business's building will
commence. If an explosion related to the gunpowder then occurs in
the building the company has legal grounds for not paying for the
property damage.
CONCURRENCY circumstance in which at least two insurance
policies provide identical coverage for the same risk. See also DOUBLE
RECOVERY.

CONCURRENT CAUSATION loss caused by two or more perils.

A certain amount of controversy exists when one of the perils is
insured and the other peril is excluded from coverage. Some courts
are begin-
 Page 103
ning to find that even if only one of the perils is insured against, the
policy providing the coverage for that peril must pay the damages.
CONCURRENT INSURANCE see CONCURRENCY.
CONDITION action(s) that the insured must take, or continue to
take, for the insurance policy to remain in force and the insurance
company to process a claim. For example, the insured must pay the
premiums when due, notify the insurance company as soon as
possible in the case of an accident, and cooperate with the company
in defense of the insured in case of a liability suit.
CONDITIONAL terms specifying obligations of an insured to keep
a policy in force. For example, an insured must pay the premiums
due; in life insurance, if death occurs, the beneficiary or the
insured's estate must submit proof of death; if there is a property
loss, the insured must submit proof of loss.
CONDITIONAL BINDING RECEIPT see BINDING RECEIPT; CONDITIONAL
RECEIPT.

CONDITIONAL INSURANCE see CONDITIONAL SALES FLOATER.

CONDITIONAL RECEIPT evidence of a temporary contract
obliging a life or health insurance company to provide coverage as
long as a premium accompanies an acceptable application. This
gives the company time to process the application and to issue or
refuse a policy, as the case may be. If the applicant were to die
before a policy is issued, the company will pay the death benefit if
the policy would have been issued. For example, Mr. A applies for
$100,000 of life insurance but is killed by an automobile before the
policy is issued. The company finds that it would have issued the
policy, and therefore pays $100,000 to the beneficiary. See also
BINDING RECEIPT.

CONDITIONAL RENEWABLE HEALTH INSURANCE

automatic right of an insured to renew a policy until a given date or
age except under stated conditions. It is extremely important for the
purchaser to review the conditions for renewal in order to make
sure of their acceptability.
CONDITIONAL SALES FLOATER coverage for the seller of
property on an installment or conditional sales contract if it is
damaged or destroyed. For example, a television set is sold on an
installment basis but is destroyed by a customer. The seller would
be indemnified for the loss.
CONDITIONAL VESTING see VESTING, CONDITIONAL.
CONDITION PRECEDENT contractual obligation that requires
one party to the contract to fulfill its obligation before another
party to the contract is required to fulfill its contractual obligation.
For example, under the HOMEOWNERS INSURANCE POLICY, in the event the
insured suffers a property loss, that insured must provide the
insurer with immediate
 Page 104
notice of the loss as well as an inventory of the damaged property
within 60 days of the occurrence of the loss.
CONDITIONS FOR QUALIFICATION rights and duties of an
insured as a prerequisite for collecting benefits. For example, in the
event of property damage, the insured may be required to submit
proof of loss to the insurance company.
CONDITION SUBSEQUENT termination of a contractual
obligation for immediate performance. For example, under the
HOMEOWNERS INSURANCE POLICY, if the INSURER refuses to pay a claim, the INSURED

(if not satisfied with the reason) must bring suit against the insured
within one year of having incurred the loss or he/she will forgo
forever the right to sue the insurer.
CONDOMINIUM INSURANCE coverage under the Homeowners
Form-4 (HO-4) for the insured's personal property and loss of use
against fire and/or lightning; vandalism and/or malicious mischief;
windstorm and/or hail; explosion, riot and/or civil commotion;
vehicles; aircraft; smoke; falling objects; weight of ice, sleet,
and/or snow; volcanic eruption; damage from artificially generated
electricity; freezing of plumbing, heating, air conditioning or
sprinkler system or household appliances; accidental tearing apart,
cracking, burning, or bulging of a steam or hot water heating
system, air conditioning system, or an automatic fire protective
sprinkler system.
CONFIDENCE LEVEL percentage of confidence in a finding. For
example, if an insurance company's total LOSS RESERVES should be
$10,000,000 in order to attain an 80% confidence level that enough
money will be available to pay anticipated claims, then, in 8 times
out of 10, after all claims have been settled the total claims paid out
will be less than $10,000,000. Conversely, in 2 times out of 10 the
total claims paid out will be greater than $10,000,000. In another
example, a 70% confidence level of one's house burning would
mean that the house would burn approximately once every 3.33
years [1 ÷ (10.70) = 3.33].
CONFINING CONDITION term describing illness, sickness, or
disability incurred by the insured such that the insured is restricted
to his or her home, a hospital, or a nursing home. Many HEALTH
INSURANCE policies provide benefits only if the insured is restricted in

such a manner.
CONFLAGRATION fire that spreads substantial destruction.
CONFUSION OF GOODS peril that occurs when personal
property of two or more people is mixed to such an extent that any
one owner can no longer identify his or her property.
CONSEQUENTIAL LOSS value of loss resulting from loss of use
of property. For example, a fire damages the structure of business
premises and the business loses customer income until it can
reopen. The loss in incomethe consequential losscan be covered
under
 Page 105
Basic property insurance policies, such as
BUSINESS INTERRUPTION INSURANCE.

the fire policy, do not cover the consequential or indirect loss.

CONSERVATION effort to keep life insurance policies from
lapsing. Many life insurance companies have conservation officers
who contact lapsing policyowners explaining the benefits of
keeping their policies in force. Often, the AGENT OF RECORD is notified of
policies in danger or in process of lapsing so that the agent may
also contact the policyowner.
CONSERVATOR court-appointed or COMMISSIONER OF INSURANCE-appointed
custodian to manage the affairs of an insurance company whose
management is deemed unable to manage that company in a proper
fashion. Usually such a company faces INSOLVENCY prior to the
appointment of the conservator.
CONSIDERATION
1. under contract law, anything of value exchanged for a promise or
for performance that is needed to make an instrument binding on
the contracting parties.
2. adherence to all provisions of an insurance policy by an insured;
for example, the insured agrees to make all premium payments
when due in order to maintain a policy in full force.
3. payment for an annuity. See also INSURANCE CONTRACT, LIFE; INSURANCE
CONTRACT, PROPERTY AND CASUALTY.

CONSIGNMENT INSURANCE coverage for items that are on

consignment, including exhibits, goods up for auction, and goods
awaiting someone's approval. The stipulation for coverage is that
these items cannot be under the care, custody, and control of the
owner.
CONSOLIDATED CAPTIVE consolidation of a noninsurance
parent company with its wholly owned subsidiary, thereby creating,
allowable under current tax law, a consolidated balance sheet. This
consolidation of balance sheets permits the offsetting of UNDERWRITING
LOSSES with taxable income of a noninsurance subsidiary.

CONSOLIDATED OMNIBUS BUDGET RECONCILIATION

ACT OF 1985, 1986, AND 1990 (COBRA) act that mandates that
employers who have at least 26 employees must provide a
terminating employee and family members, if residents of
employee's household, with health insurance coverage for periods
of time ranging from 18 to 36 months after termination. The
continued coverages end prior to the 18 to 36 months if: (1)
employer terminates all group health plans; (2) insured qualifies for
Medicare; (3) insured becomes covered under another group health
insurance plan that is not subject to any preexisting conditions; and
(4) required premium payments are not made when due. The
employer cannot require the employee to submit EVIDENCE OF INSURABILITY
as a condition for continuing the health insurance coverage, nor can
the employee be required to pay more than a premium of 102% of
the plan for coverage of same situated individuals.
 Page 106
CONSORTIUM UNDERWRITING method of underwriting by
which one or a group of LLOYD'S UNDERWRITERS write business on behalf
of a number of Lloyd's syndicates and other insurance companies.
Among the benefits of underwriting in this manner are that
potential earnings could equal the SYNDICATE'S expenses and stabilize
the planning of staff as well as other general overhead
requirements.
CONSTRUCTION BOND see BID BOND; COMPLETION BOND; LABOR AND MATERIAL
BOND; MAINTENANCE BOND; SURETY BOND.

CONSTRUCTION INSURANCE property coverage for damage or

destruction of structures in the course of construction. For example,
the standing frame of a house destroyed by fire would be covered.
See also BUILDER'S RISK PROPERTY INSURANCE.
CONSTRUCTIVE RECEIPT specific date determined by the
Internal Revenue Service on which a beneficiary has received a
death benefit from an insurance company, an ANNUITANT has received
an income benefit, or a retiree has received a retirement benefit.
CONSTRUCTIVE TOTAL LOSS partial loss of such significance
that the cost of restoring damaged property would exceed its value
after restoration. For example, an automobile is so badly damaged
by fire that fixing it would cost more than the restored vehicle
would be worth.
CONSULTANT in insurance, independent advisor who specializes
in pension and profit sharing plans. Usually a licensed insurance
agent.
CONSUMER CONFIDENCE INDEX measurement of how people
feel about prevailing economic conditions, employment outlook,
and personal finances. This index is based on statistics gathered
from questionnaires mailed by the Conference Board to a
nationwide representative sample of 5000 households, with a
response rate of 70%.
CONSUMER CREDIT PROTECTION ACT 1968 federal
legislation that makes it mandatory for lenders to disclose to credit
applicants the annual interest percentage rate (APR) and any
finance charge.
CONSUMER PRICE INDEX (CPI) measurement of the rate of
inflation according to a weighted market basket of goods and
services that includes such items as transportation costs, health care
costs, housing costs, and food costs. These statistics are released
monthly by the United States Bureau of Labor Statistics.
CONSUMER PRODUCTS SAFETY ACT OF 1972 act that
established mandatory notification by manufacturers of products
and the distributors of these products to the Consumer Product
Safety Commission in the event they become aware of a faulty
product, or part of that product, that could result in bodily injury
and/or property damage.
CONSUMER PROTECTION ACT see CONSUMER CREDIT PROTECTION ACT.
 Page 107
CONTENTS
1. in PERSONAL PROPERTY insurance, coverage is for personal property
items that are movable, that is, not attached to the building's
structure (the home), such as television sets, radios, clothes,
household goods. Not included under the coverage are animals,
automobiles, and boats.
2. in COMMERCIAL PROPERTY insurance, coverage is for the business's
personal property items that are movable, that is, not attached to
the building's structure such as inventory, machinery, equipment,
furniture, and fixtures. Not included under the coverage are
animals, automobiles, boats, and crops.
CONTENTS RATE premium rate charged on the property within a
building, but not on the building structure.
CONTESTABLE CLAUSE see INCONTESTABLE CLAUSE.
CONTIGUOUS adjoining.
CONTINGENCIES unexpected claims occurring above the
expected claims for which a CONTINGENCY RESERVE is maintained.
CONTINGENCY event that may or may not occur in a given time
period. For example, whether a specific person will die, or a
particular house will burn this year is a contingency.
CONTINGENCY RESERVE percentage of total surplus retained,
in insurance company operations, that serves as a reserve to cover
unexpected losses as well as to cover the shortfall if the earned
surplus in a particular year is not adequate to maintain a company's
announced dividend scale for participating policies.
CONTINGENCY SURPLUS see CONTINGENCY RESERVE.
CONTINGENT ANNUITANT see BENEFICIARY.
CONTINGENT ANNUITY contract providing income payments
beginning when the named contingency occurs. For example, upon
the death of one spouse (the contingency), a surviving spouse will
begin to receive monthly income payments.
CONTINGENT BENEFICIARY see BENEFICIARY.
CONTINGENT BUSINESS INCOME COVERAGE FORM
coverage for loss in the net earnings of a business if a supplier
business, sub-contractor, key customer, or manufacturer doing
business with the insured business cannot continue to operate
because of damage or destruction. For example, a specialty hot dog
stand noted for its great buns cannot sell its product if the bakery
supplier of hot dog buns burns down. In instances where a business
is heavily dependent on its suppliers or subcontractors, interruption
of the flow of material from the supplier usually results in a
substantial loss to the business.
 Page 108
CONTINGENT BUSINESS INCOME COVERAGE
INSURANCE see CONTINGENT BUSINESS INCOME COVERAGE FORM.
CONTINGENT FEE amount paid by the attorney of the plaintiff in
a liability suit. Usually the attorney receives as a fee from 30 to
50% of the case settlement or reward.
CONTINGENT LIABILITY (VICARIOUS LIABILITY) liability
incurred by a business for acts other than those of its own
employees. This particular situation may arise when an
independent contractor is hired. The business can be held liable for
negligent acts of the contractor to the extent that its representatives
give directions or exercise control over the contractor's employees.
CONTINGENT LIABILITY INSURANCE coverage for
contingent liability exposure. See CONTINGENT LIABILITY.
CONTINGENT TRANSIT INSURANCE coverage if an insured
cannot collect on property damage or destruction losses from the
hired transporter. For example, a truck transporting furniture of the
insured is involved in an accident and the furniture is damaged.
The truck owner refuses to compensate the insured for damages;
the recourse of the insured is to collect from the insurance
company.
CONTINUANCE TABLE table used in health insurance premium
rate calculations that depicts the probability that a claim will
continue by time and amount.
CONTINUING CARE RETIREMENT COMMUNITY retirement
center with a focus on group living arrangements for senior
citizens. The center has separate apartments for each resident as
well as an on-site nursing facility. Generally, these centers are quite
expensive; they require monthly fees as well as a one-time payment
(entrance fee). The monthly fee entitles the inhabitant to an
apartment, one to three meals a day (depending on the facility),
maid service (in some facilities), medical service (if needed), and
nursing home care (also, if needed).
CONTINUITY OF COVERAGE CLAUSE included in or attached to a
FIDELITY BOND designed to pay the losses that would have been paid

under another specific bond had that specific bond's period of

discovery not expired.
CONTINUOUS PREMIUM WHOLE LIFE see ORDINARY LIFE INSURANCE.
CONTRACT in insurance, agreement between an insurer and an
insured under which the insurer has a legally enforceable
obligation to make all benefit payments for which it has received
premiums.
CONTRACT ANNIVERSARY see POLICY ANNIVERSARY.
CONTRACT BOND a guarantee of the performance of a
contractor. In general, contract bonds are used to guarantee that the
contractor will
 Page 109
perform according to the specifications of the construction
contract. If the contractor fails to perform according to contract, the
insurance company is responsible to the insured for payment, up to
the limit of the bond, which is usually for an amount equal to the
cost of the construction project. The insurance company then has
recourse against the contractor for reimbursement. See also BID BOND;
PAYMENT BOND; PERFORMANCE BOND.

CONTRACT CARRIER transportation firm that carries only select

customers' goods and is not obligated to carry any particular
customer's goods even if that customer is willing to pay. Contrast
with COMMON CARRIER.
CONTRACT DATE date of issue of the policy.
CONTRACT HOLDER in insurance, individual with rightful
possession of an insurance policy, usually the policyowner.
CONTRACT INCEPTION AND TIME OF LOSS see CLAIMS MADE
BASIS; CLAIMS OCCURRENCE BASIS LIABILITY COVERAGE.

CONTRACT OF ADHESION see ADHESION INSURANCE CONTRACT.

CONTRACT OF INDEMNITY property and liability insurance
contracts that restore the insured to his/her original financial
condition after suffering a loss. The insured cannot profit by the
loss; otherwise an unscrupulous homeowner, for example, could
buy several fire insurance policies, set fire to the house, and collect
on all the policies.
CONTRACT OF INSURANCE see CONTRACT; HEALTH INSURANCE CONTRACT;
INSURANCE CONTRACT, GENERAL; INSURANCE CONTRACT, LIFE; INSURANCE CONTRACT, PROPERTY AND

CASUALTY.
CONTRACT OF UTMOST GOOD FAITH see UBERRIMAE FIDEL CONTRACT.
CONTRACTORS EQUIPMENT FLOATER form of marine
insurance that covers mobile equipment of a contractor, including
road building machinery, steam shovels, hoists, and derricks used
on the job by builders of structures, roads, bridges, dams, tunnels,
and mines. Coverage is provided on a specified peril or an ALL RISKS
basis, subject to exclusions of wear and tear, work, and nuclear
disaster.
CONTRACTORS EQUIPMENT INSURANCE see CONTRACTORS
EQUIPMENT FLOATER.

CONTRACT OWNER see CONTRACT HOLDER.

CONTRACTUAL LIABILITY liability incurred by a party
through entering into a written contract. See also CIVIL LIABILITY; CIVIL
WRONG.

CONTRIBUTE-TO-LOSS STATUTE law in some states that

permits an insurance company to deny payment of a claim resulting
from an insured loss because of breach of warranty or
misrepresentation,
 Page 110
provided that the breach of warranty or misrepresentation made a
material contribution to the loss.
CONTRIBUTING INSURANCE see CONTRIBUTION.
CONTRIBUTING PROPERTIES COVERAGE see CONTINGENT BUSINESS
INCOME COVERAGE FORM.

CONTRIBUTING PROPERTY BUSINESS INCOME COVERAGE FORM that covers

an insured business in the event that a manufacturer's operations
are interrupted or suspended, thereby resulting in a monetary loss
because a supplier of the insured has had his facility damaged or
destroyed by an insured peril. See also CONTINGENT BUSINESS INCOME COVERAGE
FORM.

CONTRIBUTION principle of equity in property, casualty, and

health insurance. When two or more policies apply to the loss, each
policy pays its part of the loss, unless its terms provide otherwise.
For example, if two policies each insure a risk for $100,000 and
there is a $50,000 loss, then each policy (depending on coinsurance
requirements) will pay $25,000. In employee benefits, payment
made by an employee.
CONTRIBUTION CLAUSE clause, generally found in BUSINESS
INTERRUPTION INSURANCE, that establishes the same indemnification basis

as the COINSURANCE clause.

CONTRIBUTION PRINCIPLE rule that concerns the distribution
of the aggregate SURPLUS among the policies in the same proportion
as each respective policy has contributed to the surplus.
CONTRIBUTORY employee benefit plans under which both the
employee and the employer pay part of the premium. Contribution
ratios vary. For example, an employer contributes two dollars for
every dollar contributed by the employee up to 6% of the
employee's salary.
CONTRIBUTORY NEGLIGENCE principle of law recognizing
that injured persons may have contributed to their own injury. For
example, by not observing the "Don't Walk" sign at a crosswalk,
pedestrians may cause accidents in which they are injured.
CONVENTIONAL MORTGAGE mortgage loan made by a lender
that is not insured by the VETERANS ADMINISTRATION (VA) or the FEDERAL HOUSING
ADMINISTRATION (FHA).

CONVENTION BLANK see ANNUAL STATEMENT.

CONVENTION EXAMINATION audit of the convention blank
(NAIC Statement Blank) every third year as to (1) all of the
financial activities of a company; (2) company claim practices; and
(3) general policyowner relations.
CONVENTION VALUES monetary sums attached to an insurance
company's assets, as listed on the ANNUAL STATEMENT.
 Page 111
CONVERSION
1. tort against another person's property, designed to detain or
dispose of it in a wrongful manner. For example, wrongful selling
of another person's automobile without permission would qualify
as an act of conversion.
2. in group life and health insurance, a provision that allows a
certificate holder to convert group coverage to an individual policy
under specified conditions.
CONVERSION FACTOR FOR EMPLOYEE CONTRIBUTIONS
inverse of the actuarial present value of a life annuity, taking the
employee's life expectancy into account, to commence income
payments at the NORMAL RETIREMENT AGE of the employee. It is used in a
DEFINED BENEFIT PLAN to determine the amount of accrued benefits that

result from the employee's contributions.

CONVERSION PRIVILEGE right of a certificate holder to convert
group life or group health insurance to an individual policy without
a physical examination to furnish evidence of insurability. Usually
this must be done within 31 days of termination of employment.
Under group life insurance, conversion is made at the employee's
attained age rate, which can be prohibitively costly in later years.
Many term life insurance policies can be converted to a whole life
policy at the insured's attained age, with no physical examination
required.
CONVERTIBLE see CONVERTIBLE TERM LIFE INSURANCE.
CONVERTIBLE TERM LIFE INSURANCE coverage that can be
converted into permanent insurance regardless of an insured's
physical condition and without a medical examination. The
individual cannot be denied coverage or charged an additional
premium for any health problems.
COOPERATIVE INSURANCE see SOCIAL INSURANCE.
COOPERATIVE INSURER mutual insurance association that
issues insurance to its members on a nonprofit basis. Examples of
such associations include fraternal societies, unions, and employee
membership groups.
COORDINATION OF BENEFITS arrangement in health insurance
to discourage multiple payment for the same claim under two or
more policies. When two or more group health insurance plans
cover the insured and dependents, one plan becomes the primary
plan and the other plan(s) the secondary plan(s). For example, two
working spouses have health insurance at their respective places of
employment. If one spouse becomes ill, his/her policy at work
would become the primary plan. Medical expenses not covered
under the primary plan would be covered under the secondary plan
of the other spouse. See also COINSURANCE.
 Page 112
COPAYMENT partial payment of medical service expenses
required in group health insurance, in addition to the membership
fee. For example, for each visit of a physician a member may be
required to pay $5, regardless of the expense of the services
rendered. Or, for each prescription for drugs and medicines, the
member may have to pay a flat $2 regardless of the actual cost.
CORPORATE ALTERNATIVE MINIMUM TAX:
IMPLICATIONS FOR CORPORATE-OWNED LIFE
INSURANCE tax that exhibits direct impact on the book income
preference. Beginning with the year 1990, the book income
preference became equal to 75% of the excess of current adjusted
earnings of the alternative minimum taxable income (AMTI). Book
income preferences are affected by corporate-owned life insurance
in the following situations:
1. If the insured dies, the excess of the life insurance policy's DEATH
BENEFIT over the CASH SURRENDER VALUE becomes book income to the

corporation.
2. If the insurance policy's annual premium exceeds the increase in
the cash surrender value for a particular year, the result is a decline
in the book income and thus a decline in the corporation's exposure
to the alternative minimum tax (AMT).
3. Conversely, if the insurance policy's cash surrender value
exceeds the increase in the annual premium for a particular year,
the result is an increase in the book income and thus an increase in
the corporation's exposure to the alternative minimum tax.
Generally, if the corporation in any given year has taxable income,
corporate-owned life insurance results in an alternative minimum
tax liability if a significant death benefit is paid to the corporation
upon the death of the insured. The result is that the alternative
minimum tax will cause a reduction in the net death benefit from
the life insurance policy paid to the corporation.
CORPORATE-OWNED LIFE INSURANCE insurance on the life
of the employee, paid for by the company, with the company being
the beneficiary under the policy. This insurance vehicle is being
used more and more to fund postretirement employee plans, in
which the cash values are listed as assets on the company's balance
sheet.
CORPORATION STOCK PURCHASE PLAN see CLOSE CORPORATION
PLAN.

CORRIDOR the space created between the total death benefit and
the cash value of a UNIVERSAL LIFE INSURANCE policy. An automatic increase
in the death benefit results when the CASH VALUE approaches the initial
face amount under Option A. If this space did not exist, the
universal life insurance policy would not qualify as a life insurance
policy under the definition of life insurance by the Internal
Revenue Code (IRC) and would cease to reap the favorable tax
treatment afforded life insurance policies by the IRC.
 Page 113
CORRIDOR DEDUCTIBLE type of major medical deductible
amount that acts as a corridor between benefits under a basic health
insurance plan and benefits under a major medical insurance plan.
After benefits are paid under the basic plan, a fixed dollar per-loss
deductible amount often is required of the insured (benefits paid
under the basic plan do not apply towards this deductible) before
major medical benefits are paid.
COST see PREMIUM, PURE PREMIUM RATING METHOD.
COST ALLOCATION METHOD method of funding a pension
plan through: (1) an individual level cost basis, where future
benefits for the employee are estimated and contributions are made
periodically while the employee is working to fund these future
benefits; or (2) an aggregate level cost basis, where future benefits
for all current employees are estimated and aggregate contributions
are made periodically while the current employees are working to
fund these future benefits.
COST-BENEFIT ANALYSIS comparison of the cost of a solution
and the economic benefits that would accrue if the solution is put
into effect. This analysis is a prerequisite to the installation of an
employee benefit plan. Questions to be answered include: (1) will
the cost result in greater loyalty of employees? (2) will the cost
result in greater productivity; and (3) will the benefits encourage
employees to participate in their cost?
COST CONTAINMENT PROVISION in many HEALTH INSURANCE and
DENTAL INSURANCE policies, stipulation that, if the estimated cost of a

recommended plan of treatment exceeds a specified sum, the

insured must submit the plan of treatment to the insurance
company for review and predetermination of benefits before
service begins. Usually, however, predetermination of benefits is
not necessary for emergency treatment.
COST OF INSURANCE value or cost of the actual net protection,
in life insurance, in any year (face amount less reserve) according
to the yearly renewal term rate used by an insurance company. See
also INTEREST ADJUSTED COST.
COST-OF-LIVING ADJUSTMENT (COLA) automatic
adjustment applied to Social Security retirement payments when
the consumer price index increases at a rate of at least 3%, the first
quarter of one year to the first quarter of the next year. See also
RIDERS, LIFE POLICIES.

COST-OF-LIVING INCREASE see COST-OF-LIVING ADJUSTMENT (COLA); COST-OF-

LIVING RIDER.

COST-OF-LIVING PLAN plan providing benefits that are adjusted

according to variations in a specified index of prices. For example,
some pension plans adjust retirement benefits yearly according to
the rise in the Consumer Price Index (CPI).
 Page 114
COST-OF-LIVING RIDER usually term insurance for one year
added to a basic life insurance policy. In effect, this increases or
decreases the face amount of the basic policy to reflect cost-of-
living changes as measured by the Consumer Price Index (CPI).
This rider can also be used in conjunction with a disability income
policy in which the income benefit is adjusted to reflect
fluctuations in the CPI.
COST OF LOSS see EXPECTED LOSS.
COST OF PROTECTION see COST OF INSURANCE; PREMIUM; PURE PREMIUM RATING
METHOD.

COST OF RISK (COR) quantitative measurement of the total costs

(losses, risk control costs, risk financing costs, and administration
costs) associated with the RISK MANAGEMENT function, as compared to a
business's sales, assets, and number of employees. The purpose of
such a comparison is to determine whether the total costs of the
risk management function are increasing, decreasing, or remaining
constant as a function of the business's economic activity. After the
quantitative measurement has been derived, a comparison can be
made between the COR of that business and the CORs of its peer
groups. In addition, COR will allow the business to focus on the
areas of operation that will have the greatest long-term effects on
its total risk management function costs.
COST PLUS insured plan under which the insurance company
agrees to provide the insured with a series of benefits on a benefits-
paid basis plus administrative services on a stipulated-fee basis.
This plan enables the POLICYHOLDER to control more of its own cash
flow than it can under traditional insurance plans. While this plan is
similar to the ADMINISTRATIVE SERVICES ONLY (ASO) plan, it is dissimilar in that
it is an insured plan.
COTTON INSURANCE coverage for property damage by a
covered peril to insured cotton during the time period from its
weighing in at the gin until its delivery to the buyer. Written either
on a specified peril basis or on an ALL RISKS basis. The purpose of
cotton insurance is much the same as the purchase of insurance by
a merchant to protect business inventory prior to its sale, since in
many instances the primary asset is the inventory.
COUNTERSIGNATURE licensed AGENT'S signature on an insurance
policy.
COUNTERSIGNATURE LAW state law that requires that an
insurance policy issued by an insurance company in a particular
state be signed by an AGENT of the company holding a LICENSE in that
state.
COUPON fixed or stated amount of interest paid by a security
expressed as a percent of the par value of the security. The longer
the length of time until maturity, the higher the coupon rate to
reflect the greater risk associated with a longer loan period. The
higher the creditworthiness
 Page 115
of the borrower, the lower the coupon rate. For example, United
States Treasury issues have a low coupon rate because the United
States has a long history of political and economic stability.
COUPON POLICY nonparticipating life insurance (also called a
guaranteed dividend or guaranteed investment policy) sold by a
stock life insurance company, usually as a 20-payment policy with
coupons attached. The policyowner can cash in each coupon
(which is actually one of a series of pure endowments) for a
stipulated sum at the time of paying the annual premium.
COURT BOND see JUDICIAL BOND.
COVER to place insurance in force on an individual. individuals,
or an organization. See also CONTRACT; COVERAGE, INDIVIDUAL; COVERAGE, LOCATION;
COVERAGE OF HAZARD; COVERAGE, PERIL; COVERAGE, PROPERTY; COVERED EXPENSES.

COVERAGE protection under an insurance policy. In property

insurance, coverage lists perils insured against, properties covered,
locations covered, individuals insured, and the limits of
indemnification. In life insurance, living and death benefits.
COVERAGE, INDIVIDUAL see INDIVIDUAL INSURANCE.
COVERAGE, LOCATION see PROPERTY INSURANCE, COVERAGE.
COVERAGE OF HAZARD see HAZARD INCREASE RESULTING IN SUSPENSION OR
EXCLUSION OF COVERAGE.

COVERAGE PART section of the INSURANCE POLICY that lists all of the
provisions that are applicable to the insurance coverage provided
under that section. This section is attached to the policy JACKET
(which lists the provisions common to all the insurance coverages)
to form the insurance policy.
COVERAGE, PERIL see ALL RISKS; PROPERTY INSURANCE, COVERAGE.
COVERAGE, PROPERTY see PROPERTY INSURANCE, COVERAGE.
COVERED see COVERAGE.
COVERED EXPENSES
1. in health insurance, reimbursement for an insured's medically
related expenses, including room and board, surgery, medicines,
anesthetics, ambulance service to and from a hospital, operating
room expenses, X-ray, and fluoroscope.
2. in business interruption insurance, reimbursement of an insured
for loss if a business cannot operate, including payroll expense and
taxes.
3. in extra expense insurance, reimbursement of an insured for
extra expenditures made to keep a business operating even under
emergency conditions.
 Page 116
COVERED EXPENSES, PRO RATA DISTRIBUTION CLAUSE
see DOUBLE RECOVERY; PRO RATA DISTRIBUTION CLAUSE.
COVERED LOCATION, PROPERTY INSURANCE see PROPERTY
INSURANCE, COVERAGE.

COVERED LOSSES see LOSS.

COVERED PERSON, PROPERTY INSURANCE see PROPERTY
INSURANCE, COVERAGE.

COVER NOTE statement made by AGENT or BROKER in written form

attesting to the INSURED that the insurance policy is in effect. This
statement is prepared by the agent or broker, unlike the BINDER,
which is prepared by the INSURANCE COMPANY (INSURER).
CPCU see CHARTERED PROPERTY AND CASUALTY UNDERWRITER (CPCU).
CPL see COMPREHENSIVE GENERAL LIABILITY INSURANCE (CGL).
CREDIBILITY OF LOSS EXPERIENCE see LOSS DEVELOPMENT.
CREDIT CARD FORGERY see CREDIT CARD INSURANCE.
CREDIT CARD INSURANCE coverage under a HOMEOWNERS INSURANCE
POLICY in the event that a credit card is fraudulently used or altered.

Fraud includes theft and the unauthorized use of a credit card.

CREDIT HEALTH INSURANCE coverage issued to a creditor on
the life of a debtor so that if the debtor becomes disabled, the
insurance policy pays the balance of the debt to the creditor.
CREDIT INSURANCE see CREDIT HEALTH INSURANCE; CREDIT LIFE INSURANCE
(CREDITOR LIFE INSURANCE).

CREDIT INVESTIGATION see RETAIL CREDIT REPORT.

CREDIT LIFE INSURANCE (CREDITOR LIFE INSURANCE)
insurance issued to a creditor (lender) to cover the life of a debtor
(borrower) for an outstanding loan. If the debtor dies prior to
repayment of the debt, the policy will pay off the balance of the
amount outstanding. Credit life insurance is sold on a group or
individual basis, and usually is purchased to cover small loans of
short duration. When issued under a group policy, a certificate is
issued to the debtor, the master policy being issued by the creditor.
The face value of a credit life insurance policy decreases in
proportion to the reduction in the loan amount until both equal
zero.
CREDITOR LIFE INSURANCE see CREDIT LIFE INSURANCE (CREDITOR LIFE
INSURANCE).

CREDITOR RIGHTS IN LIFE INSURANCE see LIFE INSURANCE,

CREDITOR RIGHTS.
 Page 117
CREDIT, PENSION PLAN value of benefit or contribution
allocated to an employee under a pension plan; method of
determining benefits due a retired employee. Each private pension
plan establishes rules for awarding credits to employees, taking
into account age, amount of time with the employer, number of
days worked per year, breaks in service, maximum salary, and
position in the company. For an employee who joined a firm before
the plan was put in place, the company computes past service
credit, crediting work done prior to establishment of the plan.
Ultimately, credits determine the level of pension income the
employee receives upon retiring.
CREDIT RECEIVABLE RISK risk that PREMIUMS and REINSURANCE, as
well as other receivable instruments, will not be collected.
CREDIT REPORT see RETAIL CREDIT REPORT.
CREDIT RISK possibility that a borrower will not be able to
service the debt (pay the interest on the borrowed funds) or make
the principal payments when due. The greater this type of risk, the
greater the yield.
CREDIT SHELTER TRUST vehicle through which the FEDERAL ESTATE
TAX credit is protected from estate tax payment. The procedure is to

leave the federal estate tax credit to the shelter trust with the trust
established for the benefit of one's spouse (spouse receives the
income from the trust and the assets of the trust are held for the
benefit of the spouse). The assets of the trust are not subject to
federal estate tax upon the death of the spouse since the assets are
not in the spouse's estate at that time.
CRIME INSURANCE coverage for the perils of burglary, theft,
and robbery. See also BURGLARY INSURANCE; BUSINESS INSURANCE; HOMEOWNERS
INSURANCE POLICY; PERSONAL AUTOMOBILE POLICY (PAP); SIMPLIFIED COMMERCIAL LINES PORTFOLIO

POLICY (SCLP); COMMERCIAL PACKAGE POLICY (CPP).

CRIMINAL LIABILITY crime against the state for which an

officer of the state can bring legal action. Society is harmed by an
individual breaking the laws of the state. Usually there is no statue
of limitations for criminal liability. Property and casualty insurance
is not designed to provide coverage for the criminal acts of an
insured individual.
CRITICAL ILLNESS INSURANCE insurance policy that pays a
FACE AMOUNT/ LUMP SUM if the INSURED is diagnosed with a specified critical

illness. This sum is paid directly to the insured regardless of any

other sources of income (job-related and non-job-related), expenses
incurred (medical and nonmedical), and any other factors.
Generally, critical illnesses include stroke, heart attack, cancer that
is life threatening, paralysis, deafness, organ transplant
requirement, blindness, and kidney failure. Some policies pay a
percentage of the face amount, for
 Page 118
example 15 to 30%, if a less serious illness occurs or medical
procedure such as a coronary bypass must be performed. The
illness does not have to result in the disability of the insured (total
or partial); the insured still receives the face amount payment. This
type of insurance can be purchased as a separate policy or as a rider
to a LIFE INSURANCE or DISABILITY INCOME policy. The face amount is not paid
if the insured dies within 30 days of being diagnosed with the
covered illness and there is usually a WAITING PERIOD before the
coverage is in force. This coverage may be purchased on both a
personal and business basis.
CROP INSURANCE coverage for crops in the event of loss or
damage by insured perils including hail, fire, and lightning. Prior to
the passage of the Federal Crop Insurance Act in 1938 it was
virtually impossible to obtain insurance protection against crop
damage. Today coverage is available from the Federal Crop
Insurance Corporation as well as from private sources. Exclusions
from coverage include the perils of war and nuclear disaster.
CROSS LIABILITY LIABILITY incurred by one INSURED as the result of
his or her damaging another insured when both insureds are
covered under the same LIABILITY INSURANCE policy. Each insured must
be treated as a separate entity under a cross-liability clause in a
liability insurance policy.
CROSS PURCHASE PLAN see PARTNERSHIP LIFE AND HEALTH INSURANCE.
CRUDE DEATH RATE total deaths as a percentage of total
population for a stipulated period of time.
CRUMMEY TRUST unfunded trust that acts as the owner of a life
insurance policy. The trust receives a donor's cash payments on a
periodic basis, from which the beneficiary of the trust has a
specified period in which to make a cash withdrawal. If this is not
done, the cash paid by the donor is used to pay the premiums due
on the life insurance policy. Under this circumstance the IRS
deems that a gift of present value interest by the donor has been
made. It is important that a gift of present value interest be
established because such a gift in trust will enable the donor to
contribute up to $10,000 ($20,000 if two donors such as husband
and wife contribute) in premium payments and enjoy the gift tax
exclusion. When the donor dies, the life insurance policy in trust is
effectively removed from the donor's estate.
CSL see COMBINED SINGLE LIMIT.
CSO TABLE see COMMISSIONERS STANDARD ORDINARY MORTALITY TABLE (CSO).
CUMULATIVE INJURIES sum total of an employee's job-related
injuries resulting in disabilities over the working career. For
example, exposure to radiation over many years on the job would
have a compounding injury effect resulting in ultimate disability.
 Page 119
CUMULATIVE LIABILITY
Reinsurance: total of the limits of liability of all reinsurance
policies that a reinsurer has outstanding on a single risk. The total
of all such limits includes all ceding contracts from all insurers
representing all lines of coverage for the single risk.
Liability insurance: total of the limits of liability of all policies that
an insurer has outstanding on a single risk. Examples are the
HOMEOWNERS INSURANCE POLICY, PERSONAL AUTOMOBILE POLICY (PAP), and personal

umbrella liability policy.

CUMULATIVE TRAUMA injury that continues after a wound
from physical or psychic entry. (The latter is a wound that makes a
lasting impression on the mind, especially upon the subconscious
mind; for example, a three-year-old child could be traumatized by
seeing father abuse mother.) Trauma results in other injuries of a
continuing nature and is usually covered under health insurance
policies.
CUMULATIVE TRAUMA DISORDERS injuries that afflict the
tendons, bones, muscles, and nerves of the back, hands, arm,
shoulders, and neck. These are the fastest growing areas of workers
compensation claims. The symptoms of these injuries range from
swelling and deformity to intense pain and numbness.
CUMULATIVE TREND METHOD approach to derive trend lines
that can be applied to rating insured losses. Other methods require
substantial preliminary operations to solve systems of equations of
several unknowns. The cumulative method reduces the probability
of mistakes because a relatively simple computation is required to
prepare a set of data for the BURNING COST RATIO.
CURE see REST CURE.
CURRENCY RISK situation where the United States dollar rises
in value in comparison with other foreign currencies resulting in
the decrease in the value of the foreign securities. This is due to the
fact that the principal and income payments on the foreign
securities are based on that particular foreign currency and thus
must be converted into United States dollars. When that particular
foreign currency is weak, and the United States dollar is strong,
fewer dollars will be received upon conversion.
CURRENT ASSUMPTIONS basis for calculating life insurance
premiums and benefits using current interest and mortality rates,
rather than historic rates. Current assumptions are critical to
interest-sensitive products such as Universal Life. When interest
rates are high, benefits projections (such as cash values) are high.
When interest rates are low, these projections are not as alluring.
The thesis of current-assumption life insurance products is that
policyowner earnings should reflect current market conditions.
CURRENT ASSUMPTION WHOLE LIFE INSURANCE
variation of ORDINARY LIFE INSURANCE under which current mortality
experience
 Page 120
and investment earnings are credited to the insurance policy either
through the cash value account and/or the premium structure (in a
stock company) or the dividend structure (in a mutual company).
Regardless of whether a company is stock or mutual, the policy has
these characteristics:
1. premiums are subject to change based on the experience
(mortality, expenses, investment) of the company. The policyowner
does not exercise any control over the changes.
2. a policyowner can use the cash value to make loans just as with
traditional ordinary life insurance.
3. a minimum amount of cash value is guaranteed, just as with
traditional ordinary life insurance.
4. the death benefit does not fluctuate.
CURRENT DISBURSEMENT payment of premiums and benefits
as they come due. In pension plans, known as the ''pay as you go
basis." The plan depends on new employees coming into the work
force so that their contributions can help pay for the benefits of the
retiring employees. If the company is not experiencing growth and
is in fact part of a matured or even a dying industry, there may not
be enough on hand to pay benefits of retiring employees.
CURRENT INCOME average earned monthly income of the
insured wage earner after regular earned income has been
interrupted or terminated because of illness, sickness, or accident.
This income amount is important to the calculation of the MONTHLY
INDEMNITY benefit and the LOSS OF INCOME amount under the DISABILITY INCOME

INSURANCE policy.
CURRENTLY INSURED under SOCIAL SECURITY, workers who have at
least six quarters of earnings of adequate amount to qualify for
credit of the last 13 quarters prior to the worker's death. If this is
the case, SURVIVOR BENEFITS will be paid by Social Security to the
dependents of the deceased worker. See also QUARTERS OF COVERAGE.
CURTESY INTEREST husband's interest in his wife's property
upon her death. A husband has an INSURABLE INTEREST in that property
and can purchase a property and casualty insurance policy to cover
the EXPOSURES on it. See also DOWER INTEREST.
CUSTODIAL ACCOUNT account established to manage the
assets of a minor. This account is under the auspices of a custodian
(either an individual or an institution). The GIFT TAX exclusion would
apply on any annual gifts to a minor.
CUSTODIAL CARE assistance provided to a person in performing
the basic daily necessities of life, such as dressing, eating, using a
toilet, walking, bathing, and getting in and out of bed. This type of
care does not require hospitalization for the treatment of a disease,
illness, accident, or injury. Its cost may or may not be covered by
health insurance.
 Page 121
CUSTOMARY AND REASONABLE CHARGE term referring to
the most common charge, in HEALTH INSURANCE, for a service.
CUT-OFF CLAUSE in a REINSURANCE policy that excludes the reinsurer's
liability for losses occurring after a stipulated date.
CUT RATE PREMIUM rate charged by the INSURANCE COMPANY (INSURER), which
is below the standard rate.
CUT-THROUGH ENDORSEMENT (ASSUMPTION OF RISK)
guarantee by a reinsurance company that payment for losses
incurred by a third party will be made even though that third party
has no contractual arrangement with the reinsurance company.
 Page 122

D
DAILY FORM (REPORT) shortened report showing pertinent
insurance policy information, copies of which are distributed in the
insurance company's HOME OFFICE and BRANCH OFFICES, as well as to AGENTS
and BROKERS.
DAMAGES sum the insurance company is legally obligated to pay
an insured for losses incurred.
DAMAGE TO PROPERTY OF OTHERS see HOMEOWNERS INSURANCE
POLICYSECTION II (LIABILITY COVERAGE).

D&O see DIRECTORS AND OFFICERS LIABILITY INSURANCE.

DATA PROCESSING INSURANCE coverage on data processing
equipment, data processing media (such as magnetic tapes, disks),
and extra expense involved in returning to usual business
conditions. The data processing equipment is usually written as
ALL RISKS on a specifically scheduled basis. The data processing
media is usually written on an ALL RISKS basis. No COINSURANCE is
required for the data processing media and the extra expense
coverage.
DATE OF INCEPTION OF THE INSURANCE POLICY see
EFFECTIVE DATE.

DATE OF ISSUE date when an insurance company issues a policy.

This date may be different from the date the insurance becomes
effective.
DATE OF PLAN TERMINATION stipulation of the exact time
when the PENSION BENEFIT GUARANTY CORPORATION assumes the legal liabilities
for an insured pension plan that is being terminated. See also PENSION
BENEFIT GUARANTY CORPORATION (PBGC).

DATE OF SUBSCRIPTION OF THE POLICY specific time at

which the INSURANCE POLICY coverage begins and ends.
DAY ORDER buy or sell order for security that expires at the end
of the trading date on which it was entered if not executed.
DAYS OF GRACE see GRACE PERIOD.
DDD see DIRECTORS AND OFFICERS LIABILITY INSURANCE.
DEALERS INSURANCE coverage on an ALL RISKS basis, subject to
listed exclusions, for personal property of the insured dealer that is
used in normal business activities. Goods that have been sold on an
installment basis contract upon leaving the care, custody, and
control of the insured dealer; furniture and fixtures used in the
business activities of the insured dealer; money; securities; and
items that are in the process of being manufactured are generally
excluded from coverage.
 Page 123
DEAN ANALYTIC SCHEDULE rating method for commercial
fire insurance according to a predetermined schedule. Published by
A. F. Dean in 1902, this method was the first comprehensive
qualitative analysis procedure to take into consideration the
numerous physical factors impacting the fire exposure. No longer
widely used, because most companies have developed their own
schedules or use schedules advocated by the INSURANCE SERVICES OFFICE (ISO).
DEATH termination of life. A death certificate is required by a life
insurance company for a beneficiary to receive the death payment.
DEATH BENEFIT amount payable, as stated in a life insurance
policy, upon the death of the insured. This is the face value of the
policy plus any riders, less any outstanding loans and the interest
accrued thereon.
DEATH BENEFIT ONLY LIFE INSURANCE PLAN see KEY
EMPLOYEES, INSURANCE PLANS FOR.

DEATH CLAIM proof of death of the INSURED form filed with the
INSURANCE COMPANY establishing the rights of the BENEFICIARY to the DEATH

BENEFIT.

DEATH PLANNING estimate of the funds necessary to maintain

the life-style of a family after the death of the wage earner. See also
HUMAN LIFE VALUE APPROACH (ECONOMIC VALUE OF AN INDIVIDUAL LIFE).

DEATH RATE see MORTALITY RATE.

DEBENTURE unsecured bond. The only protection for the lender
is the credit and reputation of the borrower. The method of
evaluating the quality of debentures is to analyze the earning
power, overall status, and outlook of the borrowing corporation.
DEBENTURE, SUBORDINATED very junior issues of debt,
according to explicit statements in the indenture, which rank after
other unsecured debt.
DEBIT in insurance, DEBIT AGENTS list of total premiums to be
collected. This also applies to the geographical area in which an
agent collects the premiums.
DEBIT AGENT (HOME SERVICE AGENT) insurance company
representative who sells debit life insurance (industrial life
insurance). This agent is usually more of a collector of small
premium payments on a weekly, biweekly, or monthly basis than a
salesperson.
DEBIT INSURANCE (HOME SERVICE INSURANCE,
INDUSTRIAL INSURANCE) life insurance on which a premium
is collected on a weekly, bi-weekly, or monthly basis, usually at the
home of a policyholder. The face value of the policy is usually
$1000 or less. See also DEBIT; DEBIT AGENT.
DEBIT LIFE INSURANCE see DEBIT INSURANCE.
 Page 124
DEBIT SYSTEM see DEBIT INSURANCE.
DEBRIS REMOVAL CLAUSE in property insurance, contract
section providing for reimbursement for removal of debris resulting
from an insured peril. The amount of reimbursement under the
HOMEOWNERS INSURANCE POLICY ranges from 5-10% of the face value.

DECEDENT dead INSURED.

DECEPTIVE PRACTICE CONCEALMENT of the actual fact. For
example, an insurance agent tells a prospective insured that a
policy provides a particular benefit when in actual fact this benefit
is not in the written language of the policy. See also TWISTING.
DECLARATION statement that the insured makes (declares) about
loss exposures in an application for a policy. For example, in a
personal automobile policy the applicant states his/her name,
address, occupation, type of automobile, expected mileage per
year, etc. Based on this information, the insurance company
decides which underwriting classification in which to place the
risk; applicable premium rate; maximum limits of coverage; and
any special conditions to govern the insured's behavior that is to be
attached to the policy.
DECLARATIONS SECTION in property and casualty insurance,
contract section containing such information as name, description,
and location of insured property; name and address of the insured;
period a policy is in force; premiums payable; and amount of
coverage.
DECLINATION rejection by an insurance company of an
application for a policy.
DECREASING TERM LIFE INSURANCE coverage in which the
face amount of a life insurance policy declines by a stipulated
amount over a period of time. For example, the initial face amount
of a $100,000 decreasing term policy decreases by $10,000 each
year, until after 10 years the face value equals zero. The premium
does not decrease.
DEDUCTIBILITY OF EMPLOYER CONTRIBUTIONS
contributions (under qualified employee benefit plans, such as
pensions and health insurance) made by an employer on behalf of
employees, deducted as a business expense for tax purposes.
Employer contributions are not considered current taxable income
to the employee. Thus, significant tax advantages are available to
both an employer and an employee.
DEDUCTIBLE amount of loss that insured pays in a claim;
includes the following types:
1. Absolute dollar amount. Amount the insured must pay before the
company will pay, up to the limits of the policy. The higher the
absolute dollar amount, the lower the premium.
2. Time period amount (Elimination period/Waiting period). Length
of time the insured must wait before any benefit payments are
 Page 125
made by the insurance company. In disability income policies it is
common to have a waiting period of 30 days during which no
income benefits are paid to the insured. The longer this time
period, the lower the premium.
The consumer would be well advised to select the highest
deductible (by dollar amount and/or time period) that he/she can
afford. First dollar coverages are very costly. A high deductible
allows the insured to self-insure expected lossesthose of high
frequency and low severity.
DEDUCTIBLE, AGGREGATE ANNUAL see AGGREGATE ANNUAL
DEDUCTIBLE.

DEDUCTIBLE, BUY-BACK see BUY-BACK DEDUCTIBLE.

DEDUCTIBLE CLAUSE provision in insurance policies that
states the DEDUCTIBLE. See also COINSURANCE; LOSS SETTLEMENT AMOUNT; SETTLEMENT
OPTIONS, PROPERTY AND CASUALTY INSURANCE.

DEDUCTIBLE, CORRIDOR see CORRIDOR DEDUCTIBLE.

DEDUCTIBLE, DISAPPEARING see DISAPPEARING DEDUCTIBLE.
DEDUCTIBLE, FRANCHISE see FRANCHISE DEDUCTIBLE.
DEDUCTIBLE, PERCENTAGE-OF-LOSS see PERCENTAGE-OF-LOSS
DEDUCTIBLE.

DEDUCTIBLE, PERIOD see DISABILITY INCOME INSURANCE (ELIMINATION PERIOD).

DEDUCTIBLE, SPLIT see SPLIT DEDUCTIBLE.
DEDUCTIVE REASONING observance of an event occurring on
a repeated basis that leads one to believe that a certain PROBABILITY is
attached to the occurrence of that event. For example, if there are a
red ball and a blue ball in a bag, and each color ball is drawn one-
half of the time, we come to believe that each color ball has a one-
half probability of being drawn at any one time.
DEFAMATION OF CHARACTER oral or written statement that
results in injuring the good name or reputation of another, causing
that individual to be held in disrepute.
DEFEASANCE procedure that moves up the maturity date of the
municipal bond to its call date. The call date permits the issuer of
the bond to redeem the bond at any time after a stipulated
minimum number of years have passed at a given price.
DEFENDANT one of two parties in a negligence lawsuit (the other
party being the PLAINTIFF) from whom the plaintiff seeks releases
because of bodily injury and or property damage incurred as the
result of the defendant's allegedly negligent acts.
 Page 126
DEFENDANT BOND type of COURT BOND filed on behalf of the
defendant and used to release assets to him or her that have been
attached pending a court decision. See also APPEAL BOND; BAIL BOND;
INJUNCTION BOND; JUDICIAL BOND.

DEFENSE AGAINST UNINTENTIONAL TORT see TORT, DEFENSE

AGAINST UNINTENTIONAL.

DEFENSE CLAUSE see DEMOLITION CLAUSE.

DEFENSE COSTS expense of defending a lawsuit. To mount a
legal defense against civil or criminal liability, a defendant faces
expenses for lawyers, investigation, fact gathering, bonds, and
court costs. Of critical importance in purchasing liability insurance
is not only the limits of coverage under the policy but also the
obligation of the insurance company to defend the insured against
suits, even if a suit is without foundation. Because legal defense
costs can be extremely high, the consumer should consider liability
insurance that pays all defense costs in addition to the policy limits.
DEFENSE OF SUIT AGAINST INSURED clause in a liability
insurance policy under which an insurance company agrees to
defend an insured even if a lawsuit is without foundation. The costs
of defending the insured are covered, in addition to the limits of
coverage under the policy. For example, if the limits of coverage
under a policy is $1,000,000 and defense costs are $120,000, the
$120,000 costs are in addition to the $1,000,000 of coverage. This
is critical, since defense costs can be quite high.
DEFENSE RESEARCH INSTITUTE (DRI) organization of trial
attorneys who specialize in the representation of defendants who
become subject to TORT actions. Generally, these tort actions
involve bodily injury or personal injury claims against the
defendant.
DEFENSIVE MEDICINE extensive medical procedures conducted
by physicians in order to document the patient's file in the event of
a negligence liability suit.
DEFERRED ANNUITY annuity that can be paid either with a
single premium or a series of installments. For example, an
annuitant pays a single premium of $100,000 on June 1 of the
current year and is scheduled to receive a monthly income of
$1300 at a specified later date. Or, the annuitant pays $50 a month
to the insurance company, starting June 1, 1968, and ending June 1,
1987, and begins receiving a monthly income of $1300, beginning
July 1, 1987. See also ANNUITY.
DEFERRED BENEFITS AND PAYMENTS see DEFERRED CONTRIBUTION
PLAN, DEFERRED RETIREMENT CREDIT.

DEFERRED COMPENSATION PLAN means of supplementing

an executive's retirement benefits by deferring a portion of his or
her current earnings. Deferring income in this manner encourages
the loyalty
 Page 127
of executives. To qualify for a tax advantage, the IRS requires a
written agreement between an executive and the employer stating
the spec-ified period of deferral of income. An election by an
executive to defer income must be irrevocable and must be made
prior to performing the service for which income deferral is sought.
DEFERRED CONTRIBUTION PLAN arrangement in which an
unused deduction (credit carryover) to a profit sharing plan can be
added to an employer's future contribution on a tax deductible
basis. It occurs when the employer's contribution to a profit sharing
plan is less than the annual 15% of employee compensation
allowed by the Federal Tax Code.
DEFERRED DIVIDENDS end of a defined time period that
dividends become payable to the POLICYHOLDER.
DEFERRED GROUP ANNUITY retirement income payments for
an employee that begin after a stipulated future time period, and
continue for life. (A beneficiary of a deceased annuitant may
receive further income, depending on whether the contract is a PURE
ANNUITY or REFUND ANNUITY). Each year, contributions are used to buy a

paid-up single premium deferred annuity. These increments, added

together, provide income payments at retirement.
DEFERRED PREMIUM life insurance premium that is not
currently due. Future payments are made on a frequency basis
other than annual.
DEFERRED PROFIT-SHARING portion of company profits
allocated by an employer, in good years, to an employee's trust.
Contributions on behalf of each employee are expressed as a
percentage of salary with 5% being common practice. If the profit
sharing plan is a qualified plan according to the IRS, employer
contributions are tax deductible as a business expense. These
contributions are not currently taxable to the employee; benefits are
taxed at the time of distribution.
DEFERRED RETIREMENT retirement taken after the normal
retirement age. For example, if the normal retirement age is 65 or
70 an employee may continue to work beyond those ages.
Normally the election of deferred retirement does not increase the
monthly retirement income when the employee actually retires.
DEFERRED RETIREMENT CREDIT former arrangement under
which retirement benefits payable to an employee who continued
to work beyond NORMAL RETIREMENT AGE were frozen, and not increased in
recognition of added work time. This was eliminated by the federal
Omnibus Budget Reconciliation Act of 1986.
DEFERRED VESTING see VESTING, DEFERRED.
DEFICIENCY RESERVE addition to reserves of a life insurance
company required by various states because the VALUATION PREMIUM is
 Page 128
greater than the GROSS PREMIUM. Without a deficiency reserve, the
normal reserve by itself would be less than the actual reserve
required.
DEFICIT REDUCTION CONTRIBUTION contribution whose
purpose is to increase funding of underfunded PENSION PLANS. It is part
of the calculation that is made to arrive at the plan's minimum
funding requirement. Usually a pension plan requires such a
contribution when the assets of the plan become less than 80 to
90% of the current liabilities of the plan.
DEFINED BENEFIT PLAN retirement plan under which benefits
are fixed in advance by formula, and contributions vary. The
defined benefit plan can be expressed in either of two ways:
1. Fixed Dollars: (a) Unit benefit approacha discrete unit of benefit
is credited for each year of service recognized by the employer.
The unit is either a flat dollar amount or (more often) a percentage
of compensationusually 1 1/22 1/2%. Total years of service are
multiplied by this percentage. For example, if total years of service
is 30 and the percentage is 1 1/2, 45% would be applied to either
the career average earnings or final average earnings (highest three
of five consecutive years of earnings). If the average of the highest
five consecutive years of earnings is $100,000, the yearly
retirement benefit would be $45,000. (b) Level Percentage of
CompensationAfter a minimum number of years of service (usually
20) and a minimum age (usually 50), all employees will receive the
same percentage of earnings as a retirement benefit, regardless of
income, position in the company, or years of service. For example,
each employee who is at least 50 years of age, with at least 20
years of service receives 20% of compensation. This plan is more
common than the flat amount approach described below. (c) Flat
AmountAfter having attained a minimum number of years of
service (usually 20) and a minimum age (usually 50), all
employees will receive the same absolute dollar amount as a
retirement benefit, regardless of income, position in the company,
or years of service. For example, each employee who is at least 50
years of age, with at least 20 years of service receives $8000 a year
in retirement benefits.
2. Variable Dollars: (a) Cost-of-Living Planbenefits are modified
according to changes in a predetermined price indexusually, the
Consumer Price Index (CPI). For example, when the CPI increases
by at least 3% benefits are increased by that percentage. (b) Equity
Annuity Planpremiums are paid into a variable annuity plan to
purchase accumulation units. At retirement, the accumulation units
are converted to retirement units whose values fluctuate according
to the common stock portfolio in which the premiums were
invested.
 Page 129
DEFINED CONTRIBUTION PENSION PLAN (MONEY
PURCHASE PLAN) retirement plan under which contributions are
fixed in advance by formula, and benefits vary. These plans are
often used by organizations that must know what the cost of
employee benefits will be in the years ahead. For example,
nonprofit organizations such as charities need to project future
pension expenses that will not rise above a preset limit. This
enables budgets to be established that provide guidelines for their
solicitation of funds.
DEFINITE LOSS see REQUIREMENTS OF INSURABLE RISK.
DEFINITIONS essential parts of insurance policies that explain the
meanings of important words and phrases found in those policies.
DEGREE OF CARE minimum of care owed by one party for the
physical safety of another. Liability suits are brought because of
negligent acts and omissions resulting from failures to exercise due
care.
DEGREE OF RISK amount of uncertainty in a given situation.
Probability that actual experience will be different from what is
expected.
DELAY CLAUSE in CASH VALUE LIFE INSURANCE policies, provision that
allows the insurance company to refuse the POLICYHOLDER a loan on the
cash value for a period of time, usually up to 6 months, from the
request date. The only exception is for premium payments due on
the policy.
DELAYED PAYMENT CLAUSE life insurance policy provision
stating that after the death of an insured, the proceeds from a policy
are not immediately paid to the primary beneficiary; instead, they
are delayed for a specified time period. This usually occurs in
common disaster situations.
DELIVERY physical handing of an insurance policy to the insured.
Sales training emphasizes the importance of delivery of a policy by
the agent. This develops a caring attitude on the part of the agent
and reinforces the insured's belief that he or she made the right
decision in purchasing the policy.
DELIVERY RECEIPT signed receipt by POLICYOWNER acknowledging
that policyowner is in possession of the policy.
DEMOLITION CLAUSE in PROPERTY INSURANCE policies, provision that
excludes the insurance company's liability for indemnification of
the insured for the insured's expenses incurred in the demolition of
undamaged property.
DEMOLITION INSURANCE coverage that will indemnify the
insured for the expenses, up to the limits of the policy, if a building
is damaged by a peril such as fire, and zoning requirements and/or
building codes mandate that the building be demolished.
 Page 130
DEMURRAGE compensation payable to the owner of a ship
detained for reasons beyond his or her control who incurs a loss of
earnings because of the delay. Detainment can be caused by a delay
in the loading or unloading of the ship.
DEMUTUALIZATION (STOCKING A MUTUAL) conversion of
form of ownership from a MUTUAL INSURANCE COMPANY to a STOCK INSURANCE
COMPANY. Interest in demutualization of life insurance companies

surged in the early 1980s among many large mutual companies

because they felt they needed new sources of capital to compete in
the financial services revolution.
DENTAL EXPENSE INSURANCE insurance that usually follows
the format of COMPREHENSIVE HEALTH INSURANCE plans in that there is a
COINSURANCE requirement of usually 75 to 80%, and a limit on
benefits for any one person per calendar year. In many instances,
there is no deductible for annual preventive oral examinations.
Orthodontia benefits are usually provided separately.
DENTAL INSURANCE coverage for dental services under a
group or individual policy.
DEPARTMENT STORE INSURANCE FLOATER coverage for
items of property being delivered to a customer. The means of
transportation covered include such common carriers as aircraft,
railroads, trucks, express carrier, and other variations, as well as the
department store's trucks and other delivery vehicles. Coverage can
be purchased on an ALL RISKS basis subject to excluded perils such as
war and nuclear disaster. Coverage applies on a blanket basis
meaning that all locations of points of delivery are covered.
DEPENDENT a person who relies on another for economic
support. For insurance purposes, the following may be included:
(1) the insured's legal spouse; (2) any unmarried children younger
than a specified age who are dependent upon the insured for
support (age requirements vary from plan to plan); (3) unmarried
children between specified years of age who are dependent upon
the insured for support, and who are full-time students in an
educational institution (age requirements vary).
A dependent child cannot be covered under more than one insured
employee's plan. For example, if the husband and wife are both
insured employees of different companies, coordination of benefits
would determine which plan is primary and which plan is
secondary. In some states, the father's plan is primary; in other
states, the birthday rule would be used: the parent with the earlier
birthday would have the primary plan.
DEPENDENT ADMINISTRATION COVERAGE see DEPENDENT;
DEPENDENT COVERAGE.
 Page 131
DEPENDENT CARE ACCOUNT type of FLEXIBLE SPENDING ACCOUNT. See
also FLEXIBLE SPENDING ACCOUNTHEALTH CARE/DEPENDENT CARE EXPENSES.
DEPENDENT CARE ASSISTANCE PLANS (DCAP) fringe
benefit provided by the employer to its employees as sanctioned
under the 1981 Economic Recovery Tax Act. Under Internal
Revenue Code Section 129, this benefit is nontaxable to the
employee and the costs incurred by the employer are considered
tax deductible as a necessary business expense. The dependent
under DCAP is defined as a dependent child under age 15, a
dependent elderly relative, or a dependent mentally and/or
physically handicapped individual. DCAP can be implemented
through a salary reduction program under which the employee can
choose to reduce his or her salary up to a maximum of $5000
annually for dependent care-related expenses. A current EMPLOYEE
BENEFITINSURANCE PLAN can be amended to include DCAP, thereby making

the benefit available to all employees. DCAP permits the employee

to select the type of dependent care program that he or she prefers.
DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT
account that is similar in form to the HEALTH PLAN FLEXIBLE SPENDING ACCOUNT
(FSA) with contributions to this account used to reimburse employees

who are parents for expenses at a children's day care center or

home child care. Employees can also be reimbursed for expenses
associated with caring for an elderly parent.
DEPENDENT COVERAGE coverage under life and health
insurance policies for dependents of a named insured to include a
spouse and unmarried children under a specified age. Under some
life insurance policies an insured's spouse and dependent children,
unmarried and under age 21, can be added at favorable rates.
Health insurance policies cover the same dependent individuals at a
far cheaper rate than the cost of separate policies for them.
DEPENDENT PROPERTIES BUSINESS INCOME FORM form
that provides insurance coverage for the insured in the event the
damage or destruction of non-owned property reduces or
terminates the insured's earnings. For example, if the insured
manufactures plastic airplane kits, and the supplier of the plastic
for making the airplanes has a catastrophic fire at its plant, the
manufacturer would not be able to continue to produce the kits in
the necessary volume. Thus, the manufacturer would be
indemnified by the insurance company for its lost earnings.
DEPOSIT ADMINISTRATION GROUP ANNUITY see PENSION PLAN
FUNDING: GROUP DEPOSIT ADMINISTRATION ANNUITY.

DEPOSIT ADMINISTRATION PLAN unallocated funding

instrument for pension plans under which premiums are placed on
deposit,
 Page 132
and are not currently allocated to the purchase of benefits for the
employee. At retirement, an immediate retirement annuity is
purchased for the employee. The amount of monthly income
depends on the investment results of the funds left on deposit.
Many insurance companies guarantee a minimum rate of return on
funds left on deposit.
DEPOSITORS FORGERY INSURANCE coverage provided for
individuals or businesses for loss due to forgery or alteration of
such financial instruments as notes, checks, drafts, and promissory
notes.
DEPOSIT PREMIUM premium required by an insurance company
for plans subject to premium adjustment. The initial provisional
premium is paid to put a commercial property or liability insurance
policy into force. The final premium is determined at the end of the
policy period, based on an insured's actual exposures and loss
experience.
DEPOSIT TERM LIFE INSURANCE policy in which a premium
(the deposit) is paid in the first policy year, in addition to the
regular term insurance premiums required. The deposit is left to
accumulate at interest for a specific number of years, e.g., 10.
Thereafter, the policy-owner can receive the deposit plus interest or
may renew the policy without the INSURED having to furnish EVIDENCE OF
INSURABILITY. This procedure can be repeated every 10 years, in some

instances up to age 100. A deposit term policy can be converted to

ORDINARY LIFE, or DECREASING TERM LIFE INSURANCE without evidence of

insurability. However, if the policyowner cancels the policy prior to

the initial 10 years, the deposit and any interest is forfeited. If the
insured dies before the policy is converted, the deposit plus the
interest is added to the death benefit.
DEPRECIATION actual or accounting recognition of the decrease
in the value of a hard asset (property) over a period of time,
according to a predetermined schedule such as straight line
depreciation.
DEPRECIATION INSURANCE see REPLACEMENT COST LESS PHYSICAL
DEPRECIATION AND OBSOLESCENCE.

DERIVATIVES securities that derive their value from other

financial instruments that are used by the insurance company to
hedge its bets on which direction the market is moving. For
example, cattle futures are a simple derivative in that the cattle
futures contract increases or decreases in value as future prices
change for cows on the hoof. When insurance companies use
derivatives, they are more likely to use them in association with
currency and interest rate transactions as a means of protecting
themselves against adverse moves in interest rates or foreign
currency exchanges. This instrument provides a mechanism for
hedging against the interest rate risks that are inherent within
insurance products by pricing in that risk in advance and protecting
against future negative occurrences.
 Page 133
DEVIATED RATE rates used by a property and casualty insurance
company that are different from that suggested by a RATING BUREAU. An
insurance company may use deviated rates because it feels they are
more indicative of the company's experience.
DEVIATING INSURANCE COMPANY insurance company
whose premium rates are usually below that of other insurance
companies and the RATING BUREAU.
DEVIATION see DEVIATED RATE.
DEVIATION POLICY INSURANCE POLICY that differs from the STANDARD
FORM.

DIAGNOSIS RELATED GROUP method of determining

reimbursement from medical insurance according to diagnosis on a
prospective basis. It originated with the MEDICARE program.
DIC see DIFFERENCE IN CONDITIONS INSURANCE.
DIFFERENCE IN CONDITIONS INSURANCE coverage for a
physical structure, machinery, inventory, and merchandise within
the structure in the event of earthquakes, flood collapses, and
subsidence strikes. Even though coverage is on an ALL RISKS basis,
important perils are excluded such as fire, vandalism, sprinkler
leakage, employee dishonesty, boiler and machinery losses, and
mysterious disappearance, since it is assumed that the insured
business already has coverage for these perils under a business
property insurance policy.
DIP-DOWN CLAUSE provision in an UMBRELLA LIABILITY INSURANCE policy
under which the policy will pay those losses that come within the
retention limits of the primary policy, but the primary policy cannot
pay because its aggregate limits have no further capacity.
DIRECT COVER AUTOMATIC NONPROPORTIONAL REINSURANCE treaty or AUTOMATIC
PROPORTIONAL REINSURANCE treaty that provides coverage for losses upon

which claims are made while the treaty is in force, without regard
to when these losses actually occurred. See also CLAIMS MADE BASIS
LIABILITY COVERAGE; CLAIMS OCCURRENCE BASIS LIABILITY COVERAGE.

DIRECT LIABILITY legal obligation of an individual or business

because of negligent acts or omissions resulting in bodily injury
and/or property damage or destruction to another party. There are
no intervening circumstances.
DIRECT LOSS property loss in which the insured peril is the
proximate cause (an unbroken chain of events) of the damage or
destruction. Most basic property insurance policies (such as the
standard fire policy) insure against only direct loss and not INDIRECT
LOSS or CONSEQUENTIAL LOSS. For example, a fire within the wall structure

of a house causes the drapes to catch fire, which in turn fans flames
onto the
 Page 134
furniturea direct loss. An indirect loss would be inconvenience of
the inhabitants, who would not be able to sleep in their home, thus
causing a drop in their efficiency at work.
DIRECTORS AND OFFICERS LIABILITY INSURANCE
coverage when a director or officer of a company commits a
negligent act or omission, or misstatement or misleading statement,
and a successful libel suit is brought against the company as a
result. Usually a large deductible is required. The policy provides
coverage for directors' and officers' liability exposure if they are
sued as individuals. Coverage is also provided for the costs of
defense such as legal fees and other court costs.
DIRECT PLACEMENT security sold by the issuer of the security
directly to the purchasing financial institution without the inclusion
of the investment banker in this process. Insurance companies are
frequent purchasers of securities in this way. Only the largest firms
with the highest credit ratings are able to issue these types of
securities. The issuer avoids the uncertainty of the market through
these private negotiations.
DIRECT PROPERTY EXPOSURES circumstance in which there
is a PROBABILITY loss to PERSONAL PROPERTY or REAL PROPERTY resulting from
property damage, destruction, or disappearance. See also COMMERCIAL
PROPERTY FLOATER; COMMERCIAL PROPERTY FORM; HOMEOWNERS INSURANCE POLICY; PERSONAL

ARTICLES INSURANCE; PERSONAL EFFECTS INSURANCE; PERSONAL PROPERTY FLOATER; COMMERCIAL

PACKAGE POLICY (CPP).

DIRECT RECOGNITION immediate taking-into-account of

present interest rates, mortality experience, and expenses in
premiums currently charged. This is critical to the formulation of
CURRENT ASSUMPTION WHOLE LIFE INSURANCE products. See also UNIVERSAL LIFE
INSURANCE.

DIRECT REGISTRATION SYSTEM system in which

shareholders are not issued physical stock certificates; instead, they
are sent a statement that shows the number of shares registered in
the shareholder's name on the insurance company's books (on
direct deposit with the company).
DIRECT RESPONSE MARKETING (DIRECT SELLING
SYSTEM) method of selling insurance directly to insureds through
a company's own employees, through the mail, or at airport booths.
The company uses this method of distribution rather than
independent or captive agents for effectiveness and efficiency.
DIRECT ROLLOVER ELIGIBLE ROLLOVER DISTRIBUTION that is paid directly
from an employee's EMPLOYEE BENEFIT INSURANCE PLAN to the employee's
INDIVIDUAL RETIREMENT ACCOUNT (IRA) or to another plan maintained by the

employer that accepts rollovers. Under such a

 Page 135
rollover, the employee is not taxed on any part of the distribution
until it is withdrawn from the IRA or the employer-maintained
plan. The employee can open an IRA to receive the distribution. If
an employee is employed by a new employer who maintains an
employee benefit insurance plan that accepts rollovers, the
distribution can be placed directly into that plan. If the new
employer does not accept rollovers, the employee can place the
distribution into an IRA.
DIRECT SELLING see DIRECT RESPONSE MARKETING (DIRECT SELLING SYSTEM).
DIRECT SELLING SYSTEM see DIRECT RESPONSE MARKETING.
DIRECT WRITER
1. property insurer that distributes its products through a direct
selling system. Traditionally, insurers often were known as direct
writ-ers if they used either a direct selling system or an exclusive
agency system for distribution. Increasingly, the term applies only
to those using a direct selling system.
2. reinsurer that deals directly with a CEDING COMPANY, without using a
REINSURANCE BROKER.

DIRECT WRITING AGENT see CAPTIVE AGENT.

DIRECT WRITTEN PREMIUM total premiums received by a
PROPERTY AND LIABILITY insurance company without any adjustments for

the ceding of any portion of these premiums to the REINSURER.

DISABILITY physiological or psychological condition that
prevents an insured from performing normal job functions.
DISABILITY BENEFIT income paid under a disability policy that
is not covered under WORKERS COMPENSATION BENEFITS. It is usually expressed
as a percentage of the insured's income prior to the disability, but
there may be a limit on the amount and duration of benefits. The
most advantageous policy pays a monthly disability income benefit
for as long as the insured is unable to perform suitable job
functions determined by experience, education, and training.
DISABILITY BENEFIT, COMMERCIAL HEALTH
INSURANCE see DISABILITY BENEFIT.
DISABILITY BUY-OUT INSURANCE buy-sell agreements found
in partnerships, sole proprietorships, and close corporations. Either
the business entity or the surviving members of the business agree
to buy out the interest of a disabled member according to a
predetermined formula funded through insurance. Disability buy-
out insurance can be more important to a business than death buy-
out insurance because the chances of becoming disabled are 7 to 10
times greater than death, depending on the age of the individual.
The mechanisms available for the disability buy-out are the same
as those found under BUSINESS LIFE AND HEALTH INSURANCE. See also PARTNERSHIP
LIFE AND HEALTH INSURANCE.
 Page 136
DISABILITY CLAUSE PROVISION found in a LIFE INSURANCE POLICY that
provides that certain benefits will be paid in the event the insured
becomes totally and permanently disabled from an accident
incurred or sickness contacted. See also WAIVER OF PREMIUM (WP).
DISABILITY INCOME (DI) life insurance payment issued after
the insured has been disabled for at least six months. One percent
of the face value of the policy is paid the insured as a monthly
income benefit and premiums are waived for the duration of the
disability. A DISABILITY INCOME RIDER can be attached to an ordinary life
insurance policy to provide this disability income benefit at extra
charge. The insured can have a WAVIER OF PREMIUM benefit without a
disability income benefit, but cannot have the disability income
benefit without the waiver of premiums benefit.
DISABILITY INCOME INSURANCE health insurance that
provides income payments to the insured wage earner when
income is interrupted or terminated because of illness, sickness, or
accident. Definitions under this insurance include:
1. Total and Partial Disabilityreduction in benefits if the insured is
found to be partially disabled instead of totally disabled.
2. Amount of Benefitsmany policies stipulate that all sources of
disability income cannot exceed 50% to 80% of the insured's
earnings prior to the disability, subject to a maximum absolute
dollar amount.
3. Duration of Benefitslength of time benefits will be paid. Some
policies will pay benefits for one or two years, whereupon the
insured must agree to be retrained for other work. Other policies
pay benefits as long as the insured is unable to do the job for which
he or she is suited by training, education, and experience (often up
to age 65, when retirement programs take over). Some policies pay
lifetime benefits.
4. ELIMINATION PERIOD (Waiting Period)period beginning with the first
day of disability, during which no payments are made to the
insured. The longer this period, the lower the premiums.
5. Physician's Carethe insured must be regularly attended by a
legally qualified physician because it is necessary to assess changes
in severity of disability.
6. PREEXISTING CONDITIONif an insured has a preexisting injury, sickness, or
illness, most policies will not pay income benefits either for the
duration of the policy or until a period of time (usu-ally from six
months to one year) has elapsed.
7. Recurrent Disabilitymost policies will not pay income benefits
to an insured who is experiencing a recurrent disability unless the
recurrent disability is deemed a new disability. Some more
progressive policies define a recurrent disability as a new disability
if there has been a break of at least six months between the first
disability and the current disability, and the insured has returned to
work during that break.
 Page 137
8. RESIDUAL DISABILITYmany policies pay for the unused portion of the
total disability period, limited to age 65.
DISABILITY INCOME RECORD SYSTEM (DIRS) service under
the auspices of the MEDICAL INFORMATION BUREAU (MIB) that provides the
insurance company with nonmedical information concerning the
APPLICANT for DISABILITY INCOME INSURANCE. The purpose of this system is to

warn the insurance company in the event the applicant tries to

purchase excessive amounts of disability income insurance from
various companies. The member insurance company is required to
report to the DIRS an applicant for disability income insurance in
amounts of at least $300 per month to be paid to the disabled
insured for at least 12 months. The DIRS then stores this
information in its computer files, from which it is retrievable by
any member company.
DISABILITY INCOME RIDER addition to a life insurance policy
stating that when an insured becomes disabled for at least six
months, premiums due are waived. Depending on the rider, the
insured may begin to receive a monthly income (usually 1% of the
face value of the policy), or only the premium may be waived. The
length of time that income payments will continue depends on the
definition of disability in the policy. During the time that premiums
are waived, the life insurance policy stays in force, so that if the
insured dies, the beneficiary receives the face value of the policy.
Cash values continue to build, and if the policy is participating,
dividends continue to be paid. See also DISABILITY INCOME (DI); DISABILITY
INCOME INSURANCE.

DISABILITY INSURANCE see DISABILITY BENEFIT; DISABILITY BUYOUT

INSURANCE; DISABILITY INCOME (DI); DISABILITY INCOME INSURANCE; DISABILITY INCOME RIDER;
PARTNERSHIP LIFE AND HEALTH INSURANCE.

DISABILITY INSURANCE, CONDITIONS see DISABILITY BENEFIT;

DISABILITY INCOME INSURANCE.

DISABILITY, LONG-TERM see LONG-TERM DISABILITY INCOME INSURANCE.

DISABILITY OF PARTNER BUY AND SELL INSURANCE see
PARTNERSHIP LIFE AND HEALTH INSURANCE.

DISABILITY, PARTIAL inability of the INSURED to perform one or

more of the important daily duties of that insured's occupation. The
income payment to the insured is reduced from that of TOTAL DISABILITY.
DISABILITY, PERMANENT PARTIAL see DISABILITY INCOME INSURANCE;
PERMANENT PARTIAL DISABILITY.

DISABILITY, PERMANENT TOTAL see DISABILITY INCOME INSURANCE;

PERMANENT TOTAL DISABILITY.

DISABILITY, SHORT-TERM see DISABILITY INCOME INSURANCE.

 Page 138
DISABILITY, TEMPORARY PARTIAL see DISABILITY INCOME INSURANCE;
TEMPORARY DISABILITY BENEFITS.

DISABILITY, TEMPORARY TOTAL see DISABILITY INCOME INSURANCE;

TEMPORARY DISABILITY BENEFITS.

DISABILITY, TOTAL inability of the INSURED to perform any and all

important daily duties of that insured's occupation.
DISAPPEARING DEDUCTIBLE in property insurance, amount
that an insured does not have to pay when a loss exceeds a
predetermined sum; here the insurance company pays more than
100% of the loss, so that the deductible amount specified in a
contract ''vanishes." For example, if a deductible amount is $100,
an insurance company may pay 125% of the losses exceeding
$100, 150% of the losses exceeding $200, and if the losses exceed
$300, the company pays the total amount of the loss (so that the
insured does not assume any deductible for losses over $300). In
another application an insured pays 125% of all losses over $100,
the deductible disappears for any loss of $500 or more. See also
DEDUCTIBLE.

DISASTER CLAUSE see COMMON DISASTER CLAUSE (SURVIVORSHIP CLAUSE).

DISCLAIMER statement issued by the INSURANCE COMPANY denying a
claim under the INSURANCE POLICY on the grounds that a CONDITION or POLICY
PROVISION has been breached.

DISCONTINUANCE termination of coverage in insurance.

DISCONTINUANCE OF CONTRIBUTIONS termination of
premium payments by an employer on behalf of an employee to an
employee benefit plan. See also GROUP DISABILITY INSURANCE; GROUP HEALTH
INSURANCE; GROUP LIFE INSURANCE; GROUP PAID-UP LIFE INSURANCE; GROUP PERMANENT LIFE

INSURANCE; GROUP TERM LIFE INSURANCE; PENSION PLAN; PENSION PLAN FUNDING INSTRUMENTS.

DISCONTINUANCE OF PLAN termination of a plan. Under

federal tax law, a plan can only be terminated for reasons of
business necessity. Otherwise, prior employer tax deductible
contributions under the plan are disallowed.
DISCOUNTED PREMIUM lump sum premium paid in advance
instead of the frequency of premium payments stipulated in the
INSURANCE POLICY. This lump sum premium payment will be less than the

PRESENT VALUE of the single premium payments.

DISCOUNT POINT see POINT.

DISCOUNT RATE rate charged by the Federal Reserve to
commercial banks for overnight loans made by these banks. If the
Federal Reserve decreases the discount rate, other rates will decline
as well.
 Page 139
Conversely, if the Federal Reserve increases the discount rate,
other rates will also rise.
DISCOUNT VALUE present value of a future sum of money to be
paid at a stipulated future date.
DISCOVERY PERIOD clause in a BOND that permits a principal
who was formerly insured by the bond to report a loss to the surety
company that occurred while the bond was in force. The period of
time for reporting after the bond terminates is usually limited to
one year.
DISCRETIONARY AUTHORITY legal power of the
commissioner of Internal Revenue to approve any classification of
employees that does not discriminate in favor of a prohibited
group. Such approval is necessary before a retirement plan can be a
qualified pension plan and thus subject to tax benefits.
DISCRIMINATION failure of an insurance company to offer
similar insurance coverages at comparable premium rates to all
individuals or groups with the same UNDERWRITING characteristics. Such
discriminatory practices are prohibited by state and federal law.
DISEASE illness or sickness such as cancer, poliomyelitis,
leukemia, diphtheria, smallpox, scarlet fever, tetanus, spinal
meningitis, encephalitis, tularemia, hydrophobia, and sickle cell
anemia, all of which are covered in health insurance policies as
specified.
DISINTERMEDIATION flow of funds out of one financial
instrument, whose interest rates are low, into another financial
instrument, whose interest rates are higher. In the early 1980s,
insurance companies experienced disintermediation as whole life
policies were surrendered for their cash values and these sums were
then transferred to higher interest-paying noninsurance products.
Because of this situation, INTEREST SENSITIVE POLICIES were developed by
INSURANCE COMPANIES.

DISMEMBERMENT BENEFIT income paid under health

insurance for loss of use of various parts of the body due to an
accident. A schedule of benefits available in a policy lists payments
for each part of the body that is dismembered.
DISMEMBERMENT INSURANCE see ACCIDENTAL DEATH AND
DISMEMBERMENT INSURANCE.

DISQUALIFIED PERSON individual prohibited under the EMPLOYEE

RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA) from conducting transactions

with a trust plan. The prohibition is intended to prevent a conflict

of interest between the prohibited person with a vested interest in
the trust plan and the trust plan itself. Prohibited individuals
include employer, trust plan participant, trustee of the plan, and
fiduciary of the trust plan.
 Page 140
DISQUALIFIED PERSON (TAX-EXEMPT ORGANIZATION)
person deemed to be an insider (according to SECTION 4958 OF THE INTERNAL
REVENUE CODE) in a tax-exempt organization who, during the last five-

year period ending as of the date of the transaction, exercised

substantial influence over the decision-making process of that
organization.
DISTRIBUTION BY LIVING HAND see ESTATE PLANNING; ESTATE PLANNING
DISTRIBUTION.

DISTRIBUTION CLAUSE see PRO RATA DISTRIBUTION CLAUSE.

DISTRIBUTION OF PROPERTY AT DEATH OF OWNER see
ESTATE PLANNING; ESTATE PLANNING DISTRIBUTION.

DIVERSIFICATION RISK distribution included by type of coverage,

by kind of risk, and by geographical location.
DIVIDED COVER insurance coverage purchased on the same item
from two or more insurance companies.
DIVIDEND sum returned to a policyowner by an insurance
company under a participating policy. Dividends are not deemed as
taxable distributions, as the Internal Revenue Service interprets
them as a refund of a portion of the premium paid. There are
several ways in which the policyowner may use dividends. See also
DIVIDEND OPTION.

DIVIDEND ACCUMULATION option under a participating life

insurance policy in which dividends are left on deposit with the
company to accumulate at a specified interest rate. If this option is
chosen, it is important to determine the interest rate. Interest on
dividends left on deposit is taxable.
DIVIDEND ADDITION option in a participating policy under
which dividends are used to purchase fully paid-up units of whole
life insurance. This option deserves careful consideration by young
families since it allows the purchase of extra life insurance without
having to take a physical examination. Paid-up additions generate
dividends and cash values that in turn will generate additional
dividends and cash values.
DIVIDEND ILLUSTRATION picture of future DIVIDENDS that the
insurance company expects to be allocated to a specific BLOCK OF
POLICIES. The accuracy of this picture depends on the actual future

mortality, investment, and expense experience being the same as

that of the projected dividends. One way to judge the validity of the
projected dividends is to ascertain the dividends that the company
has actually paid out in the past and the dividends that it is
currently paying out. Although this is not a guarantee of future
payments, it can be a strong indication of future payouts.
DIVIDEND OPTION methods of handling policyholder dividends.
In a participating life insurance policy, dividends are paid to the
policyowner according to which of the following options is
selected: (1)
 Page 141
applied to reduce premiums; (2) paid in cash; (3) purchase
increments of paid-up life insurance; (4) left on deposit with the
insurance company to accumulate at interest; or (5) purchase
extended term life insurance for one year in the amount a dividend
can buy (Fifth Dividend Option). Some health and property
insurance policies have dividend options.
DIVIDEND RATIO relationship of POLICYOWNER DIVIDENDS to EARNED PREMIUMS.
DIVIDENDS ACTUALLY PAID historical record of DIVIDENDS paid.
DIVIDEND SCALE DIVIDENDS paid historically, currently, and
projected. See also DIVIDEND ILLUSTRATION.
DIVISIBLE CONTRACT CLAUSE in PROPERTY INSURANCE contracts,
provision that states that the violation of one or more contract
condition(s) at a particular location that is insured will not void
coverage at other insured locations.
DIVISIBLE SURPLUS proportion of an insurance company's total
surplus at the end of each year's operation that is distributed to
policy-owners of participating life insurance policies.
DOC see DRIVE OTHER CAR INSURANCE.
DOCTRINE OF LAST CLEAR CHANCE see LAST CLEAR CHANCE.
DOLLAR COST AVERAGING strategy of regularly investing a
fixed amount of dollars into a VARIABLE DOLLAR ANNUITY over a substantial
period of time regardless of the ACCUMULATION UNIT VALUE. The investment
will be made when the unit value is low, high, or moderate,
permitting the average cost per unit to be significantly below the
high point in the market. Thus, the investor will not be confronted
with "Buying High" and "Selling Low."
DOMESTIC INSURER insurance company incorporated
according to the laws of the state in which a risk is located and the
policy issued. The insurance company is domiciled in that state.
DOMICILE state in which an insurance company has its principal
legal residence; where an individual resides in a fixed permanent
home.
DOMINO THEORY OF ACCIDENT CAUSATION theory
developed in 1931 by H. W. Heinrich; states that an accident is only
one of a series of factors, each of which depends on a previous
factor in the following manner:
1. accident causes an injury.
2. individual's negligent act or omission, or a faulty machine,
causes an accident.
3. personal shortcomings cause negligent acts or omissions.
4. hereditary and environment cause personal shortcomings. See
also HEINRICH, H. W.
 Page 142
DOUBLE INDEMNITY see ACCIDENTAL DEATH CLAUSE.
DOUBLE-PROTECTION POLICY life insurance contract that
combines TERM LIFE INSURANCE with WHOLE LIFE INSURANCE. The term portion of
the contract expires after a stipulated time period. If the insured
dies during this stipulated period, both the term portion and the
whole life portion of the contract will pay. If the insured dies after
the stipulated time period, only the whole life portion of the
contract will pay.
DOUBLE RECOVERY payments in excess of the value of the
lossa prohibited practice. When an insured has more than one
policy covering a risk, the full value cannot be collected from each
policy if a loss occurs. The most that can be collected is each
policy's pro rata share of the loss. For example, a home is insured
under two policies of $100,000 each. If there is a fire loss of
$100,000, the most that can be collected from each policy is
$50,000.
DOWER INTEREST wife's interest in her husband's property upon
his death. The wife has an insurable interest in that property and
can purchase a property and casualty insurance policy to cover the
EXPOSURES faced by it. See also COURTESY INTEREST.

DOWNSTREAM HOLDING COMPANY holding company

established by a MUTUAL INSURANCE COMPANY. The mutual insurance
company has 100% ownership of the holding company.
DRAM SHOP LAW liquor liability legislation in 20 states under
which a dispenser of alcoholic beverages is held responsible for
bodily injury and/or property damage caused by its customers to a
third party. Insurance coverage is available, but at a high premium
rate. See also DRAM SHOP LIABILITY INSURANCE; LIQUOR LIABILITY LAWS.
DRAM SHOP LIABILITY INSURANCE coverage for dispensers
of alcoholic beverages against suits arising out of bodily injury
and/or property damage caused by its customers to a third party.
Establishments covered include bars, restaurants, hotels, motels, or
wherever the alcoholic beverages are dispensed. These
establishments are excluded from coverage under GENERAL LIABILITY
INSURANCE.

DREAD DISEASE INSURANCE health insurance coverage only

for a specified catastrophic disease such as cancer. It is important to
ascertain the waiting period required, maximum benefits and
maximum length of time they are payable, and the exact definition
of the disease covered. Individual and group health insurance
usually cover all diseases, including dread diseases.
DRIVE OTHER CAR INSURANCE (DOC) endorsement to an
automobile insurance policy that protects an insured in either or
both of two circumstances when driving a nonowned car:
1. business endorsementif the insured's negligent acts or omissions
result in bodily injury or property damage to a third party while the
insured is driving a nonowned car for business activities.
 Page 143
2. personal endorsementif the insured's negligent acts or omissions
result in bodily injury or property damage to a third party while the
insured is driving a nonowned car for nonbusiness activities.
DRIVING WHILE INTOXICATED (DWI) term for operating an
automobile while under the influence of alcoholic beverages so as
to be unable to drive safely. An insurance company can suspend
auto coverage under a PERSONAL AUTOMOBILE POLICY (PAP).
DROP DOWN in REINSURANCE contracts, clause that requires the
REINSURER to provide coverage if an underlying carrier is unable to

fulfill its obligations under the policy CEDED to the reinsurer.

DRUG FORMULARIES recommendation of medications that
should be prescribed for certain ailments. They can be classified as
follows: (1) open or voluntaryrecommends a list of drugs to
physicians that is supposed to be the most cost-effective for a
certain ailment; (2) closeddictates which drugs will be covered by a
benefit plan.
DRUG-FREE WORKPLACE ACT OF 1988 federal statute
relating to drug abuse policies that requires all employers with
federal contracts at least equal to $25,000 to certify, as a condition
of receiving a federal contract, that the employer will provide and
maintain a drug-free workplace. In addition, a recipient of a federal
grant (award of financial assistance that includes block grant and
entitlement grant programs), as well as an independent contractor,
must certify that the employer will provide and maintain a drug-
free workplace. This act also requires federal contractors and
grantees to publish and distribute a policy statement stating the
prohibitions against the unlawful manufacture, distribution,
dispensation, possession, or use of controlled substances in the
workplace. An ongoing drug-free awareness program must be
established warning employees of the dangers of drug abuse.
DRUGGISTS LIABILITY INSURANCE coverage in the event
that, while practicing the profession of druggist, an act or omission
is committed resulting in bodily injury, personal injury, and/or
property damage to a customer. Also covered is liability arising
through the use of products on or off of the business's premises.
For example, a child is born after a druggist negligently places
sugar tablets instead of birth control pills in a container for a
customer. The druggist may have to provide funds necessary to
sustain the child until the age of majority.
DUAL CAPACITY DOCTRINE rule of law under which a
defendant who has two or more relationships with a plaintiff may
be liable under any of these relationships. For example, an
employer may be liable in two ways to an employee who incurs
bodily injury on the job as the result of using a product or service
produced by that employer: first, as the employer of the injured
employee, and second, as the producer of the product or service
that caused injury to the employee. The injured employee may then
either collect benefits for job-related
 Page 144
injuries under workers compensation or sue the employer as the
producer of the defective product or service. For example, if an
employee injures an arm at work while operating a machine with a
defective blade that the employer manufactures, the employee can
receive benefits under workers compensation or sue the employer
as the manufacturer of the defective blade.
DUAL LIFE STOCK COMPANY stock life insurance company
that sells PARTICIPATING INSURANCE and NONPARTICIPATING INSURANCE.
DUE CARE/DUE DILIGENCE assurance by the agent that the
recommended insurance plan for the client is suitable for that
client's specific needs. This assurance is derived from a careful
analysis by the agent of the insurance company's financial strength,
the accuracy of the policy illustrations, and the treatment of its
previous and current policyowners.
DUPLICATION OF BENEFITS coverage in health insurance by
two or more policies for the same insured loss. In such a
circumstance, each policy pays its proportionate share of the loss,
or one policy becomes primary and the other policy secondary. See
also COORDINATION OF BENEFITS.
DUPLICATION OF EXPOSURE UNITS see SEGREGATION OF EXPOSURE
UNITS.

DURABLE POWER OF ATTORNEY authority to act on behalf of

an individual that terminates upon its revocation or death of that
individual.
DURATION AVERAGING disciplined approach to managing an
INSURANCE COMPANY'S bond portfolio duration. When interest rates rise,
the average maturity and duration of the bond portfolio is
lengthened, resulting in the portfolio becoming more aggressively
positioned to take advantage of the falling bond prices. Conversely,
when interest rates fall, the average maturity and duration of the
bond portfolio is shortened, resulting in the portfolio becoming
more defensively positioned to take advantage of the rising bond
prices.
DURATION OF BENEFITS see DISABILITY INCOME INSURANCE.
DUTIES OF AN INSURED IN THE EVENT OF LOSS UNDER
PROPERTY AND CASUALTY POLICY see PROPERTY AND CASUALTY
INSURANCE PROVISIONS.

DUTIES OF INSURED see INSURANCE CONTRACT, LIFE; INSURANCE CONTRACT,

PROPERTY AND CASUALTY.

DWELLING, BUILDINGS, AND CONTENTS INSURANCE

(DB&C) coverage when residential property does not qualify
according to the minimum requirements of a homeowner's policy,
or because of a requirement for the insured to select several
different kinds of coverage and limits on this protection. DB&C
insurance coverages can be selected from the following forms and
attached to the Standard Fire Policy:
 Page 145
1. Basic/Regular/General FormCoverage for property damage to a
building used as a dwelling, as well as its contents. (Contents
coverage is not restricted to the building or dwelling; coverage can
be applied to contents of buildings such as hotels, that do not
qualify as dwellings under the DB&C). The property coverage for
the building includes items attached to the building such as
equipment and fixtures, built-ins, furnace, air conditioner, hot
water heater, and lighting fixtures. An optional extension of the
dwelling coverage of up to 10% can be applied to private structures
on the premises such as a garage. Contents coverage on household
and personal goods within the dwelling can be extended to off-
premises household and personal contents for up to 10%. Perils
insured for both dwelling and contents are fire, lightning, and
removal of the property from the premises to further protect it from
damage from the perils. For an additional charge, vandalism and
malicious mischief can also be insured against.
2. Broad FormIncludes the basic coverages plus the additional
perils of burglary; falling objects; weight of snow and/or ice;
accidental discharge, leakage, or overflow of water or steam from
an air conditioning, heating, and/or plumbing mechanism and/or
household appliance; glass breakage; damage resulting from water
or freezing of plumbing and/or heating mechanisms; and structural
problems leading to the collapse of the building. Damage from
insured perils resulting in additional living expenses is also
provided.
3. Special FormCoverage on an ALL RISKS basis for only the structure
of a dwelling, with no coverage for its contents.
DWELLING COVERAGE see DWELLING, BUILDINGS, AND CONTENTS INSURANCE
(DB&C).

DWELLING FORM see DWELLING, BUILDINGS, AND CONTENTS INSURANCE (DB&C).

DWELLING INSURANCE POLICY PROGRAM coverage for a
dwelling's structure; appurtenant structures on the premises;
personal contents and household items within the dwelling; and
10% of the coverage applicable to such personal contents and
household items away from the premises, for example at a hotel.
Additional living expenses are covered because of the damage of
an insured peril to the dwelling and/or its contents, and loss of
rental value of the dwelling and/or its contents.
DYNAMIC changing state of the economy associated with changes
in human wants and desires such that losses or gains occur.
Dynamic changes are not insurable.
DYNAMIC FINANCIAL ANALYSIS procedure for examining
the total financial position of the insurance company over future
time periods under various changing scenarios of uncertainty
involving interest rates, mortality rates, and equity rates of return.
 Page 146
DYNAMIC RISK see DYNAMIC.
DYNAMO CLAUSE see ELECTRICAL EXEMPTION CLAUSE.
DYNASTY TRUST TRUST in which ASSETS are controlled through
several generations and makes use of generation-skipping tax
exemption.
 Page 147

E
E&O see ERRORS AND OMISSIONS LIABILITY INSURANCE.
EARLY DISTRIBUTIONS FROM SECTION 401(a), 403(a),
403(b) RETIREMENT PLAN plan in which funds are withdrawn
or income begins before the plan participant reaches age 59 1/2. An
extra 10% early distribution tax on the taxable amount may have to
be paid unless any one of the following conditions exist: (1)
distribution because the participant is disabled; (2) participant is
separated from job after the attainment of at least age 55 and the
distribution is received at that time; (3) participant terminates job
and begins to receive annuity income consisting of a series of
substantially equal payments at regular intervals (at least on an
annual basis) over the lifetime, or life expectancy, or joint life
expectancies of the participant and the participant's beneficiary;
and (4) participant incurs medical expenses of at least 7 1/2% of
adjusted gross income. If the participant dies before reaching age
59 1/2, the beneficiary(s) will not be subject to the payment of the
10% early distribution tax.
The availability of cash withdrawals and annuity income based on
funds contributed as well as earnings on those funds under salary
reduction plans beginning January 1, 1989 is restricted by the
Internal Revenue Code. Such withdrawals and receipt of income
can only be made if the plan participant is at least age 59 1/2,
terminates employment, becomes disabled, or dies.
EARLY RETIREMENT term in pensions; leaving a job before
normal retirement age, subject to minimum requirements of age
and years of service. There usually is a reduction in the monthly
retirement benefit.
EARNED PREMIUM portion of a premium paid by an insured that
has been allocated to the insurance company's loss experience,
expenses, and profit year to date.
EARNED RIGHT basic feature of the SOCIAL SECURITY ACT under which
benefits paid are associated with the employee's earnings that have
been taxed during the employment period.
EARNED SURPLUS see RETAINED EARNINGS.
EARNINGS INSURANCE see GROSS EARNINGS FORM.
EARTHQUAKE INSURANCE coverage that can be purchased as
an endorsement to many property policies such as the Standard
Fire Policy or as a separate policy. Coverage is for direct damage
resulting from earthquake or volcanic eruption. If there is a lapse of
at least 72 hours between earthquake shocks, then each loss by a
given earthquake is subject to a new claim. Excluded are losses
resulting from fire, explosion, flood, or tidal wave.
 Page 148
EASEMENT right of one party to use land owned by another party.
For example, an electric utility can obtain an easement through
court action to place its power lines across someone's property,
even if the owner is unwilling to give permission.
ECONOMIC BENEFIT see SPLIT DOLLAR LIFE INSURANCE.
ECONOMIC LOSS total estimated cost incurred by a person or
persons, a family, or a business resulting from the death or
disability of a wage earner (KEY EMPLOYEE), damage or destruction of
property, and/or a liability suit (negligent acts or omissions by a
person result in property damage or bodily injury to a THIRD PARTY).
Factors included in the total cost are loss of earnings, medical
expenses, funeral expenses, property damage restoration expenses,
and legal expenses. See also ECONOMIC OR USE VALUE; HUMAN LIFE VALUE APPROACH
(ECONOMIC VALUE OF AN INDIVIDUAL LIFE) (EVOIL); SPLIT DOLLAR LIFE INSURANCE.

ECONOMIC OR USE VALUE property valued according to its

earnings potential. However, property insurance contracts generally
indemnify an insured on a REPLACEMENT COST LESS PHYSICAL DEPRECIATION AND
OBSOLESCENCE BASIS.

ECONOMIC VALUE OF AN INDIVIDUAL LIFE (EVOIL) see

HUMAN LIFE VALUE APPROACH.

EDUCATIONAL FUND factor considered in determining amount

of life insurance to purchase in order that funds will be available to
pay for a child's education expenses in the event of the premature
death of the wage earner. See also NEEDS APPROACH.
EEL see EMERGENCY EXPOSURE LIMIT (EEL).
EFFECTIVE DATE date at which an insurance policy goes into
force. See also DATE OF ISSUE.
EFFECTIVE FEDERAL INCOME TAX RATE ratio of insurance
company's federal income taxes to pretax net income.
EFFECTIVE TIME see DATE OF ISSUE; EFFECTIVE DATE.
EGRESS exit, act of leaving or going out.
EITF 93-6 rule adopted by the FINANCIAL ACCOUNTING STANDARDS BOARD that
requires that obligations owed to REINSURERS under multiyear
insurance contracts must be reported as liabilities by the CEDING
COMPANIES and as assets by the reinsurers. Conversely, if the ceding

companies make a profit under the contract, it must report the

profit as an asset and the reinsurers must report the profit as a
liability.
ELECTRICAL (ELECTRICAL APPARATUS) EXEMPTION
CLAUSE common element in property insurance that excludes
electrical damage or destruction of an appliance unless the damage
is caused by a resultant fire.
 Page 149
ELECTRONIC DATA INTERCHANGE (EDI) method used to
reduce WORKERS COMPENSATION INSURANCE costs by using a single database
system to electronically link claims administration, medical claim
costs, RISK MANAGEMENT, and vendor services. EDI can reduce errors in
claims handling thereby making the process more efficient. Also,
EDI permits the comprehensive gathering of demographic claims
data pinpointing the factors that affect the risk.
ELEMENTS OF AN INSURANCE CONTRACT see ANALYSIS OF
PROPERTY AND CASUALTY POLICY; INSURANCE CONTRACT, GENERAL; INSURANCE CONTRACT, HEALTH;

INSURANCE CONTRACT, LIFE; INSURANCE CONTRACT, PROPERTY AND CASUALTY.

ELEVATOR COLLISION INSURANCE liability coverage for

damage or destruction of a structure, elevator, and/or personal
property due to the collision of an elevator.
ELEVATOR LIABILITY INSURANCE coverage for suits brought
by a plaintiff as the result of bodily injury incurred while using an
elevator on the insured's premises.
ELIGIBLE EXPENSES see GROUP HEALTH INSURANCE.
ELIGIBLE RETIREMENT PLAN plan under which an employee
may make a ROLLOVER contribution. If that contribution is from a
QUALIFIED TRUST, the employee may make rollover contributions to an

employer's qualified trust, INDIVIDUAL RETIREMENT ACCOUNT (IRA), or an ANNUITY.

ELIGIBLE ROLLOVER DISTRIBUTIONS payments from an
employee's EMPLOYEE BENEFIT INSURANCE PLAN that can be rolled over to an
INDIVIDUAL RETIREMENT ACCOUNT (IRA) or to another plan maintained by the

employer that accepts rollovers.

ELIGIBILITY PERIOD length of time in life and health insurance
in which an employee can apply for and pay the first premium
without having to show evidence of insurability (take a physical
examination). The period is usually the first 30 days of
employment. After expiration of the eligibility period, an employee
may have to take a physical or provide medical history information
to qualify for coverage. If the employee does not pass the physical,
coverage can be denied under a group plan or the employee can be
charged a much higher premium rate than the group rate. This is
why it is extremely important for a new employee to apply for
group life and health insurance during the eligibility period.
ELIGIBILITY REQUIREMENTS conditions found in employee
benefit plans such as pensions, under which minimum
requirements, such as 20 years of service, must be met by an
employee to qualify for benefits.
 Page 150
ELIMINATION PERIOD form of deductible usually found in
disability income insurance; for example, no benefits may be
payable for a length of time beginning with the first day of illness.
Subsequently, benefits are usually paid only for costs incurred after
the end of the elimination period. The longer the elimination period
in a policy, the lower the premium.
EMBEZZLEMENT theft of another's property by a person
entrusted with that property. Coverage can be found under various
bonding arrangements. See also FIDELITY BOND.
EMERGENCY EXPOSURE LIMIT (EEL) maximum amount of a
toxic agent to which an individual can be exposed for a very brief
(emergency) period of time and still maintain physical safety. See
also THRESHOLD LEVEL.
EMERGENCY FUND factor considered in determining amount of
life insurance to purchase in order that funds will be available to
pay the emergency expenses following the death of a family
member. See also NEEDS APPROACH.
EMPIRICAL CONSIDERATION LOADING to the BURNING COST RATIO for a
reinsurer's expenses, profit, and to build a reserve to meet
unusually large claims.
EMPIRICAL PROBABILITY mathematical relationship resulting
from experimentation. For example, the PROBABILITY DISTRIBUTION for the
possible number of heads from four tosses of a fair coin having
both a head and a tail can be calculated from experimentation and
observation by allowing for the accumulation of empirical data.
EMPIRICAL RATE CALCULATION adjustment of the BURNING COST
RATIO for the increase in number and size of losses (losses likely in
excess of that used in the unadjusted burning cost rate), INCURRED BUT
NOT REPORTED LOSSES (IBNR), inflation, expenses, profits, and contingencies.

EMPLOYEE AS AN INSURED see BUSINESS LIABILITY INSURANCE;

BUSINESSOWNERS POLICY (BOP).

EMPLOYEE ASSISTANCE PROGRAMS (EAPs) programs that

deal with troublesome personal and family problems such as
alcohol and drug abuse, marital problems, workplace violence,
compulsive gambling, child care, legal problems, and care of
elderly relatives.
EMPLOYEE BENEFIT INSURANCE PLAN provision by an
employer for the economic and social welfare of employees.
Generally include: (1) pension plans for retirement; (2) group life
insurance for death; (3) group health insurance for illness and
accident; (4) group disability income insurance for loss of income
due to illness and accident; and (5) accidental death and
dismemberment. Dental insurance, eyeglass insurance, and legal
expense insurance
 Page 151
may be included. These plans are established for the reasons of
morale, to reduce turnover, and for tax benefits (contributions are
usually deductible as business expenses to employers and not
currently taxable income to employees).
EMPLOYEE CONTRIBUTIONS workers' premiums in a
contributory employee benefit plan.
EMPLOYEE DEATH BENEFITS see EMPLOYEE BENEFIT INSURANCE PLAN.
EMPLOYEE DISHONESTY see FIDELITY BOND.
EMPLOYEE FRIENDLY BENEFITS employee benefit plan that
provides such benefits as long-term care insurance, dependent care
spending amounts, sabbaticals, and parental leave.
EMPLOYEE HEALTH BENEFITS see EMPLOYEE BENEFIT INSURANCE PLAN.
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF
1974 (ERISA) law that established rules and regulations to govern
private pension plans, including vesting requirements, funding
mechanisms, and general plan design and descriptions. For
example, three ways of vesting were established: full vesting after
10 years of service (Cliff Vesting); FIVE TO FIFTEEN YEAR RULE (at least 25%
of benefits vest at end of 5 years of service, 5% each year during
the next 5 years, and 10% each year during the next 5 years); and
Rule of 45 (when employee's age and years of service add up to
45), 50% of the benefits must be vested with 10% additional
vesting each year thereafter.
Under the TAX REFORM ACT OF 1986, vesting requirements were changed to
100% vesting after 5 years of service or 20% vesting after 3 years
of service, 40% at the end of 4 years of service, 60% at the end of 5
years of service, 80% at the end of 6 years of service and 100% at
the end of 7 years of service. (These vesting requirements are
effective as of January 1, 1989.)
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF
1974 (ERISA) BOND federal law requiring that all PENSION PLAN
trustees and anyone else who handles pension funds must obtain a
FIDELITY BOND. This bond covers the plan in the event of embezzlement

and theft. It is important to note that this bond does not provide
coverage in the event poor investment choices result in losses. The
insurance company as well as the amount of the bond must be
stated in FORM 5500 filed annually with the Internal Revenue
Service. The amount of the bond must be at least 10% of the
pension plan's assets or $1000, whichever is the greatest amount.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) TRUST type
of benefit in which an employee obtains shares of stock in the
company, the amount normally determined by the employee's level
of compensation. ESOP acts as a leverage tool through which the
business is able
 Page 152
to obtain a source of capital. The procedure is for a lender (usually
a bank) to lend money to the ESOP. The ESOP then takes the
borrowed money to buy stock from the company's treasury. In the
meantime, the ESOP has signed a note with the lender for the
borrowed funds with the stock pledged as collateral for the loan,
and the business has guaranteed repayment if the ESOP fails to do
so. The stock held in the ESOP is allocated to each employee as the
business pays its contributions into the ESOP. The ESOP uses the
company's contributions to repay the loan and the interest thereon.
The contributions per employee that the company makes into the
ESOP are tax deductible, and they are not taxable to the employee
until the benefits are received.
EMPLOYER CREDITS in a pension plan that an employer is
required to make against future contributions (other than a cash
basis as required by the IRS). Such credits may arise when an
employee leaves an employer prior to being fully vested, works
beyond normal retirement age.
EMPLOYERS CONTINGENT ESCROWING OF ASSETS
LIABILITY see EMPLOYERS CONTINGENT NET WORTH LIABILITY DETERMINATION.
EMPLOYERS CONTINGENT INSURANCE COVERAGE
LIABILITY coverage mandated by the EMPLOYEE RETIREMENT INCOME SECURITY ACT OF

1974 (ERISA) under which employers are required to purchase insurance

to cover their contingent liability for unfunded employee pension

benefits in the event a pension plan is terminated. This requirement
is enforced by the PENSION BENEFIT GUARANTY CORPORATION (PBGC).
EMPLOYERS CONTINGENT LIABILITY see EMPLOYERS CONTINGENT
INSURANCE COVERAGE LIABILITY; EMPLOYERS CONTINGENT LIEN AGAINST ASSETS LIABILITY.
EMPLOYERS CONTINGENT LIEN AGAINST ASSETS
LIABILITY claim (lien) of the PENSION BENEFIT GUARANTY CORPORATION (PBGC)
against an employer's assets upon termination of a pension plan for
the amount of an employee's unfunded benefits.
EMPLOYERS CONTINGENT NET WORTH LIABILITY
DETERMINATION requirement upon termination of a pension
plan; an employer must reimburse the PENSION BENEFIT GUARANTY CORPORATION
(PBGC) for any loss that the PBGC incurs as the result of paying

employee benefits that were the responsibility of the employer. The

law requires reimbursement of up to 30% of the plan's net worth
without regard to any contingent liability. This net worth is
increased by escrowing or transferring any assets by the employer
in contemplation of the plan's termination.
 Page 153
EMPLOYERS INSURANCE see BUSINESS AUTOMOBILE POLICY (BAP); BUSINESS
CRIME INSURANCE; BUSINESS INCOME COVERAGE FORM; BUSINESS LIFE AND HEALTH INSURANCE;

BUSINESS PROPERTY AND LIABILITY INSURANCE PACKAGE; BUSINESSOWNERS POLICY (BOP).

EMPLOYERS LEGAL OBLIGATION TO FUND pension plan

format. After deciding how much to contribute, the employer can
suspend, reduce, or discontinue contributions during the first 10
years only for reasons of business necessity; otherwise the
employer will face a substantial IRS tax penalty. If a plan is
terminated or if contributions to the plan are discontinued, the
employer is only liable for benefit payments for which
contributions were previously made.
EMPLOYERS LIABILITY COVERAGE see WORKERS COMPENSATION,
COVERAGE B.

EMPLOYERS NET WORTH see EMPLOYERS CONTINGENT NET WORTH LIABILITY

DETERMINATION.

EMPLOYERS NONOWNERSHIP LIABILITY INSURANCE

coverage for the employer in the event of a TORT committed by an
employee in the use of his or her own car while conducting
business on behalf of the employer.
EMPLOYMENT COST INDEX measurement of the changes in
labor costs for money wages and salaries and noncash fringe
benefits in nonfarm private industry and state and local
governments for employees. The statistics are provided on a
quarterly basis by the United States Bureau of Labor Statistics.
EMPLOYMENT PRACTICES LIABILITY COVERAGE plan
that provides protection in the event of legal actions resulting from
charges of harassment, discrimination, wrongful termination of
employment, defamation, and invasion of privacy.
ENCUMBRANCE claim, such as a worker's lien, to property under
the care, custody, and control of another. This situation occurs
when a worker is not paid for labor provided. For example, a
carpenter unable to collect payment for installing wood finishings
seeks an encumbrance on the owner's property.
ENDORSEMENT written agreement attached to a policy to add or
subtract insurance coverages. Once attached, the endorsement takes
precedence over the original provisions of the policy. For example,
under a homeowners policy an inflation guard endorsement is used
so that property damage limits are increased automatically to
reflect an increase in the cost of construction in the community.
Vandalism and malicious mischief can be added to the Standard
Fire Policy through an endorsement.
ENDOWMENT ANNUITY INSURANCE INSURANCE POLICY that
combines the elements of a DEFERRED ANNUITY with the elements of
 Page 154
This policy was originally designed to act
DECREASING TERM LIFE INSURANCE.

as a funding instrument for PENSION PLANS but is rarely used today.

ENDOWMENT INSURANCE life insurance under which an
insured receives the face value of a policy if the individual survives
the endowment period. If the insured does not survive, a
beneficiary receives the face value of the policy. An endowment
policy is the most expensive type of life insurance.
ENERGY-RELEASE THEORY (OF ACCIDENT CAUSATION)
method, developed in 1970 by Dr. William Haddon, Jr., of
classifying and preventing damage caused by accidents. The thesis
is that accidents are caused by the transfer of energy with such
force that bodily injury and property damage result. According to
Dr. Haddon, strategies can interrupt or suppress the chain of
accident-causing events. These strategies revolve around (1)
control and prevention of buildup of energy that is inherently
injurious; (2) creation of an environment that is not conducive to
injurious buildup of energy; and (3) production of counteractive
measures to injurious buildup of energy.
ENGINEERING APPROACH approach in loss prevention placing
emphasis on physical features of the workplace as a potential cause
of injuries. For example, if a product is inherently dangerous in
design or during manufacture, an insurance company may assign
an engineer to analyze the situation and recommend changes that
could improve safety and lower insurance premiums.
ENHANCED ORDINARY LIFE modified PARTICIPATING level
coverage permanent life insurance policy under which the
dividends are credited to the policy, thereby reducing the premiums
below that usually charged for an ordinary life insurance policy.
The structure of the policy is such that the dividends are used to
purchase increments of PAID-UP ADDITIONS of permanent life insurance.
As the FACE AMOUNT (FACE OF POLICY) is reduced (usually after 2, 3, or 4
years that the policy is issued), the accumulated paid-up additions
are generally sufficient to make up the difference between the
reduced face amount of insurance and the initial face amount of
insurance purchased. The purpose of this approach is to maintain
the DEATH BENEFIT at a level at least equal to the original amount of
insurance purchased. Most of these policies guarantee that the
death benefit will not fall below the original amount of insurance
purchased, regardless of the fact that the dividends prove to be
inadequate to purchase sufficient amounts of paid-up additions.
Another approach to the structuring of this product is to stipulate
that the face amount of the policy is equal to 50 to 90% of the
death benefit. The difference between the face amount and the
death benefit is comprised of paid-up additions of permanent
insurance and term insurance purchased by the dividends. This
procedure will guarantee that the payable death benefit will not fall
below that initially purchased.
 Page 155
As time goes on, the aggregate paid-up additions should be
sufficient so that it is no longer required that term insurance be
purchased.
ENROLLED ACTUARY see ACTUARY, ENROLLED.
ENROLLMENT CARD document used to sign up employees for
plans such as salary savings, life insurance, or other employee
benefits.
ENTIRE CONTRACT CLAUSE feature of life and health
insurance policies that stipulates that the policy represents the
whole agreement between the insurance company and the insured,
and that there are no other outstanding agreements.
ENTITY PLAN see PARTNERSHIP LIFE AND HEALTH INSURANCE.
ENURE CLAUSE in an INSURANCE POLICY stipulating that the benefits under
the policy will accrue to the right of the INSURED. For example, if the
insured leaves a violin at a repair shop and that violin, which is
insured under the HOMEOWNERS INSURANCE POLICY, is stolen, the insurance
company will pay the benefits to the insured and not to the repair
shop.
ENVIRONMENTAL IMPAIRMENT LIABILITY negligent acts
and/or omissions by the individual(s) and the organization(s)
resulting in damage to the environment. For example, pollution of
the environment suits against manufacturers are quite common
today. The pollution risk is an excluded uninsurable risk under
most liability policies; however, insurance coverage in some
instances is becoming available under ENVIRONMENTAL IMPAIRMENT LIABILITY
(EIL) INSURANCE policies.
ENVIRONMENTAL IMPAIRMENT LIABILITY (EIL)
INSURANCE coverage in the event that negligent acts and/or
omissions by individual(s) and organization(s) result in damage to
the environment and a liability suit against these parties.
ENVIROSOURCES search engine site that emphasizes the fields
of environmental risk management, environmental engineering,
environmental planning, physical and biological sciences, and
various environmental issues of public interest. Web site is
[Link]
EQUIPMENT DEALERS INSURANCE coverage on ALL RISKS basis
for such items as binders, reapers, harvesters, plows, tractors,
pneumatic tools and compressors, bulldozers, and road scrapers.
Excluded from coverage are wear and tear, loss due to delay, loss
of market, consequential loss such as loss of income because of
damage to the equipment, and mechanical breakdown. Property
excluded includes aircraft, water craft, motor vehicles, and
property sold on an installment contract basis after it has left the
care, custody, and control of the insured dealer.
EQUIPMENT FLOATERS INSURANCE coverage for property
that moves from location to location from the perils of fire,
lightning, explosion, windstorm, earthquake, collapse of bridges,
flood, collision
 Page 156
under one of the following forms: AGRICULTURAL EQUIPMENT INSURANCE;
CONTRACTORS EQUIPMENT FLOATER; LIVESTOCK INSURANCE; PHYSICIANS AND SURGEONS EQUIPMENT

INSURANCE.

EQUITIES representation of ownership rights such as stocks.

EQUITY fairness (as an objective of insurance pricing). Premium
rates are set according to expectation of loss among a classification
of policyowners. The premise is that all insureds with the same
characteristics should have the same expectation of loss and should
be listed under the same underwriting classification. For example,
in life insurance, individuals with a good personal health history,
family health history, a job with no special hazards, and who are of
good character, should be classified as standard risks and thereby
pay standard rates.
EQUITY AMONG POLICYOWNERS grouping of applicants for
life insurance according to expected mortality, so as to produce an
under-writing classification in which the spread between health of
the worst and best applicant is not so great as to skew the
distribution curve.
EQUITY ANNUITIES see VARIABLE DOLLAR ANNUITY.
EQUITY INDEXED ANNUITY modifications of the SINGLE PREMIUM
DEFFERED ANNUITY, which usually guarantees at a minimum a return of a

stipulated amount (usually at least 90% of the single premium

accumulated at the annual rate of 3 or 4%). Additional interest can
be earned that is linked to an increasing specified stock index.
Thus, this insurance product guarantees the principal of the
investment (single premium), while at the same time providing the
opportunity for increasing values tied to the equities market. Under
the STANDARD NONFORFEITURE LAW, there must be guaranteed at the minimum
90% of the single premium accumulated at a rate of at least 3%
interest per year. The index most often used as a link to this product
is the S&P 500. Should the equity index increase, the invested
single premium could be credited with a percentage of that
increase, typically ranging from 50 to 100% of that increase. These
contracts have terms ranging from one to fifteen years and at the
end of the term, the owner/ANNUITANT can start a new term or transfer
the CASH VALUE to another product. Should the contract be terminated
before the end of a term, frequently the owner/annuitant forfeits all
index gains and will receive only the minimum return guaranteed.
EQUITY INDEXED UNIVERSAL LIFE INSURANCE insurance
in which most of the premium (generally 80 to 90%) is invested in
traditional fixed income securities. The remainder of the premium
is invested in call option contracts tied to a stipulated stock index.
In those instances where there is an increase in the market,
exercising of the option contracts takes place and a given
percentage of the gain is then credited to the policy. Conversely,
should the market decline, the option contracts are said to expire
worthlessly and the policy is credited with the minimum
guaranteed rate. This type of policy may be suitable for that
 Page 157
person who has an interest in purchasing a VARIABLE LIFE INSURANCE policy
but is not at ease in participating in the equities market. This type
of person could have the best of both worlds: the potential high
returns of the equities market without the risk to the initial
investment (principal).
EQUITY, POLICYOWNERS see POLICYOWNERS EQUITY.
EQUITY SPLIT DOLLAR LIFE INSURANCE see SPLIT DOLLAR LIFE
INSURANCE.

ERGONOMICS RISK MANAGEMENT control device used to minimize

accidents and injuries to employees resulting from an unsafe
working environment. For example, potential CUMULATIVE TRAUMA
DISORDERS losses may be lowered by using office furniture that

reduces the physical and mental stress resulting from repetitive

motions, such as constantly reading a computer screen.
ERISA see EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA).
ERRORS AND OMISSIONS LIABILITY INSURANCE policies
generally available to the various professions that require
protection for negligent acts and/or omissions resulting in bodily
injury, personal injury, and/or property damage liability to a client.
For example, insurance agents are constantly exposed to the claim
that inadequate or improper coverage was recommended, resulting
in the client suffering a loss of indemnification. If sustained, the
agent (or the carrier) would have to make good the claim of the
client without the adequate insurance coverage.
ESCROW ACCOUNT funds that the lender collects monthly to
pay the monthly MORTGAGE INSURANCE premiums, HOMEOWNERS INSURANCE POLICY
premiums, and yearly property taxes.
ESTATE sum total of the ASSETS owned by an individual.
ESTATE EQUALIZATION technique of ESTATE PLANNING under which
an estate is divided into two parts and taxed at a lower rate rather
than remaining as a whole and taxed at a higher rate. This division
may be necessary because of the progressive nature of the FEDERAL
ESTATE TAX.

ESTATE PLANNING procedure for accumulating, conserving, and

distributing personal wealth. In essence, estate planning focuses on
enhancement of the value of an estate and its conservation. At the
death of an owner, estate planning seeks to transfer the estate to the
heir(s) with a minimum loss in taxes and other expenses.
Depending on the size and nature of an estate, the expertise of one
or more of these specialists may be useful: lawyer, accountant, life
insurance agent, banker, or a qualified financial or estate planner.
ESTATE PLANNING, DEATH PLANNING see ESTATE PLANNING; ESTATE
PLANNING DISTRIBUTION.
 Page 158
ESTATE PLANNING DISTRIBUTION plan that involves
distribution of property by living hand and distribution of property
after the death of its owner. Distribution by living hand can take the
form of an out-right gift, a grant of limited property interest, or a
gift in trust. Distribution at death can be accomplished through a
will or, if there is no will, as directed by state law. Common terms
include:
Beneficiary of Trust person who receives the benefits of the trust.
Life Estate property that can be used in any manner that pleases the
donee during his/her life. Upon the death of the donee, the property
reverts to the donor or the donor's estate.
Living Trust property distributed by living individuals.
Personal Trust one in which an owner of property gives it to
another person to safeguard, hold, and use for the benefit of a third
party.
Power of Appointment owner of a property grants the right to
another person to decide who should receive title to the property.
Tenancy donee has the right to use property and to receive income
it generates for a limited time, whereupon the property reverts to
the owner.
Testamentary Trust property disposed at the death of the trustor,
who has previously described what property is to be placed in the
trust, how it is to be managed, and who is to be the trustee. The
trustor can change the provisions of the trust by a will. But at the
death of the trustor, the testamentary trust becomes irrevocable.
Trustee person to whom a trustor transfers property. The trustee is
obligated to safeguard, manage, and use the property in accordance
with the terms and conditions of the trust.
Trustor individual who puts his/her thoughts in writing concerning
the terms of the trust and the process of transferring the property to
the trustee.
ESTATE PLANNING, LIFE PLANNING see ESTATE PLANNING; ESTATE
PLANNING DISTRIBUTION.

ESTATE SETTLEMENT COSTS expenses connected with

resolving an estate to include medical expenditures, funeral
expenditures, probate expenditures, estate taxes, legal fees, and
other administrative expenditures.
ESTATE SHRINKAGE decline in an estate's value, when the estate
owner dies, because of death-related expenses to include estate
taxes, estate administration costs, funeral expenses, and
outstanding estate debts. Through proper ESTATE PLANNING, this
shrinkage can be minimized.
ESTATE TAX see FEDERAL ESTATE TAX.
ESTATE TRANSFERS conveying of assets from the donor to the
beneficiary as a means of minimizing the legal tax obligation of the
estate of the donor and avoiding PROBATE.
 Page 159
ESTIMATED PREMIUM method of premium payment under
which a temporary premium is charged based on projected loss
experience. At the end of the year this premium is adjusted to
reflect the actual loss experience. See also RETROSPECTIVE RATING.
ESTOPPEL stop or bar, such that one party makes a statement
upon which a second party has every reason to rely, thereby
preventing the first party from denying the validity of that
statement. For example, the misleading actions of an agent of the
insurance company result in the insured being estopped from
having to perform according to the provisions of the contract.
EVIDENCE CLAUSE clause requiring an insured to cooperate
with an insurance company by producing all evidence requested in
settlement of a claim. The company may have difficulty settling a
claim without the proper examination and documentation of
evidence.
EVIDENCE OF INSURABILITY documentation of physical
fitness by an applicant for insurance. Usually this takes the form of
a medical examination. Group plans (life, health, disability) require
such evidence if the 30-day eligibility period expires before the
employee has applied for coverage. See also ELIGIBILITY PERIOD.
EXAMINATION see CONVENTION EXAMINATION; MEDICAL EXAMINATION.
EXAMINED BUSINESS life or health insurance policy written on
an applicant who has passed a MEDICAL EXAMINATION and signed the
APPLICATION but has not paid the premium due.

EXAMINER
Life and Health: physician appointed by an insurance company to
examine applicants for insurance. See also EXAMINED BUSINESS.
Regulatory: representative of the COMMISSIONER OF INSURANCE who conducts
an audit of the insurance company's records. See also CONVENTION
EXAMINATION.

EXCEPTED PERIOD see ELIMINATION PERIOD; PROBATIONARY PERIOD.

EXCEPTION see EXCLUSIONS; EXCLUSIONS, BUSINESS LIABILITY INSURANCE; EXCLUSIONS
FROM MEDICAL BENEFITS EXEMPTION; EXCLUSIONS, HOMEOWNERS INSURANCE; EXCLUSIONS, PROPERTY

AND CASUALTY INSURANCE.

EXCESS BENEFIT TRANSACTION transaction by a tax-exempt

organization with a person from inside the organization (DISQUALIFIED
PERSON) that provides an economic benefit to that person that is in

excess of the value of the consideration received. Compensation

that is deemed to be unreasonable comprises an excess benefit and
is subject to a penalty excise tax under SECTION 4958 OF THE INTERNAL REVENUE
CODE.

EXCESS DISTRIBUTIONS FROM SECTION 401(a), 403(a),

403(b) RETIREMENT PLAN OR IRA plan wherein total
withdrawal or income payments from tax deferred savings plans
exceed
 Page 160
$150,000 in any one year. An excess distribution tax of 15% of the
amount greater than $150,000 must be paid to the Internal Revenue
Service.
EXCESS INSURANCE property, liability, or health coverage
above the primary amount of insurance. For example, the primary
coverage is $100,000 and the excess insurance is $1 million. After
the losses exceed $100,000, the excess insurance will pay for the
losses up to a total of $1 million.
EXCESS INTEREST amount credited to the cash value of an
insured's life insurance policy above the minimum interest rate it
guarantees. This payment is of extreme importance to a
policyowner since it will directly affect the size of the cash value.
See also CASH VALUE LIFE INSURANCE.
EXCESS INTEREST WHOLE LIFE INSURANCE type of
insurance under which it is assumed that the interest earned will
exceed the interest rate guaranteed. Excess interest is credited to
the policyowner in the following manner:
1. in a mutual companypaid to policyowners through the policy
dividend structure.
2. in a stock companypaid to policyowners through their cash
values or future premiums due. See also CURRENT ASSUMPTION WHOLE LIFE
INSURANCE.

EXCESS LIMIT in a LIABILITY INSURANCE policy, limit above the

minimum amount of coverage for which the policy can be written
according to company or legal restrictions. See also EXCESS INSURANCE.
EXCESS LINE BROKER (SURPLUS LINE BROKER) insurance
salesperson who is licensed to place coverage with an insurance
company that is not licensed to do business in the state of domicile
of the broker. The excess line coverage must be unavailable from a
company licensed in the broker's state.
EXCESS LOSS COVER see EXCESS OF LOSS REINSURANCE.
EXCESS (NONPROPORTIONAL) REINSURANCE see EXCESS OF
LOSS REINSURANCE.

EXCESS OF LOSS REINSURANCE method whereby an insurer

pays the amount of each claim for each risk up to a limit
determined in advance and the reinsurer pays the amount of the
claim above that limit up to a specific sum. For example, assume
that an insurer issues automobile liability policies of $150,000 on
any one risk and retains the first $50,000 of any risk. The insurer
purchases excess loss rein-surance for $100,000 in excess of
$50,000 on any one risk. The insurer pays the first $50,000 of all
losses, and the reinsurer pays any excess amount up to a maximum
of $100,000.
 Page 161
EXCESS OF TIME REINSURANCE term used in the reinsuring
of DISABILITY INCOME INSURANCE policies in that, after an extended period of
time expires (in addition to the ELIMINATION PERIOD found in the disability
income policy), the REINSURER usually reimburses the CEDING COMPANY for
approximately 70 to 80% of the monthly disability income
payment that the ceding company is required to pay the POLICYHOLDER.
EXCESS PER RISK REINSURANCE see EXCESS OF LOSS REINSURANCE.
EXCESS POLICY policy that pays benefits only when coverage
under other applicable insurance policies has become exhausted.
For example, the personal umbrella liability policy pays after the
liability limits in the homeowners insurance policy have been
exceeded.
EXCESS-SURPLUS LINES see SURPLUS LINES (EXCESS-SURPLUS LINES).
EXCHANGE see NEW YORK INSURANCE EXCHANGE.
EXCLUDED PERIL see EXCLUSIONS; EXCLUSIONS, BUSINESS LIABILITY INSURANCE;
EXCLUSIONS FROM MEDICAL BENEFITS EXEMPTION; EXCLUSIONS, HOMEOWNERS INSURANCE;

EXCLUSIONS, MEDICAL BENEFITS; EXCLUSIONS, PROPERTY AND CASUALTY INSURANCE.

EXCLUDED PERIOD see PROBATIONARY PERIOD.

EXCLUDED PROPERTY see EXCLUSIONS, BUSINESS LIABILITY INSURANCE;
EXCLUSIONS, PROPERTY AND CASUALTY INSURANCE.

EXCLUSION RATIO see TAX DEFERRED ANNUITY.

EXCLUSION RIDER ENDORSEMENT attached to an insurance policy
that eliminates coverage for certain specified PERILS.
EXCLUSIONS provision in an insurance policy that indicates what
is denied coverage. For example, common exclusions are: hazards
deemed so catastrophic in nature that they are uninsurable, such as
war; wear and tear, since they are expected through the use of a
product; property covered by other insurance, in order to eliminate
duplication that would profit the insured; liability arising out of
contracts; and liability arising out of Workers Compensation laws.
Exclusions are also listed in a BOILER AND MACHINERY INSURANCE policy,
BUSINESS AUTOMOBILE POLICY, BUSINESS INCOME COVERAGE FORM, HOMEOWNERS INSURANCE POLICY,

Liability Policy, and COMMERCIAL PACKAGE POLICY.

EXCLUSIONS, BUSINESS LIABILITY INSURANCE provision
used to avoid duplication of coverage in other policies; to eliminate
coverage for property under the care, custody, and control of an
insured business; as well as to avoid liability arising out of
contractual obligations between the insured business and another
party; liability
 Page 162
associated with recall of the insured business's products; liability
associated with the insured business's pollution and contamination
exposure; and liability that may arise if the insured business is
found to be in conflict with state liquor regulations.
EXCLUSIONS FROM MEDICAL BENEFITS EXEMPTION
found under the ''Exceptions and Exclusions Section for All
Medical Benefits" in many health insurance policies that exclude:
1. complications arising from elective, nontherapeutic voluntary
abortion.
2. necessary cosmetic surgery for the immediate repair of a
nonoccupational disease, illness, accident, or injury.
3. custom-built orthopedic shoes, wedges, or arch supports.
4. speech therapy ordered by a physician to restore partial or
complete loss of speech resulting from stroke, cancer, radiation
laryngitis, or cerebral palsy.
5. services, supplies, or treatment in connection with or related to
endogenous obesity or obesity resulting from external causes that
the physician certifies is associated with a serious or life-
threatening disorder.
EXCLUSIONS FROM MEDICAL BENEFITS GROUP HEALTH
INSURANCE see EXCLUSIONS, MEDICAL BENEFITS; EXCLUSIONS FROM MEDICAL BENEFITS
EXEMPTION.

EXCLUSIONS, HOMEOWNERS INSURANCE provision that

excludes from coverage under Form No. 3: flood damage, except if
the flood causes a fire, explosion, or theft; water damage from the
backup of sewers; earthquake, except if the earthquake causes a
fire explosion, theft, or glass breakage; war; nuclear exposure
(hazard); wear and tear; vandalism and malicious mischief, or glass
breakage if the house has been vacant for more than 30 consecutive
days before the day of the loss.
EXCLUSIONS, MEDICAL BENEFITS limiting provision.
Exclusions listed in group health plans include: benefits under
Workers Compensation; certain dental procedures; convalescent or
rest cures; medical expenses resulting from the insured person
and/or covered dependents committing a felony or misdemeanor;
cosmetic surgery, unless required immediately because of non-
occupational dis-ease, illness, accident, injury, or congenital
anomaly in an insured newborn infant; expenses incurred by a
member of a HEALTH MAINTENANCE ORGANIZATION (HMO) or other prepaid medical
plan; expenses associated with intentional self-inflicted injuries or
attempt at suicide; unreasonable charges for services or supplies;
convenience items such as telephone and television.
EXCLUSIONS OF POLICY see EXCLUSION.
EXCLUSIONS, PROPERTY AND CASUALTY INSURANCE
denial of coverage for various perils (such as war, flood); hazards
(storing
 Page 163
dynamite in the home, thereby increasing the chance of loss);
property (such as pets); and locations. These are excluded because
they are uninsurable by nature in that the loss frequency and
severity do not lend themselves to accurate predictions, the
premium rates chargeable would be prohibitive, and in some
instances coverages are found in other policies.
EXCLUSIVE AGENCY SYSTEM see CAPTIVE AGENT.
EXCLUSIVE PROVIDER ORGANIZATION (EPO) organization
that is part of a PREFERRED PROVIDER ORGANIZATION (PPO) in which enrollees
select an EPO provider to act as their primary care physician and
serve as the gatekeeper. This gatekeeper approves the maximum
level of benefits to which the enrollee is entitled. Characteristics of
the EPO include emphasis placed on quality of care, utilization of
the primary physician, and specified financial structure with the
providers on a fee-for-service basis.
EXCLUSIVE REMEDY a procedure in which the employer has
ABSOLUTE LIABILITY for the injuries incurred by the employee and the

employee does not have the right to sue the employer for those
injuries suffered. (For job related injuries under WORKERS COMPENSATION
INSURANCE, the sole source of funds for the injured employee is the

WORKERS COMPENSATION BENEFITS.)

EXCULPATORY PROVISION clause in legal contracts that

excuses a given party to the contract from liability for unintentional
negligent acts and/or omissions.
EXECUTOR fiduciary named in a will to settle an estate of a
deceased person. The executor must act as a reasonably prudent
man in safeguarding that property in his care, custody, and control.
Insurance coverages are available for executors. See also FIDELITY BOND.
EXECUTRIX woman executor. See also EXECUTOR.
EXEMPLARY DAMAGES see LIABILITY, CIVIL DAMAGES AWARDED.
EXEMPTION size of estate passing free from estate and gift of
taxes. The exempted amount as of January 1, 1987, is $600,000.
EX GRATIA PAYMENT "from favor" payment by an insurance
company to an insured even though the company has no legal
liability. The company makes such a payment for goodwill
purposes.
EXHAUSTIVE resulting when all possible outcomes from all the
events being studied have been considered.
EXHIBITION INSURANCE coverage provided on an ALL RISKS basis
for an exhibitor whose product, while being displayed at a public
exhibition, is damaged or destroyed by a peril that is not
specifically excluded in the policy.
EXPECTATION OF LIFE see LIFE EXPECTANCY.
 Page 164
EXPECTATION OF LOSS see EXPECTED LOSS.
EXPECTED EXPENSE RATIO relationship between expected
incurred insurance-related costs (not including claims) and
expected written premiums. See also EXPENSE RATIO; MANUAL RATE; RATE MAKING.
EXPECTED EXPENSES anticipated insurance-related costs, not
including claims-related costs.
EXPECTED LOSS probability of loss upon which a basic
premium rate is calculated.
EXPECTED LOSS RATIO proportion of a premium allocated to
pay losses, which is equivalent to (1.00 EXPENSE RATIO).
EXPECTED MORBIDITY expectation of illness or injury. The
probability of such occurrence is shown by a MORBIDITY TABLE, which is
important in determining the premiums for health insurance
policies.
EXPECTED MORTALITY expectation of death. The probability
of its occurrence is shown by a MORTALITY TABLE, which is important in
determining the premiums for life insurance policies.
EXPECTED VALUE sum of money to be received by an insured
in the event a given loss occurs.
EXPEDITED FUNDS AVAILABILITY ACT legislation passed in
1988 by the U.S. Congress to facilitate movement of checks
through the collection system. As the result of this Act, the Federal
Reserve has established rules for the endorsement of checks
stipulating that the endorsement must be within an area of 1 1/2
inches from the left edge of the back of the check and no additional
marks or notations can be made on the back of the check beyond
this 1 1/2 inch boundary.
EXPEDITING EXPENSES payment by an insurance company to a
damaged or destroyed business to hasten its return to normal
business operations. For example, if a kitchen of a restaurant is
damaged by fire, the insurance company may be willing to pay
overtime wages to enable the restaurant to return to normal
operations as soon as possible.
EXPENSE cost of doing business, not including pure expectation
of loss. See also EXPENSE LOADING.
EXPENSE ALLOWANCE payment to an insurance agent in
addition to commissions. Expense allowances, that differ from
company to company, vary with the amount of business agents
place with that company and the need of the company to attract
future business.
EXPENSE CONSTANT flat dollar amount that is added to the PURE
PREMIUM for an insured risk that is smaller than that of the lowest

EXPERIENCE RATING band. This dollar amount serves the purpose of

generating enough additional premium dollar to cover the cost of

issuing
 Page 165
and servicing an insurance policy on a risk whose size does not
readily allow it to be experience rated.
EXPENSE LIABILITIES expenses and taxes incurred by the
insurance company resulting from the normal business activities of
the company before the due date of the ANNUAL STATEMENT.
EXPENSE INCURRED see INCURRED EXPENSE.
EXPENSE LIMITATION ceiling on expense reimbursement
allowance, as stated in New York insurance law, that an insurance
company licensed in New York State can give its agents. This is
one reason why a company that is admitted (licensed) in all states
but New York may have a sister company doing business only in
New York State. If an insurance company is not admitted in New
York State, it can allocate greater expense allowances and
commissions to agents, thereby attracting more of their business.
EXPENSE LOADING amount added to the basic premium
(expectation of loss) to cover an insurance company's expenses.
These expenses include agent commissions, premium taxes, costs
of putting a policy on the books, marketing support costs, and
contingencies. CURRENT ASSUMPTIONS products, in order to be competitive,
must emphasize low expense loadings. Companies that sell these
products make special efforts to control expenses.
EXPENSE RATIO formula used by insurance companies to relate
income and expenses:

This ratio is of critical importance to the insurance company since

it reflects the percentage of the premiums income that goes for
expenses; that is, how much it costs the company to acquire the
premiums, a key element in today's competitive marketplace.
EXPENSE REIMBURSEMENT ALLOWANCE see EXPENSE
ALLOWANCE.

EXPENSE RESERVE insurance company's liability for incurred

but unpaid expenses. See also INCURRED BUT NOT REPORTED LOSSES (IBNR).
EXPENSE RISK measure of the sensitivity of the insurance
company's liability for the resultant higher expense rates than
charged for in the premium.
EXPENSES OF REPLACEMENT see VALUABLE PAPERS (RECORDS) INSURANCE.
EXPENSES PAID funds paid by an INSURANCE COMPANY associated with
the normal costs of doing business other than the costs of claims
payments.
 Page 166
EXPERIENCE record of losses, whether or not insured. This
record is used in predicting future losses and in developing
premium rates based on expectation of insured losses.
EXPERIENCE ACCOUNT loss experience of a given insured.
EXPERIENCED MORBIDITY actual morbidity experience of an
insured group as compared to the EXPECTED MORBIDITY for that group.
EXPERIENCED MORTALITY actual mortality experience of an
insured group as compared to the EXPECTED MORTALITY for that group.
EXPERIENCE MODIFICATION adjustment of premiums
resulting from the use of EXPERIENCE RATINGS. Experience rating plans
take the form of retrospective plans or prospective plans. Under
retrospective plans, premiums are modified after the fact. That is,
once the policy period ends, premiums are adjusted to reflect actual
loss experience of an insured. In contrast, under prospective plans,
an insured's past experience (usually for the immediate preceding
three years) is used to determine the premium for the current year
of coverage.
EXPERIENCE, POLICY YEAR see POLICY YEAR EXPERIENCE.
EXPERIENCE RATING statistical procedure used to calculate a
premium rate based on the loss experience of an insured group.
Applied in group insurance, it is the opposite of manual rates. Here
the premiums paid are related to actual claims and expense
experience expected for that specific group. In PROSPECTIVE RATING, the
past three years loss experience of the insured is the basis for the
premium calculation for the current year of coverage. In RETROSPECTIVE
RATING, the current premium rate for the current period of time is
modified at the close of that period to reflect actual loss experience.
The premium actually paid then can be adjusted, subject to a pre-
agreed minimum and maximum rate.
EXPERIENCE REFUND return of a percentage of premium paid
by a business firm if its loss record is better than the amount loaded
into the basic premium. See also EXPERIENCE MODIFICATION.
EXPIRATION termination date of coverage as indicated on the
insurance policy. See also EXPIRATION FILE.
EXPIRATION CARD see EXPIRATION FILE.
EXPIRATION DATE see EXPIRATION.
EXPIRATION FILE agents' records showing when clients' policies
expire.
EXPIRATION NOTICE written notice to an insured showing date
of termination of an insurance policy.
EXPIRY point in time when a TERM LIFE INSURANCE policy terminates its
coverage.
EXPLOSION, COLLAPSE, AND UNDERGROUND
EXCLUSION inherent danger resulting from certain construction
procedures that are
 Page 167
excluded from general business liability policies. Coverage for this
exclusion can be acquired at an extra premium through an
ENDORSEMENT to the various business liability policies.

EXPLOSION INSURANCE see EXTENDED COVERAGE ENDORSEMENT.

EXPORT-IMPORT BANK partnership between an agency of the
U.S. government and the Foreign Credit Insurance Association (50
commercial insurance companies, both stock and mutual). Insures
that businesses are indemnified for losses resulting from
uncollectible accounts for goods sold in foreign markets.
Additional perils covered are war, insurrection, confiscation, and/or
currency devaluation. This coverage encourages American
businesses to sell their products in foreign markets.
EXPOSURE possibility of loss. The most cost efficient way to
purchase insurance is to insure an unexpected loss with a low
probability of occurrence. Insuring a loss with a high probability of
occurrence means swapping dollars with an insurance company,
since the premium charged would reflect the expected probability
of loss. Expense and profit loadings would also be added by the
insurer. See also SELF INSURANCE.
EXPRESSED WARRANTY see WARRANTY.
EXPROPRIATION INSURANCE coverage against foreign
country expropriation underwritten by the OVERSEAS PRIVATE INVESTMENT
CORPORATION (OPIC) for U.S.-owned companies investing in given

developing countries.
EXTENDED COVERAGE ENDORSEMENT added to an INSURANCE POLICY or a
CLAUSE found in an insurance policy that will provide additional
coverage for RISKS to be insured other than those covered under the
basic policy's PROVISIONS.
EXTENDED COVERAGE ENDORSEMENT extension of
coverage available under the Standard Fire Policy. The standard
policy only covers the perils of fire and lightning. The endorsement
covers riot, riot attending a strike, civil commotion, smoke, aircraft
and vehicle damage, windstorm, hail, and explosion.
EXTENDED REPORTING PERIOD INSURANCE (ERPI) policy
underwritten on either a monoline primary insurance or monoline
EXCESS INSURANCE basis that will allow the purchaser to increase the

limits of liability coverage above that of policies already purchased

as well as fill gaps in liability coverages. These policies usually
provide liability protection on a worldwide basis to include
coverage for bodily injury, property damage, products-completed
operations, premises and operations, and personal injury. The
period for claims reporting can be on a fixed or unlimited basis.
Legal defense expenses and other supplementary expenses can be
included within the policy limits or can be in addition to the policy
limits. An endorsement can be added to provide coverage for
known circumstances, thereby permitting the purchaser
 Page 168
to retroactively add additional limits of coverage for current
evolving liability situations. In addition, this policy can provide
coverage for residual liability exposures by focusing on a particular
risk.
EXTENDED TERM INSURANCE nonforfeiture option that uses
the cash value of an ordinary life policy as a single premium to
purchase term life insurance in the amount of the original policy.
The length of the term policy depends on (1) the size of the cash
value and (2) the attained age of the insured.
EXTORTION INSURANCE coverage in the event of threats to
injure an insured or damage or destroy his property.
EXTRA DIVIDEND DIVIDEND paid in addition to the regular dividend
on a PARTICIPATING INSURANCE policy.
EXTRA EXPENSE INSURANCE form that covers exposures
associated with efforts to operate a business that is damaged by a
peril such as fire. For example, a special electrical generator may
have to be purchased in the event of a long-range loss of electricity
if the business is to continue to operate.
EXTRA PERCENTAGE TABLES form of substandard ratings that
shows additions to standard premiums to reflect physical
impairments of applicants for life or health insurance. The
additions reflect the greater probability of mortality or morbidity.
See also SUBSTANDARD HEALTH INSURANCE; SUBSTANDARD LIFE INSURANCE.
EXTRA PREMIUM addition to reflect exposures with a greater
probability of loss than standard exposures. For example, insuring
a munitions factory obviously requires a premium greater than that
required for insuring an accounting office.
EXTRATERRITORIALITY provision in WORKERS COMPENSATION INSURANCE
under which an employee who incurs an injury in another state, and
elects to come under the law of his home state, will retain coverage
under the workers compensation policy.
 Page 169

F
401 (k) PLAN see SECTION 401 (K) PLAN (SALARY REDUCTION PLAN).
403 (b) PLAN see SECTION 403 (B) PLAN.
FACE first page of an insurance policy.
FACE AMOUNT (FACE OF POLICY) sum of insurance provided
by a policy at death or maturity.
FACE OF POLICY see FACE AMOUNT (FACE OF POLICY).
FACILITY OF PAYMENT CLAUSE element usually found in
industrial life insurance policies under which the insurance
company upon the death of the insured under certain conditions is
allowed to choose the beneficiary if the beneficiary named in the
policy is a minor or deceased. For example, the funeral home may
receive a death benefit if the beneficiary is not alive.
FACILITY PLAN see AUTOMOBILE ASSIGNED RISK INSURANCE PLAN.
FACTORY INSURANCE ASSOCIATION (FIA) association of
stock property insurance companies, formed to provide engineering
services for member companies. These companies generally insure
highly protected risks (risks characterized by a high degree of care
taken for safety and potential loss reduction).
FACTORY MUTUAL organization of a group of insurers
composed of mutual property and casualty insurance companies, a
subsidiary stock insurance company, and a subsidiary safety
engineering company. Their objective is to provide insurance and
safety engineering services for large manufacturing companies,
substantial housing projects, public institutions, and educational
institutions. Coverage includes the perils of fire, explosion,
windstorm, riot, civil commotion, sprinkler leakage, malicious
mischief, damage to vehicles, and damage to aircraft. Field offices
staffed by salaried personnel deal directly with insureds; there is no
agency field force.
FACTUAL EXPECTATION strong expectation of an occurrence
resulting in a monetary interest that gives rise to an insurable
interest. For example, a daughter has a strong expectation of
wearing her mother's wedding gown and thus has an insurable
interest in the gown even though the gown is still the property of
her mother.
FACULTATIVE REINSURANCE term under which the REINSURER exercises
its faculty or prerogative to insure a risk or reject a risk from a
CEDING COMPANY.

FACULTATIVE OBLIGATORY TREATY hybrid between

FACULTATIVE REINSURANCE and treaty reinsurance where the CEDING COMPANY

may elect to assign certain risks that the reinsurer is obligated to

accept.
 Page 170
FACULTATIVE REINSURANCE individual risk offered by an
insurer for acceptance or rejection by a reinsurer. Both parties are
free to act in their own best interests regardless of any prior
contractual arrangements. With proportional facultative
reinsurance, the reinsurer assumes a proportional share of
premiums and losses. On a nonproportional basis, the reinsurer is
liable only for losses which exceed the insurer's retention level;
premiums vary with loss expectation.
FAILURE MODE AND EFFECT ANALYSIS analytical procedure
to predict the failure rate of a system still in the design stage.
FAILURE TO PERFORM EXCLUSION coverage that is excluded
under COMMERCIAL GENERAL LIABILITY INSURANCE (COMPREHENSIVE GENERAL LIABILITY
INSURANCE) for the loss of use of undamaged tangible real or personal

property as the result of failure of the performance of a product or

service as warranted or represented by the insured.
FAIR ACCESS TO INSURANCE REQUIREMENTS (FAIR)
PLAN insurance that grew out of the urban demonstrations and
riots of the 1960s. Because of the deteriorated social and economic
circumstances in these areas, it became impossible for many
business owners and homeowners to purchase property insurance.
As a result, the federal government established the FAIR plans
based on the stop loss reinsurance method. If a business owner or
homeowner cannot purchase property insurance through
conventional means, application can be made through an agent who
represents an insurance company participating in the FAIR plan. If
the property is acceptable to the company, insurance will be
provided. If the property is deficient, improvements are suggested,
and upon compliance the policy is issued.
FAIR CREDIT REPORTING ACT federal legislation giving an
insurance applicant the right to contact a reporting organization
doing a credit check and be advised of information contained in the
applicant's file showing the reason for rejection for insurance.
FAIR PLAN see FAIR ACCESS TO INSURANCE REQUIREMENTS (FAIR) PLAN.
FALLEN BUILDING CLAUSE section in some property
insurance contracts that eliminates further coverage for buildings
after they have collapsed from causes other than fire or explosion.
For example, fire coverage would not be applicable to buildings
that collapse because of inherent defects.
FALSE IMPRISONMENT tort of wrongful physical confinement
of an individual. This is not restricted to physical confinement but
includes any unjustified limitation of another's freedom of
movement. If an individual is intimidated into responding to an
order, the courts have interpreted this as false imprisonment.
FALSE PRETENSE see MISREPRESENTATION.
 Page 171
FAMILY AUTOMOBILE INSURANCE POLICY see PERSONAL
AUTOMOBILE POLICY (PAP).

FAMILY CONSIDERATIONS factors influencing the amount of

life insurance to purchase, such as marketable skills of spouse, age
of children, savings, investments, number of future working years'
expectancy, amount of bills and notes outstanding, and funds
necessary to maintain the family's customary life-style should the
wage earner die. See also LIFE INSURANCE.
FAMILY COVERAGE insurance coverage for the NAMED INSURED and
his or her eligible dependents.
FAMILY EXPENSE INSURANCE type of health insurance under
which an insured's coverage extends to all family members if they
are residents of the insured's household. Insures all medical
expenses (except those excluded), among them room and board,
surgical and physician costs, drugs and medicines, blood,
ambulance service to and from the hospital, X-rays, and floor
nursing. See also INSURANCE.
FAMILY HISTORY background information used in life and
health insurance underwriting to ascertain the probability of
hereditary disease. The purpose is to determine if the disease is of
such a nature that the life expectancy of an applicant will be
adversely affected, and if so, to what degree.
FAMILY INCOME POLICY contract combining whole life and
decreasing term insurance. A monthly income is paid to a
beneficiary if an insured dies during a specific period. At the end of
that period, the full face amount of the policy is also paid to the
beneficiary. It is designed to provide income for a household while
the children are still young. If an insured dies after the specified
period, only the face amount of the policy is paid. For example, the
face value of a family income policy is $100,000 and the specified
period is 20 years. If the insured dies 10 years into the specified
period, the beneficiary receives a monthly income of 1% of the
face amount ($1000) for the remaining 10 years. At the end of the
10 years, the beneficiary also receives $100,000. If the insured dies
after the 20-year specified period, the beneficiary receives
$100,000, which is the face amount. See also FAMILY INCOME RIDER; FAMILY
MAINTENANCE POLICY.

FAMILY INCOME RIDER attachment of decreasing term life

insurance to an ordinary life policy to provide monthly income to a
beneficiary if death occurs during a specified period. If the insured
dies after the specified period, only the face value is paid to the
beneficiary since the decreasing term insurance has expired. See
also FAMILY INCOME POLICY.
FAMILY LIMITED PARTNERSHIP partnership in which family
members hold all interest in the partnership. This partnership is
treated as a cash flow through stand-alone entity. All sums of
income and
 Page 172
credits, as well as deductions, flow through the partnership to the
partners on a pro rata basis. The partners report their pro rata share
on their individual personal income tax returns.
FAMILY MAINTENANCE POLICY combination of whole life
and level term that provides income to a beneficiary for a selected
period of time (e.g., 20 years) if an insured dies during that period.
At the end of the income-paying period the beneficiary also
receives the entire face amount of the policy. If an insured dies
after the end of the selected period, the beneficiary receives only
the face value of the policy. The remainder of the benefits are the
same as under the FAMILY INCOME POLICY. See also FAMILY INCOME RIDER.
FAMILY POLICY contract providing whole life insurance on the
father and term insurance on the mother and all children, including
newborns after reaching a stated age, usually 15 days. Children,
upon reaching the age of majority, have the right to convert their
insurance to a permanent policy up to the amount of term coverage
without having to show evidence of insurability (take a physical
examination). The premium is the same regardless of the number
of children covered.
FAMILY PROTECTION AUTOMOBILE INSURANCE
COVERAGE see UNINSURED MOTORIST COVERAGE.
FAMILY PROTECTION ENDORSEMENT see UNDERINSURED MOTORIST
ENDORSEMENT; UNINSURED MOTORIST COVERAGE.

FAMILY SUPPORT ACT OF 1988 legislation that changed the tax

treatment concerning child-care expenses so that an employee who
has incurred child-care expenses greater than $4800 and who is
participating in a company-sponsored dependent care assistance
program is required to choose between the company plan and the
child-care credit. The tax benefit gained by the employee from the
child-care credit is reduced dollar for dollar to the extent that the
company plan is used to cover child-care expenses.
FARMERS COMPREHENSIVE PERSONAL LIABILITY
INSURANCE provides the same coverage as a COMPREHENSIVE PERSONAL
LIABILITY INSURANCE policy, plus coverage to exposures that are peculiar

to farms, such as farm business operations, farm employees

engaged in farm business activities, and liability arising out of
selling farm products.
FARMOWNERS AND RANCHOWNERS INSURANCE package
coverage for a dwelling and its contents, barns, stables, and other
land structures as well as liability coverage. By means of a number
of special forms that follow the format of the HOMEOWNERS INSURANCE
POLICY, this insurance protects a number of named perils and

liabilities.
FASB 87 see FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) 87.
FASB 112 see FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) 112.
 Page 173
FASB 113 see FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) 113.
FASB 115 see FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) 115.
FAULT TREE ANALYSIS diagram of cause and effect
relationships, showing the possible outcomes if a particular course
of action is taken or continued. This method of analysis, which is
founded in the testing of aerospace materials, has increasingly been
applied to safety engineering accident cause and prevention.
FAULTY INSTALLATION coverage in the event of property
damage or destruction resulting from wrongful installation of
equipment.
FAYOL, HENRI French industrialist whose thesis is that all
business activities revolve around six areas: technical (production),
commercial (buying and selling), financing (capital employment),
accounting (financial record keeping), managerial (planning,
organizing, directing, coordinating, controlling), and security
(protection of property against loss and the physical safety of
individuals). Fayol's view of security has become the RISK MANAGEMENT
of modern business.
FCAS see FELLOW, CASUALTY ACTUARIAL SOCIETY.
FC&S see FREE-OF-CAPTURE-AND-SEIZURE CLAUSE.
FCIC see FEDERAL CROP INSURANCE.
FDIC see FEDERAL DEPOSIT INSURANCE CORPORATION.
FEDERAL CRIME INSURANCE protection under the auspices of
the federal government where such insurance cannot be purchased
by a homeowner, business owner, or tenant at affordable
community rates. A homeowner's or tenant's personal property is
covered for burglary and/or robbery, and premises for damage due
to burglary and robbery. A business owner's fixtures, furniture,
equipment, merchandise, money, and securities due are covered for
burglary and/or robbery. See also FEDERAL INSURANCE ADMINISTRATION.
FEDERAL CROP INSURANCE protection against natural
disasters that may strike crops. Coverage on ALL RISKS basis began in
1948 under the auspices of the U.S. Department of Agriculture.
Premiums reflect actual losses incurred by farmers. The objective
is to level out farmers' income that otherwise would be adversely
affected by natural disasters striking their crops. See also FEDERAL
INSURANCE ADMINISTRATION.

FEDERAL DEPOSIT INSURANCE CORPORATION

(FDIC)agency formed as the result of bank failures in the 1930s to
insure the deposits of customers of member banks. The FDIC, an
agency of the federal government, is self-supporting in that it
receives fees from the member banks at the rate of .5% of the
bank's deposits and the income from reserves that have been
invested. Each account is insured up to $100,000.
 Page 174
FEDERAL DEPOSIT INSURANCE CORPORATION
IMPROVEMENT ACT (FDICIA) OF 1991 act that provides new
funding for the Bank Insurance Fund and enhances the safety and
soundness of the financial system. The FDICIA includes the
Foreign Bank Supervision Enhancement Act (FBSEA) of 1991,
whose purpose is to enhance the authority of the Federal Reserve to
supervise the entry of foreign banks into the United States banking
system. Once having entered, the supervision would extend to the
foreign banks operating within the system as well.
FEDERAL DEPOSIT INSURANCE CORPORATION
IMPROVEMENT ACT OF 1991 TITLE I, SUBTITLE D act
providing that stringent regulatory actions may be taken against
depository institutions according to their level of capital adequacy:
(1) well capitalized; (2) adequately capitalized; (3)
undercapitalized; (4) significantly undercapitalized; and (5)
critically undercapitalized.
If an institution is classified as well capitalized or adequately
capitalized, no special regulatory steps must be taken, but those
institutions that fall into the three remaining categories are subject
to progressively more demanding restrictions. If an institution is
declared to be undercapitalized, the following applies: (1) the
institution must adopt an acceptable capital restoration plan; (2)
limits are placed on the institution's growth; (3) capital
distributions cannot be made; and (4) acquisitions and
establishment of new branches cannot be made without prior
approval of its capital plan.
If an institution is declared to be significantly undercapitalized, the
institution must: (1) sell shares; (2) restrict interest paid on
deposits; (3) restrict the growth of assets; (4) prohibit the receiving
of deposits from correspondent banks; and (5) terminate particular
executive officers and/or directors.
If an institution is declared to be critically undercapitalized, it
cannot: (1) pay interest on subordinated debt; (2) repay principal on
subordinated debt; (3) participate in highly leveraged transactions
without prior FDIC approval; (4) make material changes in
accounting methods; (5) pay excessive compensation or bonuses;
(6) change its charters or by-laws; and (7) engage in transactions
that require prior notice to the primary regulator to include
expansion, acquisition, or the sale of assets.
FEDERAL EMPLOYEES GROUP LIFE INSURANCE (FEGLI)
plan administered through a primary private life insurer and
reinsured through other private life insurers, providing a death
benefit equal to: (1) one year's salary for active employees at least
age 45 until they reach age 65; and (2) two years' salary for active
employees age 35 and under. The death benefit is graduated for
federal employees age 36 through 44. After retirement, the full
death benefit remains in force until the retired employee reaches
age 65, whereupon the death bene-
 Page 175
fit is reduced by 2% per month until it levels off at 25% of the
employee preretirement annual salary. The federal government
pays approximately one-third of the monthly premium, and the
employee pays the remainder.
FEDERAL EMPLOYERS LIABILITY ACT (FELA) federal law
comparable to state workers compensation statutes setting out
liability of railroads for work-related injuries or death of their
employees. Railroad employees are not covered by workers
compensation laws. Under normal tort law, the injured party must
prove he or she did nothing to contribute to the negligence or the
risk. But under the terms of the federal act, railroad employees
must only show that negligence on the part of the employer
contributed to the injury. Therefore, this law gives railroads
responsibility for on-the-job injuries to employees. But the
railroads are not protected by the theory that workers compensation
should be the only responsibility of employers for their employees,
or by the prescribed schedule of benefits.
FEDERAL ESTATE TAX federal tax imposed on the estate of a
decedent according to the value of that estate. The first step in the
computation of the federal estate tax owed is to determine the value
of the decedent's gross estate. This determination can be made by
adding the following values of assets owned by the decedent at the
time of death:
1. property owned outright.
2. gratuitous lifetime transfers, but with the stipulation that the
decedent retained the income or control over the income.
3. gratuitous lifetime transfers subject to the recipient's surviving
the decedent.
4. gratuitous lifetime transfers subject to the decedent's retaining
the right to revoke, amend, or alter the gift.
5. annuities purchased by the decedent that are payable for the
lifetime of the named survivor as well as the annuitant.
6. property jointly held in such a manner that another party receives
the decedent's interest in that property at the decedent's death
because of that party's survivorship.
7. life insurance in which the decedent retained incidents of
ownership.
8. life insurance that was payable to the decedent's estate.
The second step in the computation of the federal estate tax owed is
to subtract allowable deductions (including bequests to charities,
bequests to the surviving spouse, funeral expenses, and other
administration expenses) from the gross estate. This results in the
taxable estate. Adjustable taxable gifts are then added to the
taxable estate, resulting in the computational tax base. From the
table below, the appropriate tax rate is then applied to the
computational tax base, resulting in the tentative (certain credits
may still be subtracted) federal estate tax.
 Page 176

If Computational Equal
Tax Base Is to or
More Less Tentative
Than:andThan: Tax Is:
$0 $ 10,000 18%
10,000 20,000 $1,800 + $10,000
20% of
excess
over
20,000 40,000 $3,800 + $20,000
22% of
excess
over
40,000 60,000 $8,200 + $40,000
24% of
excess
over
60,000 80,000 $13,000 + $60,000
26% of
excess
over
80,000 100,000 $18,200 + $80,000
28% of
excess
over
100,000 150,000 $23,800 + $100,000
30% of
excess
over
150,000 250,000 $38,800 + $150,000
 32% of
excess
over
250,000 500,000 $70,800 + $250,000
34% of
excess
over
500,000 750,000 $155,800 $500,000
+ 37% of
excess
over
750,000 1,000,000 $248,300 $750,000
+ 39% of
excess
over
1,000,000 1,250,000 $345,800 $1,000,000
+ 41% of
excess
over
1,250,000 1,500,000 $448,300 $1,250,000
+ 43% of
excess
over
1,500,000 2,000,000 $555,800 $1,500,000
+ 45% of
excess
over
2,000,000 2,500,000 $780,800 $2,000,000
+ 49% of
excess
over
2,500,000 3,000,000 $1,025,800 $2,500,000
+ 53% of
 excess
over
3,000,000 No limit 1,290,800 $3,000,000
+ 55% of
excess
over

Note that the above tax schedule is applicable to the taxable estate only after
the adjustment for settlement costs, administrative expenses, and the unified
estate and gift tax credit.
It is important to note that there is an unlimited marital deduction (the estate of
the decedent passes to the spouse free of federal estate taxes) and that all
federal estate taxes are eliminated on estates having a computational tax base
of $650,000 or less in 1999. The unified credit will be increased from the
current $650,000 to $1,000,000 in the year 2006 accoding to the following
schedule:

Year Amount
2000 $ 675,000
2001 675,000
2002 700,000
2003 700,000
2004 850,000
2005 950,000
2006 1,000,000

To conform with the unlimited marital deduction in estates, tax-free gifts

between spouses are allowed in unlimited amounts.
FEDERAL FLOOD INSURANCE coverage made available to residents of a
community on a subsidized and nonsubsidized premium rate basis once the
governing body of the community qualifies that community for coverage under
the National Flood Insurance Act. Residents include business and nonbusiness
operations with coverage
 Page 177
written on structures and their contents. Coverage is purchased
through licensed agents. Prior to passage of the Housing and Urban
Development Act of 1968, of which the National Flood Insurance
Act is a part, it was virtually impossible to obtain flood insurance
coverage on an industrial building, residential building, retailing
building, or a single family dwelling.
FEDERAL FLOOD INSURANCE: UPTON-JONES
AMENDMENT amendment that modifies the FEDERAL FLOOD INSURANCE
program by providing relocation and acquisition coverage for
structures in imminent danger from an encroaching shoreline. This
amendment enables the Federal Flood Insurance Program to pay up
to 40% of the policy to property owners who relocate structures in
imminent danger and up to 110% of the policy to property owners
who demolish those structures and remove the debris. A
prerequisite for the property owner to receive these funds is for the
property structures to be declared uninhabitable by the local permit
authority and to be subject to erosion or to be within the
geographical boundaries of an erosion zone that has been included
in a program approved by the state. Under the Federal Flood
Insurance Program, residential structures on the shore can be
insured against floods for a maximum amount of $185,000 and
$60,000 coverage for contents within the structure.
FEDERAL GOVERNMENT INSURANCE (FTC) see FEDERAL CRIME
INSURANCE; FEDERAL CROP INSURANCE; FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC); FEDERAL

FLOOD INSURANCE; FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION (FSLIC); SOCIAL INSURANCE.

FEDERAL HOUSING ADMINISTRATION (FHA) agency of the

United States Government that insures primarily residential
mortgage loans against default. The agency also establishes
underwriting and construction standards.
FEDERAL INSURANCE ADMINISTRATION government
agency whose function is to administer the Federal Flood
Insurance Program, the Federal Crime Insurance Program, and
the FAIR ACCESS TO INSURANCE REQUIREMENT (FAIR) PLAN.
FEDERAL INSURANCE CONTRIBUTIONS ACT (FICA) tax
charged to finance the OLD AGE, SURVIVORS, DISABILITY, AND HEALTH INSURANCE (OASDHI)
plan. Both employer and employee share in the cost, making
contributions on an equal basis. The employer pays the tax on its
payroll, and the employee pays the tax on wages earned. The total
contribution (employer and employee payments) tax rate is 15.3%
in 1990 for the covered wages.
FEDERAL NUCLEAR REGULATORY COMMISSION see
NUCLEAR REGULATORY COMMISSION.

FEDERAL OFFICIALS BOND coverage for the federal

government in the event of loss due to dishonest acts of federal
government employees.
 Page 178
FEDERAL SAVINGS AND LOAN INSURANCE
CORPORATION (FSLIC) agency of the federal government
formed as the result of bankruptcies of savings and loan
associations during the 1930s. Insures deposits of customers up to
$100,000 for each account. In 1986, 1987, 1988, 1989, and 1990,
when numerous savings and loan associations failed or nearly
failed, FSLIC backed up their deposits and prevented runs.
FEDERAL TAXATION see ANNUITY; TAX-FREE INCOME; TAXATION, INSURANCE
COMPANIES; TAXATION, INTEREST ON DIVIDENDS; TAXATION, PARTICIPATING DIVIDENDS; TAXATION,

PROCEEDS; TAX BENEFITS OF LIFE INSURANCE.

FEDERAL TRADE COMMISSION (FTC) government agency,

under the McCARRAN-FERGUSON ACT (PUBLIC LAW 15), that has no authority over
insurance matters to the extent the states regulate insurance to the
satisfaction of Congress. However, this does not prevent the FTC
from conducting investigations into the insurance industry. For
example, in 1970 the Congress charged the FTC with the
responsibility of enforcing the FAIR CREDIT REPORTING ACT, which requires
an insurance company to notify an insurance applicant of an
impending INSPECTION REPORT and to release information so collected to
the applicant upon request. If the report results in the applicant's
rejection for insurance, he must be notified of the adverse report
and his right to its contents. Perhaps the best known FTC
investigation involved its study ''Life Insurance Cost Disclosure,"
that was extremely critical of industry cost disclosure practices.
FEDERAL UNEMPLOYMENT INSURANCE TAX tax assessed
by the states as a payroll tax on employers to pay for UNEMPLOYMENT
COMPENSATION.

FEE FOR SERVICE PLAN traditional insurance plan under which

the patient can select the physician and hospital of his or her
choice. The patient is responsible for paying the CO-PAYMENT and the
DEDUCTIBLE and the insurance company pays the excess up to the

policy's limit.
FEE SIMPLE ESTATE form of common law ownership of real
property that permits disposition of property by its holder in any
manner desired. Both the holder and the holder's heirs have use of
property in perpetuity and have an insurable interest in the
property.
FELLOW, CASUALTY ACTUARIAL SOCIETY (FCAS)
designation earned by passing 10 national examinations on subjects
including mathematics of property and casualty insurance, actuarial
science, insurance, accounting, and finance. Examinations and
course materials are prepared and administered by the Casualty
Actuarial Society.
FELLOW, LIFE MANAGEMENT INSTITUTE (FLMI)
professional management designation earned by passing 10
national examinations on life and health insurance subjects
including insurance, finance,
 Page 179
marketing, law, information systems, accounting, management, and
employee benefits. Examinations and course materials are prepared
and administered by the Life Office Management Association.
FELLOW OF THE INSTITUTE OF ACTUARIES see CANADIAN
INSTITUTE OF ACTUARIES.

FELLOW SERVANT RULE formerly an employer's defense under

which an injured employee had to bring a cause for action against
the fellow employee causing the injury, not the employer. Workers
Compensation laws have nullified the rule for job-related injuries.
See also WORKERS COMPENSATION, COVERAGE B.
FELLOW, SOCIETY OF ACTUARIES (FSA) designation earned
by passing 10 national examinations on subjects including
mathematics of life and health insurance, actuarial science,
insurance, accounting, finance, and employee benefits.
Examinations and course materials are prepared and administered
by the Society of Actuaries.
FIA see FEDERAL INSURANCE ADMINISTRATION.
FICTITIOUS GROUP assembly of people formed only for
obtaining GROUP INSURANCE. Such a group is uninsurable and violates
under-writing principles concerning group insurance.
FIDELITY AND SURETY CATASTROPHE INSURANCE
mechanism used by a fidelity and surety insurance company to
spread its liability through REINSURANCE by issuing a surplus treaty as a
first layer of coverage, thereby enabling a cedent to limit its
liability on the business written, while at the same time utilizing the
flexibility that the surplus method offers. The reinsurance
catastrophe cover provides a second layer of coverage.
Reinsurance covers are used by the insurance company to:
1. avoid accumulation of liability on individual principles.
Warehouse bonds are an example of such accumulations, because
they are required in great number and they result in large aggregate
amounts.
2. achieve a balance among the various types of bonds that the
insurer assumes.
3. reduce violent fluctuations in experiencing high loss ratios on
many classes of bonds.
FIDELITY BOND coverage that guarantees that the insurance
company will pay the insured business or individual for money or
other property lost because of dishonest acts of its bonded
employees, either named or by positions. The bond covers all
dishonest acts, such as larceny, theft, embezzlement, forgery,
misappropriation, wrongful abstraction, or willful misapplication,
whether employees act alone or as a team. Businesses often bond
their employees not only because the insurance will pay for the
losses, but also because the bonding company may prevent losses
by uncovering dishonesty in the work history of a new
 Page 180
employee. Since a fidelity bond makes up only a part of protection
against theft, other crime insurance is mandatory. Employee
dishonesty insurance is usually bought through an individual
Fidelity Bond, BLANKET POSITION BOND, COMMERCIAL BLANKET BOND, or a NAME SCHEDULE
BOND.

FIDELITY EXCLUSION provision of liability insurance that

excludes coverage for dishonest acts of an insured.
FIDUCIARY holding of property, or otherwise acting on behalf of
another in trust. The fiduciary must exercise due care in
safeguarding property left under personal care, custody, and
control. Insurance coverage is available for this exposure. See also
JUDICIAL BOND.

FIDUCIARY ASPECT OF INSURANCE status in which an

insurance company holds funds of its insureds (the payment of
premiums) in trust, and through an INSURING AGREEMENT promises to
make all benefit payments for which it has received premiums.
FIDUCIARY BOND see JUDICIAL BOND.
FIELD FORCE agents, managers, and office personnel serving in
the branches of an insurance company.
FIELD UNDERWRITING judgment decision by the insurance
agent concerning whether or not to submit an application. The
decision is based on the agent's familiarity with the insurance
company's UNDER-WRITING requirements for STANDARD RISK and SUBSTANDARD RISK.
FILE-AND-USE RATING LAWS use of new rate structures by an
insurance company without first obtaining approval of a State
Insurance Department.
FILE AND USE STATE see RATING BUREAU.
FILING INSURANCE COMPANY BUREAU INSURER that files its
statistical and underwriting experience with a RATING BUREAU.
FINAL AVERAGE method of calculating retirement benefits
under pension plans, by averaging the highest three or five years of
earnings (usually the final five years).
FINAL EXPENSE FUND amount of life insurance required to
purchase burial, probate, medical, and other costs associated with
death.
FINAL INSURANCE (MINIMUM DEPOSIT INSURANCE)
premiums paid out of funds borrowed from the cash value of a life
insurance policy.
FINANCED INSURANCE see FINAL INSURANCE (MINIMUM DEPOSIT INSURANCE).
FINANCED PREMIUM premiums paid with funds that are not
borrowed from life insurance. It is important to ascertain the
finance charges and the costs/benefits of such a transaction.
 Page 181
FINANCIAL ACCOUNTING STANDARDS BOARD (FASB)
group that, with the exception of the government, establishes the
standards for all financial accounting and reporting for the various
entities in the United States. The standards enable comparability
and consistency for financial statements among companies. The
Securities and Exchange Commission (SEC) requires that all SEC
registrants adhere to the FASB Standards when reporting financial
information. The SEC also requires that members of the American
Institute of Certified Public Accountants (AICPA) adhere to the
FASB requirements when reporting financial data. The FASB is
under the control of the Financial Accounting Foundation that
provides it with financial support. The accounting firms,
corporations, and others who utilize the information lend the
financial support. An appointed advisory task force of outside
experts representing the various views of auditors, preparers, and
users review projects. With the help of the FASB staff, the task
force issues a statement concerning the actual standards by which
to abide, their effective date, research leading to the conclusions,
and the logic upon which the conclusions are based.
FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) 5
rule for accounting for contingencies that has application for the
accounting of liabilities under the COMPREHENSIVE ENVIRONMENTAL RESPONSE,
COMPENSATION, AND LIABILITY ACT OF 1980 (CERCLA). The act states that recognition

must be given when a loss is probable and estimable. If the best

estimate is a possible range for the loss, the low-end number must
be recognized. When the minimum criteria for recognition has not
been met, the act requires full disclosure if there is at least a
reasonable possibility that a loss has been incurred.
FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) 87
new pension-accounting rule created by the Financial Accounting
Standards Board. The objective of this rule is to clarify pension
accounting so that investors, employers, and employees will know
what the assets and liabilities of a particular pension plan are. The
rule requires that a company disclose all relevant figures
concerning its pension plan on the face of the company's income
statement. Previously, the company could bury these figures in the
footnotes of the income statement. Also, under the new disclosure
requirement, the expected liabilities of the pension plan must be
recalculated annually, assuming market interest rates. Thus, a
company's pension liabilities each year will rise or fall according to
the market interest rate, thereby affecting the company's income
statement and balance sheet.
FINANCIAL ACCOUNTING STANDARDS BOARD (FASB)
106 new pension-accounting rule (Employers Accounting for
Postretirement Benefits Other Than Pensions) which mandates that
employers that provide postretirement benefits to include life
insurance, medical, or dental begin accruing an expense against
current income for the expected future cost of such benefits.
Additionally, the
 Page 182
employer must list on the balance sheet a liability entry reflecting
the total expected amount to be owed for the future benefit cost.
FINANCIAL ACCOUNTING STANDARDS BOARD (FASB)
112 new rule entitled "Employers Accounting for Postemployment
Benefits," which requires advanced recognition of nonretirement
benefits, health insurance continuation, and severance pay.
FINANCIAL ACCOUNTING STANDARDS BOARD (FASB)
113 new rule entitled "Accounting and Reporting for Reinsurance
of Short-duration and Long-duration Contracts," which requires the
INSURANCE COMPANY to report all assets and liabilities relating to REINSURANCE

contracts on its FINANCIAL STATEMENTS on a gross basis rather than on the

net of the influence of reinsurance, as had been the historical
reporting method. This rule establishes parameters for the
determination of whether or not a specific RISK has actually been
transferred under a reinsurance contract. In order to be classified as
a reinsurance contractthat is, one of a risk-transferring naturethe
rule requires a reasonable possibility that the REINSURER may assume
significant loss for accepting the insurance risk.
Thus, a contract will be considered reinsurance only if it transfers
significant insurance risk to the reinsurer, and if it is reasonably
possible the reinsurer will suffer a significant loss under the
reinsurance contract. Obligations owed to reinsurers under multi-
year contracts must be reported as liabilities by the CEDING COMPANY
and, at the same time, the reinsurer must report these obligations as
assets on the balance sheet. However, if the ceding company incurs
a profit under the multi-year contract resulting from good loss
experience, the profit is shown as an asset on its balance sheet and
the reinsurer shows this amount as a liability on its balance sheet.
Thus, this rule established new generally accepted accounting
principles for REINSURANCE to include the following: (1) reinsurance is
defined for accounting purposes to exclude transactions that do not
subject the REINSURER to the reasonable possibility of a substantial loss
from the insurance risk assumed or does not transfer the
underwriting risk; (2) retroactive and prospective provisions within
the same reinsurance contract must be separately accountedif the
separate accounting is not possible, the total reinsurance contract
must be accounted for on a retroactive basis; (3) reinsurance
recoverables must be reported as an asset on the balance sheet and
the total reinsured claim liability to include the INCURRED BUT NOT REPORTED
LOSSES (IBNR) reserves and recoverables on outstanding claims must be

reported; (4) the CEDING COMPANY must defer gains on retroactive

contracts and amortize these gains over the expected period of time
necessary to settle the claims; and (5) insurer must disclose
concentrations of credit risk resulting from reinsurance
recoverables, and receivables.
FINANCIAL ACCOUNTING STANDARDS BOARD (FASB)
115 new rule entitled "Accounting for Certain Investments in Debt
and
 Page 183
Equity Securities," which requires most fixed maturity investments
to be listed on the INSURANCE COMPANY'S FINANCIAL STATEMENTS at MARKET VALUE
beginning in 1994. This rule stipulates three categories of
investment to be affected:
1. Securities Available for Salesecurities that are available for sale
but are not considered securities held for trading.
2. Securities Held to Maturitysecurities that the insurance company
has both the intent and ability to hold to maturity. Such securities
would be listed on the company's financial statement at amortized
cost. See also AMORTIZATION; AMORTIZATION SCHEDULE.
3. Trading Securitiessecurities that are bought for the purpose of
trading in order to realize a profit. These securities are listed on the
financial statements valued at market with any changes in the
market value recorded on the income statement.
All of the above adjustments result in increases as well as
decreases in book value and thus will have a direct effect on the
numerous calculations that are a function of the book value, such as
the return on equity.
FINANCIAL CONSIDERATIONS investment and savings
position of an insured used in determining the amount of life
insurance to purchase. The amount of investment and savings is
subtracted from the total insurance requirement.
FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND
ENFORCEMENT ACT OF 1989 (FIRREA) legislation designed
to provide the structural reform necessary to strengthen the thrift
industry after the bailout of the insolvent Federal Savings and Loan
Insurance Corporation (FSLIC) in 1989. The Act is designed to
accomplish the following through regulatory reform: to establish a
stable system for affordable housing financing; to place the FSLIC
insurance funds on a sound financial basis; to manage and resolve
failed savings associations and, if necessary, to provide the funds
required to deal expeditiously with failed savings associations; to
improve the supervision of savings associations; and to strengthen
the enforcement powers of federal regulators of savings
associations. If the preceding aims are accomplished, the federal
regulators will have the necessary power and capital to terminate
insolvent savings associations in an effective and efficient manner
before the crisis stage is reached.
FINANCIAL INSURANCE structured product designed to meet
specific needs of the insured that may involve any of the following
funding arrangements: (1) loss portfolio transfers in which the self-
insurer transfers the reserves that it had established for its known
losses to the insurance company; by concluding such a transfer, the
self-insurer can use the capital it had previously set aside for loss
reserves; (2) retrospective transfers in which a self-insurer has
losses for which inadequate insurance coverage exists and now
these companies require additional insurance coverages so that the
limits can be raised to an
 Page 184
adequate amount; and (3) prospective loss transfers in which a self-
insurer has a requirement to fund in advance its future losses,
thereby removing its liability for loss reserves from its balance
sheet. The premium paid by the self-insurer to the insurance
company reflects the self-insurer's expectation of loss.
Under the three funding approaches, the self-insurer must have
adequate loss experience so that the LAW OF LARGE NUMBERS will be able to
operate; that is, so that the credibility of the prediction will
approach one and the standard deviation of the actual losses (X)
from the expected losses (X) will approach zero. This statistical
base is important because the self-insurer's loss experience is not
combined with another self-insurer's loss experience to form an
overall statistical bank from which to develop premiums for a
specific category of self-insurers.
This specifically designed structured product enables the self-
insurer to eliminate its liability for maintaining loss reserves. Also,
this product enables the self-insurer to protect itself against adverse
future loss experience resulting in earnings per share not being
affected by unexpected losses.
FINANCIAL PLANNING acquisition and employment of ASSETS in
order to maximize the return on these assets through: (1)
establishment of FINANCIAL PLANNING OBJECTIVES; (2) development of
financial plans by which these objectives are to be achieved; (3)
establishment of a budget by which funds can be allocated to the
purchase of the financial assets; and (4) review and, if necessary,
revision of the financial plan to make sure acceptable progress is
being made toward the achievement of the objectives.
FINANCIAL PLANNING OBJECTIVES goals of the financial
planning process as follows:
1. Standard of LivingMaslow's basic needs satisfied such as food,
water, clothing, shelter, and nice-to-have discretionary items, such
as automobiles, vacations, entertainment.
2. Savingsemergency funds for sudden and unexpected events, such
as extra living expenses because of a fire at one's home.
3. ProtectionDISABILITY INCOME INSURANCE; HEALTH INSURANCE; LIFE INSURANCE; PROPERTY
AND LIABILITY INSURANCE (all forms designed to offer coverage against the

uncertainty of a financial loss due to the PURE RISK).

4. InvestmentAccumulation of wealth through the return on assets
deployed leading to financial independence.
5. Estate Planningdistribution of the invested assets held for the
purpose of the accumulation of wealth in a tax efficient and
effective manner.
FINANCIAL REINSURANCE transaction of REINSURANCE under
which there is a limit on the total liability of the REINSURER and future
investment income is a recognized component of the underwriting
 Page 185
process. This financial instrument incorporates the time value of
money into the CEDING process such that the CEDENT can reinsure its
liabilities at a premium rate less than the true rate for the liabilities
transferred (difference in the two rates to be made up by the
investment income generated during the years the reinsurance
contract remains in force). Financial reinsurance can be used
effectively in several situations:
1. surplus relief (QUOTA SHARE REINSURANCE)CEDING COMPANY transfers a
percentage of its book of business to the reinsurer (the reinsurer
will limit its total liability under any one contract).
2. portfolio transfersceding company transfers reserves on known
losses to the reinsurer in exchange for premiums equal to the
present value of the future claims experience.
3. retrospective aggregatesceding company transfers reserves on
known losses as well as INCURRED BUT NOT REPORTED LOSSES (IBNR).
4. prospective aggregatesceding company pays a premium on a
PROSPECTIVE RATING basis to the reinsurer. In exchange, the rein-surer is

obligated to pay future losses incurred by the cedent. If these future

losses are less than expected, the cedent will receive the UNDERWRITING
GAIN. Any gains from investments and fees will be retained by the

reinsurer. Through this mechanism, in essence, the cedent gains

current capacity for writing additional business by borrowing
against income to be received in the future.
5. catastrophe protectioncoverage against shock losses is provided
by spreading the payment of such losses over several years.
FINANCIAL REPORTING recording and presentation of financial
statements, such as the ANNUAL STATEMENT, by the insurance company.
Financial reporting statements are used by the State Insurance
Commissioner in regulating the adequacy of company reserves for
benefit liabilities, assets availability, and worth.
FINANCIAL RESPONSIBILITY CLAUSE provision in
automobile insurance, such as the PERSONAL AUTOMOBILE POLICY (PAP), stating
that a particular policy furnishes adequate coverage, the minimum
of which is at least equal to that required by the financial
responsibility laws in the state in which the insured is driving.
FINANCIAL RESPONSIBILITY LAW law requiring the operator
of an automobile to show financial ability to pay for automobile-
related losses. In many states evidence usually takes the form of a
minimum amount of automobile liability insurance.
FINANCIAL RISK MANAGEMENT management of investment
risks associated with BUSINESS RISK, INTEREST RATE RISK, POLITICAL RISK, and
PURCHASING POWER RISK. Usually fixed income financial instruments, such

as fixed dollar life insurance, fixed dollar annuities, and bonds, are
most susceptible to business, purchasing power, interest rate, and
political risks. Variable dollar life insurance, variable dollar
annuities, and common stocks are most subject to business, market,
and political risks.
 Page 186
FINANCIAL STATEMENT balance sheet and profit and loss
statement of an insurance company. This statement is used by State
Insurance Commissioners to regulate an insurance company
according to reserve requirements, assets, and other liabilities.
FINANCIAL STRUCTURE see ANNUAL STATEMENT, FINANCIAL STATEMENT.
FINANCING securement of funds from outside sources such as by
borrowing or by attracting equity control. Use of leverage to
improve the profitability of a business. Achievement of an
investment return on the borrowed funds at a higher rate than the
interest being paid for the use of the funds.
FINDER'S FEE monetary sum paid to an intermediary who acts as
the contact between the lender (an insurance company) and the
borrower.
FINE ART DEALERS INSURANCE coverage for works of art,
antiques, and similar articles of value on ALL RISKS basis, subject to
exclusion of wear and tear, war, breakage, repairing, infidelity of
the insured's employees, and mysterious disappearance. Fine Arts
Insurance Policies are written on a scheduled basis with damaged
or destroyed items being indemnified on a valued basis. The same
type of coverage for fine arts is available through a Fine Arts
Endorsement for a SPECIAL MULTIPERIL INSURANCE (SMP) policy.
FINE ARTS AND ANTIQUES INSURANCE coverage for
paintings, pictures, etchings, tapestries, art glass windows, antique
furniture, coin collections, and stamp collections owned by
individuals and businesses. These works are not covered if owned
by dealers or auction firms. Protection is on an ALL RISKS basis subject
to exclusions of damage from ordinary breakage, wear and tear,
war, and nuclear disaster. Each item must be specifically listed and
valued in the policy.
FINITE RISK INSURANCE type of insurance that provides a
single aggregate limit of coverage within the insurance policy
terms, thereby limiting the insurance company's liability for a RISK
transferred to it. The insurance coverage is tailored to the
requirements of the INSURED company to reflect the insured's actual
coverage needs. If the insured's losses are favorable, the insured
receives the return of a portion of the premium paid. The insured's
premium costs are based on the insured's own loss experience,
rather than the overall loss experience of a pool of similar insureds.
In essence, through this type of insurance, the insured pays for
exposure to loss and if there is not a substantial loss, the insured
receives the return of a portion of the premium paid in. This
insurance mechanism is ideal for insureds who exhibit a frequency
distribution of high severity loss or an unusual loss frequency. See
also FINANCIAL REINSURANCE.
FINITE RISK REINSURANCE contracts of REINSURANCE in which
expected income from investments is a major component of the
 Page 187
process. Also, the ultimate liability of the reinsurer is
UNDERWRITING

limited. The reinsurer cannot cancel these contracts, but the CEDING
COMPANY may exchange this contract for another contract.

FIRE intense combustion resulting in a flame or glow. In order for

the fire PERIL to be covered under PROPERTY INSURANCE, the fire must be a
HOSTILE FIRE, not a FRIENDLY FIRE.

FIRE CATASTROPHE REINSURANCE means used by a direct

fire underwriter to protect against accumulation for a fire account,
as well as against extremely large fire account liability. For
example, heavy liabilities under individual risks can be analyzed by
the initial fire underwriter to determine the number of separate fire
risks involved. The reinsurance method applied to the risks is a
QUOTA SHARE or surplus share treaty with the use of a FACULTATIVE REINSURANCE

cover if necessary. Under this method, the reinsurer assumes the

liability of a proportionate share of the risks in exchange for a
proportionate share of the premiums. An extremely large number
of losses under individual risks caused by a single event,
commonly referred to as a conflagration hazard, arises when
different risks may be affected by one fire. An example would be
widespread damage to many adjacent private houses. While the
loss for each retained individual risk would be small, the aggregate
would be so large that it would affect the stability of the fire
insurance company. Catastrophe reinsurance would protect any
SURPLUS REINSURANCE and EXCESS OF LOSS REINSURANCE up to a stated amount.

FIRE DEPARTMENT SERVICE CLAUSE in PROPERTY INSURANCE

policies, provision that states that the INSURED will receive INDEMNITY for
expenses incurred as a result of acts by the fire department taken to
save or reduce damage to the insured's property. For example, if the
insured has a house outside the fire district, the fire department
might charge a fee for responding to a fire call.
FIRE DIVISION separation of a building into distinct separate
parts by FIRE WALL or open air spaces between buildings to minimize
the probability of a fire spreading horizontally or vertically.
FIRE DOOR partition of noncombustible material in a wall of
similar material, designed when closed to slow the spread of fire
from one side of the wall to the other. The NATIONAL FIRE PROTECTION
ASSOCIATION rates the doors according to the number of hours they can

be expected to withstand fire before burning through.

FIRE EXTINGUISHER instrument that uses noncombustible
substances such as carbon dioxide to deprive a fire of oxygen,
thereby extinguishing it.
FIRE, FRIENDLY see FRIENDLY FIRE.
FIRE, HOSTILE see HOSTILE FIRE.
 Page 188
FIRE INSURANCESTANDARD FIRE POLICY policy known as
the 165-line policy because of the standard form used in most
states. The policy is not complete, and additional forms and
endorsements are added so that it can cover numerous direct and
indirect risks. The Standard Fire Policy is Section Iproperty
coverage of most package policies such as the HOMEOWNERS and SPECIAL
MULTIPERIL. It provides the foundation for property insurance

coverages regardless of the form in which they appear. The

Standard Fire Policy has four sections:
1. DECLARATIONSdescription and location of property, insured amount,
name of insured.
2. INSURING AGREEMENTSpremium amount, obligations of the insured,
actions the insured must take in the event of loss and resultant
claim.
3. Conditionsdescribes that which suspends or restricts the
coverage, such as an increase in the hazard with the knowledge of
the insured.
4. EXCLUSIONSperils not covered under the policy, such as enemy
attack, including action taken by military force in resisting actual
or immediately impending enemy attack.
Forms that can be added to a Standard Fire Policy include Dwelling
Buildings and Contents Basic Form; Dwelling, Buildings and
Contents Broad Form; GENERAL PROPERTY FORM. Since the Standard Fire
Policy insures only against fire and lightning, the EXTENDED COVERAGE
ENDORSEMENT can cover the additional perils of windstorm, hail, riot,

civil commotion, vehicle and aircraft damage to the insured

property, explosion, and smoke damage. A VANDALISM AND MALICIOUS
MISCHIEF ENDORSEMENT can also be added.

FIRE LEGAL LIABILITY INSURANCE coverage for property

loss liability as the result of negligent acts and/or omissions of the
insured that allows a spreading fire to damage others' property.
Negligent acts and omissions can result in fire legal liability. For
example, an insured through negligence allows a fire to spread to a
neighbor's property. The neighbor then brings suit against the
insured for negligence. In another example, a tenant occupying
another party's property through negligence causes serious fire
damage to the property.
FIRE LOAD amount of combustible matter present that can act as
a fuel to feed a HOSTILE FIRE.
FIRE MAP detail showing distribution of property coverages
written by an insurance company. Illustrates a potential danger of
concentration of insured risks.
FIRE MARK historic insignia representing evidence of coverage
placed on property insured by a particular insurance company. If
the property on fire did not have the company's fire mark, its
private fire department would not fight the fire.
 Page 189
FIRE MARK SOCIETY sales honor group of property and
casualty insurance agents created by the National Association of
Professional Insurance Agents.
FIREPROOF use of engineering approved fire resistive
construction materials exclusively within a structure. See also FIRE
RESISTIVE CONSTRUCTION.

FIRE PROTECTION see FIRE RESISTIVE CONSTRUCTION; FIRE WALL; FIREPROOF.

FIRE RESISTIVE CONSTRUCTION use of engineering-approved
masonry or fire resistive materials for exterior walls, floors, and
roofs to reduce the severity of a potential fire and lower premium
rates.
FIRE WALL structure separating parts of a building in order to
contain the spread of fire. Fire walls reduce the severity of a
potential fire and lower premium rates.
FIRST-DOLLAR COVERAGE insurance policy under which
payment is made for a loss not subject to any DEDUCTIBLE or under
which payment is made up to the limits of the policy, and then an
EXCESS INSURANCE policy takes effect. For example, a HOMEOWNERS INSURANCE

POLICYSECTION II (LIABILITY COVERAGE) would pay up to its limits for an insured

loss, whereupon an UMBRELLA LIABILITY INSURANCE policy would go into

effect.
FIRST LOSS RETENTION (DEDUCTIBLE) see EXCESS OF LOSS
REINSURANCE.

FIRST PARTY INSURANCE coverage for the insured's personal

and real property and the insured's own person. Contrast with THIRD
PARTY.
FIRST POLICY YEAR year in which an annually renewable
INSURANCE POLICY was first issued. See also EFFECTIVE DATE; DATE OF ISSUE.

FIRST SURPLUS REINSURANCE see SURPLUS LINES; SURPLUS REIN-SURANCE.

FIRST SURPLUS TREATY see SURPLUS REINSURANCE.
FIRST-TO-DIE INSURANCE see JOINT LIFE INSURANCE.
FIRST-TO-DIE LIFE INSURANCE see JOINT LIFE INSURANCE.
FIRST YEAR COMMISSION percentage of first year's premium
paid to compensate an insurance agent. This is known as the ''First
Years" to show how much new business the agent is generating,
compared with renewal commissions generated by previous
business.
FIRST YEAR EXPENSES costs associated with the selling of a
new insurance policy to a POLICYHOLDER. The costs include the
acquisition commission as a percentage of the first year's premium,
underwriting charges, and the issuing of the policy charges.
 Page 190
FISCAL POLICY government policy of pumping money into the
economy by spending or taking money out of the economy by
taxing.
FIVE PERCENT RULE coinsurance requirement such that if a loss
is less than $10,000 and also less than 5% of the total of insurance
to cover a loss, then the insurance company will not require that the
property not damaged by the peril be inventoried or appraised.
FIVE PERCENT WAIVER CLAUSE see FIVE PERCENT RULE.
FIVE TO FIFTEEN YEAR RULE VESTING provision of the EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA) under which vesting must accrue

at not less than the following rates:

Years of Service Vesting

0 to less than 5 0
at least 5 25%
6 to 10 5% increase per year
11 to 15 10% increase per year

At the end of 15 years, 100% vesting has been achieved. The TAX REFORM
ACT OF 1986 eliminated this option of vesting beginning January 1,

1989.
FIXED-AMOUNT SETTLEMENT OPTION choice of beneficiary
in which the death benefit of a life insurance policy is retained by
the company to be paid as a series of installments of fixed dollar
amounts per installment until the death benefit and interest are
exhausted. Any excess interest earned above the minimum
guaranteed is applied to extend the time period for making the
payments. This option emphasizes dollar amount per installment as
opposed to length of time installments are to be paid. See also LIFE
INSURANCE; OPTIONAL MODES OF SETTLEMENT.

FIXED ANNUITY see FIXED DOLLAR ANNUITY.

FIXED BENEFITS payment to a beneficiary that does not vary; for
example, a fixed monthly retirement income benefit of $800 paid
to a retired employee.
FIXED DOLLAR ANNUITY ANNUITY that guarantees that a specific
sum of money will be paid in the future, usually as monthly
income, to an annuitant. For example, a $1000-a-month income
benefit will be paid as long as the annuitant lives; the dollar amount
will not fluctuate regardless of adverse changes in the insurance
company's mortality experience, investment return, and expenses.
FIXED DOLLAR INVESTMENTS financial instruments whose
principal and income are established in advance according to
contractual terms set forth in the financial instrument's document.
Examples of such investments include savings accounts,
certificates of deposit, ORDINARY LIFE INSURANCE, and the ANNUITY.
 Page 191
FIXED INCOME financial instrument such as a FIXED DOLLAR ANNUITY or
BOND that pays a minimum periodic income at a minimum

guaranteed rate of interest.

FIXED INCOME FINANCIAL INSTRUMENT coverage that
pays a fixed dollar amount of interest at regular intervals.
FIXED-PERIOD OPTION SETTLEMENT beneficiary's choice, in
a life insurance policy or annuity, for receiving income payments
for a given period of time. The number of payments are fixed by
the payee; the benefit amount is determined by the death proceeds.
For example, an income benefit of $1000 per month is paid for a
period of 48 months, whereupon all income payments cease.
FIXED PERIOD PAYOUT income paid for a specified number of
years from an ANNUITY.
FIXED PREMIUM payment for coverage that remains throughout
the same premium-paying period.
FLAT AMOUNT see DEFINED BENEFIT PLAN.
FLAT CANCELLATION cancellation of an insurance policy on
the date that policy becomes effective. This type of cancellation
does not require any fees to be paid to the insurance company.
FLAT COMMISSION compensation to an agent in the same
absolute dollar amount, regardless of the type of insurance policy
sold. Contrast with GRADED COMMISSION.
FLAT DEDUCTIBLE see DEDUCTIBLE.
FLAT EXTRA PREMIUM certain fixed payment made in addition
to the regularly scheduled premium.
FLAT MATERNITY BENEFIT stated fixed payment for maternity
costs regardless of the actual costs.
FLAT RATE (FLAT SCHEDULE) rate not subsequently adjusted.
The rate stays in effect regardless of an insured's subsequent loss
record.
FLAT SCHEDULE see FLAT RATE (FLAT SCHEDULE).
FLEET OF COMPANIES several insurance companies under
common ownership and, often, common management.
FLEET POLICY numerous automotive vehicles covered under a
common insurance policy.
FLEXIBLE BENEFIT PLAN employee benefit plan that allows
the employee to choose among several different benefits offered by
the employer. In essence, the employee is provided with the
opportunity to make a trade-off by trading one benefit for another
that best meets the employee's needs at a particular point in time.
Contributions paid into the plan, whether on a CONTRIBUTORY or
NONCONTRIBUTORY basis, can
 Page 192
be allocated to satisfy the needs of a particular employee rather
than those of the employees as a whole. The result should be a
balance between the employee's primary needs and the benefit/cost
constraints. Among the personal choices that the employee can
make are health care plans (choices in types and amount of
coverages). WELLNESS PROGRAM plans, child-care benefits, and LONG-TERM
CARE (LTC) PLANS.

FLEXIBLE ENHANCED ORDINARY LIFE modified ENHANCED

ORDINARY LIFE in which there is a combination of dividends purchasing

PAID-UP ADDITIONS, TERM LIFE INSURANCE, and ORDINARY LIFE INSURANCE. The structure of

this product is such that a minimum FACE AMOUNT of ordinary life

insurance must be maintained, but the POLICYOWNER is not limited in
the amount of term life insurance that may be added. Since the
ordinary life and term life product mix can vary, the premium rate
per $1000 will also vary. (Life insurance is sold in units of $1000
and rated in terms of $1000 units.) There is, however, a minimum
rate per $1000 that must be paid. At any time after issue, the
policyowner may increase or decrease the amount of term life
insurance as well as increase or decrease the amount of extra
premiums paid into the policy. These extra premiums will purchase
paid-up additions. See also ENHANCED ORDINARY LIFE.
FLEXIBLE FUNDING arrangement whereby the insured pays the
insurance company a relatively small monthly premium payment.
In exchange for this premium payment, the insurance company
processes and pays claims from a fund owned and maintained by
the insured. Should the claims exceed a stipulated limit, the
insurance company pays the excess amount of claims.
FLEXIBLE PORTFOLIO ACCOUNTS accounts in which assets
are allocated across the spectrum of equity, debt, and money
market instruments. They are the most popular equity investment in
VARIABLE ANNUITIES and VARIABLE LIFE INSURANCE.

FLEXIBLE PREMIUM one in which the amount and frequency of

payment may fluctuate. See also FLEXIBLE PREMIUM ANNUITY; FLEXIBLE PREMIUM
LIFE INSURANCE; FLEXIBLE PREMIUM VARIABLE LIFE; UNIVERSAL LIFE INSURANCE; UNIVERSAL VARIABLE

LIFE INSURANCE.

FLEXIBLE PREMIUM ANNUITY annuity with no fixed schedule

for payment of premiums. For example, premiums can be paid for
10 straight months, then not paid for the next 10 months, then paid
every other month, or any combination thereof.
FLEXIBLE PREMIUM DEFERRED ANNUITY (FPDA) contract
sold by an insurance company under which the premium payment
frequency (monthly, quarterly, semiannually, yearly) may vary and
the amount of each premium payment (usually subject to a
minimum of $100) may vary. This contract pays a monthly (or
quarterly, semiannual, or annual) income benefit for the life of a
person (the ANNUI-
 Page 193
TANT), for the lives of two or more persons, or for a specified period
of time. These income payments are scheduled to begin at a
specified later date. The annuitant can never outlive the income
from the annuity. While the basic purpose of life insurance is to
provide an income for a beneficiary at the death of the insured, the
annuity is intended to provide an income for life for the annuitant.
See also ANNUITY; CASH REFUND ANNUITY; FIXED DOLLAR ANNUITY; INSTALLMENT REFUND
ANNUITY; JOINT-LIFE AND SURVIVORSHIP ANNUITY; JOINT LIFE ANNUITY; LIFE ANNUITY CERTAIN; PURE

ANNUITY; VARIABLE DOLLAR ANNUITY.

FLEXIBLE PREMIUM LIFE INSURANCE policy that has an

initial premium with flexible premiums thereafter. Within limits, a
policy-owner can select both the future amount and frequency of
premiums, or can stop and start premium payments at his or her
discretion. Lump sum premium payments can be deposited, subject
only to federal tax code restrictions.
FLEXIBLE PREMIUM VARIABLE LIFE insurance that combines
features of FLEXIBLE PREMIUM LIFE INSURANCE and UNIVERSAL LIFE INSURANCE into one
policy in the following manner:
1. Premiumsafter the required minimum initial premium payment,
premiums are flexible. The policyowner can select both their future
amount and frequency, with certain restrictions that depend on the
design of the policy. The policyowner can stop and start the
premiums at his or her discretion, and a lump sum premium can be
made at any time subject only to federal tax restrictions.
2. Variablethe death benefit may increase or decrease subject to the
performance of an investment account of equities in which the
premiums are placed. However, a minimum death benefit is
guaranteedthe initial face value of the policy. Cash values fluctuate
according to the performance of this investment account.
FLEXIBLE SPENDING ACCOUNTHEALTH CARE/DEPEN-
DENT CARE EXPENSES plan established by the employer that
permits the employee to defer pretax earnings into a specifically
designated account. From this account, the employee may
withdraw funds to pay unreimbursed medical expenses and/or
qualified child-care expenses. Generally, there is a cap set by the
employer that limits the maximum amount the employee can pay
into this account. In addition, there is a $5000 limit set by the
federal government for the child-care expenses account. Any
unused funds remaining in this account at year's end are forfeited
by the employee.
FLEXIBLE SPENDING ACCOUNT LIFE INSURANCE account
established by the insurance company specifically for beneficiaries
of a life insurance policy where the beneficiary has the choice of
leaving the death benefit on deposit in the account earning interest
or writing checks on the deposited amount.
FLMI see FELLOW, LIFE MANAGEMENT INSTITUTE (FLMI).
 Page 194
FLOAT funds set aside by an insurance company to pay INCURRED
LOSSES which have not yet been paid.

FLOATER coverage for property which moves from location to

location either on a scheduled or unscheduled basis. If the floater
covers scheduled property, coverage is listed for each item. If a
floater covers unscheduled property, all property is covered for the
same limits of insurance. See also PERSONAL ARTICLES INSURANCE; PERSONAL
PROPERTY FLOATER.

FLOOD INSURANCE see FEDERAL FLOOD INSURANCE.

FLOOR PLAN INSURANCE coverage for a lender who has
accepted property on the floor of a merchant as security for a loan.
If the merchandise is damaged or destroyed, the lender is
indemnified. The policy is on an ALL RISKS basis.
FLOW-THROUGH COST (NO LOAD INSURANCE) net cost of
insurance with no markup to cover an intermediary's profit or
expenses. An intermediary, such as a broker, sells an insurance
product net; that is, there is no loading for his own cost of soliciting
business or his profit margin.
FOLLOWING FORM written form which has precisely the same
terms as the other PROPERTY INSURANCE policies covering a particular
property.
FOLLOWING THE FORTUNES REINSURANCE CLAUSE that stipulates that
the REINSURER will be subject to the same fate as the CEDING COMPANY. See
also AUTOMATIC NONPROPORTIONAL REINSURANCE; AUTOMATIC PROPORTIONAL REINSURANCE;
AUTOMATIC REINSURANCE; EXCESS OF LOSS REINSURANCE; FACULTATIVE REINSURANCE;

NONPROPORTIONAL REINSURANCE; PROPORTIONAL REINSURANCE; QUOTA SHARE REINSURANCE; STOP

LOSS REINSURANCE; SURPLUS REINSURANCE.

FOREIGN BANK SUPERVISION ENHANCEMENT ACT
(FBSEA) see FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT (FDICIA).
FOREIGN CARRIER see ALIEN INSURER; FOREIGN INSURER.
FOREIGN COMPANY see ALIEN INSURER; FOREIGN INSURER.
FOREIGN CREDIT INSURANCE ASSOCIATION see EXPORT-IMPORT
BANK.

FOREIGN INSURER insurance company whose domicile is in a

state other than the one in which the company is writing business.
FORFEITURE relinquishment of rights in an insurance policy or
pension plan. For example, by withdrawing contributions to a
pension plan, an employee forfeits future retirement benefits under
that plan.
FORFEITURE OF VESTED BENEFITS relinquishment of rights
to benefits when an employee withdraws previous contributions to
a
 Page 195
plan. An employee who had not withdrawn these contributions
would have been entitled to full benefits at normal retirement age
or to a reduced benefit at early retirement, whether or not he or she
is in the service of the employer at that time.
FORGERY BOND see DEPOSITORS FORGERY INSURANCE.
FORGERY INSURANCE insurance with two types of policies
available: DEPOSITORS FORGERY INSURANCE; FORGERY AND ALTERATION, FORM B.
FORM attachment to an insurance policy to complete its coverage.
For example, the Standard Fire Policy must have certain forms
attached for it to provide the coverage desired.
FORM NO. 1 (BASIC OR STANDARD), HOMEOWNERS
INSURANCE POLICY see HOMEOWNERS INSURANCE POLICYSECTION I (PROPERTY
COVERAGE).

FORM NO. 2 (BROAD), HOMEOWNERS INSURANCE

POLICY see HOMEOWNERS INSURANCE POLICYSECTION I (PROPERTY COVERAGE).
FORM NO. 3 (SPECIAL), HOMEOWNERS INSURANCE
POLICY see HOMEOWNERS INSURANCE POLICYSECTION I (PROPERTY COVERAGE) .
FORM NO. 4 (CONTENTS BROAD FORM), HOMEOWNERS
INSURANCE POLICY see HOMEOWNERS INSURANCE POLICYSECTION I (PROPERTY
COVERAGE).

FORM NO. 6 (CONDOMINIUM UNIT OWNER'S FORM),

HOMEOWNERS INSURANCE POLICY see HOMEOWNERS INSURANCE
POLICYSECTION I (PROPERTY COVERAGE).

FORM 5500 form that reports the status and activity of retirement
plans to the Internal Revenue Service (lRS). The IRS uses this form
to determine whether a retirement plan is in compliance with all
requirements. Form 5500 must be filed with the IRS by the last day
of the seventh month following the plan's year-end.
FORTUITOUS EVENT see FORTUITOUS LOSS.
FORTUITOUS LOSS loss occurring by accident or chance, not by
anyone's intention. Insurance policies provide coverage against
losses that occur only on a chance basis, where the insured cannot
control the loss; thus the insured should not be able to burn down
his or her own home and collect. Insurance is not provided against
a certainty such as wear and tear. Life insurance will not pay a
death benefit if the insured commits suicide within the first two
years that the policy is in force. Even though death is a certainty,
the insured cannot buy a policy with the intention of suicide within
the first two years.
FORTY-FIVE YEAR RULE one of three ways vesting must occur
in a pension plan under the EMPLOYEE RETIREMENT INCOME SECURITY ACT OF
 Page 196
. An employee is entitled to 50% of his or her benefits after
1974 (ERISA)

10 years of employment, or when the total years of service (at least

5) and the employee's age equal 45, whichever is the earlier
achieved. After that, the employee is credited with 10% for each
year of service for the next 5 years, whereupon 100% vesting is
achieved. Under the TAX REFORMACT OF 1986, this vesting rule will no
longer be in effect for plan years after December 31, 1988. See also
VESTING.

FORWARD COMMITMENT RISK RISK incurred by the insurance

company after it makes the commitment to make the loan at some
future time and the borrower may not accept the loan at that time.
FORWARD CONTRACT arrangement between the buyer and the
seller in which there is a mutual agreement to buy or sell a security
at a given price at a stipulated future date. These contracts are
effected on a private placement or over-the-counter basis.
FPA see FREE OF PARTICULAR AVERAGE (FPA).
FRACTIONAL PREMIUM annual premium expressed on a
proportionate basis such as monthly, quarterly, or semiannually.
FRANCHISE CLAUSE CLAUSE found in a MARINE INSURANCE policy that
states that the policy will not pay any CLAIMS less than a given
amount but will pay claims in excess of that amount. The purpose
of this clause is to eliminate the costs associated with processing
small claims because their costs could easily exceed the actual
amount of the claim. This is a form of deductible insurance.
FRANCHISE DEDUCTIBLE stipulation that no claim will be paid
until a loss exceeds a flat dollar amount or a given percentage of
the amount of insurance in force. After the loss exceeds this dollar
amount or percentage amount, the insurance company pays 100%
of the claim loss.
FRANCHISE INSURANCE (WHOLESALE INSURANCE)
coverage for small groups that cannot meet the underwriting
standards of true group insurance. Even though the franchise
insurance covers an entire group, individual policies are written on
each insured person, each having the right to different coverage
than other members. Usually sold to employer groups.
FRATERNAL LIFE INSURANCE group coverage for members of
a fraternal association, usually on a nonprofit basis.
FRAUD dishonest act. Coverage for loss by fraud (not liability for
committing fraud) is provided under the various bonds and crime
insurance policies. See also FIDELITY BOND.
FRAUD BOND see BOND; BLANKET POSITION BOND; COMMERCIAL BLANKET BOND;
CONTRACT BOND; FIDELITY BOND; JUDICIAL BOND; NAME SCHEDULE BOND.
 Page 197
FRAUDULENT CLAIM demand without foundation, such as a
claim submitted to an insurance company by an insured who
caused a loss, or for a loss that never occurred.
FRAUDULENT MISREPRESENTATION dishonest statement to
induce an insurance company to write coverage on an applicant. If
the company knew the truth, it would not accept the applicant.
Fraudulent misrepresentation gives a property and casualty
company grounds to terminate a policy at any time. A life
insurance company, on the other hand, can terminate a policy on
the grounds of fraudulent misrepresentation only during its first
two years; after that, the INCONTESTABLE CLAUSE takes effect.
FREE ALONGSIDE SHIP (FAS) term meaning that an exporter of
goods that are damaged or destroyed during international shipment
relinquishes responsibility for the damage or destruction once the
goods leave the point of origination.
FREE EXAMINATION "FREE LOOK" PERIOD right, in most
states, of an insured to have 10 days in which to examine an
insurance policy, and if not satisfied, to return it to the company for
a full refund of the initial premium.
FREE LOOK PERIOD see FREE EXAMINATION "FREE LOOK" PERIOD.
FREE-OF-CAPTURE-AND-SEIZURE CLAUSE exclusion of
coverage in marine insurance if damage or destruction of property
results from war, capture, or seizure.
FREE OF PARTICULAR AVERAGE (FPA) marine insurance
contract clause that limits an insurance company's liability. The
company agrees to pay only losses that exceed a percentage or flat
dollar amount; partial (below this percentage or amount) losses are
not paid. In essence, the principle is like the DEDUCTIBLE feature of
other policies.
FREE ON BOARD (FOB) term meaning that an exporter of goods
that are damaged or destroyed during international shipment
relinquishes responsibility for the damage or destruction once the
goods reach the point of destination.
FREE TRADE ZONE geographical area in which commerce can
be conducted without tariffs being applied. The concept was
adopted in insurance through the use of a REINSURANCE FACILITY for
buying and selling of insurance coverages without a premium tax
being applied.
FREEZING OF SUPPLEMENTAL LIABILITY procedure
whereby there is no amortization of the employer's liability for the
supplemental cost of an employee's future benefits to be paid at
retirement. See also INDIVIDUAL LEVEL COST METHOD WITH SUPPLEMENTAL LIABILITY.
FREIGHT INSURANCE coverage for goods during shipment on a
common carrier. See also CARGO INSURANCE.
 Page 198
FREQUENCY number of times a loss occurs.
FREQUENCY AND DISTRIBUTION OF LOSSES number of
times losses occur, and their severity. These statistics measure
expectation of loss, and are critical in establishing a basic premium
or the pure cost of protection that is based on expectation of loss.
FRIENDLY FIRE kindling intentionally set in a fireplace, stove,
furnace, or other containment that has not spread beyond it.
Property insurance does not protect against damage from a friendly
fire. For example, smoke damage to the inside of a fireplace is not
covered because the fire is in its normal habitat; to insure it would
be insuring against a certainty. Insurance is designed to provide
coverage against the fortuitous loss. See also HOSTILE FIRE.
FRONT END LOADED TERM see DEPOSIT TERM LIFE INSURANCE.
FRONTING COMPANY see FRONTING.
FRONTING (FRONTING COMPANY) procedure under which
the CEDING COMPANY (the primary or fronting company) cedes the risk it
has underwritten to its reinsurer with the ceding company retaining
none or a very small portion of that risk for its own account. See
also REINSURANCE.
FRONT LOADING expenses added to the beginning of a premium
payment period. For example, an annuity with a 10% front load
would include $10 of expenses for each $100 premium paid.
FROZEN KEOGH PLAN plan to which contributions are not
being made, but which has not been formally terminated. The
freezing of a KEOGH PLAN (HR-10) may occur in the following
circumstances:
1. self-employed person stops contributing to the plan.
2. personal corporation is dissolved and stops contributing to the
plan even though the employee of the personal corporation may
continue in the same occupation.
3. self-employed person under the original plan may form a
partner-ship or incorporate, necessitating the freezing of the
original plan and the establishment of a new plan.
Owners of a frozen plan must make sure the plan continues to
conform to current regulations and continue to file annually FORM
5500. Annual administrative costs may be saved by terminating the
frozen plan and rolling over its assets into a currently active
qualified plan.
FSA see FELLOW, SOCIETY OF ACTUARIES (FSA).
FSLIC see FEDERAL SAVINGS AND LOAN CORPORATION (FSLIC).
FTZ see FREE TRADE ZONE.
FULL COVERAGE all insured losses paid in full.
 Page 199
FULL-PAID ADDITIONS see DIVIDEND ADDITION.
FULL PRELIMINARY TERM RESERVE PLAN method of
valuing a reserve under which a life insurance policy, from an
actual point of view, combines one-year term insurance and a one-
year deferred plan. Here the net premium is sufficient only to pay
first-year death claims. For example, a 10-pay life insurance policy
issued at age 30 would be viewed actuarially, for full preliminary
term reserve plan purposes, as one-year term insurance at age 30
plus a nine-pay policy issued at age 30 but deferred to age 31.
FULL PRELIMINARY TERM RESERVE VALUATION
mathematical combination of one-year term insurance and one-year
deferred permanent insurance such that no reserve has to be set up
for the first year the policy is in force and allowance is made for
adjustment in future reserves to reflect this one-year lag.
FULL REPORTING CLAUSE provision in commercial property
coverage under which an insured must report the value of an
insured property at periodic intervals in order to preserve coverage
up to values reported. In essence, this clause requires the insured to
maintain total insurance to the value of the property, or 100%
coinsurance. If the insured maintains less than the 100%
requirement and a loss takes place, only a portion of that loss will
be paid. See also COINSURANCE.
FULL VALUATION RESERVE method of valuing a reserve under
which no reserve is established for a life insurance policy at the end
of the first policy year, but reserves are established at the end of the
second policy year. This approach enables the company to have
more funds available during the first policy year to pay the
expenses associated with selling the policy. See also FULL PRELIMINARY
TERM RESERVE PLAN.

FULL VALUE LOSS RESERVES undiscounted LOSS RESERVES that

must be maintained by property and casualty insurance companies
in an adequate amount to provide for the payment of the settlement
value of the outstanding claims of the companies. These reserves
cannot be reduced by the expected return from any investment
considerations.
FULL VESTING entitlement to pension benefits without a
reduction, even though an employee is no longer in the service of
an employer at retirement. For example, under the TEN YEAR VESTING
rule, an employee who has worked 10 years for an employer is
automatically credited with future retirement benefits. See also
VESTING, CONDITIONAL.

FULLY INSURED STATUS provision in Social Security: to

receive retirement monthly income, a participant must have earned
income on which Social Security taxes were paid for at least 10
years or 40 quarters.
 Page 200
FULLY PAID POLICY limited pay whole life policy under which
all premium payments have been made. For example, a 20 pay
policy is completely paid for after 20 payments; no future
premiums have to be made, and the policy remains in full force for
the life of the insured.
FUNDAMENTAL basic requirements of an employee benefit
insurance plan such as minimum age and years of service with an
employer.
FUNDED COVER transaction in which the CEDING COMPANY pays a
premium and is guaranteed certain future payments to fund future
losses. If losses are less than was expected, the ceding company
receives a profit commission. Conversely, if catastrophic losses are
occurring at a faster rate than the investment return earned on the
premium, the ceding company will not receive its full recovery on
its reinsurance. See also FINANCIAL REINSURANCE.
FUNDED PENSION PLAN plan in which funds are currently
allocated to purchase retirement benefits. An employee is thus
assured of receiving retirement payments, even if the employer is
no longer in business at the time the employee retires. See also
ALLOCATED FUNDING INSTRUMENT.

FUNDED RETIREMENT PLAN see FUNDED PENSION PLAN.

FUNDED TRUST see LIFE INSURANCE TRUST.
FUNDING allocation of funds in a retirement plan. See also
ALLOCATED FUNDING INSTRUMENT.

FUNDING AGENCY individual or organization that provides the

mechanism in which financial assets are accumulated for the
purpose of paying accrued pension benefits. See also ACCRUED BENEFIT
COST METHOD; PENSION PLAN FUNDING, GROUP DEPOSIT ADMINISTRATION ANNUITY; PENSION PLAN

FUNDING, GROUP IMMEDIATE PARTICIPATING GUARANTEE (IPG) CONTRACT ANNUITY; PENSION PLAN

FUNDING, GROUP PERMANENT CONTRACT; PENSION PLAN FUNDING, INDIVIDUAL CONTRACT PENSION

PLAN.

FUNDING AGREEMENT private placement investment contract

sold by insurance companies. This product has no registration
requirement and pays the investor a higher rate of return than
commercial paper. Frequently associated with this product are PUT
OPTIONS that permit the investor to terminate the contract provided 7,

30, 90, or 180 days' notification is given.

FUNDING COVER refers to the insured or reinsured paying
premiums into an account at a commercial bank that will be used to
pay for future or past losses. Portions of the premiums not required
to pay for these losses are refunded to the POLICYOWNER or CEDING COMPANY.
FUNDING INSTRUMENT/FUNDING MEDIA/FUNDING
VEHICLE legal contract, such as an insurance policy, annuity or
pension plan, containing ACTUARIAL EQUIVALENT considerations for the
proper
 Page 201
rate structure so that premium payments will be adequate to
provide for future benefit payments.
FUNDING STANDARD ACCOUNT approach in pension plan
funding under which a separate account is maintained for
comparing actual contributions to the plan with the minimum
contributions required to meet future employee benefit liabilities.
This account acts as a reservoir in that it can store excess
contributions above the minimum required. It also allows excess
contributions to accumulate at interest and then applies these
accrued contributions to reduce the minimum required future
contributions.
FUNDS PAID IN ADVANCE TO COVER EXPENSES see RAIN
INSURANCE.

FUNERAL INSURANCE modest life insurance coverage to pay

burial expenses upon the death of an insured.
FUR AND JEWELRY FLOATER coverage on an ALL RISKS basis for
loss or damage to fur and jewelry at any location. Furs and jewelry
must be scheduled in order to be covered.
FURRIER'S BLOCK INSURANCE coverage for furs owned by a
furrier, or a customer's furs in the care, custody, and control of the
furrier. Coverage is on an ALL RISKS basis except those specifically
excluded: wear and tear; war; delay; loss of market; flood;
earthquake; loss or damage while furs are being worn by the
insured or his or her representatives; loss resulting from infidelity
of any person under the care, custody, and control of the insured;
damage or destruction of the furs after they leave the care, custody,
and control of the insured that has been sold under an installment
contract; and mysterious disappearance.
FURRIERS CUSTOMERS POLICY coverage on an ALL RISKS basis
for fur garments belonging to customers of a furrier. See also
FURRIERS BLOCK INSURANCE.

FURS INSURANCE coverage on fur coats as well as other clothes

that have fur trim. Protection is provided at any location on an ALL
RISKS basis subject to the exclusions of wear and tear, war, and

nuclear disaster. Each item must be specifically listed in the policy.

FUTURE BUY-OUT EXPENSE OPTION option clause in a
DISABILITY BUY-OUT INSURANCE POLICY that permits the owner of the policy to

increase the limits of coverage for the expenses associated with the
buy-out process. Usually, the limits can be increased only on the
dates stipulated in this option clause.
FUTURE INSURABILITY GUARANTEE/FUTURE INCREASE
OPTION option clause in a DISABILITY INCOME POLICY that the insured can
exercise that would permit the insured the right to purchase
additional limits of coverage regardless of the insured's physical
condition. These additional purchases are limited by the insured's
age and a
 Page 202
maximum dollar amount, as well as twice the total monthly
disability income from all insurance companies that the insured has
in force, at which time the lesser of these two amounts would
apply. This option may be exercised by the insured annually,
usually until age 55.
FUTURES CONTRACTS DERIVATIVE representing a legal obligation
to carry out a transaction that has been prearranged according to a
stipulated price and date in the future. There are numerous types of
financial instruments through which the value of this obligation
may be established to include commodities, currencies, market
indexes, interest rates, stocks, and bonds.
FUTURE SERVICE BENEFITS retirement payments to be
credited for future years of service with an employer.
FUTURES TIED TO REINSURANCE futures contracts based on
automobile and health REINSURANCE policies to be traded on the
Commodity Future Exchange of the Chicago Board of Trade. The
purpose is to allow insurance companies in the United States and
abroad to use these futures contracts to hedge against losses on
automobile and health policies that the companies underwrite. At
the expiration point of the 3-month-long futures contract,
certificates of reinsurance (showing evidence of the existence and
terms of a particular policy or policies) are issued to the remaining
contract holders. After all the claims have been paid, the
reinsurance certificates are redeemed for an amount equal to the net
earned premium. See also AUTOMATIC NONPROPORTIONAL REINSURANCE; AUTOMATIC
PROPORTIONAL REINSURANCE; AUTOMATIC REINSURANCE; EXCESS OF LOSS REINSURANCE; FACULTATIVE

REINSURANCE; FINANCIAL REINSURANCE; NONPROPORTIONAL REINSURANCE; PROPORTIONAL

REINSURANCE; QUOTA SHARE REINSURANCE; STOP LOSS REINSURANCE; SURPLUS REINSURANCE.

FUTURE VALUE amount a sum of money today is worth at a
specified future date because of the effect of compound interest.
FUTURISM methodology in which a range of plausible
alternatives is suggested concerning future scenarios. The scenarios
describe possibilities rather than predictions.
 Page 203

G
GAMBLING RISK-creating device as compared with INSURANCE, which
is a risk-reducing or -eliminating device. This is a form of
speculative risk.
GAMBLING INSURANCE see WAGERING AND INSURANCE.
GARAGE INSURANCE coverage for bodily injury, property
damage or destruction, for which the insured garage and/or its
representatives become legally liable resulting from the operation
of the garage. For example, negligent repair to a customer's
automobile brakes cause them to fail, thereby injuring the driver.
The garage faces a liability suit for perhaps three types of damages:
special, general, and punitive.
GENERAL ACCOUNT GUARANTEED INVESTMENTS
CONTRACT (GIC) type of GUARANTEED INVESTMENTS CONTRACT in which
funds for the contract are put in the insurance company's general
account.
GENERAL ADJUSTMENT BUREAU (GAB) national agency
supported by property insurance companies. The bureau is used by
companies that do not have their own claims adjusters.
GENERAL AGENCY SYSTEM means of distribution that uses
general agents rather than branch offices to sell life and health
insurance. See also GENERAL AGENT (GA).
GENERAL AGENT (GA) individual responsible for insurance
agency operation in a particular area, including sale of life and
health insurance, servicing policies already sold, recruiting and
training agents, and providing administrative support. General
agents are compensated on a commission basis and usually pay all
expenses of administering their agencies.
GENERAL AGENTS AND MANAGERS CONFERENCE
(GAMC) association of general agents and managers affiliated with
the NATIONAL ASSOCIATION FOR LIFE UNDERWRITING (NALU). Their objective is to seek
solutions to common managerial problems. GAMC provides a
forum for the exchange of ideas and gives awards for outstanding
performance by members.
GENERAL AVERAGE expenses and damages incurred as the
result of damage to a ship and its cargo and/or of taking direct
action to prevent initial or further damage to the ship and its cargo.
These expenses and damages are paid by those with an interest in
the ship and its cargo in proportion to their values exposed to the
common danger. Contrast with PARTICULAR AVERAGE.
GENERAL CHARACTERISTICS attributes of a particular
employee benefit plan. For example, a general characteristic of
group life insurance is that the whole group is underwritten, not
individual members.
 Page 204
GENERAL CONSIDERATIONS see GENERAL CHARACTERISTICS.
GENERAL DAMAGES see LIABILITY, CIVIL DAMAGES AWARDED.
GENERAL LIABILITY INSURANCE coverage for an insured
when negligent acts and/or omissions result in bodily injury and/or
property damage on the premises of a business, when someone is
injured as the result of using the product manufactured or
distributed by a business, or when someone is injured in the general
operation of a business.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) type of accounting method, in life insurance, designed to
match revenues and expenses of an insurer according to principles
designed by the Financial Accounting Standards Board and the
Audit Guide for Stock Life Insurance Companies published by the
American Institute of CPAs. For example, under GAAP, acquisition
expenses (costs of placing insurance on a company's books such as
administrative expenses and agent commissions) are recognized in
the same proportion that premium income is recognized over the
premium paying period, with losses subtracted from premium and
investment income as they occur.
GENERAL OPERATING EXPENSE costs incurred by an
insurance company other than agent commissions and taxes; that is,
mainly the administrative expense of running a company.
GENERAL PROPERTY FORM attachment to a property business
insurance policy providing coverage for a business structure and
any additions and/or extensions; merchandise and other stock and
inventory within the structure (not including animals, pets,
watercraft, out-door trees, shrubs, and plants, outdoor signs, fences,
and swimming pools); personal property of the insured while in the
insured structure and within 100 feet of the premises; and personal
property of a third party under the safekeeping of the insured in the
insured structure and within 100 feet of the premises. The General
Property Form Provides coverage in three ways:
1. Specifican amount of insurance is provided on a specified piece
of property.
2. Schedulean amount of insurance is provided on several specified
pieces of property listed in the policy.
3. Blanketan amount of insurance is provided on several different
kinds of property, several different locations, or a combination of
several different kinds of property at several different locations.
GENERATION SKIPPING TRANSFER TAXES provision under
the Internal Revenue Code, Chapter 13, that specifies a transfer tax
of 55% of the gift to a person at least two generations younger than
the transferor (person who gives the gift). This tax is imposed in
addition to any estate taxes or regular gift taxes.
GEOGRAPHICAL LIMITATION see TERRITORIAL LIMITS.
 Page 205
GIFT transfer of property without payment.
GIFT IN TRUST value or property given by an individual to a
trustee who holds and administers it for the benefit of the donee
(recipient of the gift). For example, a father entrusts a life
insurance policy with all ownership rights to a trustee. The trustee
owns the policy, collects the proceeds, and administers the
proceeds for the benefit of the donee son. See also ESTATE PLANNING
DISTRIBUTION.

GIFT OUTRIGHT value or property given by an individual

directly to a donee (recipient of the gift), for example, when a
father gives a life insurance policy with all ownership rights to his
son. See also ESTATE PLANNING DISTRIBUTION.
GIFT TAX tax, under federal and state laws, on transfer of property
made without payment or other value in exchange.
GIFT TAX EXCLUSION amount, not in excess of $10,000 per
year, given to each of an unlimited number of donees free of FEDERAL
ESTATE TAX and GIFT TAX. Each individual can give up to $10,000 to any

one donee, or up to $10,000 each to an unlimited number of

donees, provided the gift has no conditions attached. A gift
completed in this manner will not reduce the donor's MARITAL DEDUCTION.
Wealth can be transferred on a significant basis free from federal
estate tax by careful planning providing the donor is comfortable
giving away acquired wealth while still alive. A word of caution: If
the gift is in the form of a check, the Internal Revenue requires that
the check be paid and cleared by the donor's bank before the gift
can be considered complete. Thus, if the check is given in
December, but does not clear the donor's bank until January, the
gift would be deemed to have been given in the new year and the
old year's gift allowance will have been wasted.
G.I. INSURANCE see GOVERNMENT LIFE INSURANCE.
GLASS INSURANCE see COMPREHENSIVE GLASS INSURANCE.
GLASS-STEAGALL ACT (BANKING ACT OF 1933) legislation
excluding commercial banks that are members of the Federal
Reserve System from most types of investment banking activities.
The coauthor of the Act, Senator Carter Glass of Virginia, believed
that commercial banks should restrict their activities to
involvement in short-term loans to coincide with the nature of their
primary classification of liabilities, demand deposits. Today, many
in the banking field view these constraints as particularly
burdensome because of increased competition from other financial
institutions for customers' savings and investment dollars.
GOLFERS EQUIPMENT INSURANCE coverage for golf clubs
and golf equipment on an ALL RISKS basis subject to exclusions of
wear and tear, war, and nuclear disaster. Location of coverage is a
clubhouse locker or any other building used in golf activities. For
example, if a golfer's clubs were in the locker in the clubhouse and
they were stolen,
 Page 206
the golfer would be indemnified. There is usually no coinsurance
requirement, and coverage is provided on a replacement cost basis.
GOOD SAMARITAN COVERAGE see HOMEOWNERS INSURANCE
POLICYSECTION II (LIABILITY COVERAGE).

GOOD STUDENT DISCOUNT reduction in automobile insurance

rate for a student with a good academic record. Some statistical
studies suggest that good students have fewer automobile
accidents.
GOODWILL monetary value of the reputation of a business.
Goodwill is an intangible asset and thus may be difficult to
measure.
GOVERNMENT INSURANCE coverage under the auspices of a
federal or state agency that can be either mandatory or elective. See
also SOCIAL INSURANCE.
GOVERNMENT LIFE INSURANCE coverage for present and
past U.S. uniformed services members under one of these
programs:
1. United States Government Life Insurance (USGLI)established in
1919 to provide RENEWABLE TERM LIFE INSURANCE up to $10,000. This
program is no longer available.
2. National Service Life Insurance (NSLI)established in 1940 to
take the place of USGLI; terminated in 1950. Today NSLI exists
for amounts ranging from $1000 to $10,000 under five-year
renewable term and permanent forms of life insurance. The latter
policies have the same nonforfeiture benefits and OPTIONAL MODES OF
SETTLEMENT as COMMERCIAL FORMS of life insurance.
3. SERVICEMEN'S GROUP LIFE INSURANCE (SGLI)established in 1965 to cover active
members of the U.S. uniformed forces; purchased through
commercial insurance companies on a group basis at a government
subsidized rate. Each service person pays a premium that reflects
nonmilitary mortality expectation and administrative expenses. The
federal government subsidizes the premium by paying for any extra
mortality and administrative expenses associated with the military
exposure. Upon discharge, a SGLI policy can be converted,
regardless of physical condition, to a five-year nonrenewable
Veterans Group Life Policy (VGLI), and then can be converted
(after five years)again regardless of healthto an individual life
policy with any of the participating commercial life insurance
companies.
4. VETERANS GROUP LIFE INSURANCE (VGLI)nonrenewable convertible five-year
term insurance to which SGLI is converted at the time a service
person is discharged. It has no cash or loan value, disability
benefits, paid-up benefits, or extended term benefits. It can be
converted to an individual policy with a participating company.
GOVERNMENT MONEY MUTUAL FUNDS investments made
in a variety of securities issued by government agencies.
 Page 207
GRACE PERIOD period after the date the premium is due during
which the premium can be paid with no interest charged, the policy
remaining in force. This period is for 30 or 31 days. If the insured
dies during this period, the beneficiary would receive the full face
amount of the policy minus the premium owed. Thus the use of the
grace period allows the financial technique of leveraging.
GRADED see GRADED COMMISSION; GRADED DEATH BENEFIT; GRADED PREMIUM, WHOLE LIFE
INSURANCE.

GRADED COMMISSION compensation that varies with the class

and type of insurance sold. Many insurance companies offer
varying commissions according to the volume of business an agent
places with the company.
GRADED DEATH BENEFIT death payment that increases with
the age of an insured. Graded benefits may increase gradually and
then level off, or may increase sharply before becoming level. This
type of coverage is most common in juvenile life insurance.
GRADED POLICY insurance for which premiums are charged
according to the size of the FACE AMOUNT of the policy, so that the
greater the face amount, the lower the cost per $1000 unit of
insurance.
GRADED PREMIUM, WHOLE LIFE INSURANCE coverage
under which initial premiums are less than normal for the first few
years, then gradually increase for the next several years until they
become level for the duration of the policy.
GRADED VESTING VESTING, DEFERRED or VESTING, IMMEDIATE under which the
accrued benefits of the employee increase on a percentage basis
(according to years of service and/or attained age) until 100%
VESTING is achieved.

GRADUATED LIFE TABLE MORTALITY TABLE that reflects

irregularities from age to age due to chance fluctuations in the
sequence of the rates of mortality. The rates of death as reflected by
the mortality table in its most idealized form (the ''perfect world"
approach) should proceed smoothly from age bracket to subsequent
age bracket. Irregularities may result from:
1. statistical fluctuations due to an insufficiently large data base.
2. use of statistics that are not homogeneous.
3. statistics of one particular mortality study not representing other
mortality studies.
4. mortality statistics for later policy years too scanty to yield
reliable information, and too heavily weighted towards the earlier
policy years.
GRADUATED MORTALITY TABLE see GRADUATED LIFE TABLE.
GRADUATION statistical procedure applied to the data that
comprises a MORTALITY TABLE. It is designed to smooth out the
irregularities in
 Page 208
that data believed to not be truly indicative of the population from
which the sample data has been taken.
GRANT OF LIMITED PROPERTY INTEREST see ESTATE PLANNING
DISTRIBUTION.

GRANTOR individual who creates a TRUST and generally places

his or her assets in it.
GRANTOR RETAINED ANNUITY TRUST (GRAT) irrevocable
TRUST into which the GRANTOR places assets and receives in turn a fixed

amount of income from a fixed ANNUITY (amount of income stipulated

at the time the trust is established) for either a given number of
years, or for the lesser of a given number of years, or until the
grantor's death. When the term of the trust expires, assets in the
trust to include any appreciation are distributed to the named
remainder beneficiary(s). If the assets in the trust fail to generate
sufficient income to make the required annuity payments, the
principal of the asset on deposit in the trust must be liquidated in an
amount needed to meet the required income payments. This
principal could diminish dramatically by the time it is transferred to
the remainder beneficiary(s). If the grantor is alive when the trust
terminates, the assets and their appreciation within the trust are not
included in the grantor's estate.
GRANTOR-RETAINED INCOME TRUST (GRIT) irrevocable
TRUST into which the GRANTOR places assets and retains the income

from or the use of these assets for a stipulated period of time. At

the termination of this time period, the principal (assets) of the trust
is transferred to the grantor's noncharitable BENEFICIARY. The
noncharitable beneficiary may include individual(s) such as a
grandchild, niece, nephew, son, or daughter. Should the grantor
survive the stipulated period of time, he or she will incur
substantial savings in estate and gift taxes. In order for these
savings in taxes to occur, the following requirements must be met
by the grantor:
1. income to the grantor must be the sole result of the income
generated by assets held in the trust.
2. any income generated by the assets held in the trust can be paid
only to the grantor of the trust.
3. neither the grantor nor the spouse of the grantor can act as a
trustee of the trust.
4. any income retained by the grantor must be for a period of time
not to exceed 10 years.
Should the grantor die before the stipulated period of time the trust
expires, the value of the assets of the trust are included in the
grantor's estate for FEDERAL ESTATE TAX purposes, even though the assets
are not physically transferred to the estate of the grantor. See also
SUPERGRIT.

GRANTOR RETAINED TRUST TRUST under which grantor retains

income from the ASSETS that have been transferred to the trust. This
 Page 209
trust permits the avoidance of probate, protects the assets from
creditors, and leads to the savings of substantial taxes. See also
GRANTOR-RETAINED INCOME TRUST (GRIT); SUPERGRIT.

GRANTOR RETAINED UNITRUST (GRUT) irrevocable TRUST

into which the GRANTOR places assets and receives in turn a variable
amount of income from a VARIABLE ANNUITY (amount of income will
vary yearly depending upon the increase or decrease in the value of
the assets on deposit in the trust) for either a given number of
years, or for the lesser of a given number of years, or until the
grantor's death. When the term of the trust expires, assets in the
trust to include any appreciation are distributed to the named
remainder beneficiary(s). If the grantor is alive when the trust
terminates, the assets and their appreciation within the trust are not
included in the grantor's estate.
GROSS see GROSS EARNINGS FORM; GROSS INCOME; GROSS PREMIUM.
GROSS DOMESTIC PRODUCT (GDP) measurement of the
nominal value of all goods and services produced in a one year
period. This production includes that by United States-owned
companies as well as by production plants located in the United
States and owned by foreign companies. As GDP increases, there is
a tendency for company profits and interest rates to rise as well.
Conversely, as GDP decreases, there is a tendency for company
profits and interest rates to also decline. These figures are
published on a quarterly basis by the United States Department of
Commerce.
GROSS EARNINGS FORM coverage for loss in the gross
earnings of the business (minus expenses that cease while the
business is inoperative) as the result of the interruption of normal
business activities caused by damage to the premises by an insured
peril. Noncontinuing expenses include light, gas, and advertising
for which there is no contractual obligation. Coverage can be
obtained on either a 50, 60, 70, or 80% coinsurance basis. Selection
of the coinsurance percentage is dependent upon the length of time
business is expected not to operate in the worst of circumstances.
GROSS ESTATE sum total of all assets owned by the decedent to
include personal property, real property, and trust property.
GROSS INCOME total income before adjustment for deduction as
applied to tax calculation for both the individual and the firm.
GROSS LINE total limit on the amount of coverage an INSURER will
underwrite on an individual RISK. The amount underwritten includes
the amount to be CEDED through a REINSURANCE agreement.
GROSS NATIONAL PRODUCT (GNP) total value of all goods
and services produced by companies located in the United States as
well as that produced by United States companies whose
production facilities are outside the United States.
 Page 210
GROSS NEGLIGENCE reckless action without regard to life,
limb, and/or property; for example, driving 100 miles per hour on a
road or highway.
GROSS PREMIUM
General: net premium, plus operating and miscellaneous expenses,
and agent's commissions.
Life insurance: premium before dividends are subtracted.
GROUP ACCIDENT AND HEALTH INSURANCE see GROUP
DISABILITY INSURANCE; GROUP HEALTH INSURANCE; GROUP INSURANCE.

GROUP ANNUITY contract providing a monthly income benefit

to members of a group of employees. A group annuity has the same
characteristics as an individual annuity, except that it is
underwritten on a group basis. See also ANNUITY.
GROUP ANNUITY TABLE, 1951 first historical MORTALITY TABLE used
for the calculation of PREMIUM rates for GROUP ANNUITIES. This table was
subsequently replaced by the GROUP ANNUITY TABLE, 1971.
GROUP ANNUITY TABLE, 1971 historical MORTALITY TABLE that
replaced the GROUP ANNUITY TABLE, 1951, whose statistics at that time were
more current than the replaced table. This table was subsequently
replaced by the 1983 GAM table (mortality table used to calculate
male annuity rates on a group basis).
GROUP CERTIFICATE summary certificate of benefits issued to
an employee in lieu of a policy. The master contract remains with
the employer. For example, in group life insurance, an employee
receives only a summary certificate of benefits, while the master
contract remains with the employer.
GROUP CONTRACT see GROUP INSURANCE.
GROUP CREDIT INSURANCE coverage issued to a creditor on
the lives of debtors for outstanding loans. If a debtor dies before
repayment, the policy pays the remainder of the loan to the
creditor. The contract covers an entire group of debtors rather than
each debtor separately.
GROUP CREDITOR INSURANCE see CREDIT LIFE INSURANCE (CREDITOR LIFE
INSURANCE); GROUP CREDIT INSURANCE.

GROUP DEFERRED ANNUITY contract for retirements benefits

in which an entire group of employees is underwritten, as opposed
to a single annuity for each employee. Each premium pays for an
increment of a paid-up annuity; thus a group deferred annuity is a
series of single premium paid-up annuities. It may be considered an
ALLOCATED FUNDING INSTRUMENT for purchasing retirement benefits. Single

premium paid-up annuities that have already been purchased

guarantee that an employee will receive retirement income whether
or not the employer remains in business at the time he or she
retires.
 Page 211
GROUP DEPOSIT ADMINISTRATION ANNUITY see PENSION PLAN
FUNDING.

GROUP DISABILITY INSURANCE coverage of an employee

group whose members receive a monthly disability income benefit,
subject to a maximum amount, if illness or accident prevents a
member from performing the normal functions of his or her job.
Benefits are usually limited to a stated length of time, and the
maximum monthly income benefit is usually no more than 50-60%
of earnings prior to the disability, or a flat dollar amount,
whichever is less.
GROUP HEALTH INSURANCE coverage underwritten on
members of a natural group, such as employees of a particular
business, union, association, or employer group. Each employee is
entitled to benefits for hospital room and board, surgeon and
physician fees, and miscellaneous medical expenses. There is a
DEDUCTIBLE and a COINSURANCE requirement each employee must pay.

Characteristics of group health insurance include:

1. TRUE GROUP PLANone in which all employees must be accepted for
coverage regardless of physical condition. (For example, coverage
cannot be denied because of a pre-existing condition such as
cancer.) Usually an employee must apply and pay the first premium
within the first 30 days of employment or he or she forfeits the
right to automatic coverage (a form of GUARANTEED INSURABILITY).
Individuals are covered under a MASTER CONTRACT, each receiving a
certificate denoting coverage.
2. Schedule of Benefitsdescribes what the insured and his or her
covered dependent(s) is entitled to in the event of disease, illness,
or injury. After the insured or the covered dependent has satisfied
the DEDUCTIBLE (defined as the first portion of all of the eligible
expenses that occur during a calendar year of coverage), the
insurance company pays a given percentage (usually 80%) until a
total sum (stop loss), usually $5000, is reached for the calendar
year. After the total sum has been reached, the insurance company
pays 100% of the total eligible expenses until the end of the
calendar year subject to a maximum lifetime amount. See also
DEPENDENT.

3. Eligible Expensesinclude hospital bills, surgery, doctor's

services, private nursing, medicines, and X-rays. Payment allowed
for these and other expenses are spelled out in the policy. For
example, the hospital's daily charge for room and board is subject
to a specified maximum.
4. Exclusions from Provisions of Medical Benefitsmany exclusions
occur in group health plans, including benefits under Workers
Compensation; certain mouth conditions; convalescent or rest
cures; expenses incurred by a member of a HEALTH MAINTENANCE
ORGANIZATION (HMO) or other prepaid medical plan; expenses associated

with intentional self-inflicted injuries or attempt at suicide.

5. COORDINATION OF BENEFITSwhen there are two or more group health
insurance plans covering the insured, one plan becomes the
Primary Plan and the other plan(s) becomes the Secondary Plan(s).
 Page 212
The Primary Plan is required to pay benefits due the insured and/or
covered dependents before any other plan pays benefits. When a
claim is made, the primary plan must pay the claim without regard
to the benefits provided under any other plan. The secondary plan
pays the difference between the total claim amount and the amount
that the primary plan has paid, up to total allowable expenses.
GROUP IMMEDIATE PARTICIPATION GUARANTEED
ANNUITY see PENSION PLAN FUNDING; GROUP IMMEDIATE PARTICIPATION GUARANTEED (IPG)
CONTRACT ANNUITY.

GROUP INSURANCE single policy under which individuals in a

natural group (such as employees of a business firm) and their
dependents are covered. See also GROUP ANNUITY; GROUP CERTIFICATE; GROUP CREDIT
INSURANCE; GROUP DEFERRED ANNUITY; GROUP DISABILITY INSURANCE; GROUP HEALTH INSURANCE;

GROUP LIFE INSURANCE; GROUP PAID-UP LIFE INSURANCE; GROUP PERMANENT LIFE INSURANCE; GROUP

TERM LIFE INSURANCE; PENSION PLAN FUNDING; GROUP DEPOSIT ADMINISTRATION ANNUITY.

GROUP LIFE INSURANCE basic employee benefit under which

an employer buys a master policy and issues certificates to
employees denoting participation in the plan. Group life is also
available through unions and associations. It is usually issued as
yearly renewable term insurance, although some plans provide
permanent insurance. Employers may pay all the cost or share it
with employees. Characteristics include:
1. Group Underwritingan entire group of employees is
underwritten, unlike individual life insurance whereunder only the
individual is underwritten.
2. Guaranteed Issueevery employee must be accepted; an
employee cannot be denied coverage because of a pre-existing
illness, sickness, or injury.
3. Conversion at Termination of Employmentregardless of whether
termination is because of severance, disability, or retirement, the
employee has the automatic right to convert to an individual life
policy without evidence of insurability or taking a physical
examination. Conversion must be within 30 days of termination.
The premium upon conversion is based on the employee's age at
the time (ATTAINED AGE).
4. DISABILITY BENEFITavailable in many policies to an employee less than
60 years of age who can no longer work because of the disability.
The benefit takes the form of waiver of premium, and the employee
is covered for as long as the disability continues. The beneficiary
will receive the death benefit even though the employee may not
have been in the service of the employer for a long time.
5. DEATH BENEFIT Structure or Scheduleis usually based on an
employee's earnings. The benefit is a multiple of the employee's
earnings, normally 1 to 2 1/2 times the employee's yearly earnings.
 Page 213
In many companies, if the employee dies while on company
business, 6 times the yearly earnings are paid as a death benefit.
For example, a $50,000 a year employee dies in an accident while
traveling on company time; the beneficiary would receive
$300,000. But if the same employee dies in his sleep at home, the
beneficiary would receive $100,000 (assuming that the normal
death benefit is twice annual earnings).
GROUP LONG-TERM DISABILITY POLICY group insurance
contract under which a periodic (usually monthly) disability
income benefit is paid to the insured as long as he or she remains
disabled.
GROUP OF COMPANIES see FLEET OF COMPANIES.
GROUP ORDINARY INSURANCE see GROUP PERMANENT LIFE INSURANCE.
GROUP PAID-UP LIFE INSURANCE combination of two basic
plans: (1) accumulating units of paid-up permanent life insurance,
and (2) decreasing units of group term life insurance. The premium
paid each month consists of the (a) employee's contribution and (b)
employer's contribution. The employee's portion purchases
increments of paid-up insurance, and the employer's portion
purchases group decreasing term. The employer's contribution is
tax deductible as a business expense, and these contributions are
not taxable income to the employee. (However, if the employer
purchases increments of paid-up units of permanent insurance,
these contributions are taxable income to the employee on a current
basis.) Paid-up units purchased by an employee are vested and thus
can be taken as a paid-up life benefit regardless of the reason for
termination of employment. The paid-up benefit will always
remain in force; no further premium payments are required.
GROUP PERMANENT see GROUP PERMANENT LIFE INSURANCE.
GROUP PERMANENT LIFE INSURANCE coverage following
the same structure as group term, the significant difference being
that premiums go toward the purchase of permanent insurance
instead of term insurance. The employee has a vested interest in the
increments of paid-up insurance purchased. Because of the tax
consequences to the employee, group permanent insurance usually
is applied to fund retirement plans such as pensions instead of
providing life insurance coverage. If the employer purchased
permanent insurance on the employee's behalf, the contributions
would become taxable income to the employee on a current basis.
Group life insurance is experience rated, in that the loss experience
of the entire group determines the premium rate applied to each
employee.
GROUP PRACTICE HEALTH MAINTENANCE
ORGANIZATION (HMO) HEALTH MAINTENANCE ORGANIZATION that restricts
to a relatively small amount the number of medical providers from
which
 Page 214
an HMO member may seek services. Usually, HMO members may
select the primary care physician of their choice from this number.
After rendering services to the HMO member, the physician
charges the HMO a predetermined fee. Frequently, this select group
of medical providers are exclusively in the employment of this
particular HMO.
GROUP TERM LIFE INSURANCE one-year coverage that is
renewable at the end of each year. Since the group plan is subject to
EXPERIENCE RATING, the premium rate upon renewal is based on such

factors as the loss record (death) of the group and range of

employee ages. All employees are insured with term life insurance.
Realistically, coverage is temporary because on termination of
employment, the employee usually does not convert group term to
individual permanent insurance because the conversion is at a
higher attained age rate. See also ATTAINED AGE.
GROUP UNDERWRITING process of forming a large group of
homogeneous lives that in order to allow the LAW OF LARGE NUMBERS to
operate, thereby projecting a probable rate of mortality or
morbidity whose creditability approaches one, and standard
deviation approaches zero. Since no evidence of insurability has to
be submitted on an individual basis, the objective of this type of
UNDERWRITING is to minimize ADVERSE SELECTION by any member of that

group. In an effort to achieve this minimization, certain

underwriting rules apply: (1) the group must be formed for reasons
other than obtaining insurance, or people who have a particular
disease would join together for the sole purpose of buying
insurance; (2) a constant flow of young people into the group and
outflow of older people out of the group is required so that,
statistically, the average person (standard health) will continue to
be insured; (3) the insurance benefits should automatically be
determined by some type of formula on behalf of the members, or
only those members who are in poor health would select the higher
limits of coverage; and (4) close to total participation of all eligible
employees should be achieved.
GROUP UNIVERSAL LIFE INSURANCE policy similar to that
of an individual UNIVERSAL LIFE INSURANCE policy except that the coverage
is provided (up to a limit) without the requirement of the
submission of EVIDENCE OF INSURABILITY.
GROWTH OF ASSETS rate of increase in asset value.
GUARANTEE COST NONPARTICIPATING LIFE INSURANCE
policy whose premiums, cash value, and face amount are
guaranteed (all values are fixed and do not fluctuate according to
the loss experience, expenses, and investment returns of the
insurance company). The advantage of this policy to the POLICYOWNER
is that, when the company experiences adverse conditions, they are
not passed on to the policy-owner. Likewise, the disadvantage of
this policy to the policyowner is
 Page 215
that the policyowner does not reap the benefits when the company
experiences good conditions.
GUARANTEED COST PREMIUM premium charged for an
insurance policy whose coverage does not vary according to the
insured loss experience. The premium is calculated either on a
specified rating basis or on a prospective basis (fixed or
adjustable).
GUARANTEED COST (TRADITIONAL) INSURANCE
PROGRAM arrangement under which the insured pays a fixed
premium to the insurance company in exchange for the total
transfer of the risk to that company.
GUARANTEED INSURABILITY right of an insured to make
additional purchases of life insurance without having to take a
physical examination or show other evidence of insurability.
Additions can be bought (1) at stated times; (2) upon specified
policy anniversaries such as every fifth year of a policy up to a
maximum age (usually 40 or 45); or (3) upon the birth of a child.
Many young families should consider adding this option, since a
likely time to add to a life insurance portfolio is when family
obligations increase. See also RIDERS, LIFE POLICIES.
GUARANTEED INTEREST RATE see INTEREST RATES, GUARANTEED/EXCESS.
GUARANTEED INTEREST RATE FIXED ACCOUNT account
in which a predetermined interest rate is paid for a predetermined
period of time. For each contribution that is paid into the fixed
account, a new guarantee period begins for that particular
contribution.
GUARANTEED INVESTMENT CONTRACT (GIC) institutional
investment sold by life insurance companies that guarantees
principal and offers withdrawal flexibility. This conservative
investment, which can be used with a corporate qualified plan,
became one of the most popular choices in such salary reduction
plans as the 401 (k) plan. Many of these plans offered employees
three choices for depositing their pre-tax retirement dollars: a stock
fund, a bond fund, and a GIC. By 1987, about 40% of employees
had elected GIC investments.
GUARANTEED INVESTMENT POLICY see GUARANTEED INVESTMENT
CONTRACT (GIC).

GUARANTEED ISSUE the right to purchase insurance without

physical examination; the present and past physical condition of
the applicant are not considered.
GUARANTEED PURCHASE OPTION see GUARANTEED INSURABILITY.
GUARANTEED RENEWABLE CONTRACT (LIFE OR
HEALTH) insurance policy renewable at the option of the insured
for a specified number of years or to a stated age. The insurance
company cannot refuse to renew the policy and cannot change any
of its provisions except the PREMIUM RATE. If the insurance company
changes the premium, it must
 Page 216
do so for the entire policyholder classification, not just for one or a
few members. See GUARANTEED INSURABILITY.
GUARANTEED RENEWABLE HEALTH INSURANCE see
COMMERCIAL HEALTH INSURANCE.

GUARANTEES, LACK OF see UNALLOCATED FUNDING INSTRUMENT.

GUARANTOR term in surety coverage. Through the issue of a
surety bond, a surety company is in effect the guarantor. See also
SURETY BOND.

GUARANTY FUND (INSOLVENCY FUND) aggregate sums, in

certain states, to pay claims of insolvent insurance companies.
These funds are maintained by contributions of companies
operating in a particular state in proportion to their business written
in the state. A guaranty fund insures the integrity of the insurance
business.
GUARDIAN individual who is legally responsible for taking care
of another individual(s) who is deemed to be incapable of
managing his/her own affairs. For example, children under the age
of majority are not assumed to be able to manage their own affairs.
GUERTIN LAWS standard State Valuation and Nonforfeiture Law
approved by the NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) in 1942.
This law is named for Alfred N. Guertin, the actuary who headed
the NAIC committee that studied the need for a new mortality table
to be used in calculating life insurance nonforfeiture values. In
essence, application of this law guarantees that an insured is
entitled to all benefits for which the life insurance company has
received premiums. The insured cannot be made to forfeit the
equity that has built up in a life insurance product. See also
NONFORFEITURE BENEFITS (OPTION).

GUEST LAW legal right of a passenger in an automobile involved

in an accident to bring a liability suit against the driver. It is
deemed that a special standard of care is owed by an automobile
driver towards the passenger. This law bars suits only for
ordinarynot gross or criminalnegligence. In many states, such
actions by a passenger are prohibited; in other states, intentional
misconduct of the driver must be shown.
GUIDING PRINCIPLES title of a published set of rules, adhered
to by member companies of major property and liability
associations, that stipulate how losses should be adjusted when the
same loss is covered by more than one insurance company.
Particular emphasis is placed on how the cost of the losses should
be apportioned among the companies under various situations.
 Page 217

H
HABITS behavior or character standing of an individual in a
community. Some personal habits are considered in underwriting
an insurance application.
HAIL INSURANCE coverage against hail damage to crops.
Coverage is on a proportionate basis; that is, in the event of loss, a
farmer will recover an amount based on the ratio of the damaged
part of a crop to the entire crop.
HANGARKEEPERS LEGAL LIABILITY INSURANCE
coverage for the owner of an airplane in circumstances where use
of the owner's premises as an aircraft hangar results in bodily
injury or property damage to a third party. Excluded from coverage
is property under the care, custody, and control of the insured.
Another application of this policy covers the operator of a hangar
for liability from damage to an aircraft that the owner has placed
under the operator's care, custody, and control for storage or repair.
HARDSHIP existence of a financial need which permits in-service
withdrawals of funds from a SECTION 401 (k) PLAN or a SECTION 403 (b) PLAN
to pay tuition for postsecondary education for a participant or his or
her spouse, children, or other dependents.
HAZARD circumstance that increases the likelihood or probable
severity of a loss. For example, the storing of explosives in a home
basement is a hazard that increases the probability of an explosion.
HAZARD INCREASE RESULTING IN SUSPENSION OR
EXCLUSION OF COVERAGE provision commonly found in fire
insurance contracts. If the insured knows that a hazard is increased,
most property contracts permit the insurance company to suspend
or terminate coverage. For example, manufacture of drugs in the
home would give the insurance company the right to invoke this
clause if it could show that the manufacturing process increases the
probability of fire. See also LOSSES PAID.
HAZARD, MORAL see MORAL HAZARD.
HAZARD, MORALE see MORALE HAZARD.
HAZARD, PHYSICAL see HAZARD; INCREASED HAZARD.
HEAD OFFICE see HOME OFFICE.
HEALTH CARE POWER OF ATTORNEY legal instrument that
authorizes a person to make medical decisions for another person
should that person become permanently or temporarily incapable of
making those decisions. This power is usually coupled with a LIVING
WILL to
 Page 218
indicate the type of health care desired if the person no longer has
control of his or her faculties or is terminally ill.
HEALTH CERTIFICATE statement submitted to the INSURANCE COMPANY
to accompany a request for the REINSTATEMENT of an INSURANCE POLICY that
has LAPSED. This statement certifies that the INSURED'S health has not
materially changed during the lapsed period.
HEALTH INSURANCE three basic plans are available to cover the
costs of health care: COMMERCIAL HEALTH INSURANCE, private noncommercial
(BLUE CROSS/BLUE SHIELD), and SOCIAL INSURANCE (Social Security). See also

MEDICAID; MEDICARE; WORKERS COMPENSATION INSURANCE.

HEALTH INSURANCE ASSOCIATION OF AMERICA (HIAA)

organization that seeks to educate the public on the benefits of
private health insurance coverage. Its membership consists of
private companies that sell health insurance. The HIAA publishes
materials and lobbies federal and state legislatures in an effort to
support its objective. Based in Washington, D.C.
HEALTH INSURANCE BENEFITS see COMMERCIAL HEALTH INSURANCE;
DISABILITY INSURANCE; GROUP DISABILITY INSURANCE; GROUP HEALTH INSURANCE; HEALTH

MAINTENANCE ORGANIZATION (HMO); PRIVATE NONCOMMERCIAL (BLUE CROSS/BLUE SHIELD); SOCIAL

INSURANCE (SOCIAL SECURITY); SURGICAL EXPENSE INSURANCE.

HEALTH INSURANCE CONTRACT policy that pays benefits to

an insured who becomes ill or injured, provided that documentation
is offered to confirm the illness or injury. See also DISABILITY INSURANCE;
GROUP DISABILITY INSURANCE; GROUP HEALTH INSURANCE; HEALTH INSURANCE; HEALTH MAINTENANCE

ORGANIZATION (HMO); SURGICAL EXPENSE INSURANCE.

HEALTH INSURANCE FUTURES one-year futures contract

(standardized agreement between two parties to buy or sell a
commodity or financial instrument on an organized futures
exchange such as the CBOT within some future time period at a
present stipulated price), traded at the Chicago Board of Trade
(CBOT), which would allow health insurance companies and self-
insured employers to hedge their losses. The essential design of
this contract is such that when actual claims exceed expected
claims by amount ''X," the futures contract would increase by the
same amount "X." The financial instrument that forms the basis of
this futures contract is an index that reflects the claims experience
of ten health insurance companies. By buying futures contracts that
will appreciate in the future as claims increase in the future,
insurance companies and self-insured employers can profit from
increasing futures prices through which they can offset their losses.
Accordingly, by selling futures contracts that will decline in the
future, these organizations can profit from decreasing futures prices
 Page 219
that can be used to offset smaller cash flow. For example, if a
health insurance company buys a futures contract for $40,000 and
then sells it for $50,000, the company will recognize a profit of
$10,000, which can be used to pay the higher than expected claims
incurred. The cost effectiveness of hedging through the buying and
selling of futures contracts depends on high correlations between
expected claims payments and the futures contracts prices. If there
is a low correlation between expected claims payments and the
futures contracts prices, the less cost effective the hedge becomes.
Thus, it is critical for the insurance company or the self-insured
employer to establish the correlation between its block of business
and the health insurance futures index.
HEALTH INSURANCE PORTABILITY AND
ACCOUNTABILITY ACT OF 1996 (HIPAA) legislation
providing that, to the extent that all deductible medical care
expenses exceed 7.5% of the taxpayer's adjusted gross income
(AGI), expenses not reimbursed under qualified long-term care
coverages are subject to tax deductibility according to the medical
expense deduction rule under the Internal Revenue Service Code,
Section 770(b). Also regarded as deductible medical expenses up to
a specified maximum according to the individual's age are
premiums paid for qualified LONG-TERM CARE (LTC) insurance policies. The
specified maximum increases according to the age of the insured,
ranging from $200 for insureds age 40 or younger to $2500 for
those insureds older than age 70. In addition, benefits received
from LTC policies are not included in one's taxable income subject
to given restrictions. An insurer offering individual health
insurance in an individual state cannot deny coverage to an
individual leaving group coverage. Under this act there is
guaranteed acceptance and a maternity preexisting condition
prohibition. In order for the LTC contract to be qualified under the
IRS code, the contract must be an insurance policy that restricts its
coverage to only qualified long-term care services; the policy must
be a GUARANTEED RENEWABLE CONTRACT; and the policy must not have a CASH
VALUE.

HEALTH INSURANCE RENEWABILITY see HEALTH INSURANCE.

HEALTH MAINTENANCE ORGANIZATION (HMO) prepaid
group health insurance plan that entitles members to services of
participating physicians, hospitals, and clinics. Emphasis is on
preventive medicine. Members of the HMO pay a flat periodic fee
(usually deducted from each paycheck) for these medical services:
1. HMO Managing Physiciana new member can select an HMO
physician, who is then responsible for providing all of his or her
health care needs. If necessary, the managing physician makes
arrangements for the member to see a specialist.
2. HMO Copaymenta member may be required to pay an amount in
addition to required penodic payments, for example, a $5 flat fee
for each visit regardless of how expensive the services may be. Or,
 Page 220
for each prescription, to pay a flat amount of $2 regardless of the
actual cost.
3. HMO Hospital Servicesinclude, among others, room and board,
operating room, laboratory tests, radiation, medications, and
physical therapy.
4. HMO Physicians and Surgeons Services in Hospitalinclude
surgeons and related medical specialists, with no copayment.
5. HMO Outpatient Hospital Caremembers receive the same
services that are provided under Inpatient Hospital Services, as
authorized by the managing physician; there is no copayment.
6. HMO Outpatient Health Services Provided at HMO
Facility include physician services, preventive health services,
diagnosis and treatment services, skilled nursing facility services,
mental health and/or alcohol and drug abuse services, dental care
under specific circumstances, and emergency services in and out of
the HMO area. A copayment may be required.
HMO exclusions include custodial care, experimental procedures,
conveniences not medically related such as television, radio, and
telephones, and cosmetic care except for medically necessary
reconstruction.
HEALTH MAINTENANCE ORGANIZATION (HMO) ACT OF
1973 federal legislation requiring employers with traditional health
plans to also provide an HMO to its employees. The act also makes
it mandatory for employers to contribute as much to the HMO as
they did to their regular plan. The requirement that employers offer
an HMO alternative was repealed in 1993. In 1988, the act was
amended so that the employer gained greater flexibility in
determining its HMO contributions.
HEALTH PLAN FLEXIBLE SPENDING ACCOUNT (FSA)
central fund into which employees contribute untaxed earnings to
pay for the insurance premiums and uninsured medical costs. When
the employee submits evidence of unreimbursed medical expenses,
the employee is then indemnified. This indemnification fund uses
untaxed dollars to pay for family health care costs that are not
covered by the employer's health care plan. Examples would
include elective surgery, eyeglasses, orthodontia, and the
deductibles and coinsurance requirements that are part of the
insured medical claims. The amount that the employee contributes
to this account must be spent in total during that year. If this
amount or any part thereof is not spent during that year, it is
forfeited in total to the employer.
HEDGING method of transferring RISK to permit the RISK BEARER to
assume two offsetting positions at the same time so that, regardless
of the outcome of an event, the risk bearer is left in a no win/no
lose position. For example, in the options market, a stock owner of
an underlying stock can write calls or buy puts. In the same options
market, the short sellers of the underlying stock can buy calls or
write puts.
 Page 221
HEDONIC DAMAGES in personal injury cases, damages awarded
to the plaintiff for the loss of joy of living. For example, if a
person's negligent act results in damage to another person's leg, the
injured person claims that he/she can no longer walk his/her dog
and thus has been deprived of one of the greatest joys in the injured
person's life.
HEINRICH, H. W. executive of Travelers Insurance Company who
developed the DOMINO THEORY OF ACCIDENT CAUSATION by studying over 75,000
industrial accidents and concluding that most accidents would be
preventable if only the acquired behavior of individuals could be
changed. Heinrich held that extensive programs should be
conducted by industrial companies to convince employees to act
safely.
HIGHLY PROTECTED RISK exposures where action has been
taken to reduce the frequency and severity of loss, such as adding
sprinkler systems in public buildings. These actions may result in a
significant reduction in the fire insurance premium.
HIGH-PRESSURE SELLING extremely aggressive behavior by an
INSURANCE AGENT to convince a PROSPECT to purchase the insurance product

without due regard for the prospect's ability to pay the PREMIUMS
and/or needs for the product.
HIGH RISK POOLS FOR THE MEDICALLY UNINSURABLE
see STATE HIGH RISK POOLS FOR THE MEDICALLY UNINSURABLE.
HOBBIES OR AVOCATIONS activities of interest in underwriting
an application for life insurance to determine the rate classification
(premium) for the applicant. For example, a sky diver is at greater
personal risk than average, and accordingly is charged a much
higher premium for life insurance.
HOLD-HARMLESS AGREEMENT assumption of liability
through contractual agreement by one party, thereby eliminating
liability on the part of another party. An example is a railroad
sidetrack agreement with a manufacturing company under which
the manufacturer is held harmless for damage to railroad
equipment and tracks.
HOLOGRAPHIC WILL will written totally in the handwriting of
that individual whose name appears on the will. See also ESTATE
PLANNING; ESTATE PLANNING DISTRIBUTION.

HOME OFFICE central (main) office of an insurance company

whose facilities usually include actuarial, claims, investment, legal,
under-writing, agency, and marketing departments.
HOME OFFICE LIFE UNDERWRITERS ASSOCIATION
(HOLUA) organization of home office underwriters of life
insurance companies. HOLUA offers educational material and
national examinations for home office life underwriters, the
individuals who evaluate applications for insurance, decide if an
applicant meets the requirements of the company for issuing
insurance, and determine the rate classification into which the
applicant should be placed.
 Page 222
HOME OFFICE UNDERWRITER see UNDERWRITER LAY; UNDER-WRITING;
UNDERWRITING CYCLE; UNDERWRITING GAIN (OR LOSS).

HOMEOWNERS INSURANCE POLICY package policy that

combines (1) coverage against the insured's property being
destroyed or damaged by various perils, and (2) coverage for
liability exposure of the insured.
Homeowners policies cover both individuals as well as property. In
addition to the insured, those covered include his or her spouse,
their relatives, and any others under 21 who are residents of the
insured's household.
HOMEOWNERS INSURANCE POLICYSECTION I
(PROPERTY COVERAGE) section providing protection in four
areas:
1. Coverage A (Home)the structure of the home (basic contract
amount). Other property coverages in Section I are expressed as a
percentage of Coverage A.
2. Coverage B (Garage or Appurtenant Private
Structures)structures not attached to or part of the home, covered
up to 10% of the basic home structure.
3. Coverage C (Contents or Personal Property)coverage of 40 to
50% (depending on the form selected) of the structural coverage of
the home for the contents or personal property in the home;
coverage of up to 10% applies to contents away from the home.
For example, a home whose value is $100,000 would have
coverage on the contents of $50,000 (assuming 50% contents
coverage); away from home, contents coverage would be up to
$5000.
4. Coverage D (Additional Living Expenses)coverage if the home is
damaged or destroyed and the insured must seek temporary
lodging. Reimbursement is 10 to 20% of the structural coverage of
the home, depending on the form selected,
All four property coverages A, B, C, and D are offered through one
of the following forms:
1. Form No. 1 (Basic or Standard)coverage for fire, lightning,
windstorm, hail, explosion, smoke, theft, vandalism, malicious
mischief, riot, civil commotion, glass breakage, vehicles, and
aircraft.
2. Form No. 2 (Broad)coverage for a broader spectrum of perils
than under Form No. 1.
3. Form No. 3 (Special)provides that Coverage A (Home),
Coverage B (Garage or Appurtenant Private Structures), and
Coverage C (Contents or Personal Property) are insured on an ALL
RISKS basis. This form is sometimes called "landlords and tenants

insurance" since the building and garage or appurtenant private

structure and contents are covered on an all risks basis. There are a
number of exclusions under Form No. 3.
4. Form No. 4 (Contents Broad Form)coverage only for the
contents of a dwelling (Coverage C) and additional living expense
(Coverage D) as the result of the perils listed in Form No. 2. This
 Page 223
form is called the "renters form" since it does not cover damage to
the structure of an apartment building, its garages or appurtenants.
5. Form No. 6 (Condominium Unit Owners Form)provides the
same coverage as Form No. 4 but extends coverage for damage to
additions and/or alterations that the unit owner may have made
inside the unit. Coverage goes into effect as an excess amount
above that insurance (if any) that the condominium association
may have. Numerous endorsements can be added to each one of the
above forms to increase the limits of coverage and the properties
insured. For example, specified property such as jewelry, furs,
silverware, and guns can be added through a valuable personal
articles endorsement. Also, an inflation guard endorsement
(reflecting increases in the cost of construction) can be added to
Coverage A, which automatically increases Coverages B, C, and D,
since they are expressed as a percentage of Coverage A.
The insured is obligated to take certain actions following a loss,
including: notifying the company or agent immediately; if the loss
is due to theft, notifying the police immediately; if credit cards are
stolen, notifying the credit card company immediately; and
protecting the property from further damage.
There is usually an 80% coinsurance requirement which means that
the insured must carry insurance on a replacement cost basis of at
least 80%. For example, a home is worth $200,000, and a fire does
$50,000 damage. If the insured carries $150,000 of insurance, only
$46,875 would be covered according to the following formula:

Replacement Cost Basis

If, however, the insured had carried an 80% insurance to a value of
$160,000, then the total loss of $50,000 would have been to the
following formula:

HOMEOWNERS INSURANCE POLICYSECTION II

(LIABILITY COVERAGE) section providing protection under
three coverages:
1. Coverage E (Personal Liability)coverage in the event a suit is
brought against the insured because of bodily injury and/or
property damage resulting from the acts or non-acts of the insured.
Also covers the insured's spouse, relatives of either, and others
under age 21 under the insured's care. Just about any personal act is
insured. For example, if the insured lives in Shreveport, Louisiana,
 Page 224
and hits someone with a tennis ball in a game in Hong Kong, the
insured is covered against a possible lawsuit. The insurance
company must also pay for the costs of defending the insured, even
if a suit has no reasonable basis. Defense costs are separate and in
addition to the limits of liability in the policy. For example, if the
limits of the policy are $100,000 and the defense costs are
$200,000, the insurance company could have to pay a total of
$300,000 on behalf of the insured. Once the insurance company
pays the $100,000 limit in the policy, the insurance company's
obligation to defend the insured any further ends. The basic
liability limits are $100,000the minimum amount stipulated in the
policy. (For a relatively few dollars these limits can be increased
substantially.)
2. Coverage F (Medical Payments to Others)coverage for
reimbursement of reasonable medical expenses incurred (a) by the
insured (and individuals as defined in Coverage E, above); and (b)
for injuries sustained by a third party either on or off of the
insured's premises as a result of the activities of the insured and
others covered. This is called "Good Samaritan Coverage" because
by providing emergency medical expenses of an injured third party,
the insured does not admit liability, nor does the injured third party
relinquish his or her right to bring suit against the insured by
accepting the medical aid.
3. Coverage G (Damage to Property of Others)as with Coverage F,
the insured is reimbursed for expenses incurred up to $250
regardless of legal liability for damage to the property of a third
party. The insured and covered residents of the household make
payment out of a feeling of moral responsibility for the damage to
the property, which may have the result of a liability suit not being
brought.
HOME SERVICE AGENT see DEBIT AGENT (HOME SERVICE AGENT).
HOME SERVICE INDUSTRIAL INSURANCE see INDUSTRIAL LIFE
INSURANCE.

HOME SERVICE LIFE INSURANCE see DEBIT INSURANCE (HOME SERVICE

INSURANCE, INDUSTRIAL INSURANCE).

HOME SERVICE ORDINARY life insurance in which the debit

system is used to collect premiums on a monthly basis. See also
DEBIT INSURANCE (HOME SERVICE INSURANCE, INDUSTRIAL INSURANCE); ORDINARY LIFE INSURANCE.

HOMESTEAD RIGHT use of a home, and the land and buildings

surrounding that home, free from the claim of creditors. This right
gives rise to an INSURABLE INTEREST.
HOMOGENEITY see INSURABLE RISK.
HOMOGENEOUS EXPOSURES elements within a group under
study that have the same characteristic(s), have the same EXPECTATION
OF LOSS, are very much alike with respect to the variable under

consideration,
 Page 225
and do not show significant differences through any given time
periods. Homogeneity of exposure units is extremely important to
the accuracy of the prediction of future losses based on historical
loss experience. For example, if an ACTUARY is going to predict the
number of wood-frame houses likely to suffer a fire loss, the
sample upon which the prediction is based should consist of wood-
frame houses, not brick-frame houses.
HOSPICE facility that provides short periods of stay for a
terminally ill person in a homelike setting for either direct care or
respite. A "terminally ill" person has a life expectancy of six
months or less. A hospice provides continuous care. Some health
insurance plans pay benefits in full up to a maximum without a
deductible for charges incurred for a terminally ill person while in a
hospice care program. Also provided are bereavement benefits up
to a maximum (usually $200) per family unit.
HOSPITAL CONFINEMENT INDEMNITY INSURANCE policy
that pays a fixed dollar amount for each day the insured is confined
to the hospital. This method of payment is in contrast with most
other MEDICAL EXPENSE INSURANCE that reimburses the insured on the costs
incurred.
HOSPITAL EXPENSE INSURANCE see GROUP HEALTH INSURANCE; HEALTH
INSURANCE; HEALTH MAINTENANCE ORGANIZATION (HMO).

HOSPITAL INDEMNITY INSURANCE see GROUP HEALTH INSURANCE;

HEALTH INSURANCE; HEALTH MAINTENANCE ORGANIZATION (HMO).

HOSPITALIZATION INSURANCE see GROUP HEALTH INSURANCE; HEALTH

INSURANCE; HEALTH MAINTENANCE ORGANIZATION (HMO).

HOSPITAL LIABILITY INSURANCE form of insurance covering

(1) liability arising out of the provision or nonprovision of hospital
services so as to have an action brought against the hospital for
malpractice, error, or mistake; (2) injuring of a patient by another
patient; (3) food and other items resulting in injury to the patients;
(4) injury to a person treated in an ambulance; and (5) costs to
defend the hospital even if the suit is groundless.
HOSPITAL MEDICAL INSURANCE see GROUP HEALTH INSURANCE; HEALTH
INSURANCE; HEALTH MAINTENANCE ORGANIZATION (HMO).

HOSPITAL SERVICES, HMO see HEALTH MAINTENANCE ORGANIZATION (HMO).

HOSPITAL, SURGICAL, AND MEDICAL EXPENSE
INSURANCE see GROUP HEALTH INSURANCE; HEALTH INSURANCE; HEALTH MAINTENANCE
ORGANIZATION (HMO).

HOSTILE FIRE unfriendly fire not confined to its normal habitat.

For example, fire in the fireplace leaps onto the sofa. Property
contracts protect against damage from a hostile fire, not from
damage from fire in the fireplace, its normal habitat. The insurance
is designed to cover FORTUITOUS LOSS, which the hostile fire is. See also
FRIENDLY FIRE.
 Page 226
HOST LIABILITY exposure created by an individual acting as a
host serving alcoholic beverages at no charge to persons already
intoxicated, resulting in these intoxicated individuals causing
property damage and/or bodily injury to third parties. See also DRAM
SHOP LAW.

HOST LIQUOR LIABILITY see HOST LIABILITY.

HOUSEHOLD INVENTORY list and description of valuables, to
be utilized in the event an insurance claim must be filed. Included
should be: (1) a detailed explanation of possessions that are of
special value, such as a piano or violin; (2) appraisals on expensive
items such as jewelry, art, furs, and antiques; (3) make and model
numbers of electronic equipment and appliances. A photograph
and/or videotape should be taken of the important items in the
home showing their condition and quality.
HOUSING STARTS INDICATOR index that traces the
construction of new single-family homes, townhouses, and
multifamily apartment buildings. These statistics are published
monthly by the United States Department of Commerce. Rising
housing starts is one sign of a healthy economy.
HOW LONG A POLICY WILL BE IN FORCE duration of a
policy. Property and casualty coverages are usually written for one
year, although a personal automobile policy can be for six months.
Life insurance can be written on (1) a term basis (1 year, 5 years,
20 years, to age 65), (2) whole or life basis, or (3) any combination
of the two. Health insurance can be written on a multiple time
period basis.
HR-10 PLAN see KEOGH PLAN (HR-10).
HULL MARINE INSURANCE coverage of the hull of a ship and
its tackle, passenger fittings, equipment, stores, boats, and
ordnance. Coverage is provided under the following types of
policies: BUILDERS RISK HULL INSURANCE; NAVIGATION RISK INSURANCE, and PORT RISK
INSURANCE.

HUMAN APPROACH technique of loss control and reduction of

losses in insurance. Supporters of this method believe that the
safety attitudes of individuals determine the safety precautions they
take. The human approach seeks to convince people to want to be
safe in order to reduce loss frequency and severity. For example,
campaigns encouraging the use of seat belts help promote a safety-
conscious society.
HUMAN FACTORS ENGINEERING see HUMAN APPROACH.
HUMAN LIFE VALUE APPROACH (ECONOMIC VALUE OF
AN INDIVIDUAL LIFE) (EVOIL) quantitative measure to
determine the amount of life insurance required to replace lost
future earnings of a wage earner. Three steps are used in arriving at
the needed sum:
1. Determine average yearly earned income devoted to a family in
the future by the wage earner (AEIDF).
 Page 227
2. Determine future number of years wage earner is planning to
work (n).
3. Determine the interest rate (i) (discount factor) to be used in
calculating the present value of the average yearly earned income
devoted to family.
The calculation uses this equation:

HURRICANE INSURANCE part of windstorm coverage, usually

one of a group of property coverages that covers all kinds of winds
such as storms and tornadoes. See also STORM INSURANCE (WINDSTORM
INSURANCE).
 Page 228

I
IBNR see INCURRED BUT NOT REPORTED LOSSES (IBNR).
I-BONDS bonds issued by the United States Treasury that earn a
fixed interest rate plus the rate of inflation. These bonds are sold at
face value in denominations of $50 up to $5000 and may earn
interest for up to 30 years. These bonds may be liquidated at any
time after they have been in force for at least six months, but if
liquidation occurs during the first five years, three months of
interest must be forfeited. The interest earned is compounded twice
a year and paid when the bond is redeemed. Protection against loss
of principal and purchasing power while accumulating tax-deferred
interest are some of the advantages of this Treasury-backed issue.
IDENTIFICATION first step in the risk management process. The
objective is to determine the sources of losses. For example, the
profit and loss statement of a business firm not only shows the
sources of its earnings but identifies exposures that these sources
face from various perils, such as worker injuries, ill-designed
products, and hazardous manufacturing conditions.
IMMEDIATE ANNUITY ANNUITY that begins payments after a
single premium is paid. For example, the annuitant pays a single
premium of $100,000 on June 1 of the current year and begins
receiving a monthly income of $1200 for life starting July 1.
IMMEDIATE NOTICE provision found in PROPERTY AND LIABILITY INSURANCE
policies that mandates that the insured notify the insurance
company as soon as possible following the occurrence of a covered
loss under the policy.
IMMEDIATE PARTICIPATION GUARANTEE PLAN (IPG) see
PENSION PLAN FUNDING: GROUP IMMEDIATE PARTICIPATION GUARANTEED (IPA) CONTRACT ANNUITY.

IMMEDIATE VARIABLE ANNUITY CONTRACT a contract

sold by insurance companies that is bought by means of a single
lump sum payment usually providing a monthly income payment
for the ANNUITANT's life. The amount of the monthly income payment
varies according to the performance of the underlying portfolio of
investments. A stipulated rate of return (ASSUMED INTEREST RATE/ASSUMED
INVESTMENT RETURN) is assumed when the insurer calculates the initial

income payment to the annuitant. If the underlying portfolio

produces a net return greater than or less than the stipulated rate of
return, the income payments will rise or decline accordingly. See
also ANNUITY; VARIABLE ANNUITY.
IMMEDIATE VESTING entitlement of an employee to benefits
immediately upon entering a retirement plan. As benefits are
earned, they
 Page 229
are credited to the employee's account. These ''portable" future
benefits can be withdrawn by individuals leaving the service of the
employer.
IMPAIRED RISK IMMEDIATE ANNUITIES income payments
that are calculated based on the ANNUITANT'S LIFE EXPECTANCY and adjusted
to reflect the annuitant's medical circumstance. For example, a
person age 63 may have a medical impairment that gives him or
her the same life expectancy as that of a person age 73. The income
payment can be increased accordingly to reflect the shorter life
expectancy.
IMPAIRED RISK (SUBSTANDARD RISK) in life and health
insurance, person whose physical condition is less than standard or
who has a hazardous occupation or hobby. For example, an
applicant with a history of strokes is regarded as an impaired risk.
Some substandard insurance companies specialize in insuring
substandard risks, applying an additional premium (surcharge) to
reflect the higher probability of loss from a particular impairment.
IMPAIRMENT OF CAPITAL situation where a stock insurer must
invade its capital account in order to meet its obligations. Most
states do not allow insurers to do this and quickly rescind their
right to do business.
IMPLIED AUTHORITY see APPARENT AGENCY (AUTHORITY).
IMPREST ACCOUNT fund established to pay specified losses,
usually the low severity property losses. This type of account is an
excellent device in conjunction with a SELF-INSURANCE plan, in
which the fund is infused with new money as it goes to zero after
paying property losses.
IMPROVEMENTS AND BETTERMENTS INSURANCE tenant's
modifications of leased space to fit his particular needs. Up to 10%
of contents coverage inside the structure may be applied to insure
against damage or destruction of improvements or betterments
made by a tenant who does not carry coverage on the structure
itself. For example, under the HOMEOWNERS INSURANCE
POLICY, if the contents of an apartment are insured for $25,000,
then $2500 would apply to cabinets that the tenant built into the
kitchen.
INADMITTED ASSET ASSET excluded from the FINANCIAL STATEMENTS
submitted to the state INSURANCE EXAMINER because the asset has virtually
no value in meeting claims in the event the INSURANCE COMPANY must be
liquidated. Also called NONADMITTED ASSET.
IN-AREA EMERGENCY SERVICES provision of HEALTH MAINTENANCE
ORGANIZATION (HMO) coverage. A member who is critically injured within

the geographical service area of the HMO can use the nearest
hospital for emergency care, rather than a more distant HMO-
authorized hospital.
 Page 230
INCENDIARISM act of starting a fire; arson. Arson is a covered
peril under a PROPERTY INSURANCE contract, provided that the owner of the
property is not responsible for the arson.
INCEPTION DATE see EFFECTIVE DATE.
INCHMAREE CLAUSE provision of MARINE INSURANCE. It protects
property damaged or destroyed as the result of the negligent acts of
the crew. The name is derived from a steamer in which a pump was
damaged by its crew's negligence.
INCIDENCE RATE see FREQUENCY AND DISTRIBUTION OF LOSSES.
INCIDENTAL CONTRACT secondary (not primary) reason for
forming a contract. In group insurance, the group must be formed
and maintained for reasons other than obtaining insurance. If the
group were formed primarily to obtain insurance, ADVERSE SELECTION
would take place.
INCIDENTAL MALPRACTICE medical malpractice that is the
legal responsibility of a person or organization not in the medical
profession or business. It is usually covered under a PROFESSIONAL
LIABILITY INSURANCE policy.

INCIDENTS OF OWNERSHIP policyowner rights under a life

insurance policy, including the right to name a new beneficiary at
any time and to surrender the policy for its cash value.
INCOME all sources of cash flow, usually stated on an annual
basis.
INCOME AND PRINCIPAL POLICY policy that provides an
income for life to the primary BENEFICIARY upon the death of the INSURED.
The FACE AMOUNT of the policy becomes payable to the secondary
beneficiary upon the death of the primary beneficiary. Should the
primary beneficiary die before the insured, the face amount of the
policy is paid to the secondary beneficiary upon the death of the
insured.
INCOME AVERAGING income averaged over a specified period
of years. For example, to calculate benefits in a pension plan, it is
common to average the highest three years or five years of
earnings.
INCOME BENEFICIARY individual(s) entitled to receive the
income generated by the TRUST.
INCOME CONTINUATION INSURANCE see PARTNERSHIP LIFE AND
HEALTH INSURANCE.

INCOME IN RESPECT OF A DECEDENT (IRD) classification at

death of all PENSION PLANS, PROFIT-SHARING PLANS, INDIVIDUAL RETIREMENT ACCOUNTS
(IRAs), ANNUITIES, and installment payments to the extent to which the

deceased was entitled to receive income and that income was not
included in the deceased's taxable income in the year of the death.
This income is ruled to be subject to income tax to the BENEFICIARY as
well as ESTATE TAX to the heirs.
 Page 231
INCOME OPTION choice or choices the ANNUITANT has in deciding
how income is to be received from an ANNUITY.
INCOME (PERSONAL) INSURANCE see DISABILITY INCOME INSURANCE.
INCOME POLICY proceeds from a life insurance policy paid on a
monthly basis instead of in a lump sum.
INCOME REIMBURSEMENT INSURANCE see INCOME REPLACEMENT.
INCOME REPLACEMENT benefit in disability income insurance
whereby an injured or ill wage earner receives a monthly income
payment to replace a percentage of his or her lost earnings. See
also DISABILITY INCOME INSURANCE (Amount of Benefits).
INCOME REPLACEMENT RATIO percentage of income required
by a retiree to maintain a desired standard of living during the
retirement years.
INCOME-SHIFTING STRATEGIES ownership of tax-free or tax-
deferred investments by a child or for a child, given that these
investments will not reach maturity before the child attains at least
age 14. The objective is to shift investment producing current
income from high-tax-bracket adults to low-tax-bracket children.
Possible means of achieving this objective would be the utilization
of the following investment instruments:
1. Municipal bondsinterest earned is not subject to federal or state
taxes.
2. Savings bonds U.S. EE savings bonds that have a maturity date
after the child attains age 14these bonds guarantee payment of 85%
of the average interest rate of U.S. Treasury notes and bonds
subject to a minimum guarantee rate of 6%. These bonds must be
held for at least five years for the full interest rate to apply.
3. PERMANENT LIFE INSURANCEearnings accumulate on a tax-deferred basis
with the possibility of avoiding taxes on the accrued earnings if the
policy remains in force until the insured's death.
4. DEFERRED ANNUITYthis instrument offers the same tax-deferred
treatment as life insurance.
5. Growth equitiestaxes need not be paid on "paper gains;" taxes on
gains are paid only after stock is sold.
6. Custodial accountparent retains control of the asset owned by
the child until the child reaches the age of majority. The first $1000
of income in the account is taxed at the child's rate (if child is less
than age 14), and any additional income is taxed at the parent's
rate. When the child reaches age 14, all income in the account
becomes taxable at the child's rate.
INCONTESTABLE CLAUSE section in a life insurance policy
stating that after the policy is in force two years, the company
cannot void it because of misrepresentation or concealment by the
insured in obtaining
 Page 232
the policy. For example, when asked on the application if there is a
history of diabetes in the family, the applicant writes no, knowing
that his or her father and mother both have diabetes. This does not
void the policy after two years. However, if the age of the applicant
had been understatedsay, to obtain a lower premiumthe company
will recalculate the benefit according to the correct age.
INCORPORATION INTO FUNDING AGREEMENT factors
taken into account concerning the instrument used in funding a
pension plan. For example, an allocated funding instrument
guarantees that benefits will be paid for all premium payments
received. This should eliminate concerns of employees about the
availability of funds to pay their benefits at retirement.
INCORPOREAL INTERESTS right to insurable interest in
property such as the right of a secured creditor in the property
pledged as security.
INCREASED COST ENDORSEMENT coverage for extra
expenses associated with the reconstruction of a damaged or
destroyed building where zoning requirements mandate more
costly construction material. This endorsement is attached to
property policies.
INCREASED COST OF CONSTRUCTION CLAUSE coverage if
state or municipal law requires that a damaged or destroyed
building must be rebuilt at an increased cost to comply with
building code provisions that were not in effect when the building
was originally constructed.
INCREASED HAZARD state that increases the probability of a
loss. For example, storage of flammable material next to a furnace
in one's home increases the hazard with the knowledge of an
insured, and is grounds for suspension of a policy by an insurance
company.
INCREASING LIFE INSURANCE term or whole life policy with
a face value that increases over time.
INCURRED BUT NOT REPORTED LOSSES (IBNR) insured
losses that have occurred but have not been reported to a PRIMARY
INSURANCE company. These types of claims have a tremendous effect

on a REINSURANCE treaty, which may be showing a healthy profit when

in reality it is losing money. Hence, under this false security, the
reinsurer will continue operating under a rating plan that is totally
inadequate for the losses. This explains why a provision for
incurred but not reported losses should be made in a rating plan.
Also, the reinsurer must establish an adequate reserve for IBNR
claims to make a correct analysis of its business. If such a reserve
is not established, overly optimistic evaluation of the real loss may
not be revealed for several years. A method of deriving the reserve
for IBNR claims is to calculate a percentage of the Claims Paid
and Outstanding.
INCURRED EXPENSES expenses that have or may not yet have
been paid by an insurance company.
 Page 233
INCURRED LOSSES losses that have occurred within a stipulated
time period whether paid or not.
INCURRED LOSS RATIO proportion of losses incurred to
premiums earned. This ratio indicates the amount of a premium
dollar that is being consumed by losses.
INDEMNIFY see INDEMNITY.
INDEMNITEE recipient of an indemnity.
INDEMNITOR provider of an indemnity payment.
INDEMNITY compensation for loss. In a property and casualty
contract, the objective is to restore an insured to the same financial
position after the loss that he or she was in prior to the loss. But the
insured should not be able to profit by damage or destruction of
property, nor should the insured be in a worse financial position
after a loss.
In life insurance the situation is totally different. By the payment of
a single premium, the beneficiary of an insured can be placed in a
much better financial position at the death of an insured than he or
she was in prior to the death. However, the payment of a
predetermined amount upon the insured's death does not make a
life insurance policy a contract of indemnity.
In hospital indemnity and other health insurance plans, COORDINATION OF
BENEFITS is designed so that the insured cannot profit from an illness.

See also COORDINATION OF BENEFITS.

INDEMNITY AGREEMENT policy provision designed to restore
an insured to his or her original financial position after a loss. The
insured should neither profit nor be put at a monetary disadvantage
by incurring the loss. See also INSURANCE CONTRACT, GENERAL; INSURANCE CONTRACT,
LIFE; INSURANCE CONTRACT, PROPERTY AND CASUALTY.

INDEMNITY BOND coverage for loss of an obligee in the event

that the principal fails to perform according to standards agreed
upon between the obligee and the principal.
INDEMNITY COMPANY INSURANCE COMPANY that specializes in
UNDERWRITING CASUALTY INSURANCE.

INDEMNITY DISABILITY INCOME POLICY policy used to

provide the funds necessary for BUY-AND-SELL AGREEMENTS whereby an
income payment or a series of income payments are paid to the
buyer of the disabled partner's interest contained in a PARTNERSHIP LIFE
AND HEALTH INSURANCE PLAN or disabled stockholder's interest contained in a

CLOSE CORPORATION PLAN to reimburse that buyer for the sum paid. If this

sum to be paid the buyer by the insurance company exceeds the

actual market value of the business at the time of the sale, that sum
must still be paid.
INDEMNITY OR FEE-FOR-SERVICE INSURANCE coverage
for the percentage of the health care costs paid by the health
insurance
 Page 234
company, which is usually 80% above the insured's deductible up
to a dollar amount of approximately $5000. The company then
pays 100% of the costs up to the policy limits. The insured may
select a physician of his or her choice.
INDEPENDENT ADJUSTER independent contractor who adjusts
claims for different insurance companies. Such services are used by
insurance companies whose financial resources or volume of
claims do not warrant employing their own in-house adjusters.
INDEPENDENT AGENCY SYSTEM means of selling and
servicing property and casualty insurance through agents who
represent different companies. The agents own the records of the
policies they sell. See also INDEPENDENT AGENT.
INDEPENDENT AGENT contractor who represents different
insurance companies and who searches the market for the best
place for a client's business. The independent agent, who owns the
records of policies sold, is not controlled by any one company,
pays agency's expenses out of the commissions earned, and is
responsible for maintaining employee benefits.
INDEPENDENT CONTRACTORS INSURANCE see OWNERS AND
CONTRACTORS PROTECTIVE LIABILITY INSURANCE.

INDEPENDENT EVENTS events that do not have any influence

on the occurrence or nonoccurrence of another event; for example,
a plane crashing in Shreveport should have no influence on a plane
crashing in Dallas.
INDEPENDENT INSURANCE AGENTS OF AMERICA (IIAA)
association of independent agents whose objective is to further the
interests of these agents through education, lobbying, and
professional ethics.
INDEPENDENT INSURER insurance company that is not a
member of a rating bureau or is not under common ownership or
management with other companies. The insurance company is said
to stand alone. See also INDEPENDENT AGENCY SYSTEM; INDEPENDENT AGENT.
INDEPENDENT PRACTICE ASSOCIATION (IPA) type of HEALTH
MAINTENANCE ORGANIZATION (HMO) that issues contracts to independent

physicians. These physicians are paid a per visit fee for seeing an
HMO member or are paid an annual fixed sum. The HMO
members are covered only when they use an HMO hospital or
physician.
INDETERMINATE PREMIUM LIFE INSURANCE
nonparticipating life insurance under which the first few annual
premiums are smaller than would be the case under a traditional
nonparticipating policy. While the maximum amount of these
initial premiums is guaranteed, future premiums can be increased,
but not beyond a guaranteed maximum. Adjustments to premiums
reflect the insurance
 Page 235
company's anticipated mortality experience, investment return, and
expenses. If these three elements are more profitable than had been
loaded for in the initial premiums, future premiums will be
reduced; if less profitable, they will be increased, but not greater
than the guaranteed maximum. See also ADJUSTABLE LIFE INSURANCE.
INDEX ANNUITY see EQUITY INDEXED ANNUITY.
INDEXED LIFE INSURANCE policy with a face value that varies
according to a prescribed index of prices; otherwise benefits
provided are similar to ordinary whole life. The death benefit is
based on the particular index used, such as the Consumer Price
Index (CPI). The policyowner has the choice of having the index
applied either automatically or on an elective basis. With an
automatic index increase, the premium remains level since it has
already been loaded to reflect the automatic increase. If the policy
allows for an optional index increase, an extra premium is charged
when this option is exercised by the policyowner. Regardless of
which index is selectedautomatic or optionalthe increased death
benefit does not require another physical examination or other
evidence of insurability.
INDEXED GUARANTEED INVESTMENT CONTRACT (GIC)
type of GUARANTEED INVESTMENT CONTRACT in which the interest rate credited
is tied to an external index such as the United States Treasury Bond
Index.
INDEXED LIFE POLICIES see INDEXED LIFE INSURANCE.
INDEXED SECURITIES (STRUCTURED NOTES) bond DERIVATIVES
of short-term duration whose principal or coupon value is
determined by a market index. Market indexes that can be utilized
include securities, commodity prices, and short-term bond rates.
INDIRECT LOSS loss that is not a direct result of a peril. For
example, damage to property of a business firm would be a direct
loss, but the loss of business earnings because of a fire on its
premises would be an indirect loss.
INDIRECT PROPERTY EXPOSURES loss of income resulting
from the damage or destruction of a person's property or a
business's property. For example, if a store is damaged by fire and
is unable to sell its inventory to customers, a loss of income results.
INDIVIDUAL ANNUITY TABLE, 1971 historical MORTALITY TABLE
that replaced the ANNUITY TABLE, 1949, used for the calculation of annuity
rates with more-current mortality experience at that time. This table
was subsequently replaced by the 1983 Table-a (mortality table
used for the calculation of annuity rates for males).
INDIVIDUAL BALANCE SHEET statement showing assets and
liabilities of an individual.
 Page 236
INDIVIDUAL CONTRACT PENSION PLAN see PENSION PLAN FUNDING;
INDIVIDUAL CONTRACT PENSION PLAN.

INDIVIDUAL FIDELITY BOND bond that reimburses a business

for loss caused by the dishonest act of an employee. Since crime
insurance policies exclude coverage of dishonest acts of
employees, it is necessary to have a fidelity bond for this
protection. Fidelity bonds cover mercantile business and financial
institutions. See also FIDELITY BOND.
INDIVIDUAL HEALTH INSURANCE POLICY HEALTH INSURANCE
CONTRACT sold to an individual to provide coverage for medical

expenses. Contrast with GROUP HEALTH INSURANCE.

INDIVIDUAL INCOME STATEMENT report showing sources of
income and expenses of an individual.
INDIVIDUAL INSURANCE single policy under which one
individual is insured. See also ANNUITY; BROAD FORM PERSONAL THEFT INSURANCE;
COMPREHENSIVE PERSONAL LIABILITY INSURANCE; DISABILITY INCOME INSURANCE; FAMILY INCOME

POLICY; FAMILY INCOME RIDER; FAMILY MAINTENANCE POLICY; FAMILY POLICY; FARMERS

COMPREHENSIVE PERSONAL LIABILITY INSURANCE; HEALTH INSURANCE; HOMEOWNERS INSURANCE

POLICY; INDIVIDUAL LIFE INSURANCE; LIFE AND HEALTH INSURANCE, PERSONAL AND FAMILY EXPOSURES;

PERSONAL AUTOMOBILE POLICY (PAP).

INDIVIDUAL LEVEL COST METHOD means, in pension plans,

by which a projection is made of benefits credited to each
employee's account at retirement age. Costs are then allocated on a
level basis over a specified future period of time. This cost method
can be classified according to whether there is or is not a
supplemental liability. See also INDIVIDUAL LEVEL COST METHOD SUPPLEMENTAL
WITHOUT LIABILITY; INDIVIDUAL LEVEL COST METHOD WITH SUPPLEMENTAL LIABILITY.
INDIVIDUAL LEVEL COST METHOD WITHOUT SUPPLE-
MENTAL LIABILITY means of projecting the costs of pension
plans on a level basis over a specified future period of time. The
actuarial value of each employee's future benefits to be paid at
retirement is determined (including past service benefits to be
credited, if any), and their costs are spread equally over the
remaining work experience of the employee. The equation states
that the present value of future benefits equals the present value of
future costs.
INDIVIDUAL LEVEL COST METHOD WITH
SUPPLEMENTAL LIABILITY means of projecting the costs of
pension plans on a level basis over a specified future period of
time. The actuarial value of each employee's future benefits to be
paid at retirement is determined (beginning with the first day an
employee could have joined the pension plan, had it been in effect
at that timethereby creating a supplemental liability), and their
costs are spread equally over the remaining work experience of the
employee.
 Page 237
INDIVIDUAL LIFE INSURANCE coverage of a single life, in contrast to group life
insurance, which covers many lives. See also ENDOWMENT INSURANCE; LIFE INSURANCE; ORDINARY LIFE
INSURANCE; TERM LIFE INSURANCE.

INDIVIDUAL POLICY PENSION TRUST type of PENSION PLAN in which the employer
(if NONCONTRIBUTORY plan) or the employer and employee (if CONTRIBUTORY plan) make level
annual premium payments to fund the future retirement benefits, through an
individual DEFERRED ANNUITY, of the employee. Also funded in this manner is a separate
life insurance policy on each employee. (This policy is usually held in the trust.) See
also PENSION PLAN FUNDING, INDIVIDUAL CONTRACT PENSION PLAN.
INDIVIDUAL PRACTICE ASSOCIATION HEALTH MAINTENANCE
ORGANIZATION (HMO) HEALTH MAINTENANCE ORGANIZATION that provides medical services to
the HMO members through an exclusive contract with specific physicians and
hospitals. These selected physicians and hospitals provide medical services to both
HMO members and non-HMO members. Generally, HMO members may select the
primary care physician of their choice from the list of specific physicians. After
rendering services to the HMO member, the physician is paid a predetermined fee by
the HMO.
INDIVIDUAL RETIREMENT ACCOUNT (IRA) traditional fund under the TAX
REFORMACT OF 1986 into which any individual employee can contribute up to $2000.

Unemployed spouses may contribute up to $2000 even if the working spouse does
not make a contribution. However, income level and eligibility for an employee
pension plan determine whether or not the employee's contribution or a percentage is
tax deductible. The following are the circumstances of contribution to an IRA and the
tax consequences under the current law:

Income Covered Tax Individual Family (Either Contribution

by Consequences or
Employee of $2000 both
spouses)
Pension
Plan No No No Totally
restrictionsrestrictions deductible
$30,000 $50,000 Yes Totally
on income on income
or less or less deductible
BetweenBetweenYes Partially
$30,000 $50,000 deductible
and and
$40,000 $60,000
Greater Above Yes No deduction
than $60,000
$40,000

Note that relevant employee pension plans include 401(k), 403(b), Keogh, and DEFINED
BENEFIT PLAN. (There is no requirement for the
 Page 238
employee to have benefits vested.) IRA earnings remain tax
deferred. Withdrawals prior to age 59 1/2 are subject to a 10%
penalty except for disability, death, to pay qualified higher
education expenses, the purchase of a first home (there is a $10,000
lifetime limit on withdrawals for first-time home buyers), or to pay
qualified medical expenses. Under the new law, each phase-out
range has increased from $50,000 to $60,000 in 1998 to $80,000 to
$100,000 in 2007 for married taxpayers filing jointly; and from
$30,000 to $40,000 in 1998 to $50,000 to $60,000 in 2005 for
single taxpayers.
INDIVIDUAL RETIREMENT ACCOUNT FUNDING
INSTRUMENTS under the EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
(ERISA), the INDIVIDUAL RETIREMENT ACCOUNT (BANK TRUST CUSTODIAL ACCOUNT, MUTUAL FUND

CUSTODIAL ACCOUNT, SELF-DIRECTED CUSTODIAL ACCOUNT), or the INDIVIDUAL RETIREMENT

ANNUITY may be utilized.

INDIVIDUAL RETIREMENT ACCOUNT PLUS (IRA PLUS)

proposal, endorsed by then-President Bush and Secretary of the
Treasury Nicholas Brady, which expands in a significant manner
the number of individuals who could take advantage of the effect of
tax-deferred compounding of savings for retirement. The plan
would be available to everyone since there are no income caps, to
include employees who are covered under an employer's qualified
pension plan. A spouse without an earned income could also
establish such an account. Contributions to this account would be
made with after-tax dollars. All principal would compound on a
tax-free basis, so that no taxes would be due upon distribution. As
the plan is currently designed, a participant could withdraw without
penalty up to 25% of his or her account to purchase a first home, to
meet catastrophic medical bills, or to pay for college expenses.
Contrast with INDIVIDUAL RETIREMENT ACCOUNT (IRA).
INDIVIDUAL RETIREMENT ANNUITY type of INDIVIDUAL
RETIREMENT ACCOUNT (IRA) allowed by the EMPLOYEE RETIREMENT INCOME SECURITY ACT OF

1974 (ERISA) whereby contributions in the form of premium payments

are made on a FIXED DOLLAR ANNUITY or VARIABLE DOLLAR ANNUITY or both.

INDIVIDUAL RISK PREMIUM MODIFICATION PLAN in
group insurance, adjustment of premiums, because of reduced
expenses due to economy of scale. Group life premiums are subject
to negotiation and modification because of administrative savings
in dealing with large numbers of people. In contrast, a single
person cannot negotiate his or her premium rate because each
policy is handled individually.
INDIVIDUAL STOCK PURCHASE PLAN see CLOSE CORPORATION PLAN.
INDIVISIBLE CONTRACT inability to divide a CASH VALUE LIFE
INSURANCE policy into a savings element and a protection element

because, in theory, if the POLICYOWNER withdraws a portion or all of the

cash value, there is a reduction in the DEATH BENEFIT.
 Page 239
INDUCEMENT TO ESTABLISHMENT OF PENSION PLANS
circumstances that encourage the organization of pension plans by
employers. For example, employer contributions are tax deductible
as business expenses and not currently taxable income to
employees. Pensions also help attract employees, maintain
employee loyalty, and help improve the image of a business firm in
its community.
INDUCTIVE REASONING type of logic that makes the
assumption that what has happened in the past will happen in the
future, given the same conditions surrounding the two occurrences.
In other words, ''History repeats itself." In insurance, an example
would involve the assumption of future wooden frame houses
burning if the same conditions exist now that existed in the past
when wooden frame houses burned.
INDUSTRIAL INSURANCE see INDUSTRIAL LIFE INSURANCE.
INDUSTRIAL INSURED one who purchases insurance, usually
property and liability and not life or annuities, by utilizing his or
her own employee purchaser or licensed broker/agent at a
minimum annual premium of not less than six digits.
INDUSTRIAL INSURED CARRIER insurance company that sells
property and casualty insurance only to INDUSTRIAL INSUREDS. These
companies are separately licensed and separately capitalized to
market insurance to cover the risks of industrial insureds.
INDUSTRIAL LIFE INSURANCE modest amounts of coverage
sold on a DEBIT basis. The face amount is usually less than $1000.
See also DEBIT INSURANCE (HOME SERVICE INSURANCE, INDUSTRIAL INSURANCE).
INDUSTRIAL PRODUCTION INDEX index that reflects changes
in industrial output by manufacturers, mines, electric utilities, and
natural gas utilities. This is a monthly index published by the
Federal Reserve.
INDUSTRIAL PROPERTY POLICY PROGRAM predecessor of
SPECIAL MULTIPERIL INSURANCE (SMP) policy and COMMERCIAL PACKAGE POLICY, which

covered property of manufacturing installations, in at least two

different locations, including machinery and equipment, and,
optionally, improvements and betterments.
INEVITABLE ACCIDENT ACCIDENT that is unforeseen and
unpreventable. See also FORTUITOUS LOSS.
INFIDELITY EXCLUSION see FIDELITY EXCLUSION.
INFLATION ENDORSEMENT attachment to a property insurance
policy that automatically adjusts its coverage according to the
construction cost index in a community. This endorsement is
necessary in a property contract to maintain adequate coverage.
Otherwise, it is advisable for a policyowner, at time of renewal, to
adjust the limits of coverage to reflect the increased cost of
construction and the market value of the property.
 Page 240
INFLATION FACTOR adjustment in property insurance to reflect
increased construction costs. See also INFLATION ENDORSEMENT.
INFLATION GUARD ENDORSEMENT see INFLATION ENDORSEMENT.
IN-FORCE BUSINESS aggregate amount of insurance policies
that are paid-up (or are being paid) that a life or health insurance
company has on its books. The size of a life or health insurance
company is often measured by its in-force business. In a life
insurance company, the measure is expressed as a face amount of
the insurer's portfolio. In a health insurance company, the measure
is expressed as premium volume.
IN-FORCE REQUIREMENT need for an insurance policy to be
paid up or to be paid for a minimum number of years before the
insured is eligible to receive any benefits. This requirement is
typically found in LONG-TERM CARE (LTC) insurance policies.
INHERENT EXPLOSION CLAUSE provision of a property
insurance policy which covers conditions usually present in a
particular location. For example, there is an inherent risk of
explosion in a flour mill.
INHERENT VICE EXCLUSION provision of a property policy
that excludes construction that is likely to suffer a loss. For
example, the roofing material used may not be able to withstand a
wind force of more than 15 miles per hour.
INHERITANCE TAX tax on the right to acquire ASSETS that are
transferred to a BENEFICIARY at the death of the owner of those assets.
INITIAL PREMIUM premium paid at the time a policy goes into
effect. With some policies, such as group health insurance,
premiums are subject to adjustment at the end of the policy period
to reflect loss experience. If the loss experience is good (that is, if
the losses are smaller than anticipated in the premium loading), a
significant premium reduction can be made at the end of the policy
period, with a refund going to the policyowner. See also PREMIUM.
INITIAL RESERVE reserve at the beginning of the POLICY YEAR that is
equal to the TERMINAL RESERVE for the preceding year plus the NET LEVEL
PREMIUM for the current year.

INJUNCTION BOND type of judicial bond under which a plaintiff

is held liable for damages in the event of a false injunction. The
objective of this bond is to protect the party who has been wrongly
accused by a plaintiff and suffers financial loss.
INJURIES AND DISEASES COVERED list of injuries and
diseases covered in a health insurance policy. Consumers are well
advised to read and understand the definitions of injuries and
diseases in a health insurance policy. See also HEALTH INSURANCE.
INJURY INDEPENDENT OF ALL OTHER MEANS injury
covered in a health insurance policy that is isolated from any
previous injury.
 Page 241
INLAND MARINE transit over land.
INLAND MARINE EXPOSURE see INLAND MARINE INSURANCE
(TRANSPORTATION INSURANCE): BUSINESS RISKS.

INLAND MARINE INSURANCE BUREAU rate-making division

of INSURANCE SERVICES OFFICES (ISO) for inland marine insurance coverages of
member companies.
INLAND MARINE INSURANCE (TRANSPORTATION
INSURANCE): BUSINESS RISKS coverage for (1) property
damage or destruction of an insured's property and (2) liability
exposure of an insured for damage or destruction of someone else's
property under his or her care, custody, or control. The insured
(shipper) needs this insurance because the carrier (who can also be
the insured and purchase inland marine insurance) may be found
not at fault for damage to a property; or the carrier may not have
any insurance or adequate insurance.
Perils covered include fire, lightning, windstorm, flood,
earthquake, landslide, theft, collision, derailment, overturn of the
transporting vehicle, and collapse of bridges. Specialty coverages
include: ACCOUNTS RECEIVABLE INSURANCE; AIR CARGO INSURANCE; ARMORED CAR AND
MESSENGER INSURANCE; CONSIGNMENT INSURANCE; CONTINGENT TRANSIT INSURANCE; COTTON

INSURANCE; DEPARTMENT STORE INSURANCE FLOATER; EQUIPMENT FLOATERS INSURANCE; INSTALLATION

INSURANCE; INSTALLMENT INSURANCE; INSTRUMENTALITIES OF TRANSPORTATION INSURANCE; MOTOR

TRUCK CARGO INSURANCE; PARCEL POST INSURANCE; RAILROAD ROLLING STOCK INSURANCE;

REGISTERED MAIL AND EXPRESS MAIL INSURANCE; STOCK PROCESSING INSURANCE; TRIP TRANSIT

INSURANCE; VALUABLE PAPERS (RECORDS) INSURANCE.

INLAND MARINE UNDERWRITERS ASSOCIATION

organization of inland marine insurance underwriters.
INLAND TRANSIT INSURANCE POLICY particular type of
INLAND MARINE INSURANCE.

INNKEEPERS LIABILITY liability arising out of the operation of

a motel or hotel as it pertains to the physical safety of guests and
their property.
INNKEEPERS LIABILITY INSURANCE coverage for negligent
acts or omissions of an operator of a motel or hotel resulting in
bodily injury to guests and damage or destruction of a guest's
property.
IN-PATIENT resident patient of a medical installation. Previously,
health insurance benefits were limited to in-patient care. Today
health insurance policies provide an extensive list of out-patient
benefits. See also GROUP HEALTH INSURANCE; HEALTH MAINTENANCE ORGANIZATION (HMO);
OUTPATIENT.

INSECT EXCLUSION exclusion in property insurance eliminating

coverage for damage or destruction of property due to insects.
 Page 242
INSIDE AND OUTSIDE PREMISES ROBBERY INSURANCE
see INTERIOR ROBBERY POLICY, MESSENGER ROBBERY INSURANCE.
INSOLVENCY bankruptcy. If an insured business firm becomes
bankrupt, the circumstance does not relieve an insurance company
of its obligations under an insurance contract.
INSOLVENCY CLAUSE provision of a reinsurance contract that
states that the reinsurance company remains liable for its
predetermined share of a claim submitted by an insured, even
though the primary insurance company is no longer in business.
INSOLVENCY FUND see GUARANTY FUND (INSOLVENCY FUND).
INSPECTION in property or liability insurance, right retained by
the company to inspect the insured premises as well as its
operations in order to detect inherent structural defects and other
hidden hazards. Inspections also help reduce loss frequency and
severity through recommended safety engineering loss prevention
and reduction procedures. In WORKERS COMPENSATION INSURANCE, the
insurance company must inspect the business's payroll record since
premiums are based on the business's gross payroll. In LIFE INSURANCE,
the company may obtain verification of statements by an applicant
and other information.
INSPECTION RECEIPT form provided for an INSPECTION REPORT.
INSPECTION REPORT statement prepared by an inspection
bureau for a life or health insurance company that summarizes
information about an applicant for a policy, including financial
standing, morals, physical condition, habits, and other information.
This report is used by a company underwriter in evaluating an
application for insurance; that is, whether the company should
classify an individual as a standard risk at standard insurance rates,
as a substandard risk (charged an extra rate), or as uninsurable.
INSPECTION SLIP see INSPECTION RECEIPT.
INSPECTOR person who has the responsibility for examining the
RISK to determine whether or not to insure it.

INSTALLATION INSURANCE property coverage on a dealer's

interest in equipment while it is being installed. Labor and material
are protected against such perils as fire, lightning, and windstorm.
For example, if an elevator was installed and it was damaged or
destroyed before the buyer could take possession, the contractor
would lose the cost of labor and materials if there was no
installation insurance.
INSTALLMENT REFUND see INSTALLMENT REFUND ANNUITY.
INSTALLMENT REFUND ANNUITY ANNUITY contract. If the
annuitant dies before receiving income at least equal to the
premiums paid, a beneficiary receives the difference in
installments. If the annuitant lives after the income paid equals the
premiums paid, the insurance company continues to make income
payments to the annuitant for life.
 Page 243
INSTALLMENT SALES FLOATER see CONDITIONAL SALES FLOATER.
INSTALLMENT SETTLEMENT life insurance policy DEATH BENEFIT
or cash value paid out in a series of installments, rather than in a
lump sum. See also FIXED-AMOUNT SETTLEMENT OPTION; FIXED-PERIOD OPTION SETTLEMENT;
LIFE INCOME; LIFE INCOME WITH PERIOD CERTAIN.

INSTITUTE OF ACTUARIES see CANADIAN INSTITUTE OF ACTUARIES.

INSTITUTE OF LONDON UNDERWRITERS trade association
of insurance companies that writes transportation, aviation, and
marine insurance. The association began operation in the 1880s and
it suggests standard clauses to be incorporated in policies written
by the under-writers in London.
INSTRUMENTALITIES OF TRANSPORTATION INSURANCE
coverage for entities (other than motorized vehicles) used in the
transportation of property, including BRIDGE INSURANCE; BRIDGE INSURANCE FOR
BRIDGES UNDER CONSTRUCTION; PIERS, WHARVES, DOCKS AND SLIPS INSURANCE; RADIO AND TELEVISION

TRANSMITTING EQUIPMENT; TRANSMISSION LINES, PIPE LINES; TRAFFIC LIGHTS INSURANCE; TUNNEL

INSURANCE.

INSURABILITY circumstance in which an insurance company can

issue life or health insurance to an applicant based on standards set
by the company.
INSURABILITY CONDITIONAL PREMIUM RECEIPT offer
made by the insurance company to insure an applicant, provided
the applicant is insurable according to the UNDERWRITING standards of
the company, and the applicant accepts the offer by making the
PREMIUM payment. If the applicant should die prior to the APPLICATION and

premium reaching the HOME OFFICE, and the applicant would have
qualified for INSURED status according to the underwriting standards
of the company, the DEATH BENEFIT would be paid to the applicant's
BENEFICIARY. Thus, the insurance policy applied for goes into effect

upon the date of the CONDITIONAL RECEIPT if the applicant is later found to
be insurable according to the underwriting standards of the
company.
INSURABLE INTEREST expectation of a monetary loss that can
be covered by insurance. Insurable interest varies according to the
type of policy. These relationships give rise to insurable interest:
(1) owner of the property; (2) vendor (to the extent of the unpaid
balance due on the property sold to the vendee); (3) vendee; (4)
bailee (to the extent of the value of the property under his or her
temporary care, custody, and control); (5) bailor; (6) life estates; (7)
fee simple estates; (8) mortgagee (to the extent of the unpaid
balance due on the loan to which the property is pledged as
security); and (9) mortgagor. See also INSURABLE INTEREST: LIFE INSURANCE;
INSURABLE INTEREST: PROPERTY AND CASUALTY INSURANCE.

INSURABLE INTEREST: LIFE INSURANCE

1. each individual has an unlimited insurable interest in his or her
own life, and therefore can select anyone as a beneficiary.
 Page 244
2. parent and child, husband and wife, brother and sister have an
insurable interest in each other because of blood or marriage.
3. creditor-debtor relationships give rise to an insurable interest.
The creditor can be the beneficiary for the amount of the
outstanding loan, with the face value decreasing in proportion to
the decline in the outstanding loan amount.
4. business relationships give rise to an insurable interest. An
employee may insure the life of an employer, and an employer may
insure the life of an employee. See also BENEFITS OF BUSINESS LIFE AND HEALTH
INSURANCE (KEY PERSON INSURANCE): KEY EMPLOYEE (KEY MAN); PARTNERSHIP LIFE AND HEALTH

INSURANCE.

Insurable interest must exist at the inception of the contract, not

necessarily at the time of loss. For example, because a woman has
an insurable interest in the life of her fiance, she purchases an
insurance policy on his life. Even if the relationship is terminated,
as long as she continues to pay the premiums she will be able to
collect the death benefit under the policy.
INSURABLE INTEREST: PROPERTY AND CASUALTY
INSURANCE
1. owner of property has an insurable interest because of the
expectation of monetary loss if that property is damaged or
destroyed.
2. creditor of an insured has an insurable interest in property
pledged as security.
Insurable interest has to exist both at the inception of the contract
and at the time of a loss. For example, an insured can purchase a
homeowners policy because of insurable interest in a home. Upon
selling it, the insured no longer has an insurable interest because
there is no expectation of a monetary loss should the home burn
down.
INSURABLE RISK condition in which an applicant has met an
insurance company's standards. Requirements include a loss that is
(1) definable; (2) fortuitous; (3) one of a large number of
homogeneous exposures; and (4) carries a premium reasonable in
relation to a potential loss.
INSURABLE VALUE see INSURABLE RISK.
INSURANCE mechanism for contractually shifting burdens of a
number of PURE RISKS by pooling them.
INSURANCE AGENT representative of an insurance company in
soliciting and servicing policyholders. An agent's knowledge
concerning an insurance transaction is said to be the knowledge of
the insurance company as well. Wrongful acts of the agent are the
responsibility of the company; these bind the company to the
customer. Notice given by an insured to the agent is the same as
notice to the company. See also AGENT; CAPTIVE AGENT; INDEPENDENT AGENT.
INSURANCE AGENTS AND BROKERS LIABILITY
INSURANCE coverage for acts or omissions committed by an
agent or bro-
 Page 245
ker resulting in adequate insurance in the event of a liability suit or
property damage to a client.
INSURANCE AND SOCIETY phrase referring to constructive
relationship, in which insurance provides society with benefits such
as security, savings, encouragement of investment, and reduction in
prices of goods to consumers.
INSURANCE BROKER representative of an insured, not of an
insurance company. Acts of a broker are not the responsibility of
the company, and notice given by an insured to a broker is not the
same as notice to the company. The broker searches the insurance
marketplace for a company in which to place the insured's business
for the most coverage at the best price. The broker is not restricted
to placing business with any one company.
INSURANCE CARRIER see INSURANCE COMPANY (INSURER); INSURER.
INSURANCE CHARGE see RETROSPECTIVE RATING.
INSURANCE COMMISSIONER see COMMISSIONER OF INSURANCE (INSURANCE
COMMISSIONER, SUPERINTENDENT OF INSURANCE).

INSURANCE COMPANY, CHOOSING AN consideration should

be given to a company's capacity to underwrite a particular risk, as
indicated by its financial standing, claims philosophy, price
structure, agent representation, loss prevention and reduction
services, and risk analysis expertise. Information can be gained in
several ways:
1. Reputationa prospective insured can fairly easily learn
something about an insurance company through business and
professional associates (lawyer, accountant, banker), through
conversations with others in the same field, and by discussions
with agents and brokers.
2. Financial capacitylarger businesses and public libraries often
have up-to-date reference books, such as Best's Insurance Reports
(available in Life-Health and Property-Casualty editions) giving
detailed analyses of hundreds of companies.
3. State Insurance Departmentinformation about specific insurance
companies may be available from the insurance departments
located in state capitals.
INSURANCE COMPANY DEPARTMENT see INSURANCE COMPANY
ORGANIZATION.

INSURANCE COMPANY FLEET see FLEET OF COMPANIES.

INSURANCE COMPANY (INSURER) organization that
underwrites insurance policies. There are two principal types of
insurance companies: mutual and stock. A mutual company is
owned by its policy-owners, who elect a board of directors that is
responsible for its operation. A stock company is owned by its
stockholders. In a mutual company, profits take the form of policy
dividends, or refunds of part
 Page 246
of premiums paid, which are distributed to policyowners. Profits in
a stock company take the form of stockholders dividends, which
are distributed to stockholders.
INSURANCE COMPANY ORGANIZATION structure. In
general, company functions are delegated to several departments:
actuarial, AGENCY, claims and loss control, INVESTMENTS, legal, MARKETING,
and UNDERWRITING.
INSURANCE CONTRACT see HEALTH INSURANCE CONTRACT; INSURANCE
CONTRACT, GENERAL; INSURANCE CONTRACT, LIFE; INSURANCE CONTRACT, PROPERTY AND CASUALTY.

INSURANCE CONTRACT, GENERAL legally binding unilateral

agreement between an insured and an insurance company to
indemnify the buyer of a contract under specified circumstances. In
exchange for premium payment(s) the company covers stipulated
perils. See also ADHESION INSURANCE CONTRACT; ALEATORY CONTRACT; APPLICATION;
CAPACITY OF PARTIES; CONDITIONAL; CONSIDERATION; ENDORSEMENTS; INDEMNITY; INSURABLE

INTEREST; LEGAL PURPOSE; MUTUAL ASSENT; UTMOST GOOD FAITH.

INSURANCE CONTRACT, HEALTH see HEALTH INSURANCE CONTRACT.

INSURANCE CONTRACT, LIFE see BENEFICIARY; CLAUSES ADDED TO A LIFE
INSURANCE POLICY; NON-FORFEITURE PROVISION; POLICY LOAN; REPRESENTATIONS; STANDARD

PROVISIONS, LIFE INSURANCE; SUICIDE CLAUSE; VALUED POLICY; WAR EXCLUSION CLAUSE.

INSURANCE CONTRACT, PROPERTY AND CASUALTY see

CONCEALMENT; DEDUCTIBLE; DOUBLE RECOVERY; ESTOPPEL; INDEMNITY; INSURANCE TO VALUE; LARGE

LOSS PRINCIPLE; MISREPRESENTATION (FALSE PRETENSE); PERSONAL CONTRACT; SMALL LOSS PRINCIPLE;

STANDARD PROVISIONS; LIFE INSURANCE; SUBROGATION CLAUSE; WAIVER; WARRANTY.

INSURANCE COVERAGE see COVERAGE.

INSURANCE CRIME PREVENTION INSTITUTE organization
of over 300 property and casualty insurance companies whose
mission is to investigate fraudulent claims and bring to justice
those making such claims.
INSURANCE DEPARTMENT authority that administers state
laws regulating insurance and licenses insurance companies and
their agents.
INSURANCE EXAMINER employee of a state insurance
department who audits statements of insurance companies to
determine their continued solvency.
INSURANCE EXCHANGE see NEW YORK INSURANCE EXCHANGE.
 Page 247
INSURANCE EXPENSES costs associated with FIRST-YEAR EXPENSES,
CLAIMS EXPENSES, ADMINISTRATIVE EXPENSES, and RENEWAL EXPENSES.

INSURANCE FIELDS see SOCIAL INSURANCE.

INSURANCE FORM attachment to a property and casualty policy
that makes it operative. For example, the Standard Fire Policy
remains inoperative until a form such as the Buildings and
Contents Form is attached.
INSURANCE FRAUD PREVENTION ACT legislation that makes
insurance fraud a federal crime. This act is part of the Omnibus
Crime Bill. Under the act, it is a federal crime to embezzle or
misappropriate funds, money, or premiums from an insurance
company, to knowingly file false financial information with
regulators, to obstruct the investigation of an insurance regulator,
and to work or allow such work in an insurance field after
conviction of a felony involving dishonesty.
INSURANCE FUTURES futures contracts (legally binding
contract that stipulates that delivery of an ASSET will be taken or
delivery of an asset will be made at a future time at an agreed upon
price at the current moment) on insurance lines to include
CATASTROPHIC INSURANCE FUTURES, automobile insurance futures, homeowners

insurance futures, and so forth, traded on the Chicago Board of

Trade (CBOT). Traditionally, precious metals such as gold and
silver; agriculture commodities such as cattle, corn, and soy beans;
and United States Treasury issues such as bonds and bills, have all
been traded on the CBOT. The aim of the transaction with these
futures is to cancel the contract with a gain before the delivery of
the commodity. (Who would want cattle delivered to their house?)
On the other hand, the insurance futures contract concerns itself
with the dollar value the market attaches to an index. In turn, this
index is an expectation of how much of the premium income
generated by a particular line of insurance will have to be allocated
to pay off incurred losses. For example, if the automobile insurance
line generates an income of $5,000,000 and the market has an
expectation that 90% of that income will have to be allocated to
paying off incurred losses, the market will value that futures
contract at a price somewhat less than $450,000. This is because of
such factors that have to be accounted for as incurred but not
reported losses (IBNR).
INSURANCE GUARANTY ACT law, in several states,
establishing a fund to guarantee benefits under policies issued by
insurance companies that become insolvent.
INSURANCE IN FORCE see IN-FORCE BUSINESS.
INSURANCE INFORMATION INSTITUTE organization having
as its objective the education of the general public concerning
items of national concern of member property and casualty
insurance companies.
 Page 248
INSURANCE INSTITUTE FOR HIGHWAY SAFETY
organization located in Washington, D.C., whose membership
consists of automobile insurers.
INSURANCE INSTITUTE FOR PROPERTY LOSS
REDUCTION association of insurance companies formed to
reduce deaths, injuries, and the loss of property resulting from all
types of natural hazards in the United States. This institute
concentrates on improving construction and building techniques in
order to minimize the damage resulting from natural hazards.
INSURANCE INSTITUTE OF AMERICA (IIA) organization that
develops and publishes educational material and administers
national examinations in supervisory management, general
insurance, claims, management, risk management, underwriting,
loss control management, accredited adviser in insurance, premium
auditing, research and planning, and accounting and finance.
INSURANCE MARKETPLACE STANDARDS ASSOCIATION
(IMSA) voluntary market conduct compliance organization whose
purpose is to protect the public interest and to enhance the
insurance buyer's perception of the life insurance instrument. The
member companies place the emphasis on self-regulation. Each
member company is required to perform a self-assessment of its
sales and marketing practices. Member companies are required to
adhere to six principles of ethical market conduct that specifies
compliance supervision, complaint procedures, types of sales
materials, procedure for replacement and fair competition, agent
selection and training, and suitability.
INSURANCE MARKETPLACE STANDARDS ASSOCIATION
PRINCIPLE 6 rule that provides four requirements for monitoring
the INDEPENDENT AGENT distribution system:
1. The insurance company must be involved in the training of the
independent agent.
2. The insurance company must monitor the sales practices
employed by the independent agent in selling its product.
3. The insurance company must have a written contract with the
independent agent that describes the responsibilities of the agent as
well as the limitations on the agent's authority.
4. The insurance company must perform DUE DILIGENCE on the
independent agent.
INSURANCE PLANS COVERED see BUSINESS INSURANCE; GROUP INSURANCE;
INDIVIDUAL INSURANCE.

INSURANCE PLANS FOR KEY EMPLOYEES see KEY EMPLOYEES,

INSURANCE PLANS FOR.

INSURANCE POLICY written contract between an insured and an

insurance company stating the obligations and responsibilities of
each
 Page 249
party. See also INSURANCE CONTRACT, LIFE; INSURANCE CONTRACT, PROPERTY AND CASUALTY.
INSURANCE POOL see POOL.
INSURANCE PREMIUM see PREMIUM.
INSURANCE RATE amount charged to an insured that reflects
expectation of loss for a covered risk; and insurance company
expenses and profit. See also PREMIUM; PURE PREMIUM RATING METHOD.
INSURANCE REGISTER see REGISTER.
INSURANCE REGULATION see STATE SUPERVISION AND REGULATION.
INSURANCE REGULATORY INFORMATION SYSTEM (IRIS)
financial analysis method established by the NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS (NAIC) to detect problems of property and casualty

insurance companies and life and health insurance companies

according to these audit ratios: Property and casualty insurance
companies: (1) current year increase or decrease in net written
premiums to net written premiums in previous year; (2) net written
premiums to adjusted policyowners' surplus; (3) loss ratio for two
years; (4) expense ratio for two years; (5) net investment income to
average invested assets; (6) liabilities to liquid assets; (7) unpaid
premiums to surplus; and (8) previous year adjusted surplus to
current year adjusted surplus.
(Other property and casualty audit ratios concern measurement of
the adequacy of a company's reserve.)
Life and health insurance companies: (1) yield on investments; (2)
nonadmitted assets to assets; (3) net gain to total income; (4)
investments in affiliates to capital and surplus; (5) expenses
(including agents commissions) to premiums; (6) exchange in
capital and surplus; and (7) surplus increase or decrease.
INSURANCE RISK coverage for exposures that exhibit a
possibility of financial loss. See also PRICING INADEQUCY RISK.
INSURANCE SERVICES OFFICE (ISO) organization that
calculates rates and develops insurance policies for its property and
casualty member companies. The suggested rates are used by
smaller companies where the loss experience lacks actuarial
accuracy. Its rates are also used by larger companies, which modify
them to fit their own loss experience.
INSURANCE SOLICITOR see SOLICITOR.
INSURANCE SUPERINTENDENT see INSURANCE COMMISSIONER.
INSURANCE TITLE see TITLE INSURANCE.
INSURANCE TO VALUE in property coverage, ratio of the
amount of insurance to the value of an insured property. This ratio,
multiplied by
 Page 250
the amount of the loss, determines the indemnification payment.
See also COINSURANCE.
INSURED party covered by an insurance policy. In life insurance
policies there is one designated insured, the person so named; or a
policy can be issued to numerous insureds on a group basis. The
insured persons in property and casualty policies may also include
residents of the insured's household, such as a spouse, relatives of
either, and other individuals under their care, custody, and control
if under age 21.
INSURED LOAN type of loan that has been insured by the Federal
Housing Administration or a private mortgage insurance company.
INSURED, NAMED see NAMED INSURED.
INSURED PERIL source of loss that is covered under an insurance
policy, such as a fire, and explosion, among others.
INSURED PREMISES real property (structure(s) attached to the
land) that is occupied and/or is under the care, custody, or control
of an individual, individuals, or an organization for which an
insurance policy provides coverage. Within the insurance policy,
the premises will be listed in the DECLARATIONS SECTION and/or further
defined in the policy.
INSURED'S OBLIGATION AFTER LOSS see PROPERTY AND CASUALTY
INSURANCE PROVISIONS.

INSURER company offering protection through the sale of an

insurance policy to an insured. See also INSURANCE COMPANY (INSURER).
INSURER FINANCES: LIFE AND HEALTH, PROPERTY AND
CASUALTY management of premium inflow and benefit outflow.
See also ASSETS AND VALUATION; FULL PRELIMINARY TERM RESERVE PLAN; INVESTMENTS AND
REGULATION PROSPECTIVE RESERVE; REINSURANCE RESERVE; RETAINED EARNINGS; UNDERWRITING GAIN

(LOSS).

INSURING AGREEMENT section describing coverages under a

policy. Elsewhere in the policy other sections may restrict or
exclude coverages. See also INSURING AGREEMENT, PROPERTY AND CASUALTY POLICY.
INSURING AGREEMENT, AUTOMOBILE POLICIES see INSURING
AGREEMENT, PROPERTY AND CASUALTY POLICY.

INSURING AGREEMENT, FIRE see INSURING AGREEMENT, PROPERTY AND

CASUALTY POLICY.

INSURING AGREEMENT, LIABILITY see INSURING AGREEMENT, PROPERTY

AND CASUALTY POLICY.

INSURING AGREEMENT, PROPERTY AND CASUALTY

POLICY section of a policy specifying: (1) parties to the contract
(the insurance company and the person or business to be insured);
(2) terms of the policywhen it goes into force, and when it ends; (3)
premiums
 Page 251
and their due date; (4) limits of insurance; (5) types and location of
property to be insured; (6) CONSIDERATION; (7) perils (what the policy
protects against); and (8) assignment (and under what conditions
the policy can be assigned).
INSURING AGREEMENT, WORKERS COMPENSATION AND
EMPLOYERS LIABILITY see INSURING AGREEMENT, PROPERTY AND CASUALTY
POLICY.

INSURING CLAUSE essential part of an insurance policy. It

names the individual(s) covered, property and locations covered,
perils covered, the time a policy goes into force, and its termination
date. See also INSURING AGREEMENT, PROPERTY AND CASUALTY POLICY.
INTANGIBLE PERSONAL PROPERTY that which cannot be
touched; having no meaning to the senses. It is represented by
incorporeal rights in property (that which is evidence or represents
value; for example, a copyright).
INTEGRATED DEDUCTIBLE deductible amount between a basic
health insurance plan and major medical insurance.
INTEGRATED PLAN EMPLOYEE BENEFIT PLAN that includes benefits to be
received from Social Security when determining the allowable
benefit amount to be received by that employee or beneficiary.
INTEGRATION PERCENTAGE see INTEGRATION WITH SOCIAL SECURITY.
INTEGRATION WITH SOCIAL SECURITY method of reducing
an employee pension according to IRS procedures:
1. Offset methodrestricted to a DEFINED BENEFIT PLAN under which a
mandatory percentage of the monthly Social Security benefit
payable to a retired employee is subtracted from the monthly
retirement benefit payable to the employee under a business firm's
qualified retirement plan.
2. Integration methodused with a defined benefit plan or a defined
contribution plan under which a basic level of compensation is
established for a retired employee so that (a) for compensation
above this level, the employee receives a greater retirement benefit;
or (b) for compensation below this level, the employee receives a
smaller retirement benefit.
INTENTIONAL TORT deliberate act or omission, including
trespass, assault and battery, invasion of privacy, libel, and slander.
An intentional tort is a branch of civil liability. Liability insurance
can be purchased to cover libel and slander, but not the other
intentional torts.
INTERCOMPANY ARBITRATION settlement of a dispute that
arises when two or more insurers cover a single loss, and there is a
question concerning the amount each is responsible to pay. The
companies are bound by the arbitration decision.
 Page 252
INTERCOMPANY DATA information generated by the MEDICAL
INFORMATION BUREAU (MIB) and made available to member companies

concerning medical information of applicants for life and health

insurance. Member companies are required to report to the MIB
physical impairments of an applicant as uncovered through the
underwriting process.
INTEREST money paid by one party for the use of another party's
funds.
INTEREST ADJUSTED COST procedure for calculating the cost
of life insurance, taking into account the TIME VALUE OF MONEY
(investment return on sums placed in premium dollars had these
sums been invested elsewhere). There are several ways to calculate
interest adjusted cost based on time value of money. See also LINTON
YIELD METHOD; NET PAYMENTS INDEX; SURRENDER COST INDEX.

INTEREST-ADJUSTED METHOD see INTEREST ADJUSTED COST.

INTEREST AND DIVIDEND TAX COMPLIANCE ACT
requirement of the Internal Revenue Service that any dividend
payments received are subject to a 20% withholding if the investor
fails to furnish the dividend payor with the investor's correct tax
identification number.
INTEREST ASSUMPTION minimum rate of return, in life
insurance, guaranteed to a policyowner in calculating benefits for a
life insurance policy. It is also used by an insurance company as the
minimum rate of return it expects on its investments in calculating
reserves.
INTEREST FREE LOANS means of borrowing at no charge by a
policyowner under UNIVERSAL LIFE INSURANCE policies.
INTEREST MAINTENANCE RESERVE (IMR) liability RESERVE,
establishment required by the NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
(NAIC), the purpose of which is to accumulate realized capital gains

and losses resulting from fluctuations in the interest rate. These

gains and losses in the IMR are amortized and shown as an
adjustment to the net investment income over the remaining life of
the sold assets.
INTEREST OPTION use of a life insurance policy dividend by the
owner of a participating policy. Here the policy dividend is left
with the insurance company to accumulate at a guaranteed
minimum interest rate. Also, an interest option is a choice a
beneficiary can make by leaving death proceeds with the insurance
company to accumulate at interest. Interest earned under either
option is subject to federal and state income taxes.
INTEREST POLICIES see CURRENT ASSUMPTION WHOLE LIFE INSURANCE; INTEREST
SENSITIVE POLICIES; UNIVERSAL LIFE INSURANCE; UNIVERSAL VARIABLE LIFE INSURANCE.
 Page 253
INTEREST RATE CAP upper limit on the maximum possible
interest rate an insurance company will pay. If the market interest
rates are below that maximum, the insurance company pays the
market interest rate. In this way, the insurance company can hedge
its interest rate exposure (risk that interest rates will rise or fall at
some stipulated time), reflected by changes in the value of its assets
on the balance sheets.
INTEREST RATE CHANGE RISK one of four types of risks used
by the SOCIETY OF ACTUARIES (SA) to determine a life insurance company's
overall risk profile when fluctuations in interest rates result in
abnormal cash inflows or outflows causing positive or negative
investment implications. See also ASSET DEPRECIATION RISK; GENERAL BUSINESS RISK;
INTEREST RATE CHANGE RISK; PRICING INADEQUACY RISK.

INTEREST RATE COLLAR combination of an INTEREST RATE CAP and

an INTEREST RATE FLOOR, creating a band within which interest rates can
range. For example, if an interest rate band is between 6% and
10%, the insurance company does not receive or pay a continuous
stream of interest payments from or to another party within this
band. Above the upper limit on the maximum possible interest rate
an insurance company will pay, and below the lower limit of the
maximum possible interest rate an insurance company will pay, the
insurance company and another party will exchange interest
payments.
INTEREST RATE FLOOR lower limit on the maximum possible
interest rate an insurance company will pay. If the market interest
rates are below that lower limit, the insurance company pays the
lower limit rate. In this way, the insurance company can hedge its
interest rate exposure (risk that interest rates will rise or fall at
some stipulated time), reflected by changes in the value of its assets
on the balance sheets.
INTEREST RATE RISK investment risk associated with the
possibility that there is a rise in the interest rates after a fixed
income security has been purchased resulting in a decline in that
security's price. The longer the maturity date of that security, the
greater the exposure of the security's price to interest rate
fluctuations. The fluctuations in interest rates can have a dramatic
effect on the insurance company's bond portfolio.
INTEREST RATE SCENARIO set of yield curves in which an
interest rate is specified for various maturities such as monthly,
quarterly, or annually. The basis of the interest rate can be
corporate bond rates, United States Treasury Issues, Commercial
Mortgage Rate, or other fixed interest rate instruments. Since the
assets and liabilities of pension plans and insurance companies are
interest-rate sensitive, it is important to be aware of possible future
interest rate movements.
INTEREST RATES, GUARANTEED/EXCESS circumstances in
life insurance in which, although a minimum rate is guaranteed, a
 Page 254
policyowner may earn additional (excess) interest, depending on
the company's investment return. See also CURRENT ASSUMPTION.
INTEREST RATE SWAP contractual agreement between two
parties in which they agree to exchange a stream of interest
payments on either a fixed rate for a floating rate or a floating rate
for a fixed rate. The insurance company is most likely to select a
floating rate for a fixed rate because it needs to know exactly what
it will be paying in future interest. In this way, the insurance
company can hedge its interest rate exposure (risk that interest rates
will rise or fall at some stipulated time), reflected by changes in the
value of its assets on the balance sheet.
INTEREST SENSITIVE CASH FLOW ANALYSIS measurement
of the response of the cash flow of an insurance company to
various interest rate scenarios; for example, how rising interest
rates will affect the number of life insurance policies surrendered
and thus the cash flow.
INTEREST SENSITIVE POLICIES a newer generation of life
insurance policies that are credited with interest currently being
earned by insurance companies on these policies.
INTERGOVERNMENTAL POOLS tool of RISK MANAGEMENT used for
risk financing by local governments. The technique is for many
local governments to combine resources in order to SELF INSURE a
particular line of business, such as general liability, automobile,
and WORKERS COMPENSATION. Above the RETENTION level, there is the
collective purchase of REINSURANCE for the required excess coverage.
INTERINSURANCE CLAIM SERVICE ORGANIZATION type
of organization of property and casualty insurance companies
whose objective is to share information on fraudulent claims,
handle claims in an expeditious manner, and disseminate public
information concerning safeguarding of property. Some
interinsurer organizations are the AMERICAN INSURANCE ASSOCIATION (AIA) Index
Bureau, INSURANCE CRIME PREVENTION INSTITUTE, NATIONAL ASSOCIATION OF INDEPENDENT
INSURANCE ADJUSTERS (NAII), and NATIONAL AUTOMOBILE THEFT BUREAU.

INTERINSURANCE COMPANY CLAIMS those claims that arise

when two or more property and casualty insurance companies have
coverage on a loss. Which company then owes which portion of the
claim must be determined. See also INTERCOMPANY ARBITRATION.
INTERINSURANCE EXCHANGE see RECIPROCAL EXCHANGE.
INTERIOR ROBBERY POLICY coverage for the inside of an
insured premises of a business firm if it experiences a loss of
money, securities, personal property, and damage or destruction of
real or personal property due to robbery, whether successful or
attempted.
INTERMEDIARY reinsurance broker for a primary company (the
reinsured). This broker is paid commissions by the reinsurance
company,
 Page 255
just as an agent is paid commissions by an insurance company for
selling its policies.
INTERMEDIATE DISABILITY see DISABILITY INCOME INSURANCE; TEMPORARY
DISABILITY BENEFITS.

INTERMEDIATE POLICY INSURANCE POLICY that combines the

characteristics of a DEBIT INSURANCE policy with that of an ORDINARY LIFE
INSURANCE policy. These policies were historically sold by the DEBIT

AGENT.

INTERNAL RATE OF RETURN method used to determine the

POLICYHOLDER'S return on premiums paid into a life insurance policy.

This method is illustrated in two ways:

1. Surrender of Policy Approachcalculation of the interest rate
required for the accumulated value of the total premiums paid
(minus any DIVIDENDS) into the policy at a given time to equal the CASH
SURRENDER VALUE of the policy at that time;

2. DEATH BENEFIT Paid Approachcalculation of the interest rate required

for the accumulated value of the total premiums paid (minus any
dividends) into the policy at a given time to equal the death benefit
of the policy at that time.
INTERNAL REVENUE CODE federal statute defining the federal
tax code, covering such topics as credits against tax; business-
related credits; computing credit for investment in certain
depreciable property; computation of taxable income; definition of
gross income, adjusted gross income, and taxable income; itemized
deductions; pensions, profit-sharing, and stock bonus plans;
taxation of estates and trusts; taxation of life insurance companies,
capital gains and losses; and other areas.
INTERNAL REVENUE CODE: SECTION 303 STOCK
REDEMPTION PLAN portion of the federal tax code outlining the
procedure by which a corporation cancels or redeems its shares
with funds paid out of earnings or profits, thus making the
distribution a taxable dividend.
INTERNAL REVENUE CODE: SECTION 501 (c) portion of the
federal tax code that determines which organizations are exempt
from federal income taxation. These are generally nonprofit
corporations, funds, and foundations for education, religious,
charitable, or scientific purposes; civic leagues for general social
welfare; fraternal beneficial societies, orders, or associations; and
others.
INTERNATIONAL EMPLOYEE BENEFIT NETWORK
agreement among insurance companies through which a
multinational employer is permitted to purchase employee benefits
coverages for two or more of its overseas subsidiaries under a
single master policy. This working arrangement (network) may be
composed of several overseas independent insurance companies,
may consist of a cooperative agreement between a U.S. insurance
company and an overseas insurance company,
 Page 256
or may be administered by an insurance company that has several
subsidiary companies overseas. Employee benefits provided
through these multinational networks include life, health, pensions,
disability income, and accidental death. Such a network pools the
loss experiences of a particular employer's overseas subsidiaries. If
the pooled loss experience is better than that expected through the
premium charged, a dividend is paid to the employer. However, if
the loss experience is worse than that expected through the
premium charged, three courses of action are available: (1) the
adverse loss experience is charged to the employer's account with
any negative balance shifted to the following loss-experience year;
(2) the adverse loss experience is absorbed by the insurance
companies in the network, and any negative balance is not shifted
to the following loss-experience year; (3) the adverse loss
experience is charged to the employer's account with any negative
balance shifted to the following loss-experience year, and a
contingency fund is established with annual contributions against
which future adverse loss experiences can be charged. The pooling
effect allows the employer's adverse loss experience in one country
to be offset by better than expected loss experience in another
country.
INTERNATIONAL INSURANCE INSURANCE transactions
conducted across national boundaries. Such transactions occur
when the insurance company sells insurance outside the country of
the company's domicile.
INTERNATIONAL INSURANCE SEMINARS, INC. (IIS) annual
meetings of insurance practitioners and academicians from
throughout the world interested in exchanging ideas concerning the
theory and applications of insurance. The meeting is held in a
different part of the world each year.
INTERNET immense collection of networks that are
interconnected on a global basis providing services to the general
public. These services include the transferring of files among
computers, hypertext transfer protocol (HTTP) involving the
reading and interpreting of hypertext files (web pages) that contain
pictures and sounds, and operating computers from distant
locations. Computers use telephone lines, optical fibers, and radio
transmissions to connect networks thereby forming Internets. Thus,
the Internet is really a super highway along which information
travels to the electronic address of its destination computer. Along
the way this information may pass through computer network to
computer network several times before reaching its electronic
address.
1. The Internet can be used to determine life insurance needs and
compare costs and types of life insurance policies by referencing
the following web sites: [Link];
[Link]; and [Link]
2. Similar analysis of health and disability insurance can be found
at these web sites:
 Page 257
[Link]/unlimited/services_listing/greg_connors/[Link];
[Link]/answers/health_insurance.html
3. For homeowners, renters, and automobile insurance, the following
web sites may be referenced: [Link]; [Link];
[Link]
INTERNET SERVICE PROVIDER (ISP) company that provides
access to the INTERNET through electronic communications.
INTERPLEADER legal procedure through which a court determines
the rightful claimant (of two or more claimants making the same
claim) against a third party. Insurance companies use interpleader if
claims are made by different parties. For example, upon the death of an
insured, two or more individuals (such as the widow and a former
wife) may contest the beneficiary's rights. The insurance company will
deposit the policy proceeds with the court until it decides on the
ownership.
INTERSTATE COMMERCE COMMISSION ENDORSEMENT
certificate of insurance required by law under the auspices of the
Interstate Commerce Commission. The endorsement is attached to all
INLAND MARINE policies issued to interstate motor carriers. The insurance

company covers all damage or destruction on an ALL RISKS basis to

property being transported.
INTERSTATE COMMERCE COMMISSION (ICC) federal agency
that regulates commerce across state lines. The ICC does not oversee
insurance, which is subject to regulation by the states according to
Public Law 15, McCarran-Ferguson Act. However, insurance
companies must comply with many federal laws and regulations.
INTER-VIVO TRUST trust that is established by people still alive. See
also ESTATE PLANNING; ESTATE PLANNING DISTRIBUTION.
INTESTACY see INTESTATE.
INTESTATE death without a will having been drawn. Under this
circumstance, the court follows state law in deciding how the estate of
the deceased is to be distributed. See also ESTATE PLANNING; ESTATE PLANNING
DISTRIBUTION.

INTESTATE DISTRIBUTION see ESTATE PLANNING DISTRIBUTION.

INTRASTATE CARRIER insurance company that restricts its
UNDERWRITING of RISKS to one state.

IN-TRUST (ON-CONSIGNMENT) POLICIES insurance that follows

an insured property. See also CONSIGNMENT INSURANCE.
INVERSE FLOATING RATE NOTE variable-rate bonds whose
coupon and value increases as interest rates decrease.
INVERTED YIELD CURVE curve that results when yields on short-
term treasury issues exceed those on long-term government debt. A
widely accepted theory holds that when short-term and intermediate-
 Page 258
term issues are higher than those on long-term issues, a recession is
imminent and investors expect rates to decline further.
INVESTMENT AND VALUATION OF ASSETS see INVESTMENTS AND
REGULATION.

INVESTMENT COMPANY ACT OF 1940 act that regulates the

variable dollar insurance products (equity related) sold by
insurance companies. The act includes regulations that stipulate:
(1) the variable dollar insurance products must be funded through a
separate account (segregated from the other investment accounts of
the insurance company); (2) benefits and cash values must vary in
tandem with the investment returns of this separate account; (3)
mortality and expense fluctuations (above the maximum chargeable
stipulated in the policy) must be borne by the insurance company;
(4) maximum sales load; and (5) periodic financial reports must be
sent to the POLICYOWNER.
INVESTMENT EARNINGS OF INSURANCE COMPANY
investment income. Insurance companies invest part of their
premiums that are not immediately needed for claims and
administrative expenses. These earnings are critical to an insurance
company. A property and casualty company depends on investment
earnings to balance under-writing losses. A life company depends
on the investment earnings to help build policy cash values.
INVESTMENT EXPENSES expenses associated with the
investment of the company's assets to include such items as
transaction and research costs.
INVESTMENT GENERATION METHOD DIVIDEND paid to
POLICYHOLDER according to the time period in which the policy was
sold and the investment return the insurance company made on that
policy during that time period. See also THREE-FACTOR CONTRIBUTION METHOD.
INVESTMENT INCOME earnings by an insurance company from
dividends on its equity portfolio, rent from real estate and other
property it owns, and interest on its bond holdings.
INVESTMENT IN COMMON STOCK RATIO ratio of the
insurance company's investment in common stocks dividend to its
ADJUSTED SURPLUS account. This ratio shows how vulnerable the

company's surplus is to the stock market fluctuations.

INVESTMENT IN JUNK BONDS RATIO ratio of the company's
investment in noninvestment grade bonds dividend to its ADJUSTED
SURPLUS. This ratio shows how vulnerable the company's surplus is to

the market fluctuations in noninvestment grade bonds. The lower

this ratio, the more financially sound the insurance company.
INVESTMENT RATIO relationship of gains from investments
(including realized capital gains) resulting from insurance
operations to EARNED PREMIUMS.
 Page 259
INVESTMENT RISK possibility of a reduction in value of an
insurance instrument resulting from a decrease in the value of the
assets incorporated in the investment portfolio underlying the
insurance instrument. This reduction can also be effected by a
change in the interest rate.
INVESTMENTS money expended with the object of profit. The
goal of an insurance company is to invest in assets with a rate of
return greater than that to be paid out as benefits under its policies.
Traditionally, life insurance companies have invested in long-term
financial instruments such as mortgages. Today, under CURRENT
ASSUMPTION life insurance policies, investments are in short-
term financial instruments. Property and casualty insurance
companies, because of the nature of their policies, favor short-term
financial instruments as investments.
INVESTMENTS AND REGULATION
Life insurance:
1. Bondsmost state regulations permit life insurance company
investments in debentures, mortgage bonds, and blue chip
corporate bonds.
2. Stocks(a) preferred stock investment is limited to 20% of the
total stock of any one company, not exceeding 2% of a company's
admitted assets; (b) common stock investment is limited to the
lesser amount of 1% of the ADMITTED ASSETS or the policyowner's
surplus.
3. Mortgageinvestment is unlimited in first mortgages on
residential, commercial, and industrial real estate.
4. Real Estateinvestment is limited to 10% of admitted assets.
Valuation of the assets in a typical state is accomplished in the
following manner: (1) stocks or bonds in default (principal or
interest) cannot be valued at greater than market value; (2) bonds
not in default valued according to their purchase price adjusted to
equal par at maturity; (3) preferred and common stocks of firms in
good financial condition are valued according to purchase price;
(4) preferred and common stocks in companies not in good
financial condition are valued at market price; and (5) real estate,
mortgages, and policy loans are valued at book value.
Property and casualty insurance:
1. DOMESTIC INSURERS and FOREIGN INSURERS must invest according to the
minimum capitalization requirement in federal, state, or municipal
bonds.
2. Company funds in excess of minimum capitalization and reserve
requirements can be invested in federal, state, or municipal bonds
as well as stocks or real estate. The insurance company is limited in
its investment in any one firm up to no more than 10% of its
admitted assets; its real estate investment can be no more than 10%
of its admitted assets.
 Page 260
INVESTMENT YEAR METHOD OF ALLOCATING
INVESTMENT INCOME procedure in which investment income
is paired with each life insurance policy according to the time
frame in which the premiums for that particular policy are
received.
INVITEE person who is expressly or by implication asked to visit
property in the possession, care, or control of another person. The
inviter has the obligation to render his or her property safe for the
visit of the invitee. Liability insurance is designed to protect an
insured in the event that his or her negligent acts or omissions
result in bodily injury to the invitee.
IRA see INDIVIDUAL RETIREMENT ACCOUNT.
IRREVOCABLE something that cannot be changed. In life
insurance, a beneficiary who has been named as irrevocable cannot
be changed without his or her formal (written) permission.
IRREVOCABLE BENEFICIARY see BENEFICIARY CLAUSE.
IRREVOCABLE LIFE INSURANCE TRUST ESTATE PLANNING device
used so that any life insurance policies that are owned by and paid
to the TRUST will avoid ESTATE TAX upon the death of the INSURED, and,
upon the death of the insured's spouse, estate taxes will be avoided
as well. The requirement of this trust are: (1) it must be
irrevocable; and (2) no distributions of the trust's principal or
income can be made to the insured. All income generated by the
trust must be accumulated and then distributed along with the
trust's principal to the trust's beneficiary(s). The methods of
operation of this trust could include the following forms:
1. Trustee (insured's spouse) has the right to distribute income
generated by the trust as well as the principal of the trust to the
insured's spouse as long as the insured lives. The trustee also has
the right to borrow on the CASH VALUE of the life insurance policies on
the life of the insured owned by the trust and then distribute the
funds so obtained to the insured's spouse as long as the insured is
alive.
2. Trustee (cannot be insured) has the right to distribute income
generated by the trust and/or principal of the trust to the insured.
The trustee also has the right to borrow on the cash value of the life
insurance policies on the life of the insured owned by the trust and
then distribute the funds so obtained to the insured.
3. SPLIT DOLLAR LIFE INSURANCE policy is established within the trust with the
insured's spouse having ownership rights to the cash value part of
the split dollar policy and the trust having ownership rights to the
death benefit minus the cash value. Through this mechanism, the
insured's spouse has access to the cash value while the insured is
alive. Upon the death of the insured and insured's spouse, the
amount of the death benefit minus the cash value will not be
subject to estate tax.
 Page 261
IRREVOCABLE LIVING TRUST TRUST in which rights to make
any changes therein are surrendered permanently by the GRANTOR.
The grantor uses this type of trust to transfer assets and any
potential depreciation out of his or her estate in order to avoid
FEDERAL ESTATE TAX on the second estate distributions to heirs, as well as

to avoid PROBATE expenses. The primary disadvantage of this type of

trust is that the grantor surrenders all control over the assets and the
right to change the terms of the trust. See also ESTATE PLANNING DISTRIBUTION;
REVOCABLE LIVING TRUST.

IRREVOCABLE TRUST trust that cannot be revoked by the

creator. See also ESTATE PLANNING DISTRIBUTION.
ISO see INSURANCE SERVICES OFFICE.
ISSUED BUSINESS policies that have been sold to and paid for
by an insured, but not yet delivered to the insured.
ISSUE DEPARTMENT department in an INSURANCE COMPANY that
prepares policies to be sent to the POLICYHOLDER, sends the policies, and
keeps records of the policies that were sent.
 Page 262

J
JACKET outer covering containing an insurance policy; in many
instances it lists provisions common to several types of policies.
JEWELER'S BLOCK INSURANCE POLICY type of INLAND MARINE
INSURANCE that provides coverage for jewels, watches, gold, silver,

platinum, pearls, precious and semiprecious stones. Property can be

owned by the insured jeweler, or can be customer's property in
care, custody, and control of the jeweler. Coverage is on an ALL
RISKS basis except specifically excluded perils such as wear and
tear; war; delay; loss of market; flood; earthquake; loss or damage
while jewelry is being worn by the insured or his or her
representatives; loss resulting from the infidelity of any person
under the care, custody, and control of the insured; damage or
destruction of jewelry after it leaves the insured under an
installment contract; mysterious disappearance; and shipments of
jewelry not sent registered first class mail.
JEWELRY FLOATER see PERSONAL JEWELRY INSURANCE.
JEWELRY INSURANCE see PERSONAL JEWELRY INSURANCE.
JOB RELATED INJURIES, DEATH incidents covered under
WORKERS COMPENSATION BENEFITS.

JOINT AND ONE-HALF ANNUITY/JOINT AND TWO-

THIRDS ANNUITY modified JOINT LIFE AND SURVIVORSHIP ANNUITY under
which the income payments are reduced to one-half or two-thirds
of the initial income amounts upon the death of the first ANNUITANT.
JOINT AND SEVERAL LIABILITY legal obligation under which
a party may be liable for the payment of the total judgment and
costs that are associated with that judgment, even if that party is
only partially responsible for losses inflicted, whether bodily injury
and/or property damage.
JOINT AND SURVIVOR OPTION settlement choice under a life
insurance policy whereby a beneficiary may elect to have the death
proceeds paid in the form of a joint and survivor annuity. See also
JOINT LIFE AND SURVIVORSHIP ANNUITY.

JOINT ANNUITANT person other than the ANNUITANT as designated

by the POLICYHOLDER on whose life expectancy the annuity payment is
also based.
JOINT ANNUITY see JOINT LIFE ANNUITY.
JOINT CONTROL estate under the legal and administrative
guidance of both the surety and the fiduciary. Any actions on the
part of the estate requires the signatures of both in order to reduce
the chances of fraud.
 Page 263
JOINT INSURANCE see JOINT LIFE AND SURVIVOR INSURANCE; JOINT LIFE AND
SURVIVORSHIP ANNUITY; JOINT LIFE ANNUITY; JOINT LIFE INSURANCE.

JOINT LIFE AND SURVIVOR INSURANCE coverage for two or

more persons with the death benefit payable at the death of the last
of those insured. Premiums are significantly lower under joint life
and survivor insurance than for policies that insure only one
person, since the probability of having to pay a death claim is
lower.
JOINT LIFE AND SURVIVORSHIP ANNUITY ANNUITY that
continues income payments as long as one annuitant, out of two or
more annuitants, remains alive. For example, a married couple
would receive an income for as long as both spouses are alive.
Thereafter, payments would continue as long as the surviving
spouse is alive, usually for a smaller amount. This type of annuity
is ideal for a husband and wife in that it guarantees the surviving
spouse an income for life. Even with a LIFE ANNUITY CERTAIN or other type
of refund annuity, it is possible for a surviving spouse to outlive the
money that has been funding the annuity. See also ANNUITY.
JOINT LIFE ANNUITY retirement plan in which income
payments continue until the death of the first of two or more
annuitants. This type of annuity is not appropriate for a husband
and wife since at the death of the first spouse income payments
cease. The monthly benefit is greater than with other annuities
since income payments cease at the first death. See also ANNUITY.
JOINT LIFE INSURANCE coverage of two or more persons with
the death benefit payable at the first death. Premiums are
significantly higher than for policies that insure one person, since
the probability of having to pay a death claim is higher.
JOINT LOSS APPORTIONMENT see APPORTIONMENT.
JOINT PROTECTION see JOINT-LIFE AND SURVIVORSHIP ANNUITY; JOINT LIFE
INSURANCE.

JOINT TENANCY see JOINT TENANTS.

JOINT TENANTS property owned by two or more parties in such
a way that at the death of one, the survivors retain complete
ownership of the property.
JOINT UNDERWRITER ASSOCIATION combination of several
insurance companies to provide the capacity to underwrite a
particular type or size of exposure. For example, liability coverage
for a drug company's vaccine has been instituted as the result of
several insurance companies working together to provide the
required capacity due to the extra hazard.
JOINT VENTURE agreement of two or more insurance companies
to provide a product or service.
 Page 264
JONES ACT (MERCHANT MARINE ACT) federal law passed in
1920 that allows any seaman incurring bodily injury as the result of
the performance of one or more functions of the job to bring a suit
for damages against the employer. The employer's exposures under
the act consist of negligence, unseaworthiness of the vessel, and
disability income for the injured man or woman.
JOURNAL OF RISK AND INSURANCE academic publication of
the AMERICAN RISK AND INSURANCE ASSOCIATION in which articles deal with
aspects of risk, insurance, and allied fields of study.
JUDGMENT decision by a court of law.
JUDGMENT BY DEFAULT decision in the absence of a plaintiff
or defendant at the specified court time.
JUDGMENT RATING underwriting phrase denoting the best
judgment based on the experience of an underwriter, in classifying
a particular risk.
JUDICIAL BOND type of SURETY BOND that is either a fiduciary or a
court bond.
1. Fiduciary Bondguarantees that individuals in a position of trust
will safeguard assets belonging to others placed under their control.
For example, guardians appointed by a court who are authorized to
pay expenses of the minor and administrators of estates who take
care of a deceased's assets may require fiduciary bond.
2. Court Bondguarantees concerning ligation such as: (a) APPEAL BOND,
which guarantees that a judgment will be paid if an appeal is lost in
a higher court; (b) Plaintiff 's Replevin Bond, which guarantees that
damages will be paid if the replevin action is wrongfully brought;
(c) Removal Bond, which guarantees that damages will be paid if
improper removal actions are taken.
JUMPING JUVENILE POLICY (JUVENILE ESTATE
BUILDER) life insurance coverage on a child in which the initial
face amount of the life insurance policy increases when the child
reaches the age of majority, with no corresponding increase in
premium.
JUVENILE ENDOWMENT POLICY life insurance on the life of
a child that provides a DEATH BENEFIT to a BENEFICIARY should the child die
during a stipulated time period and the maturity value of the policy
at the end of that time period to the child if that child is still alive.
This policy has typically been used to provide funds to finance a
college education.
JUVENILE ESTATE BUILDER see JUMPING JUVENILE POLICY (JUVENILE ESTATE
BUILDER).

JUVENILE INSURANCE life insurance on the life of a child.

 Page 265

K
KEETON-O'CONNELL AUTOMOBILE INSURANCE PLAN
early type of no-fault automobile insurance developed by two law
professors, Robert Keeton and Jeffrey O'Connell. Its basic premise
is that for many accidents it is impossible to place the blame as
required by the tort legal system. In this approach, each individual
would be able to collect from his or her own insurance company
without having to prove fault on the part of anyone.
KENNEY RATIO proposal by Roger Kenney, an insurance
journalist, that in order to maintain the solvency of a property and
casualty insurance company, insurance premiums written should
not exceed more than twice the company's surplus and capital. This
historical measure is used by regulators to determine a property and
casualty company's capacity to make claim payments while
maintaining its solvency.
KEOGH PLAN (HR-10) act first passed in 1962 that permits the
self-employed individual to establish his or her own retirement
plan. This individual can make nondeductible voluntary
contributions and tax-deductible contributions subject to a
maximum limit of 25% of earned income up to $30,000 for a
defined contribution plan after the reduction for the contribution to
the Keogh Plan. This is an equivalent rate of 20% of earned income
prior to the contribution to the Keogh Plan.
KEY EMPLOYEE INSURANCE see BENEFITS OF BUSINESS LIFE AND HEALTH
INSURANCE (KEY PERSON INSURANCE); KEY EMPLOYEE (KEY PERSON).

KEY EMPLOYEE (KEY PERSON) individual who possesses a

unique ability essential to the continued success of a business firm.
For example, this individual might have the technical knowledge
necessary for research and development of products that keep the
company at the cutting edge of its field. The death or disability of
this key individual could severely handicap the company. See also
BENEFITS OF BUSINESS LIFE AND HEALTH INSURANCE (KEY PERSON INSURANCE).

KEY EMPLOYEES, INSURANCE PLANS FOR typical

NONQUALIFIED PLANS of life insurance for key employees include:

1. PERMANENT LIFE INSURANCEdividends generated by the policy are used to

pay the income tax of the key employee that results from the
premiums paid by the employer on the permanent insurance policy.
For federal tax purposes the employer-paid premiums are taxed as
additional earned income for the employee. Under the better
permanent policies, after the policy has been in force a few years
the dividends should exceed the taxable premium income to the
employee. The advantages of permanent insurance to the key
employee include life insurance coverage for life, increasing cash
values, increasing dividends selection of beneficiary, and owner-
ship of policy.
 Page 266
2. TERM LIFE INSURANCEpremiums paid by the employer are considered
federal taxable income to the employee. Employee selects
beneficiary and owns policy. Policy probably will not remain in
force after retirement because the premiums continue to increase in
cost and become prohibitive.
3. SPLIT DOLLAR LIFE INSURANCEpermanent life insurance is purchased on the
life of the employee. Premium payments are split between the
employee and the employer. The employer has an equity interest in
the cash value of the policy to the extent of the premium payment
he or she has paid in. The employee has an equity interest in the
cash value of the policy to the extent that the cash value exceeds
the premiums paid in by the employer. Under the better permanent
policies, the cash values will accumulate to a substantial sum,
whereupon the employer can withdraw from the cash value an
amount equal to his or her premium paid in. At this point the split
dollar plan is said to terminate, and the employee has sole
possession of the policy. The cash values remaining should be
sufficient so that no further premium payments are required by the
employee to keep the policy in force.
4. SALARY CONTINUATION PLANemployer usually purchases permanent life
insurance on the life of the employee, is the beneficiary of the
policy, and owns the policy. If the employee dies before receiving
all promised supplemental pension benefits, the employer will pay
the remaining supplemental pension benefits to the beneficiary of
the deceased employee. Funds for payments are provided from the
life insurance proceeds.
5. Death Benefit Only Life Insurance Planemployer usually
purchases permanent life insurance on the life of the employee, is
the beneficiary of the policy, and owns the policy. Premiums paid
by the employer are not considered federal taxable income to the
employee. Upon the death of the employee, the employer will use
the life insurance proceeds to pay death benefits for several years
to the employee's beneficiary. The employer receives the life
insurance proceeds tax free; however, the death payments to the
employee's beneficiary are federal taxable income to that
beneficiary. This plan can also be utilized to supplement the
employee's pension plan at retirement.
KEYNESIAN ECONOMICS theory, named after the British
economist John Maynard Keynes, that deals with current
consumption at the expense of saving. This theory has important
implications for life insurance products and annuities since their
purchase requires foregoing a portion of current consumption in
favor of savings and future financial security. See also ANNUITY; SAVINGS
ELEMENT, LIFE INSURANCE.

KEY PERSON INSURANCE see BENEFITS OF BUSINESS LIFE AND HEALTH

INSURANCE (KEY PERSON INSURANCE).
 Page 267
KEY PERSON LIFE AND HEALTH INSURANCE see BENEFITS OF
BUSINESS LIFE AND HEALTH INSURANCE (KEY PERSON INSURANCE); BUSINESS LIFE AND HEALTH

INSURANCE.

KIDNAP INSURANCE coverage in the event an employee is

kidnapped from an insured business's premises and forced to return
to aid a criminal in a theft.
KIDNAP-RANSOM INSURANCE see RANSOM INSURANCE.
KNOCK-FOR-KNOCK AGREEMENT arrangement between two
or more insurance companies under which the parties to the
agreement waive their SUBROGATION rights against the other. Most such
agreements are no longer in use. See also INTERCOMPANY ARBITRATION.
 Page 268

L
LABOR AND MATERIAL BOND coverage to indemnify an
owner for whom work was done if the completed work is not free
of worker's liens for labor and material.
LABOR MANAGEMENT RELATIONS ACT OF 1947 see TAFT-
HARTLEY ACT.

LABOR STATISTICS, BUREAU OF federal agency that collects

and analyzes numerous U.S. demographics used by government
and industry. Insurance companies use the demographics to predict
areas of high demand for their products, to perform market
segmentation studies, and to position distribution systems.
LADDERING purchasing bond investments that mature at
different time intervals.
LADDER PORTFOLIO method of investing that staggers the
maturities of a group of bonds. As a bond matures, the investor can
reinvest the proceeds in either short-or long-term bonds depending
on the interest rate and economic environment at that time. For
example, if interest rates are rising, the matured bond's proceeds
can be invested in longer term, higher yielding bonds. As interest
rates decline, higher interest rates would have already been locked
in through the previous purchase of higher yielding bonds. As
bonds continue to mature in a falling interest rate environment, the
proceeds can be invested in bonds of shorter maturities, thereby
having liquidity for future investment in longer maturity bonds if
interest rates increase.
LAG time that has elapsed between when claims actually occurred
and when claims are actually paid.
LAND OWNERSHIP, USE AND POSSESSION OF liability
exposure, in insurance, associated with three classifications of
individuals that may come upon an insured property:
1. TRESPASSERindividual enters without permission. Generally the
insured has no legal obligation to render his or her land safe for the
trespasser, but the insured cannot create a death trap.
2. LICENSEEindividual enters with permission, but there is no mutual
profit motive involved. Generally, the insured's only obligation to
the licensee is to warn of any hidden dangers of which the insured
is aware.
3. INVITEEindividual expressly or by implication is invited to enter
property; there is a mutual profit motive. Generally, the insured
must use reasonable care to render his property safe for the
invitee's visit.
LAPSE
1. in property and casualty insurance, termination of a policy
because of failure to pay a renewal premium.
 Page 269
2. in life insurance, termination of a policy because of failure to
pay a premium and lack of sufficient cash value to make a
premium loan.
LAPSED POLICY see LAPSE.
LAPSE RATIO percentage of a life insurance company's policies
in force at the beginning of the year that are no longer in force at
the end of the year. This ratio is critical because it indicates the rate
at which policies are going off the books and the resultant loss of
earnings to the company.
LAPSE RISK measure of the sensitivity of the insurance
company's liability to changing policy surrender distributions.
LAPSE SUPPORTED LIFE INSURANCE POLICIES policies that
have their future cash values closely correlated with a high LAPSE RATIO
of the insurance company's BOOK OF BUSINESS. In theory, gains resulting
from these lapses will result in a greater SURPLUS ACCOUNT, thereby
building the future cash values of these policies. In essence, the
policy is specifically designed so that if it is surrendered, its
SURRENDER VALUE would be less than its ASSET SHARE VALUE.

LARGE LOSS PRINCIPLE transfer of high severity risks through

the insurance contract to protect against catastrophic occurrences.
While insurance is generally not the most cost-effective means of
recovery of minor losses, an insured cannot predict catastrophes
and thus set aside enough money to cover losses on a mathematical
basis or to self-insure. Actuarial tables are based on the large loss
principle: the larger the number of exposures, the more closely
losses will match the probability of loss. In essence, a large number
of insureds, each paying a modest sum into an insurance plan, can
protect against the relatively few catastrophes that will strike some
of their numbers.
LAST CLEAR CHANCE common law rule of negligence that
imposes liability on an individual who had one last opportunity to
avoid an accident but did not take it. An example is a driver who
could have avoided hitting another automobile by applying his
brakes but did not do so. One reason for not avoidingor even
causingan accident is a desire to collect insurance proceeds.
LAST SURVIVOR ANNUITY see JOINT LIFE AND SURVIVORSHIP ANNUITY.
LAST SURVIVOR INSURANCE coverage of two or more
individuals with the death benefit payable at the last death.
Premiums are significantly lower than for policies that insure one
person, since the probability of having to pay a death claim on the
second death is lower.
LAW OF LARGE NUMBERS mathematical premise stating that
the greater the number of exposures, (1) the more accurate the
prediction; (2) the less the deviation of the actual losses from the
expected losses (X - x approaches zero); and (3) the greater the
credibility of the prediction (credibility approaches 1). This law
forms the basis for the statistical expectation of loss upon which
premium rates for insurance
 Page 270
policies are calculated. Out of a large group of policyholders the
insurance company can fairly accurately predict not by name but
by number, the number of policyholders who will suffer a loss. Life
insurance premiums are loaded for the expected loss plus modest
deviations. For example, if a life insurance company expects (x)
10,000 of its policy-holders to die in a particular year and that
number or fewer actually die (X), there is no cause for concern on
the part of the company's actuaries. However, if the life insurance
company expects (x) 10,000 of its policyholders to die in a
particular year and more than that number dies (X) there is much
cause for concern by actuaries.
LAW OF MORTALITY premise that, out of a large group of
people, a given number will die each year (conversely, a given
number will remain alive each year) until all the people in that
original group are dead. This life and death event will allow the LAW
OF LARGE NUMBERS to operate effectively.

LAWYERS (ATTORNEYS PROFESSIONAL) LIABILITY

INSURANCE coverage if a lawyer's professional act (or omission)
results in the client inflicting bodily injury or property damage to
another party, or if personal injury and/or property damage is
incurred by a client who brings an action for injuries and or
damages suffered. The policy also provides for defense costs, legal
fees, and court costs of the defendant, even if the suit is without
foundation.
LAYERING combination of several policies with each adding an
additional layer or limit of coverage above the limits of the policy
that comes before it. For example, Policy A adds $100,000, then
Policy B adds $200,000 and then Policy C adds $300,000, for a
total of $600,000. In some instances a business firm cannot obtain
the total coverage it requires from a single insurance company.
Thus, the business may have to buy several policies from different
companies in order to acquire the total needed.
LAY UNDERWRITER home office underwriter who evaluates risk
based on probability, statistics, and medical knowledge.
LEAD INSURER insurance company that puts together a
consortium of insurance and reinsurance companies to provide an
adequate financial base with sufficient underwriting capacity to
insure large risks. Usually the lead insurer will take a large
percentage of the risk for its own account.
LEASE use of another party's property in exchange for rental
payment. See also LEASEHOLD INSURANCE; LEASEHOLD PROFIT INTEREST; LEASEHOLD VALUE
INTEREST.

LEASEHOLD see LEASE.

LEASEHOLD INSURANCE coverage for a tenant with a
favorable lease (enabling the lessee to rent premises for less than
the market value). If the lease is canceled by the lessor because an
insured peril
 Page 271
(such as fire) strikes, the lessee is indemnified for the loss incurred.
The premise is that the lessee will have to forgo earnings derived
from having an advantageous lease, and should be indemnified for
this incurred loss.
LEASEHOLD PROFIT INTEREST difference between the rent
received by a lessee for the subletting property and the rent the
lessee pays the lessor.
LEASEHOLD VALUE INTEREST difference between the rent
paid by a lessee as fixed by a lease prior to destruction of property
and the rent received by the lessor after that property has been
restored.
LEDGER COST see LIFE INSURANCE COST.
LEGACY SALE utilization of life insurance to make annual gifts
into a trust in order to produce the largest tax-free death benefit
possible to the trust beneficiaries.
LEGAL see LEGAL PURPOSE; LEGAL RESERVE; LIABILITY, LEGAL.
LEGAL EXPENSE INSURANCE prepaid legal insurance
coverage plan sold on a group basis. Entitles a group member to a
schedule of benefits, at a stipulated premium, for adoptions,
probates, divorces, and other legal services. This emerging
employee benefit has had wide acceptance in some localities but
limited acceptance elsewhere. After scheduled benefits have been
exhausted, subsequent legal fees are usually based on the attorney's
customary rate. For example, a prepaid legal insurance plan may
provide only three legal consultations a year.
LEGAL LIABILITY see LIABILITY, LEGAL.
LEGAL LIABILITY INSURANCE POLICY see LIABILITY INSURANCE.
LEGAL PLAN group arrangement in which a network of attorneys
provides legal services to the participants in the plan with the
attorney fees being reimbursed by the provider. The attorneys who
are members of the network provide their legal services at a
reduced rate from their customary fee to the plan participants. Most
legal plans are voluntary on the part of the employees with the
employees paying their entire cost through PAYROLL DEDUCTION INSURANCE.
There are two main types of group legal plans:
1. Access plansparticipants in the plan receive legal advice for such
matters as simple wills, and demand letters plus other legal advice
over the telephone.
2. Comprehensive plansparticipants in the plan receive legal advice
through office and telephone consultations for such concerns as
wills, trusts, bankruptcy, civil litigation, real estate transactions,
and other general legal planning.
 Page 272
LEGATEES individuals who inherit ASSETS as the result of being
named in a WILL.
LEMON AID INSURANCE property and casualty coverage that
indemnifies automobile dealers if a dissatisfied customer demands
a refund within the period of time allowed under the Uniform
Commercial Code. This insurance is not widely sold today because
of the increase in recalls of vehicles for inherent defects.
LENDER ESTATE V. COMMISSIONER legal decision wherein
proceeds of a life insurance policy on which the decedent's
corporation paid the premiums within three years of his or her
death are not includable in the decedent's gross estate, as affirmed
by the Tenth Circuit Court of Appeals.
LENDERS HOLDER-IN-DUE-COURSE INSURANCE coverage
that indemnifies a third party lender if a customer refuses to repay a
loan made on a faulty product and the dealer who arranged the loan
refuses to correct the fault. This coverage has gained new
importance as more customers are refusing to repay loans on
products with inherent defects.
LEVEL uniformity. See also COMMERCIAL HEALTH INSURANCE, LEVEL COMMISSION;
LEVEL PREMIUM INSURANCE; LEVEL TERM INSURANCE.

LEVEL COMMISSION compensation in which an insurance

agent's fee for the sale of a policy is the same year after year. Most
life insurance companies pay a high first year commission and
lower commissions in later years. This commission structure is
controversial since critics feel that it is heavily weighted towards
selling a product at the expense of subsequent service.
LEVEL PERCENTAGE OF COMPENSATION see DEFINED BENEFIT
PLAN.

LEVEL PREMIUM premium that remains unchanged over time,

regardless of any change in the nature of the risk.
LEVEL PREMIUM GROUP ANNUITY type of PREMIUM PLAN under
which the employer (if NONCONTRIBUTORY plan) or the employer and
employee (if CONTRIBUTORY plan) make level annual premium
payments to fund the future retirement benefits of the employee,
through a GROUP DEFERRED ANNUITY, plus a GROUP LIFE INSURANCE policy on the
employee, usually held in the trust.
LEVEL PREMIUM INSURANCE coverage in which premiums
do not increase or decrease for as long as the policy remains in
force. In the early years of a policy, the premiums are greater than
is necessary to pay mortality costs. The excess is used to build the
cash value and to provide for the increasing mortality costs later in
the life of the policy.
LEVEL PREMIUM RENEWABLE TERM HEALTH
INSURANCE see COMMERCIAL HEALTH INSURANCE.
 Page 273
LEVEL TERM INSURANCE coverage in which the face amount
of a policy remains uniform, neither increasing nor decreasing for
as long as the policy is in force.
LEVERAGED SPLIT DOLLAR LIFE INSURANCE modified
collateral SPLIT DOLLAR LIFE INSURANCE plan under which the employee
purchases and owns a life insurance policy on the employee's own
life. The employer makes the unscheduled premium payments on
the policy. The employee makes a collateral assignment of the
policy to the employer, which acts as security for the unscheduled
premiums paid by the employer. Upon this assignment, the life
insurance company that issued the policy lends the employer the
amount of the unscheduled premium payment; interest paid the
insurance company by the employer for the loan is tax-deductible
to the employer. Part of this interest paid by the employer is
credited to the cash value of the policy by the insurance company.
During this period of time, the employer is also making the
scheduled premium payments due on this policy (at least seven
annual premium payments must be made if the policy is to retain
its tax-advantaged status). The scheduled premium payments are
taxed as ordinary current income to the employee. When the
employee retires, the split dollar plan is terminated and all of the
unscheduled premium payments made by the employer are repaid
to the employer, either through loans on the cash value of the
policy or through cash withdrawals from the policy. With the
repaid premiums amount, the employer then repays the insurance
company for the previous loans made to pay the unscheduled
premium payments. The repaid loan amount is credited to the cash
value of the policy by the insurance company. From the
reconstituted cash values, the employee then borrows a series of
annual income payments based on the employee's life expectancy.
When the employee dies, the DEATH BENEFIT from the policy repays the
amount owed the insurance company for the loans from the cash
value made to fund the retirement income of the employee. The
excess amount (if any) of the death benefit minus the policy loan
repayment is paid to the BENEFICIARY(S) of the employee.
LIABILITIES: LIFE INSURANCE COMPANIES future benefits
to be paid to the policyholders and beneficiaries, assigned
surpluses, and miscellaneous debts. These primary liabilities take
the form of reserves, which must be listed on the company's
balance sheet as part of the liabilities section. The valuation of a
company's reserves, which guarantee that funds will be available to
meet its liabilities, is strictly regulated by the state insurance
departments. Life insurance company liabilities also include cash
surrender values of its policies and annuities.
LIABILITY legal obligation to perform or not perform specified
act(s). In insurance the concern is with the circumstance in which
(1) one party's property is damaged or destroyed, or (2) that party
incurs bodily injury as the result of the negligent acts or omissions
of another
 Page 274
party. Liability insurance is designed to provide coverage for
exposure on either a business or a personal basis. See also BUSINESS
LIABILITY INSURANCE; COMPREHENSIVE PERSONAL LIABILITY INSURANCE; LIABILITY, PERSONAL

EXPOSURES.

LIABILITY, ABSOLUTE see ABSOLUTE LIABILITY.

LIABILITY, BUSINESS EXPOSURES negligent acts or
omissions that result in actual or imagined bodily injury and/or
property damage to a third party, who brings suit against a business
firm and its representatives.
LIABILITY, CIVIL alleged torts or breaches of contract, but not
crimes. Action is brought by one individual against another at the
litigant's own expense, within the statute of limitations. The losing
party must pay any judgment plus court expenses. Casualty
insurance provides coverage for an insured in a civil liability suit
for alleged negligent acts or omissions, even if the suit is without
foundation.
LIABILITY, CIVIL DAMAGES AWARDED three types of
damages can be awarded to a plaintiff:
1. Special Damagesreimbursement for out-of-pocket expenses,
including medical bills, legal charges, cost of repairing damaged or
destroyed property, and loss of current and projected income.
2. General Damagesreimbursement for damages that do not readily
lend themselves to quantitative measurement, commonly known as
''pain and suffering."
3. Punitive Damagesreimbursement for damages due to gross
negligence by a defendant.
LIABILITY CLAIM see CLAIMS MADE BASIS LIABILITY COVERAGE; CLAIMS OCCURRENCE
BASIS LIABILITY COVERAGE.

LIABILITY, CONTINGENT see CONTINGENT LIABILITY (VICARIOUS LIABILITY).

LIABILITY, CONTRACTUAL see CONTRACTUAL LIABILITY.
LIABILITY, CRIMINAL wrong against the government or society
as a whole. An individual representing the state (usually the district
attorney) brings an action on behalf of the state against an
individual(s) or entity who has broken a criminal (non-civil) law.
Insurance is not designed to cover criminal liability; to do so would
encourage criminal behavior.
LIABILITY INSURANCE coverage for all sums that the insured
becomes legally obligated to pay because of bodily injury or
property damage, and sometimes other wrongs to which an
insurance policy applies. Personal liability policies include
COMPREHENSIVE PERSONAL LIABILITY (CPL), HOMEOWNERS INSURANCE POLICY, PERSONAL AUTOMOBILE

, Personal Umbrella Liability, and the Uninsured Motorist

POLICY (PAP)

Endorsement. Business liability policies include BUSINESS AUTOMOBILE

 Page 275
, Completed Operations and Products
POLICY (BAP), BUSINESSOWNERS POLICY

Liability, COMMERCIAL GENERAL LIABILITY INSURANCE (CGPL), Employers Liability

and Workers Compensation, MANUFACTURERS AND CONTRACTORS LIABILITY (M&C),
OWNERS, LANDLORDS AND TENANTS LIABILITY INSURANCE POLICY (OL&T), Physicians,

Surgeons and Dentists Professional Liability, STOREKEEPERS LIABILITY

INSURANCE, Umbrella Liability Policy, and the Uninsured Motorists

Coverage.
LIABILITY INSURANCE, BODILY INJURY see LIABILITY INSURANCE.
LIABILITY INSURANCE, COMPREHENSIVE GENERAL see
COMMERCIAL GENERAL LIABILITY INSURANCE (CGL).

LIABILITY INSURANCE, COMPREHENSIVE PERSONAL see

COMPREHENSIVE PERSONAL LIABILITY INSURANCE; HOMEOWNERS INSURANCE POLICY; PERSONAL

AUTOMOBILE POLICY (PAP); PERSONAL UMBRELLA LIABILITY; UNINSURED MOTORIST ENDORSEMENT.

LIABILITY INSURANCE, ELEVATOR see ELEVATOR LIABILITY INSURANCE.

LIABILITY INSURANCE, EMPLOYERS see BUSINESS AUTOMOBILE
POLICY (BAP); BUSINESS OWNERS POLICY (BOP); BUSINESS PROPERTY AND LIABILITY INSURANCE PACKAGE;

EMPLOYERS CONTINGENT INSURANCE COVERAGE; WORKERS COMPENSATION, COVERAGE B.

LIABILITY INSURANCE, OWNERS, LANDLORDS, AND

TENANTS see OWNERS, LANDLORDS, AND TENANTS LIABILITY POLICY.
LIABILITY INSURANCE, PHYSICIANS AND SURGEONS see
PHYSICIANS, SURGEONS, AND DENTISTS INSURANCE.

LIABILITY INSURANCE, PRODUCTS see PRODUCT LIABILITY INSURANCE;

PRODUCT RECALL INSURANCE; PRODUCTS AND COMPLETED OPERATIONS INSURANCE.

LIABILITY INSURANCE, PROPERTY DAMAGE see PROPERTY

DAMAGE LIABILITY INSURANCE.
LIABILITY INSURANCE, PROTECTIVE see OWNERS AND CONTRACTORS
PROTECTIVE LIABILITY INSURANCE.

LIABILITY INSURANCE, PUBLIC see PUBLIC LIABILITY INSURANCE.

LIABILITY, LEGAL obligations and responsibilities subject to
evaluation, interpretation, and enforcement in a court of law.
Casualty insurance provides coverage for an insured against a civil
legal liability suit, not criminal legal liability, intentional torts, or
liability for breach of contract. See also LIABILITY, CIVIL; LIABILITY, CIVIL
DAMAGES AWARDED.

LIABILITY: LIMITATIONS ON INSURERS exceptions to

coverage. There is no obligation for an insurance company to pay a
claim if:
1. the loss is not covered by a policy, or a particular person is not
included in the definition of the insured.
 Page 276
2. the loss takes place outside the territorial coverage of the policy.
For example, there is no coverage under the PERSONAL AUTOMOBILE POLICY
(PAP) outside the United States and Canada.

3. the loss takes place after the policy has expired.

4. the insured involved in the loss was in violation of public law;
for example, an insured's car that is damaged as the result of his
transporting drugs.
5. the insured is in violation of contract law.
6. the limit of coverage under the policy is not sufficient to cover a
loss.
LIABILITY LIMITS maximum amount of coverage available
under a liability insurance policy. See also AGGREGATE LIMIT; BASIC LIMITS OF
LIABILITY; BUSINESS LIABILITY INSURANCE (Insuring Agreements section); LIABILITY:

LIMITATIONS ON INSURERS; LOSS.

LIABILITY, NO-FAULT INSURANCE see NO-FAULT AUTOMOBILE

INSURANCE.

LIABILITY, PERSONAL EXPOSURES acts or omissions that

result in suits against an individual and/or residents of the
individual's household for actual or imagined bodily injury and/or
property damage to a third party. Exposures include:
1. ownership, use, and possession of property concerning: (a)
trespassthe obligation is not to render property safe for a trespasser,
but one cannot create a death trap or maintain an attractive
nuisance, such as a swimming pool, without proper safeguards; (b)
licenseethe obligation is not to render property safe for a licensee
but to provide adequate warning of any hidden dangers such as
quicksand at the side of an approach road; (c) invitation the
obligation is to render the property safe for an invitee's visit. For
example, if someone trips on a throw rug, the owner or occupier of
the premises can be held liable.
2. ownership, use, and possession of a motorized vehicle on or off
premises.
3. involvement in sports.
4. actions of pets.
LIABILITY, PROFESSIONAL liability created when an individual
who offers services to the general public claims expertise in a
particular area greater than the ordinary layman. Today, suits are
frequently brought alleging that a professional, such as a physician,
attorney, or CPA, has committed negligent acts or omissions in
performing the purchased service. For some professions, such as
medical specialties, it has become impossible to purchase
professional liability insurance at a reasonable price. Premiums
have become prohibitive because of the frequency and severity of
both reasonable and unreasonable professional liability suits.
LIABILITY, PRO RATA see PRO RATA LIABILITY CLAUSE.
 Page 277
LIABILITY RISK see LIABILITY, BUSINESS EXPOSURES; LIABILITY, PERSONAL EXPOSURES.
LIABILITY, STRICT see STRICT LIABILITY.
LIABILITY, VICARIOUS see CONTINGENT LIABILITY (VICARIOUS LIABILITY).
LIABILITY WITHOUT REGARD TO FAULT see ABSOLUTE LIABILITY;
STRICT LIABILITY.

LIBEL see TORT, INTENTIONAL.

LIBEL INSURANCE coverage for an insured in the event that he
writes and publishes libelous statements and the injured party
brings suit against the insured.
LIBERALIZATION CLAUSE in PROPERTY INSURANCE policy, clause that
stipulates that if legislative acts or acts of the insurance
commissioner's office expand the coverage of an insurance policy
or endorsement forms without requiring an additional premium,
then all similar insurance policies and endorsement forms will
automatically have such expanded coverage.
LICENSE in insurance, legal authority obtained by an insurance
company, agent, broker, or consultant that permits them to do
business in a particular state. The document issued by the state
shows that the company or person is in compliance with the
various governing laws and thus is authorized to conduct insurance
business in that jurisdiction. A license, in and of itself, is not a
guarantee that a consumer will be sold the best product to fit his or
her needs or that an agent will have the proper technical expertise
to evaluate the products on a consumer's behalf.
LICENSE, AGENTS see LICENSING OF AGENTS AND BROKERS.
LICENSE BOND instrument that guarantees compliance with
various city, county, and state laws that govern the issuance of a
particular license to conduct business.
LICENSED CARRIER insurance company that is organized under
the state laws by which the company is licensed and that is called a
DOMESTIC INSURER. Also, this insurance company may be chartered and

licensed in another state or country and has obtained a license to

conduct business in that particular state.
LICENSEE individual permitted to enter property with the
permission of the owner or the person who controls the property.
There is no mutual profit motive; the licensee comes onto the
property for his or her sole benefit. For example, the owner of land
gives an individual permission to hunt on the property but does not
charge a fee. The owner must warn the licensee of any hidden
dangers on the property of which he or she is aware.
 Page 278
LICENSE FEE sum paid by an insurance company or other firms
or individuals to designated types of business in a particular state
or municipality.
LICENSING OF AGENTS AND BROKERS legal authority
granting individuals the right to conduct insurance business in a
particular state. In many states, agents and brokers must pass a
written exam as a prerequisite to being licensed. In others, a
professional designation such as the CLU or CPCU can be
substituted for the examination requirement. The caliber of
examinations varies from state to state. A license is usually issued
for one or two year periods, and then must be renewed.
LIEN action brought by a worker or creditor for failure to receive
payment for labor and material provided. Property insurance is
available for individuals with an insurable interest in property
against which they may bring a lien.
LIFE AND HEALTH, BUSINESS EXPOSURES loss of a key
person due to death, disability, sickness, resignation, incarceration,
or retirement. Because of the expertise of such an individual, there
could be a loss of income, market share, research and development
advantage, and line of credit by the firm. Also, there are extra
expenses associated with training a replacement for a key person.
Coverage for many of these exposures is available under key
person life and health insurance. See also BUY AND SELL AGREEMENT.
LIFE AND HEALTH INSURANCE PARTNERSHIP see PARTNERSHIP,
LIFE AND HEALTH INSURANCE.

LIFE AND HEALTH INSURANCE, PERSONAL AND FAMILY

EXPOSURES personal and family loss by death, disability,
sickness, old age, accident, and unemployment. All of these
exposures are insurable, and coverages can be purchased under a
variety of policies. In life insurance these include ADJUSTABLE LIFE, CURRENT
ASSUMPTION, ENDOWMENT, FAMILY INCOME POLICIES, FAMILY MAINTENANCE POLICIES, FAMILY POLICY,

, and VARIABLE LIFE. In annuities, both

LIMITED PAYMENT LIFE, TERM LIFE, UNIVERSAL LIFE

fixed and variable types are available; in health insurance, medical

expense and disability income coverages are available. In pensions,
there are DEFINED BENEFIT and DEFINED CONTRIBUTION PENSION plans. The various
Social Security benefits also provide considerable protection
against personal and family exposures.
LIFE ANNUITY see ANNUITY.
LIFE ANNUITY CERTAIN ANNUITY guaranteeing a given number of
income payments whether or not the annuitant is alive to receive
them. If the annuitant is living after the guaranteed number of
payments have been made, the income continues for life. If the
annuitant dies within the guarantee period, the balance is paid to a
beneficiary. For example, under one common contract, a life
annuity certain for 10 years, income payments are guaranteed for a
minimum of 10 years. If the annuitant
 Page 279
dies after receiving two years of payments, the beneficiary would
receive the remaining eight years of income. An annuitant who
lives out the 10 years would receive income payments for life, but
there would be none available to a beneficiary.
LIFE ANNUITY CERTAIN AND CONTINUOUS see LIFE ANNUITY
CERTAIN.

LIFE ANNUITY DUE see ANNUITY DUE.

LIFE CARE COMMUNITIES facilities for senior adults who pay
an entrance fee to move into the facility as well as a monthly fee.
The adults receive, in return, a place to live and long-term care
usually for the adult's life. Questions to be asked before joining a
community include:
1. Who sponsors the community?
2. What is the financial condition of the community?
3. Is the community accredited?
4. Who are the trustees?
5. Does the community provide educational and recreational
opportunities?
6. May the residents of the community have visitors and pets and
under what circumstances?
7. Who makes the rules for the community and to what extent are
the members allowed to contribute?
8. What legal rights do the members have to the assets of the
community?
LIFE ESTATE see ESTATE PLANNING DISTRIBUTION.
LIFE EXPECTANCY probability of one's living to a specific age
according to a particular mortality table. Life expectancy is the
beginning point in calculating the pure cost of life insurance and
annuities and is reflected in what is known as the BASIC PREMIUM. The
probability of living longer has continued to increase in the U.S.,
and thus the pure cost of insurance continues to decrease. This is
reflected in a declining premium rate. Increasing life expectancy is
critical to the cash value projection in CURRENT ASSUMPTIONS life insurance
products, such as universal life insurance and variable life
insurance.
LIFE EXPECTANCY TERM INSURANCE type of TERM LIFE INSURANCE
policy that has a FACE AMOUNT that increases to a predetermined sum
and then decreases to zero at the termination point of the policy,
while at the same time generating a CASH VALUE. The number of years
that the term policy will be in force is determined by the average
LIFE EXPECTANCY for the age and sex classification in which the

prospective insured falls.

LIFE INCOME annuity payments that continue for the life of the
annuitant. See also ANNUITY.
 Page 280
LIFE INCOME POLICY policy that has many similar
characteristics to that of the SURVIVORSHIP ANNUITY in that the ANNUITANT
receives a predetermined monthly income benefit for life upon the
death of the INSURED. The annuitant's LIFE EXPECTANCY as well as the
insured's life expectancy must be taken into consideration when
determining the premium; thus, the annuitant cannot be changed
after having been selected. The essential difference between this
policy and the survivorship annuity is that under this policy a
minimum number of payments are guaranteed to be paid after the
insured's death, regardless of whether or not the annuitant is alive
to receive them. If the annuitant does not survive the guarantee
period (PERIOD CERTAIN), a contingent annuitant will receive the
remaining guaranteed monthly income payments.
LIFE INCOME WITH PERIOD CERTAIN annuity payments that
continue for the life of the annuitant; should the annuitant not
survive a stated period, the payments are then made to a
beneficiary until the stated period ends.
LIFE INSURANCE protection against the death of an individual in
the form of payment to a beneficiaryusually a family member,
business, or institution. In exchange for a series of premium
payments or a single premium payment, upon the death of an
insured, the face value (and any additional coverage attached to a
policy), minus outstanding policy loans and interest, is paid to the
beneficiary. Living benefits may be available for the insured in the
form of surrender values or income payments. See also ADJUSTABLE LIFE
INSURANCE; ENDOWMENT INSURANCE; FAMILY INCOME POLICY; FAMILY INCOME RIDER; FAMILY

MAINTENANCE INSURANCE; LIMITED PAYMENT LIFE INSURANCE; ORDINARY LIFE INSURANCE; TERM

INSURANCE; UNIVERSAL LIFE INSURANCE; VARIABLE LIFE INSURANCE.

LIFE INSURANCE, ASSIGNMENT CLAUSE see ASSIGNMENT CLAUSE,
LIFE INSURANCE.

LIFE INSURANCE, BUSINESS USES see BUSINESS LIFE AND HEALTH

INSURANCE.

LIFE INSURANCE CONTRACT see INSURANCE CONTRACT, LIFE.

LIFE INSURANCE COST amount paid to an insurer.
Determination of the actual cost (not the price paid) of a life
insurance policy has been widely discussed for many years in life
insurance and consumer circles. The traditional or net cost method
(that adds a policy's premiums, and subtracts dividends, if any, and
cash value) does not consider the TIME VALUE OF MONEY. The LINTON YIELD
METHOD, a theoretical approach, attempted to remedy this by

comparing a cash value policy with a combination of decreasing

term insurance and the yield of a side fund of bonds and other
investments. Other methods have been proposed. At present many
states require prospective insureds to be given INTEREST-ADJUSTED COST
figures that do take into consideration the time value of money.
This method is not altogether practical for
 Page 281
, but it is generally felt that present work toward
INTEREST SENSITIVE POLICIES

a new approach will eventually result in a useful means of

comparing the costs of these policies.
LIFE INSURANCE, CREDITOR RIGHTS protection given to life
insurance beneficiaries by state laws, under which the benefits of a
life insurance policy usually cannot be attached by creditors of an
insured and/or beneficiary. These laws are based on philosophical
concerns dating back to the founding of the U.S., and the
Homestead Laws that a widow and children should not be made to
pay for the financial sins of the father.
LIFE INSURANCE, FAMILY PROTECTION see FAMILY INCOME POLICY;
FAMILY INCOME RIDER; FAMILY MAINTENANCE POLICY; FAMILY POLICY.

LIFE INSURANCE ILLUSTRATION QUESTIONNAIRE form

whose purpose it is to help the agent and the prospective
policyowner judge the validity of the insurance company's policy
illustrations. This questionnaire's focus is on the nonguaranteed
elements of the policy and how these nonguaranteed elements
compare with the company's current experience. Some of the
questions this questionnaire seeks to answer include:
1. To what degree are the mortality rates in the illustration
reflective of the true mortality rates that the company is currently
experiencing?
2. To what degree are the interest rates in the illustration reflective
of the true interest rates that the company is currently
experiencing? Upon what is the interest rate to be based (new
money or portfolio average)?
3. To what degree are the expense charges in the illustration
reflective of the true expense charges that the company is currently
experiencing? Are these expense charges significantly understated
in the illustration?
4. To what degree are the persistency rates in the illustration
reflective of the true persistency rates that the company is currently
experiencing? Are these persistency rates significantly understated
in the illustration, thereby increasing policy cash value?
LIFE INSURANCE ILLUSTRATIONS MODEL REGULATION
regulation set forth by the NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)
to govern life insurance sales illustrations. Includes the following
major provisions:
1. POLICYOWNER must be provided an annual report of the policy status
if illustrations were used in conjunction with selling the policy.
2. An agent must sign the illustrations with copies furnished to the
insurance company and the policyowner.
3. The COMMISSIONER OF INSURANCE must be notified by the insurance
company if a policy is to be sold with or without illustrations.
 Page 282
4. Illustrations' nonguaranteed elements cannot be more favorable
than the lesser of the currently payable scale or the disciplined
current scale as defined by law.
5. Specific format guidelines must be followed by the illustrations.
6. Illustrations must contain a narrative summary and a numerical
table, as well as tabular details.
7. The regulation applies to all individual life, group life, and
certificate life policies with the exceptions of individual and group
annuities, variable life, credit life, and those life policies whose
death benefits are less than $10,000.
8. The board of directors of the insurance company is required to
appoint an illustration actuary who must certify on an annual basis
that the illustrations meet the requirements of the regulation.
LIFE INSURANCE IN FORCE aggregate of face amount of
coverage paid up, or on which premiums are still being paid, as
issued by a life insurance company. This is one measure used to
rank life insurance companies by size.
LIFE INSURANCE, INDUSTRIAL see INDUSTRIAL LIFE INSURANCE.
LIFE INSURANCE, LEGAL RESERVE see LEGAL RESERVE LIFE INSURANCE
COMPANY.

LIFE INSURANCE: LIFE RISK see HUMAN LIFE VALUE APPROACH (EVOIL); NEEDS
APPROACH.

LIFE INSURANCE, LIMITED PAYMENT see LIMITED PAYMENT LIFE

INSURANCE.

LIFE INSURANCE LIMITS see FACE AMOUNT (FACE OF POLICY); RENEWABLE TERM
LIFE INSURANCE.

LIFE INSURANCE, LIVING BENEFITS see LIVING BENEFITS OF LIFE

INSURANCE.

LIFE INSURANCE MARKETING AND RESEARCH

ASSOCIATION (LIMRA) organization that conducts research on
distribution systems for the life and health insurance products on
behalf of its member companies. Studies range from consumer
attitudes towards the life insurance product to reasons for turnover
of the agency field force. Headquarters in Hartford, Connecticut.
LIFE INSURANCE, ORDINARY see ORDINARY LIFE INSURANCE.
LIFE INSURANCE POLICIES PROVIDING FAMILY
PROTECTION coverage giving income benefits to surviving
family member(s) if one member should die. These include the
FAMILY INCOME POLICY, FAMILY INCOME RIDER, FAMILY MAINTENANCE POLICY, and the FAMILY

POLICY.

LIFE INSURANCE POUR-OVER TRUST ASSETS from a WILL

transfer into an established LIFE INSURANCE TRUST. Through this
mechanism, assets that have been probated are transferred into a
LIVING TRUST.
 Page 283
LIFE INSURANCE PROGRAMMING process used to determine
the amount of life insurance required on the life of the prospective
insured. The process involves an analysis of the prospective
insured's current financial condition (income, expenses, liquid and
nonliquid assets, liabilities, savings, and investments), the financial
objectives of the POLICYOWNER, the development and installation of a
plan designed to achieve these objectives, and the periodic
monitoring of the plan to determine the extent to which the plan is
achieving the objectives. See also ESTATE PLANNING; ESTATE PLANNING DISTRIBUTION;
HUMAN LIFE VALUE APPROACH (ECONOMIC VALUE OF AN INDIVIDUAL LIFE [EVOIL]).

LIFE INSURANCE RENEWABILITY see RENEWABLE TERM LIFE INSURANCE.

LIFE INSURANCE RESERVES see FULL PRELIMINARY TERM RESERVE PLAN;
PROSPECTIVE RESERVE; RETROSPECTIVE METHOD RESERVE COMPUTATION.

LIFE INSURANCE SETTLEMENT OPTIONS see OPTIONAL MODESOF

SETTLEMENT.

LIFE INSURANCE, STRAIGHT see ORDINARY LIFE INSURANCE.

LIFE INSURANCE, TERM see TERM LIFE INSURANCE.
LIFE INSURANCE TRUST agreement establishing a trust for the
named beneficiary under a life insurance policy. Upon the death of
the insured, the trust has the legal obligation to pay the policy
proceeds in the manner stipulated in the trust agreement.
LIFE INSURANCE, WHOLE LIFE see ORDINARY LIFE INSURANCE.
LIFE INSURERS CONFERENCE (LIC) organization of home
service debit life insurance companies and combination companies.
See also COMBINATION AGENT; DEBIT INSURANCE (HOME SERVICE INSURANCE, INDUSTRIAL
INSURANCE).
LIFE MANAGEMENT INSTITUTE unit of the LIFE OFFICE MANAGEMENT
ASSOCIATION (LOMA), which prepares and administers educational

materials for the Fellow Life Management Institute (FLMI)

Program. Upon successful completion of its examinations, the
student receives the FLMI designation.
LIFE OFFICE MANAGEMENT ASSOCIATION (LOMA)
organization that develops and administers educational materials
and examinations for the life insurance industry. It awards the
FELLOW, LIFE MANAGEMENT INSTITUTE (FLMI) designation to individuals who pass a

series of 10 national life and health insurance examinations on

insurance, accounting, marketing, information systems, finance,
law, management, and computers.
LIFE PAID UP AT SPECIFIED AGE see LIMITED PAYMENT LIFE INSURANCE.
 Page 284
LIFE PLANNING see ESTATE PLANNING; ESTATE PLANNING DISTRIBUTION: HUMAN LIFE
VALUE APPROACH (ECONOMIC VALUE OF AN INDIVIDUAL LIFE) (EVOIL).

LIFE REINSURANCE system whereby a life insurance company

(the reinsured) reduces its possible maximum loss on either an
individual life insurance policy (FACULTATIVE REINSURANCE) or a large
number of life insurance policies (AUTOMATIC REINSURANCE) by giving
(ceding) a portion of its liability to another insurance company (the
reinsurer). See also REINSURANCE.
LIFE RISK FACTORS information needed for underwriting a life
insurance policy, such as an applicant's age, weight, height, and
build; personal and family health record; occupation; and personal
habits. These factors decide into which rate classification to place
the applicant since they determine to a significant degree the
probability of an applicant's length of life.
LIFE TABLE see MORBIDITY TABLE; MORTALITY TABLE.
LIFETIME DISABILITY BENEFIT provision in some disability
income policies that provides a monthly income benefit to a
disabled insured for as long as he or she remains disabled
according to the definition of disability in the policy. See also
DISABILITY INCOME INSURANCE.

LIFETIME POLICY see LIFETIME DISABILITY BENEFIT.

LIFE UNDERWRITER life insurance agent.
LIFE UNDERWRITER POLITICAL ACTION COMMITTEE
(LUPAC) affiliate of the NATIONAL ASSOCIATION OF LIFE UNDERWRITERS (NALU) that
supports legislators in the interest of the insurance agents. One
becomes a member of LUPAC through a monetary contribution.
LIFE UNDERWRITING TRAINING COUNCIL (LUTC)
organization that develops and administers educational materials
and examinations for life insurance agents. A significant objective
of the courses is sales technique.
LIGHTNING discharge of electricity from the atmosphere, one of
the perils covered in most fire insurance policies.
LIMIT, AGGREGATE see AGGREGATE LIMIT.
LIMIT, ANNUAL AGGREGATE see ANNUAL AGGREGATE LIMIT.
LIMITATIONS exceptions and limitations of coverage; that is, the
maximum amount of insurance coverage available under a policy.
See also COINSURANCE.
LIMITATIONS ON AMOUNT OF MONTHLY BENEFITS clause
in some DISABILITY INCOME INSURANCE policies under which there is a
maximum an insured can receive from all sources of disability
income benefits. For example, the clause may stipulate that all
sources of
 Page 285
disability income cannot exceed 50% of the insured's gross
earnings prior to the disability.
LIMITATIONS ON INSURERS LIABILITY see LIABILITY: LIMITATIONS ON
INSURERS.

LIMIT, BASIC see BASIC LIMITS OF LIABILITY.

LIMIT, BLANKET see BLANKET LIMIT.
LIMIT, DIVIDED see SPLIT LIMIT.
LIMITED LIABILITY COMPANY (LLC) company in which
shareholders limit their liability exposure to their percentage of
ownership or equity interest in the company. Shareholders' personal
assets are protected in the event of business-related lawsuits. The
tax situation for this type of company is much like that of the
partnership in that it acts as a pass-through tax entity. A tax return
for a partnership is filed with the IRS for information purposes
only. All income and expenses are attributed to the stockholders of
the LLC. According to the LLC agreement, the stockholders can
allocate income and its resultant tax liability the same way as
partners in a partnership.
The LLC has advantages over the subchapter ''S" corporation to
include the following: (1) LLC has no restriction on number of
persons who may be stockholders; "S" corporations are limited to
35 stockholders; (2) LLC may have multiple classes of stock; an
"S" corporation can have only one issue of stock; and (3) LLC may
own subsidiaries; an "S" corporation cannot own subsidiaries.
LIMITED PAYMENT LIFE INSURANCE type of policy with
premiums that are fully paid up within a stated period. For
example, a 20-payment life insurance policy has 20 annual
premium payments, with no further premiums to be paid.
LIMITED POLICY type of health insurance providing benefits for
only a particular peril, such as cancer.
LIMITED POLLUTION LIABILITY COVERAGE FORM
commercial liability insurance form providing coverage for an
insured business in the event of a pollution liability suit. The
insurance provides CLAIMS MADE BASIS LIABILITY COVERAGE. Excluded from
coverage are cleanup costs.
LIMIT, EXCESS see EXCESS LIMIT.
LIMIT, LINE see LINE LIMIT.
LIMIT OF LIABILITY see LIABILITY; LIMITATIONS ON INSURERS.
LIMIT OF RECOVERY see COINSURANCE.
LIMIT, PER ACCIDENT see PER ACCIDENT LIMIT.
LIMIT, PER PERSON maximum amount under a liability policy
that insurance company will pay for bodily injury incurred by any
one person in any one accident.
 Page 286
LIMIT, POLICY see LIMITATIONS.
LIMITS see LIABILITY; LIMITATIONS ON INSURERS; COINSURANCE.
LIMIT, SCHEDULED see SCHEDULED LIMIT.
LIMIT, SINGLE see SINGLE LIMIT.
LIMIT, SPECIFIC see SPECIFIC LIMIT.
LIMIT, STANDARD see BASIC LIMITS OF LIABILITY.
LIMITS UNDER MULTIPLE POLICY YEARS (LUMP) single
limit insurance program remaining in force for several years as
compared with traditional insurance programs where there is a
series of annual limits. The LUMP insurance program is most
effective in those instances where the statistical analysis shows
low-frequency, short-tail (length of time elapsed between the act
giving rise to the claim and when the claim is recognized or
reported to the insurance company) risks that have a potential for
catastrophic loss. LUMP insurance programs provide insurance
coverages for such exposures as marine liability, directors and
officers liability, general liability, and workers compensation.
LIMIT, VARIABLE see VARIABLE LIMIT.
LINE term used for a general class of insurance such as LIFE INSURANCE,
PROPERTY INSURANCE, or WORKERS COMPENSATION INSURANCE.

LINE CARD record of insurance policies sold to an individual.

LINE, GROSS see GROSS LINE.
LINE LIMIT maximum amount of a specified type of insurance
coverage, according to underwriting guidelines, that an insurance
company feels it can safely underwrite on a particular exposure
without having to acquire REINSURANCE for that exposure. See also LINE;
SURPLUS LINES; SURPLUS REINSURANCE.

LINE, NET see NET LINE.

LINE OF BUSINESS see LINE; LINES OF INSURANCE, MAJOR.
LINE OF CREDIT borrowing power that a business firm or an
individual has with a lending institution such as a bank.
LINES see SURPLUS LINES.
LINE SHEET amount of insurance coverage that an insurance
company is willing to write on a given category of business.
LINES OF INSURANCE, MAJOR five primary sectors of
insurance coverage. Their purposes are:
1. LIFE INSURANCEprovides income to a beneficiary in the event of the
death of the insured.
 Page 287
2. HEALTH INSURANCEprovides two types of coverage: (a) Medical
Expense, which indemnifies an insured for hospital, physician, and
related expenses; (b) Disability Income, which provides a source of
income for an insured in the event of partial or total disability. It is
generally felt that this source of income should approximate at least
50% of earnings prior to a disability.
3. ANNUITYprovides monthly income to an annuitant for life.
4. PROPERTY INSURANCEindemnifies an insured for damages or destruction
of property.
5. LIABILITY INSURANCEcovers damages on behalf of an insured who
becomes legally obligated to pay because of actual (or alleged)
negligent acts and omissions.
LINTON YIELD METHOD interest adjusted method that
measures the cost of life insurance. Named for the late
distinguished actuary M. Albert Linton. This method compares a
whole life policy with a combination of a decreasing term policy
and a side fund. The rate of return of the side fund is called the
Linton Yield, in that it brings the side fund up to an amount equal
to the cash value of the whole life policy after a specified period of
time.
LIQUIDATION AND REHABILITATION taking over of an
insurance company's assets by the State Insurance Commissioner
when examination of the annual report reveals that the company is
in substantial financial difficulty. The State Insurance
Commissioner will then operate the company in what is deemed to
be the best interest of the policyowners, insureds, and creditors. If
the State Insurance Commissioner believes it is possible to save the
company, rehabilitation (reorganization of the company's structure)
may be ordered; if salvage is deemed impossible, liquidation may
be necessary.
LIQUIDATION CHARGE amount subtracted from an annuity or
from mutual fund proceeds payable to an annuity owner or mutual
fund owner to reflect expense fees described in the annuity contract
or mutual fund prospectus. This charge may be viewed as a penalty
for cashing in the annuity or mutual fund early. This fee is meant to
dis-courage early withdrawal of funds and/or to enable the
company to recoup its expenses associated with marketing,
administering, and liquidating the product.
LIQUIDATION PERIOD time frame during which an annuitant
receives income payments from the insurance company, usually on
a monthly basis. The obligations of the company to the annuitant
during the liquidation period depend on whether it is a pure or
refund annuity. For the PURE ANNUITY, all payments cease upon the
death of the annuitant. For the REFUND ANNUITY, a beneficiary is usually
entitled to payments upon the death of the annuitant.
LIQUIDITY see LIQUIDITY OF ASSETS.
 Page 288
LIQUIDITY OF ASSETS financial holdings that can be converted
into cash in a timely manner without the loss of principal, such as
U.S. Treasury Bills. Liquidity of assets is one of the most important
principles of investment strategies, especially the first layer of an
investment portfolio. Life insurance is generally placed in this first
layer because of its cash value. The owner has complete liquidity
since it can be used as collateral for a loan a any time.
LIQUOR LIABILITY LAWS legislation that makes an
establishment and/or individual selling liquor responsible for
injuries caused by its customers to third parties. The best known
law governing dispensation of liquor on premises is the DRAM SHOP LAW.
For example, an individual is served liquor at an establishment and
becomes intoxicated. On his way home he or she causes an
accident, injuring another party. The injured third party can bring a
liability suit against the establishment that dispensed the liquor for
injuries suffered.
LIVE ANIMAL INSURANCE coverage under the Commercial
Property Floater for loss under two forms: LIVESTOCK MORTALITY LIFE
INSURANCE and LIVESTOCK FLOATER. This is really life insurance coverage for

livestock.
LIVESTOCK FLOATER standard Commercial Property Floater
form covering death or damage to livestock as the result of insured
perils such as fire, lightning, explosion, smoke, wind, hail, aircraft,
earthquake, theft, flood, collapse of bridges, collision, or overturn
of a vehicle used in transporting the livestock from the point of
destination. Some insurance companies also cover attacks by
domestic or wild animals, drowning, and accidental shooting.
Common exclusions include illegal acts, confiscation by the order
of a government authority, loss due to quarantine, war, loss due to
sleet or snow, and loss due to the acceptance by the owner of a
check covered by insufficient funds.
LIVESTOCK INSURANCE coverage for designated horses and
other farm animals if they are damaged or destroyed. The insurance
includes registered cattle and herds, other farm livestock, and zoo
animals. This type of insurance protects the farmer or rancher
against the premature death of animals resulting from natural
causes, fire, lightning, accidents, and acts of God, acts of
individuals other than the owner or employees, and destruction for
humane purposes.
LIVESTOCK MORTALITY (LIFE) INSURANCE coverage that
provides a death benefit to the owner of a policy in the event of the
death of insured livestock.
LIVESTOCK TRANSIT INSURANCE coverage in event of
damage or destruction of animals that are being shipped.
LIVING still with life. This is a life insurance term used to
describe the living benefits available under a life insurance policy
such as a monthly retirement payment to an insured.
 Page 289
LIVING BENEFITS OF LIFE INSURANCE benefits provided to
and obtained by those insured, while still alive. They include the
ANNUITY, CASH SURRENDER VALUE, DISABILITY INCOME (DI), POLICY LOAN, and WAIVER OF PREMIUM

(WP).

LIVING DEATH BENEFITS early payout of anticipated death

benefits from a RIDER attached to an existing policy or from a
separate policy. The purpose is to allow the terminally ill insured
an additional source of finance to pay medical bills and/or nice-to-
have items. There are basically two methods for paying out these
benefits: (1) the policy-holder gains access to the benefits when the
policyholder contracts an illness that has been diagnosed as
terminal with a life expectancy usually of less than two years; (2)
the policyholder gains access to the benefits when the policyholder
is confined to a nursing home or a long-term care facility and can
be expected to remain in this facility until death. Generally, as long
as the POLICYHOLDER is expected to die within 12 months of the date of
the payment of the living death benefit, and that benefit is
discounted only by an amount that is consistent with a life
expectancy no greater than one year in duration, the beneficiary(s)
is not taxed on the life insurance proceeds.
LIVING TRUST see ESTATE PLANNING DISTRIBUTION.
LIVING WILL legal document that permits the individual to
declare his or her desires concerning the use of life-sustaining
treatment to be made at the point in time when death is imminent
and the individual no longer has control of his or her faculties. This
type of will has the advantages of ensuring that the individual's
wishes are followed to the conclusion and that a family member
does not have the burden of making extremely agonizing decisions
on behalf of the individual. It is the requirement of most state
statutes that such a will be signed, dated, and witnessed (excluding
anyone who has an interest in the estate of the individual affirming
the will). Also required by most state statutes is that the will
include both a statement of capacity and a statement of intent by
the individual. The following states have statutes addressing the
living will issue: Alabama, Arizona, Arkansas, California,
Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois,
Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Mississippi,
Missouri, Montana, Nevada, New Hampshire, New Mexico, North
Carolina, Oklahoma, Oregon, South Carolina, Tennessee, Texas,
Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin,
and Wyoming, as well as Washington, D.C. See also ESTATE PLANNING
DISTRIBUTION.

LLOYD'S ASSOCIATION organization following the format of

LLOYD'S OF LONDON.

LLOYD'S BROKER specialist whose task is to place insurance

with the specialized syndicates that underwrite particular risks at
LLOYD'S OF LONDON.
 Page 290
LLOYD'S OF LONDON insurance facility composed of many
different syndicates, each specializing in a particular risk; for
example, hull risks. Lloyd's provides coverage for primary jumbo
risks as well as offering REINSURANCE and RETROCESSIONS. Membership in a
syndicate is limited to individuals with a large personal net worth,
and each member may belong to one or more syndicates depending
upon his or her net worth. Although much of the publicity Lloyd's
receives involves insuring exotic risks such as an actress' legs, this
represents only a very small portion of its total business, most of
which involves reinsurance and retrocessions.
LLOYD'S REGISTER OF SHIPPING classification of ships
according to their construction material, age, physical condition,
propulsion type, stress tests of structure, and owners. Marine
insurance rates for a particular vessel are based on these
demographics. Lloyd's register is used worldwide by government
agencies and industry to track and identify vessels. In many
instances the country of registration is of strategic importance if a
vessel is exposed to attack, say, in the Middle East and in other
danger points in the world.
LLOYD'S SYNDICATE group of underwriters with LLOYD'S OF LONDON
who specialize in underwriting a particular risk such as hull
insurance.
LLOYD'S UNDERWRITER individual member of one of the
syndicates of LLOYD'S OF LONDON.
LOADING addition to the pure cost of insurance that reflects agent
commissions, premium taxes, administrative costs associated with
putting business on an insurance company's books, and
contingencies.
LOAN money that is lent. In life insurance, a loan can be taken
against the cash value of a life insurance policy at any time. The
policyholder does not have to repay the loan until the policy
matures or until the loan and any outstanding interest equals the
cash value.
LOAN RECEIPT acknowledgment by the POLICYOWNER that he or she
has received the POLICY LOAN requested.
LOAN VALUE amount that a policyowner can borrow from a cash
value of a permanent life insurance policy.
LOCAL AREA NETWORKS (LANs) systems composed of
personal computers linked by a file server. These computers share
software as well as databases that enable the risk manager access to
information in a quick and efficient manner. For example, in
Workers' Compensation claims the risk manager can quickly
analyze claims data and pinpoint the exact area of the company's
operations that is responsible for the most severe injuries incurred
by the workers.
LOCAL GOVERNMENT ENVIRONMENTAL ASSISTANCE
NETWORK (LGEAN) clearinghouse and forum of information
concerning the environment used by local governments. Included
in the
 Page 291
information are topics on drinking water systems, pesticide
management, public safety, solid waste management,
vehicle/equipment maintenance, wastewater collection and
treatment, and water resources management. Web site is
[Link]
LOCATION CARD insurance record showing the amount of
INSURANCE coverage placed on any one location.

LOCK-IN PRINCIPLE accounting rule found under the Generally

Accepted Accounting Principles (GAAP) that prohibits the
insurance company from restating assumptions that it made for
interest earned, expenses paid, and mortality charges for policies in
force.
LOCK-IN RATE commitment that a lending institution makes to
offer a loan at a stipulated interest rate at a predetermined future
time, usually limited to 90 days.
LODGE SYSTEM OF INSURANCE see FRATERNAL LIFE INSURANCE.
LONDON INSURANCE AND REINSURANCE MARKET
ASSOCIATION (LIRMA) association that represents reinsurance
companies as well as insurance companies that do not market MARINE
INSURANCE. LIRMA and the INSTITUTE OF LONDON UNDERWRITERS share the same

facility for processing policies and claims.

LONDON INSURANCE MARKET NETWORK (LIMNET)
computer system established by London trade associations for
processing insurance policies. The work of LIMNET involves the
notification and settlement of insurance policy claims.
LONGSHOREMEN AND HARBOR WORKERS ACT
LIABILITY coverage under the Workers Compensation Act for all
employees in the maritime industry who perform their function in
navigable U.S. waters, including dry docks, wharves, piers, and
other places for docking. Excluded are the master and crew of the
ship, and any individual involved in loading, unloading, or
repairing of a ship whose weight is less than 18 tons.
LONGSHOREMEN AND HARBOR WORKERS
ENDORSEMENT extension of a Workers Compensation and
Employers Liability Insurance policy to cover workers who go
aboard ship to perform their jobs. See also WORKERS COMPENSATION BENEFITS;
WORKERS COMPENSATION, COVERAGE B.

LONG-TAIL LIABILITY one where an injury or other harm takes

time to become known and a claim may be separated from the
circumstances that caused it by as many as 25 years or more. Some
examples: exposure to asbestos, which sometimes results in a lung
disease called asbestosis; exposure to coal dust, which might cause
black lung disease; or use of certain drugs that may cause cancer or
birth defects. These long-tail liabilities became very expensive for
many corporations in the 1970s and 1980s, also causing problems
for insurers because it was unclear when the situation that gave rise
to the claim
 Page 292
happened and who should pay the claim. One theory, the
MANIFESTATION/INJURY THEORY, states that the insurer is responsible whenever

the disease is diagnosed. The other view, the OCCURRENCE/INJURY THEORY,

states that the insurer must pay only when the person is injured.
LONG-TERM CARE (LTC) day-to-day care that a patient
(generally older than 65) receives in a nursing facility or in his or
her residence following an illness or injury, or in old age, such that
the patient can no longer perform at least two of the five basic
activities of daily living: walking, eating, dressing, using the
bathroom, and mobility from one place to another. There are
basically three types of LTC plans:
1. Skilled nursing care provided only by skilled medical
professionals as ordered by a physician. MEDICARE will pay a limited
amount of the associated cost.
2. Intermediate care provided only by skilled medical professionals
as ordered by a physician. This care involves the occasional
nursing and rehabilitative assistance required by a patient.
3. Custodial care provided only by skilled medical professionals as
ordered by a physician. The patient requires personal assistance in
order to conduct his or her basic daily living activities.
When selecting a LTC policy, some of the more important
considerations include:
1. Renewabilitypolicy should be a GUARANTEED RENEWABLE CONTRACT.
2. Waiting periodlength of time before benefits are paid should not
exceed 90 days.
3. Age eligibilityupper age limit should be at least 80.
4. Length of time benefits are paidtypically the range is 5 to 10
years. It would be preferable to have benefits paid for life.
5. Inflation guardthe benefit level should be automatically adjusted
each year according to the increase in the costs charged by the
long-term-care providers.
6. Premium waiverafter the patient has received benefits for at least
90 days, the patient is no longer required to make premium
payments for as long as he or she is under long-term care.
7. No increase of premiums with agepremiums should be based on
the age at the time of application and should never increase as a
result of changes in age.
8. No limitations for preexisting conditionsthere should be no
PREEXISTING CONDITION limitations.

LONG-TERM DISABILITY INCOME INSURANCE coverage

that provides monthly income payments for as long as an insured
remains disabled. The insurance policy defines the nature of the
disability it covers. Most policies discontinue income payments
beyond age 65. See also DISABILITY INCOME INSURANCE.
LONG-TERM INSURANCE insurance written for a period of time
greater than one year.
 Page 293
LOSS damage through an insured's negligent acts and/or omissions
resulting in bodily injury and/or property damage to a third party;
damage to an insured's property; or amount an insurance company
has a legal obligation to pay.
1. a company is legally obligated to pay the least of the following
amounts: (a) amount of the loss; (b) limits of coverage; (c) amount
resulting from the application of the coinsurance formula, such that

where Insurance Required = Value of Property x Coinsurance

For example, assume that the insured had a $200,000 home
destroyed totally by fire; carried $150,000 in insurance coverage;
and there was an 80% coinsurance requirement. Then, according to
the formula

(d) amount according to the pro rata distribution clause. If there is

more than one insurance policy covering the damaged or destroyed
property, each policy will pay no more than its proportionate share
of the loss. In the foregoing example, if the insured had two
separate $200,000 policies, each would pay no more than
$100,000.
2. questions regarding loss coverage include: Is the peril covered?
Is the property covered? Is the person covered? Is the policy in
force? Are the limits of coverage adequate? Is the location
covered? Has the hazard been increased?
3. steps an insured should take: (a) send written notice immediately
to the insurance company or its agent; (b) do everything reasonable
to protect the property from further damage; (c) separate damaged
from undamaged property; (d) provide the insurance company with
a written inventory of damaged or destroyed property; (e) submit
within 60 days following the loss written proof of the loss; and (f)
make the damaged or destroyed property available for examination
by the insurance company.
LOSS ADJUSTMENT EXPENSE cost involved in an insurance
company's adjustment of losses under a policy.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
amount of the insurance company's liabilities for claims that have
not been settled. If this reserve increases significantly in relation to
the company's SURPLUS, the risk is greater for potential deficiencies in
the reserves; that is, the reserves could prove to be inadequate to
meet future claim payments.
 Page 294
LOSS ASSUMPTION see RETENTION AND LIMITS CLAUSE; RISK MANAGEMENT; SELF
INSURANCE.

LOSS AVOIDANCE see AVOIDANCE.

LOSS CARRYBACK ruling that, under current tax law, if an
insurance company is to use a LOSS CARRYFORWARD accounting
adjustment, the company must first offset a net income loss in a
specified time period against a net income gain in the three
preceding years.
LOSS CARRYFORWARD ruling that, under current tax law, an
insurance company that has incurred a net income loss in a given
year may charge that loss against its taxable income in a
subsequent year. This accounting adjustment may be made
provided that the insurance company first offsets its net income
loss in a given period against its net income gain in the three
preceding years, or thus adopts a loss carry-back accounting
procedure.
LOSS CLAUSE feature of property and casualty policy providing
coverage without a reduction in the policy's limits after a loss is
paid. For example, if the limit of coverage under a property policy
is $100,000 and a loss of $50,000 is paid, the limit still remains
$100,000. Thus, the total amount of coverage in force for future
losses is $100,000. In the absence of a loss clause, the total limit of
coverage is reduced after payment of a loss.
LOSS CONSTANT surcharge, in retrospective rating of property
and liability insurance, added to the BASIC PREMIUM rate charged to
reflect fixed cost of adjusting or settling losses.
LOSS CONTROL see ENGINEERING APPROACH; HUMAN APPROACH; RISK MANAGEMENT.
LOSS CONVERSION FACTOR measure used in the RETROSPECTIVE
RATING method for WORKERS COMPENSATION INSURANCE. A factor is applied to the

INCURRED LOSSES during the rating period in question in order to generate

a loss adjustment expense amount to be used in claim investigation

and settlement.
LOSS DEPARTMENT see CLAIMS DEPARTMENT.
LOSS DEVELOPMENT difference in the amount of losses
between the beginning and end of a time period.
LOSS DEVELOPMENT FACTOR element used to adjust losses to
reflect the INCURRED BUT NOT REPORTED CLAIM (IBNR) under the retrospective
method of rating. See also RETROSPECTIVE RATING.
LOSS DRAFT payment of INSURANCE proceeds for a claim resulting
from a loss to INSURED mortgaged property.
LOSSES reductions in the value of property due to physical
damage or destruction.
 Page 295
LOSSES INCURRED important quantitative measure for an
insurance company indicating the percentage of each premium
dollar that is going to pay for losses. Based on losses incurred,
appropriate reserves are established. Changes in incurred losses
over several policy periods indicate the trend in the loss picture and
the accuracy of the basic premium charged to reflect expected
losses.
LOSSES OUTSTANDING losses representing claims not paid.
LOSSES PAID losses representing claims paid.
LOSS EVENT circumstance that produces the loss.
LOSS EXPECTANCY see EXPECTED LOSS; EXPECTED LOSS RATIO; EXPECTED MORBIDITY;
EXPECTED MORTALITY; LOSS FREQUENCY METHOD.

LOSS FREQUENCY see FREQUENCY; FREQUENCY AND DISTRIBUTION OF LOSSES.

LOSS FREQUENCY METHOD procedure used in projecting the
number of future losses within a given time frame. This prediction
of future losses forms the basic premium onto which loadings are
made for an insurance company's expenses, profits, and
contingencies.
LOSS LOADING see LOADING.
LOSS OF INCOME insured's income prior to the disability minus
the insured's income after the disability. See also DISABILITY INCOME
INSURANCE.

LOSS OF INCOME INSURANCE coverage in property insurance

for an employee's lost income if a peril such as fire damages or
destroys the place of employment, causing the worker to become
unemployed. For example, a fire destroys a manufacturing plant,
and as a result employees are placed on indefinite leave without
pay. This coverage would then go into effect. In health insurance,
loss of income benefits are paid when an insured becomes disabled
and cannot work.
LOSS OF TIME INSURANCE see LOSS OF INCOME INSURANCE.
LOSS OF USE INSURANCE coverage in the event that property
is damaged or destroyed so that an insured cannot use the property
for its intended purpose. For example, loss of use of a drill press
because of vandalism would be covered.
LOSS PAYABLE CLAUSE coverage for a mortgagee where real
or personal property, used as security for a loan, is damaged or
destroyed. For example, a bank (mortgagee) lends money to an
individual (mortgagor) who pledges certain valuables as security.
The valuables are stolen. If the individual defaults on the loan, the
bank would be indemnified under the policy for an amount up to
the outstanding loan.
LOSS PORTFOLIO TRANSFER REINSURANCE type of EXCESS OF
LOSS REINSURANCE in which the insurance company (CEDENT) cedes its

known LOSS REVENUES to its reinsurer.

 Page 296
LOSS PREVENTION see ENGINEERING APPROACH; LOSS PREVENTION AND REDUCTION.
LOSS PREVENTION AND REDUCTION risk management
control procedure that emphasizes safety management. Its purpose
is to reduce the frequency and severity of potential losses. Business
firms apply this procedure by posting safety signs, holding safety
meetings, and providing cash awards for employees with the best
safety records. See also ENGINEERING APPROACH; HUMAN APPROACH.
LOSS PREVENTION SERVICE see ENGINEERING APPROACH.
LOSS RATE frequency of losses. See also LOSS FREQUENCY METHOD.
LOSS RATIO relationship of incurred losses plus loss adjustment
expense to earned premiums.
LOSS RATIO METHOD modification of premium rates by a
stipulated uniform percentage for closely related classes of
property or liability insurance policies. The objective of such
modification is to more directly align the combined actual loss ratio
of the classes of policies under consideration with the expected loss
ratio of these classes. The resultant alignment should show no
significant STANDARD DEVIATION OR VARIATION of the actual loss ratio from the
expected loss ratio.
LOSS RATIO RESERVE METHOD formula for a given line of
insurance used by property and casualty insurance companies to
compare losses and loss adjustment expense with premiums. This
shows (1) the amount of each premium dollar generated that is
used to pay losses and expenses, and (2) the reserves that must be
maintained to pay for those losses and expenses.
LOSS REDUCTION see LOSS PREVENTION AND REDUCTION.
LOSS REPORT see CLAIM REPORT.
LOSS RESERVES provision for known claims due but not paid,
known claims not yet due, and provision for INCURRED BUT NOT REPORTED
(IBNR) claims. The critical problem facing a casualty insurance

company is the amount of reserves necessary for the incurred but

not reported losses (IBNR) because many of these claims and their
resultant settlements may not manifest themselves until several
years in the future. This is known as the tail end distribution
liability. See also FULL PRELIMINARY TERM RESERVE PLAN; PROSPECTIVE RESERVE; RESERVE
LIABILITIES REGULATION; RETROSPECTIVE METHOD RESERVE COMPUTATION.

LOSS RETENTION see RETENTION AND LIMITS CLAUSE; RISK MANAGEMENT; SELF
INSURANCE.

LOSS RUN see LOSS DEVELOPMENT; LOSS FREQUENCY METHOD.

LOSS SETTLEMENT see LOSS SETTLEMENT AMOUNT.
LOSS SETTLEMENT AMOUNT in homeowners insurance,
usually an 80% coinsurance requirement, which means the insured
must carry
 Page 297
insurance on the value of a home on a replacement cost basis of at
least 80%. For example, a home is worth $200,000, and a fire does
$50,000 damage. If there is $150,000 of insurance, it may appear
that the insured would be reimbursed for the total loss. But the
homeowner would receive only $46,875 according to the following
formula:

If, however, the insured had carried an 80% insurance to value of

$160,000, then the insured would have been reimbursed for the
total loss of $50,000 according to the following formula:

See also COINSURANCE; SETTLEMENT OPTIONS, PROPERTY AND CASUALTY INSURANCE.

LOSS SEVERITY see SEVERITY RATE.
LOSS TRENDS projections of future accidental losses based on
analyses of historical loss patterns. A projected loss picture is used
to determine the pure cost of protection and the resultant basic
premium, contingency reserves, and whether or not the company
should continue selling a given line of business, or remain in a
particular geographical area. However, loss trends based on
historical data may not really represent likely loss outcomes in the
future.
LOSS-YEAR STATISTICS see ACCIDENT-YEAR STATISTICS.
LOST-INSTRUMENT BOND indemnification bond under which a
stock certificate holder who loses the original certificate will be
issued a duplicate. The indemnity bond guarantees that if the
original stock certificate is recovered, the holder will send it to the
surety company.
LOST POLICY RECEIPT life insurance company form to be
signed by a policyholder who wishes to surrender a policy that has
been lost. The signed receipt then becomes evidence that the policy
is no longer in force. This protects the insurance company if a
policyholder claims that the policy was never surrendered.
LOST POLICY RELEASE see LOST POLICY RECEIPT.
LOUISIANA OMNIBUS PREMIUM REDUCTION ACT (NO
PAY, NO PLAY LAW) law that places limitations on an uninsured
motor vehicle owner or motor vehicle operator's ability to recover
damages in the event of a motor vehicle accident. The state of
Louisiana requires every registered motor vehicle to be covered
either by liability
 Page 298
insurance or other evidence of the ability to pay such as a security
deposit placed with the state treasury or posted bond. If there is a
motor vehicle accident and the motor vehicle owner or operator
does not have the minimum liability insurance or other evidence of
the ability to pay in force, the owner/operator is prohibited from
recovering the first $10,000 in property damage and the first
$10,000 in bodily injury damage. This prohibition also applies if
the CLAIMANT does not have liability insurance or other forms of
security covering the motor vehicle.
LUMP SUM in life insurance, single payment instead of a series of
installments. See also LUMP SUM DISTRIBUTION.
LUMP SUM DISTRIBUTION death benefit option in which a
beneficiary of a life insurance policy receives the death benefit as a
single sum payment instead of installments.
LUMP SUM REFUND ANNUITY see CASH REFUND ANNUITY (LUMP SUM
REFUND ANNUITY).
 Page 299

M
MACHINERY MALFUNCTION (BREAKDOWN) INSURANCE
see BOILER AND MACHINERY INSURANCE.
MAIL ORDER INSURANCE insurance marketed through
advertising in such media as newspapers, magazines, television,
and radio. The mail is used to collect the application and distribute
the policy. An insurance agent is not involved in the process. See
also DIRECT RESPONSE MARKETING (DIRECT SELLING SYSTEM).
MAINTAINING A NUISANCE see ATTRACTIVE NUISANCE.
MAINTENANCE BOND legal instrument posted by a contractor
or craftsman to guarantee that completed work is free of flaws and
will perform its intended function for a specified period of time.
MAJOR MEDICAL INSURANCE coverage in excess of that
provided by a basic hospital medical insurance plan. After the
limits of coverage have been exhausted under a basic plan, major
medical then covers medical expenses relating to room and board;
physician fees; miscellaneous expenses such as bandages,
operating room expenses, drugs, X-ray, and fluoroscopy. There
may be a lifetime limit. For example, if the lifetime limit is
$500,000 and an insured uses $100,000 of coverage in a given
year, the lifetime limit would be reduced to $400,000. See also GROUP
HEALTH INSURANCE: HEALTH INSURANCE; HEALTH MAINTENANCE ORGANIZATION (HMO).

MALICIOUS MISCHIEF intentional damage or destruction of

another person or business's property. Insurance can be purchased
by the owner of the property to protect against this exposure. See
also HOMEOWNERS INSURANCE POLICY; PERSONAL AUTOMOBILE POLICY (PAP); COMMERCIAL PACKAGE
POLICY; VANDALISM AND MALICIOUS MISCHIEF INSURANCE.

MALINGERING effort by an individual to continue to receive

disability income benefits by taking a continuing sickness or injury.
MALPRACTICE LIABILITY INSURANCE professional liability
coverage for a practitioner in a given field of expertise. Coverage
takes the form of defending the practitioner against liability suits
whether or not with foundation, and paying on behalf of the
insured, court awarded damages up to the limits of the policy. See
also PROFESSIONAL LIABILITY INSURANCE.
MANAGED CARE plan to control employer's health care cost
through the introduction of practice guidelines or protocols for
health care providers, and to improve the methods used by
employers and employees to select health care providers. The goal
of the plan is to create a financial accounting system in order to
manage the impact of
 Page 300
medical treatment on the patient's clinical response and quality of
life. Once such a system is created, the employer and the employee
will be better able to judge which health provider is more effective
and efficient.
MANAGED CARE ORGANIZATION (MCO) entity that offers a
MANAGED CARE plan for WORKERS COMPENSATION BENEFITS that joins a provider

network with the following parts: case management personnel,

medical bill review personnel, internal dispute resolution vehicle,
written guidelines for treatment of cases, quality assurance
program, and a utilization review committee. This mechanism
executes in the following manner:
1. Case management personnelmonitors treatment of an injured
employee to make sure the employee recovers from illness and
returns to work in a timely fashion.
2. Guidelines for treatment of caseswritten criteria for determining
when an illness requires medical treatment, scope of the medical
treatment, and acceptable disability time periods.
3. Internal dispute resolution vehicleprovides written instructions
for procedures to resolve conflicts in issues between health
providers and fee payers regarding the size of medical fees
charged, type and scope of medical treatment, and overutilization
of medical facilities.
4. Utilization review committeeprovides guidelines for inpatient
hospital care, outpatient care, and physician care.
MANAGED COMPETITION government-supervised health care
system with economic incentives for providers and consumers.
MANAGER see AGENCY MANAGER.
MANAGING PHYSICIAN, HMO see HEALTH MAINTENANCE ORGANIZATION
(HMO).

MANDATORY SECURITIES VALUATION RESERVE (MSVR)

liability RESERVE required to be maintained by the NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS (NAIC) prior to 1992 for fluctuations in the values

of investments in securities. Realized and unrealized capital gains

and losses involving invested securities were credited and debited
respectively to the MSVR. Beginning in 1992, the MSVR was
discontinued, and ending December 31, 1991, MSVR was
transferred into the ASSET VALUATION RESERVE.
M&C see MANUFACTURERS AND CONTRACTORS LIABILITY INSURANCE.
MANIFESTATION INJURY THEORY approach that maintains
injury or sickness begins when it is first detected by an obvious
appearance. This argument is used in determining if liability
insurance is afforded in a particular bodily injury case.
MANUAL publication stipulating underwriting rules applicable for
a given line of insurance, classifications of exposures within that
line of insurance, and premium rates per classification. For
example, a life
 Page 301
insurance manual shows the PREMIUM MODE factor, POLICY FEE, PREMIUMS, and
values per $1000 of coverage, to include CASH VALUE, PAID-UP INSURANCE and
EXTENDED TERM INSURANCE, available at the end of each policy year. See

also MANUAL RATE.

MANUAL RATE published cost per unit of insurance, usually the
standard rate charged for a standard risk. For example, one
company's manual yearly rate per $1000 of life insurance for a
given policy for a male age 26 is $12.02. See also RATE MAKING.
MANUFACTURERS AND CONTRACTORS LIABILITY
INSURANCE coverage for liability exposures that result from
manufacturing and/or contracting operations in process on a
manufacturer's premises (all locations of ongoing operations) or, in
the case of the contractor, off-premises operation at a construction
site. Excluded are activities of independent contractors, damage to
property by explosion, collapse, and underground property damage.
Additional coverages apply to the acts of the insured's employees
when constructing new structures, demolishing old structures, and
changing the size and/or location of existing structures.
MANUFACTURERS OUTPUT INSURANCE coverage for
personal property of a manufacturer on an ALL RISKS basis when that
property is off the manufacturer's premises.
MANUFACTURING INSURANCE see BUSINESS INCOME COVERAGE FORM.
MANUSCRIPT INSURANCE coverage tailored to the particular
requirements of an insured, when a standard policy cannot be used
to provide coverage for real or personal property. A manuscript
policy is often written on site by an agent (most often representing
a large brokerage house) to reflect the special conditions and
provisions.
MAP diagram used in property insurance to locate the geographical
area in which risks reside. Maps are also used to reveal areas of
high concentration of insured risks and their potential impact on an
insurance company should a catastrophe occur, such as a hurricane.
MARGIN fluctuation in claims arising from ADVERSE SELECTION.
MARGOLIN ACT legislation passed in California that establishes
procedures applicable to any worker who incurs a job-related
injury. This act has far-reaching implications for WORKERS COMPENSATION
INSURANCE in other states also. Under the act, the employer must

provide the Employee's Claim for Workers Compensation Benefits

form upon an employee's request or within 1 day of his or her
injury. A series of penalties and fines is established in the event
that claims rightfully due a claimant are inappropriately delayed.
For example, one fine could result if indemnity payments do not
begin within 14 days of the employer's knowledge of an
employee's disability. Another fine could result if the entire
compensability investigation is not completed within 90 days.
Attorney's are required to provide prospective clients at the initial
 Page 302
consultation with an Attorney Fee Disclosure Statement, which
states attorneys' fees for handling the case, and also encourages the
prospective client to use instead the Office of Benefit Assistance
and Enforcement, which provides its service at no charge. It is a
requirement that this form be signed by both the prospective client
and the attorney.
MARINE INSURANCE coverage for goods in transit and the
vehicles of transportation on waterways, land, and air. See also
INLAND MARINE INSURANCE (TRANSPORTATION INSURANCE): BUSINESS RISKS; INSTRUMENTALITIES OF

TRANSPORTATION INSURANCE; NATIONWIDE MARINE DEFINITION; OCEAN MARINE INSURANCE.

MARINE INSURANCE CERTIFICATE special policy blank

issued by an insured for individual shipments or other purposes
under an OPEN POLICY. The open policy allows an insured to buy
protection for all marine business for an indefinite period. When
required to show evidence of insurance for a particular shipment,
or to protect the cargo or ship of a client, the insured may issue a
certificate of insurance backed by his or her own overriding open
policy.
MARINE INSURANCE OFFICERS PROTECTIVE see OFFICERS
PROTECTIVE MARINE INSURANCE.

MARITAL DEDUCTION provision in the Federal Tax Code for

favorable treatment of an estate. Under the UNLIMITED MARITAL DEDUCTION no
federal estate tax is imposed on qualified transfers between a
husband and wife. Under the QUALIFIED TERMINABLE INTEREST PROPERTY (Q TIP) TRUST
all income from assets in trust is paid at least annually for the life
of the spouse. See also ESTATE PLANNING.
MARITAL TRUST TRUST that qualifies assets under the MARITAL
DEDUCTION provision in the Federal Tax Code for favorable treatment
of an estate. The surviving spouse has the full power to use the
assets of the trust as well as to transfer assets to any heirs. Upon the
death of the surviving spouse, any assets in the trust are subject to
FEDERAL ESTATE TAX. See also BYPASS TRUST; ESTATE PLANNING DISTRIBUTION; GIFT IN TRUST.

MARKET ASSISTANCE PLANS (MAPs) voluntary state

insurance programs that aid small businesses in acquiring insurance
coverages when there are impediments to obtaining the coverage.
MARKETING creation of a demand for a company's products, its
distribution, and services for customers who purchase that product.
Actuarial research and development, underwriting efficiency, and
claim payment promptness is of little value if no one is willing to
purchase insurance products. Agency and marketing departments
are the focus of all sales activity within an insurance company, and
touch every aspect of a company by generating (1) premium
income for securities, real estate, and mortgage investments; (2)
sales for review by the underwriting department and their issuance
by policyholder services; (3) need for data storage and retrieval by
the company's data
 Page 303
processing center; (4) legal analysis and decisions by the law
department; and (5) need for corporate planning.
MARKETING REPRESENTATIVE see SPECIAL AGENT.
MARKET RISK investment risk associated with the psychology of
the market in that emotions affect the price of a company's stock
that, in most instances, has nothing to do with the current or
potential earnings per share of that company.
MARKET TIMING investment strategy that advocates the transfer
of amounts from one category of investment to another category
according to a perception of how each of these categories of
investments will perform relative to other categories of investments
at a stipulated point in time. This strategy may be applied by
purchasers of the VARIABLE DOLLAR ANNUITY or VARIABLE LIFE INSURANCE, both of
which have provisions for the transfer of sums between stock,
bond, and real estate accounts.
MARKET VALUE see MARKET VALUE V. ACTUAL CASH VALUE.
MARKET VALUE ADJUSTMENT (MVA) increase or decrease in
the SURRENDER CHARGE of the LIFE INSURANCE policy or annuity contract
depending on the current financial markets. The CASH VALUE is
adjusted upward if the policy interest rate is greater than the current
interest rate on new money and thus, if interest rates decline after
the insurance policy or annuity contract purchase date, the
surrender charge becomes less than that exhibited. Conversely, the
cash value is adjusted downward if the policy interest rate is less
than the current interest rate on new money and thus, if interest
rates rise after the insurance policy or annuity contract purchase
date, the surrender charge becomes greater than that exhibited.
MARKET VALUE CLAUSE provision of property insurance that
establishes the amount for which an insured must be reimbursed for
damaged or destroyed property according to the price a willing
buyer would pay for the property purchased from a willing seller,
as opposed to the ACTUAL CASH VALUE of the damaged or destroyed
property. See also MARKET VALUE V. ACTUAL CASH VALUE.
MARKET VALUE v. ACTUAL CASH VALUE value of property
as established by the price a willing buyer would pay for property
purchased from a willing seller, compared with the replacement
cost of damaged or destroyed property minus depreciation and
obsolescence. Usually, replacement cost basis is used in property
insurance to indemnify an insured for damaged or destroyed
property. See also MARKET VALUE CLAUSE.
MASS MARKETING see MASS MERCHANDISING.
MASS MERCHANDISING coverage for a group of individuals
under one policy. Usually, members belong to a particular
company, union,
 Page 304
or trade association. In a contributory plan a lump sum premium is
paid by the group to the insurance company using salary
deductions.
MASS UNDERWRITING evaluation of the demographic
characteristics of the entire group (such as age, sex, MORBIDITY,
MORTALITY), as opposed to the evaluation of individuals in that group.

See also MASS MERCHANDISING.

MASTER CONTRACT see MASTER POLICY.
MASTER POLICY single contract coverage on a group basis
issued to an employer. Group members receive certificates as
evidence of membership summarizing benefits provided. See also
GROUP HEALTH INSURANCE; GROUP LIFE INSURANCE.

MASTER-SERVANT RULE assumption that an employer is liable

for negligent acts or omissions of employees that result in bodily
injury and/or property damage to third parties if those acts are in
the course of employment.
MATCHING requiring assets and liabilities of an insurance
company to go up or down together on a proportional basis. The
duration of the asset and liability should be approximately the
same. For example, an insurance policy of 12 months in duration
should be identified with an asset that matures in 12 months. As
interest rates go up, thereby requiring the insurance company to
pay a higher return to its policyholders, the interest earned on
investments should go up on a proportionate basis.
MATCHED SET OR PAIR INSURANCE see SET CLAUSE (PAIR OR SET
CLAUSE).
MATERIAL BOND BOND issued to a contractor guaranteeing
that the supplier (individual posting the bond) will provide all of
the necessary materials for the satisfactory completion of the
contracted project.
MATERIAL FACT see MATERIAL MISREPRESENTATION.
MATERIAL MISREPRESENTATION falsification of a material
fact in such a manner that, had the insurance company known the
truth, it would not have insured the risk. A material
misrepresentation gives an insurance company grounds to rescind a
contract. See also CONCEALMENT.
MATURED describing the time of payment of FACE AMOUNT (FACE OF POLICY)
upon the death of the INSURED, or when the cash value in an ENDOWMENT
INSURANCE policy equals the face amount.

MATURED ENDOWMENT endowment period of time, in life

insurance, at which the face amount of the policy is payable to the
insured.
MATURITY DATE time at which life insurance death proceeds or
endowments are paid, either at the death of an insured or at the end
of the endowment period.
MATURITY FUNDING CONTRACT type of PENSION PLAN under
which a RETIREMENT ANNUITY is purchased at the time of retirement of
 Page 305
the employee, funded by means of a single premium payment made
to the insurance company.
MATURITY VALUE specified amount received by an insured at
the end of an endowment period (usually the face amount of the
endowment policy), or by the owner of an ordinary life policy
(usually the individual insured) who lives to a given age.
MAXIMUM total amount of insurance coverage available for an
INSURED.

MAXIMUM BENEFIT see BENEFIT FORMULA; COINSURANCE.

MAXIMUM DEDUCTIBLE CONTRIBUTION limit allowed by
law on employee salary reduction plans. Many pension plans, as
well as the popular 401 (k) plan, allow employees to set aside pre-
tax dollars in a company-sponsored retirement account, often
matched by a company contribution. But the amount contributed by
the employee is regulated by law. For example, the maximum
annual contribution for the 401 (k) plan, which was $30,000 per
year in 1986, was reduced to $7000 by the TAX REFORM ACT OF 1986.
MAXIMUM FAMILY BENEFIT see COORDINATION OF BENEFITS; GROUP HEALTH
INSURANCE.

MAXIMUM FORESEEABLE LOSS (MFL) worst case scenario

under which an estimate is made of the maximum dollar amount
that can be lost if a catastrophe occurs such as a hurricane or
firestorm.
MAXIMUM POSSIBLE LOSS see MAXIMUM FORESEEABLE LOSS (MFL).
MAXIMUM PROBABLE LOSS (MPL) estimate of maximum
dollar value that can be lost under realistic situations. For example,
a fire or other peril occurs, but a sprinkler system works and a fire
department responds in good order.
MAXI TAIL (FULL TAIL) extended reporting period, for an
unlimited length of time, during which claims may be made after a
CLAIMS MADE BASIS LIABILITY COVERAGE policy has expired. See also INCURRED BUT

NOT REPORTED LOSSES (IBNR); LONG-TAIL LIABILITY.

McCARRAN-FERGUSON ACT (PUBLIC LAW 15) 1945 federal

legislation in which the Congress declared that the states may
continue to regulate the insurance industry. Nevertheless, in recent
years Congress has expanded the federal government's insurance
activities into flood insurance, FEDERAL CROP INSURANCE, and riot and civil
commotion insurance. See also SOUTH-EASTERN UNDERWRITERS ASSOCIATION (SEUA)
CASE.

MEAN see EXPECTED LOSS.

MEAN RESERVE INITIAL RESERVE plus the TERMINAL RESERVE divided by two
for any year of valuation.
 Page 306
MEANS TEST principle that holds that SOCIAL INSURANCE programs
should be for the benefit of lower socioeconomic segments of
society and not for that segment of society that does not require
financial assistance.
MEASUREMENT see LOSS DEVELOPMENT; LOSS FREQUENCY METHOD; LOSS TRENDS.
MEDIAN statistical term indicating the central value of a
frequency distribution, such that smaller and greater values than
this central value occur at an equal rate. For example, given the
numbers 1, 7, 10, 12, 14, 17, 19, 20, and 22, the median is 14.
MEDIATION situation in which parties agree to take part in a
structured settlement negotiation through the guidance of a neutral
expert. By participating in this process, the parties do not agree that
they will actually settle and the mediator does not have the
authority to impose such a settlement. The mediation process may
be terminated at any time without cause by either party. The
advantage of this process includes the claimant's ability to have
quick settlements, thereby enabling the claimant to pay medical
bills and to replace lost wages.
MEDICAID assistance program for the financially needy.
Medicaid, also referred to as Title XIX of the Social Security Act,
was enacted in 1965 at the same time as MEDICARE. It is a joint
federal-state program that provides medical assistance for the aged,
blind, and disabled, and families with dependent children who
cannot pay for such assistance themselves. Benefits vary widely
among the states.
MEDICAID QUALIFYING TRUST IRREVOCABLE LIVING TRUST (rights to
make any changes are forfeited by the GRANTOR permanently) in
which the grantor forfeits control of all assets placed in the trust.
However, the grantor retains the right to all income produced by
the assets in the trust, and the assets can be distributed to
beneficiaries at the grantor's death. The objective of this trust is to
protect the assets of the grantor against depletion to pay the costs of
LONG-TERM CARE or against dissipation by the grantor's heirs
during the grantor's lifetime.
MEDICAL see MEDICAL EXAMINATION.
MEDICAL EXAMINATION physical checkup required of
applicants for life and/or health insurance to ascertain if they meet
a company's underwriting standards or should be classified as
substandard or uninsurable. Physicals are administered by medical
personnel selected by the insurance company at its expense.
Physicals may also be used to determine extent of disability for
insurance purposes. See also MEDICAL EXAMINER.
MEDICAL EXAMINER physician who conducts physicals of
applicants for life and/or health insurance. This physician is
selected by the insurance company at its expense. See also MEDICAL
EXAMINATION.
 Page 307
MEDICAL EXPENSE BENEFITS see COORDINATION OF BENEFITS; GROUP
HEALTH INSURANCE; HEALTH INSURANCE CONTRACT; HEALTH MAINTENANCE ORGANIZATION (HMO);

MAJOR MEDICAL INSURANCE.

MEDICAL EXPENSE INSURANCE see COORDINATION OF BENEFITS; GROUP

HEALTH INSURANCE; HEALTH INSURANCE CONTRACT; HEALTH MAINTENANCE ORGANIZATION (HMO).

MEDICAL INFORMATION BUREAU (MIB) central

computerized facility that keeps on file the health history of the
applicants for life and health insurance with member MIB
companies. For example, the health record of an applicant for
insurance with a member MIB company in Atlanta, Georgia, is
available to another member MIB company in Shreveport,
Louisiana. The MIB was organized to guard against fraud by
applicants.
MEDICAL PAYMENTS INSURANCE provision of liability
policies and the liability sections of package insurance policies,
such as the PERSONAL AUTOMOBILE POLICY (PAP), that pay medical expenses
without regard to fault. The insured does not admit liability for
bodily injury to another party, nor does an injured party forfeit the
right to sue the insured.
MEDICAL PAYMENTS TO OTHERS INSURANCE see
HOMEOWNERS INSURANCE POLICYSECTION II (LIABILITY COVERAGE).

MEDICAL SAVINGS ACCOUNTS (MSAs) savings accounts that

have tax advantages combined with HEALTH INSURANCE plans for the
benefit of the employee. Both the employee and the employer are
permitted to contribute to the MSA. The contributions can be
directed to pay the deductible under the health insurance plan
and/or the medical expenses not covered by the health insurance
plan. Funds not spent are allowed to accumulate in the MSA on a
continuous basis. When the employee reaches retirement age, the
accumulated funds may be allocated to the employee's retirement
income. The MSA differs from a FLEXIBLE SPENDING ACCOUNT (FSA) in one
very important respect: Under an MSA, funds not used for current
health care expenses belong to the employee. Under an FSA, funds
not under the current health care expenses belong to the employer.
MEDICAL SPENDING ACCOUNT type of FLEXIBLE SPENDING ACCOUNT.
See also FLEXIBLE SPENDING ACCOUNTHEALTH CARE/DEPEN-DENT CARE EXPENSES.
MEDICARE program enacted in 1965 under Title XVIII of the
Social Security Amendments of 1965 to provide medical benefits
to those 65 and over. The program has two parts: Part A, Hospital
Insurance, and Part B, Supplementary Medical Insurance. Retired
workers qualified to receive Social Security benefits, and their
dependents, also qualify for the hospital insurance portion. The
program is paid for by payroll taxes on employees and covered
workers. The supplementary medical
 Page 308
insurance provides additional coverage on a voluntary basis for
physician services. Those enrolled in the program pay a monthly
premium. Coverage is also available to persons under 65 who are
disabled and have received Social Security disability benefits for
24 consecutive months.
MEDICARE CATASTROPHIC COVERAGE ACT federal
legislation passed in 1988 (repealed November 23, 1989) that
significantly increased the benefit amounts provided under MEDICARE,
both Part A and Part B, in the following manner:
1. Doctors' billseffective January 1, 1990. Medicare patients under
Part B would have had their out-of-pocket expenses for doctors'
bills limited to $1370. However, if the doctor charged more than
Medicare approved, the patient would be liable for the difference.
The patient would have paid the first $75 as a DEDUCTIBLE for the
approved charges, and Medicare would have paid 80% of the
remaining approved charges up to $1370, and 100% of the
approved charges above $1370. Any payments made by the
patient's private insurance would be applied to the $1370.
2. Hospital billseffective January 1, 1990, Medicare patients would
have paid a deductible of $564 per year for the first stay in the
hospital. After this deductible was paid, Medicare would have paid
100% of all hospital bills regardless of the length of stay.
3. Drugseffective January 1, 1990, Medicare would have begun
paying for OUTPATIENT prescription drugs. After the patient paid a $550
deductible, Medicare would have paid 80% of the cost of
intravenous drugs, to include antibiotics, and 50% of the cost of
immunosuppressive drugs. Effective January 1, 1991, after the
patient paid a $600 deductible and a 50% COPAYMENT, Medicare would
have paid for most other prescription drugs and insulin. Effective
January 1, 1992, after the patient paid a $652 deductible and a 40%
copayment, most prescription drugs would have been covered by
Medicare. Effective January 1, 1993, and beyond, after the patient
paid a deductible yet to be determined and a 20% copayment, most
prescription drugs would have been covered by Medicare.
4. Skilled nursing facilityeffective January 1, 1989, after the patient
paid a copayment of $22 per day for the first eight days, Medicare
would have paid for 150 days of skilled nursing facility care.
5. Home health careeffective January 1, 1990, patients who did not
require daily care would have been eligible for up to six days a
week of home health care for as long as the doctor prescribed.
6. Hospice careeffective January 1, 1989, terminal patients would
have been entitled under Medicare to unlimited hospice care.
7. Respite careeffective January 1, 1990, an individual who was
caring for a Medicare patient (provided the patient had met either
the $1370 Part B limit or the annual deductible for prescription
drugs) at home who required daily care would have been entitled to
80 hours per year of home health aide and personal care services.
 Page 309
8. Mammographyeffective January 1, 1990, a Medicare patient
would have been covered up to $50 for X-ray expenses incurred to
detect breast cancer.
The costs to Medicare participants would have been as follows:
1. Currently, all Medicare Part B beneficiaries must pay an extra $4
premium each month above the normal Medicare Part A premium.
By 1993, the extra premium would have been $10.20 per month.
All individuals who were entitled to Part A benefits for more than
six months during a tax year and owed at least $150 in federal
income taxes would also have paid a supplemental premium of
15% for each $150 for 1989, 25% for 1990, 26% for 1991, 27% for
1992, and 28% for 1993. For tax years starting after 1993, the
annual limit would have been tied to increases in the costs of
Medicare. The maximum supplemental premium would have been
$800 per Medicare beneficiary, or $1600 per couple enrolled in
Medicare for tax year 1989; $850 and $1700, respectively, for tax
year 1990; $900 and $1800, respectively, for tax year 1991; $950
and $1900, respectively, for tax year 1992; and $1050 and $2100,
respectively, for tax year 1993.
MEDICARE GAP INSURANCE see MEDICARE; MEDICARE INSURANCE.
MEDICARE PLUS CHOICE (MEDICARE PART C) part of the
Balanced Budget Act of 1997 that permits MEDICARE recipients to
select coverage among various private health care plans to include
HMOS, PPOS, POINT-OF-SERVICE (POS), MEDICAL SAVINGS ACCOUNTS (MSA), fee-for-service

plans, and provider-sponsored plans. These plans will receive a per

capita payment per enrollee from the federal government, and the
plans have the option to charge the enrollees a monthly premium.
Persons who are eligible for Medicare Part A and are enrolled in
Medicare Part B are eligible for enrollment in either the traditional
Medicare program or this new Medicare Part C program. Each
November, the health care financing administration will conduct
open enrollment periods so that persons may select the type of
health care program in which they wish to participate.
MEDICARE SUPPLEMENTARY INSURANCE see MEDIGAP
INSURANCE.

MEDICARE SUPPLEMENT INSURANCE two basic kinds of

policies sold by health insurance companies: (1) MEDIGAP INSURANCE
(MEDICARE SUPPLEMENTARY INSURANCE); and (2) MEDICARE WRAP-AROUND INSURANCE.

MEDICARE WRAPAROUND INSURANCE insurance that acts

as a supplement to MEDICARE in that it will pay the DEDUCTIBLES and
COINSURANCE sums that the Medicare recipient is responsible for

paying. In addition, some policies pay amounts for hospital and

nursing home expenses after the Medicare limits have been
reached.
 Page 310
MEDIGAP INSURANCE (MEDICARE SUPPLEMENTARY
INSURANCE) policy designed to act as a supplement to Medicare.
The supplementation is in the form of additional benefits to that
provided by Medicare. The additional benefits are in the form of
payment for medical expenses incurred but excluded by Medicare's
deductibles, by limitations on approval medical charges, by
limitations on length and type of care in nursing facilities, and by
limitations imposed by various cost-sharing requirements. Most of
these policies pay substantially less than 100% of the expenses not
covered under Medicare. Insurance companies that sell Medigap
policies are required by law to have an open enrollment period of
six months for those individuals who first enroll in Medicare Part B
at age 65 or older. Insurance companies can, however, exclude
preexisting conditions from the data of initial coverage, but for no
more than six months. Insurance companies are restricted by the
National Association of Insurance Commissioners to the selling of
10 standard Medigap insurance policies. Each policy is mandated
to provide a basic amount of benefits.
MEMBER person covered by insurance under a BLUE CROSS or BLUE
SHIELD plan.

MEMORANDUM CLAUSE provision in ocean marine cargo

policies to limit an insurance company's liability for partial losses;
the company has liability only for losses that exceed a stipulated
PERCENTAGE of the value of the cargo.

MENTAL HEALTH PARITY ACT OF 1996 act that prohibits

insurance companies, group health plans, and HEALTH MAINTENANCE
ORGANIZATIONS from establishing lifetime limits or annual limits on

mental health coverage that are lower than the limits on medical
coverage. These plans that do not have limits on medical coverage
cannot establish limits for mental health coverage. Under this act,
the employer is not required to offer mental health or substance
abuse benefits. This act applies to those companies with at least 50
employees and became effective for the plan year beginning on or
after January 1, 1998.
MERCANTILE OPEN-STOCK BURGLARY INSURANCE
coverage for damage or destruction of property due to a crime, and
property lost due to a burglary, whether successful or attempted.
An endorsement provides coverage for robbery and theft of
merchandise. Coverage is provided for merchandise, equipment,
fixtures, furniture left in the open on the business premises. There
is a coinsurance basis of 40 to 80%. This policy has generally been
replaced by current COMMERCIAL CRIME COVERAGE FORMS.
MERCANTILE ROBBERY INSURANCE coverage available
under two forms for actual or attempted robbery of money,
securities or other property. Under the First Form the policy covers
if the robbery is committed on the premises of the business. The
Second Form covers if the robbery is committed against a
messenger of the business off its
 Page 311
premises. An endorsement can provide coverage if employees have
property of the business in their custody at home, and this property
is lost through robbery or burglary. This policy has generally been
replaced by current COMMERCIAL CRIME COVERAGE FORMS.
MERCANTILE SAFE BURGLARY INSURANCE coverage in
the event a safe of a business is forceably entered, either on or off
the premises, and property is stolen from the safe. Also covered is
damage to the premises during actual or attempted burglary.
Premium rates can be reduced through precautions such as burglar
alarms, guards, and other protective measures. There is no
coinsurance or deductible requirement. This policy has generally
been replaced by current COMMERCIAL CRIME COVERAGE FORMS.
MERCHANT MARINE ACT see JONES ACT.
MERGER, CONSOLIDATION OR REORGANIZATION OF
PLAN SPONSOR change in the nature of an employer or other
organization that sponsors a qualified pension plan. A qualified
plan must guarantee vested benefits due to participants in the event
of a merger, acquisition, or change in employer status. For
example, the value of benefits cannot be reduced as the result of a
merger.
MERIT RATE see MERIT RATING.
MERIT RATING system of charges to an insured that fluctuates
according to the loss experience of that insured. This is a form of
EXPERIENCE RATING. See also PROSPECTIVE RATING; RETROSPECTIVE RATING.

MESSENGER INSURANCE see MESSENGER ROBBERY INSURANCE.

MESSENGER ROBBERY INSURANCE coverage for an insured
who is authorized to convey property such as money, securities,
and other valuables, away from a business's premises.
MEXICO INSURANCE coverage through an endorsement to the
PERSONAL AUTOMOBILE POLICY (PAP) to extend its protection against accidents

within a 25 mile radius of the U.S. border. This coverage is excess

over liability insurance with a licensed Mexican insurance
company. The purchase of Mexican liability insurance is a
prerequisite to the extended coverage of PAP.
MFL see MAXIMUM FORESEEABLE LOSS.
MIB see MEDICAL INFORMATION BUREAU.
MIDI TAIL automatically extended reporting period of five years,
during which claims may be made after a CLAIMS MADE BASIS LIABILITY
COVERAGE policy has expired, provided these claims are the result of

an event that took place within 60 days of the termination of the

policy. See also INCURRED BUT NOT REPORTED LOSSES (IBNR); LONG-TAIL LIABILITY.
 Page 312
MILITARY SERVICE EXCLUSION clause common to life and
health insurance policies issued during wartime that exclude
benefits for military service-connected perils of death, disability,
illness, accident, or sickness. This clause is usually canceled with
the declaration of peace.
MILLION DOLLAR ROUND TABLE (MDRT) association of life
insurance agents who meet minimum life insurance sales standards
predetermined each year by the organization. Membership is a
primary goal of professional life insurance agents, as it denotes
personal sales achievement.
MINIMUM AMOUNT POLICY see MINIMUM BENEFIT.
MINIMUM BENEFIT smallest face amount of life insurance that
an insurance company will write on any one person.
MINIMUM CONTINUATION PREMIUM smallest PREMIUM
necessary to keep the life insurance policy in force regardless of
the current mortality, interest, and expense experience of the
insurance company. This type of premium is usually associated
with UNIVERSAL LIFE INSURANCE.
MINIMUM CONTRIBUTION see MINIMUM PREMIUM PLAN.
MINIMUM DEPOSIT INSURANCE see FINAL INSURANCE (MINIMUM DEPOSIT
INSURANCE).

MINIMUM DEPOSIT RESCUE technique designed to permit the

exchange of a life insurance policy that has an outstanding loan
charged against it for another life insurance policy on a tax-free
basis. The procedure is for the insurer to issue a new policy subject
to a loan in the amount equal to the outstanding loan on the old
policy. If the new policy so issued is of the form of a FLEXIBLE PREMIUM
policy such as UNIVERSAL LIFE, the loan from the old policy can be
replaced by the new policy assuming the loan.
MINIMUM DEPOSIT WHOLE LIFE INSURANCE ORDINARY LIFE
INSURANCE that generates a first year cash value from the payment of

the first year premium. Using this cash value, loans could be made
to finance premiums due in the future, with the interest deductible
for tax purposes under specified IRS rules. However, the 1986 Tax
Code revision appears to have canceled this arrangement.
MINIMUM DISTRIBUTION REQUIREMENTS AND TAXES
FROM SECTION 401(a), 403(a), 403 RETIREMENT PLAN OR
IRA requirement that income payments must begin from tax-
deferred saving programs by April 1 of the calendar year after the
calendar year in which the plan participant becomes age 70 1/2 or
retires.
MINIMUM GROUP smallest number of individuals for which an
insurance company will issue a policy. A minimum number is
required
 Page 313
because the fixed expenses of placing a policy on the books exist
regardless of the size of a group.
MINIMUM PREMIUM DEPOSIT PLAN see MINIMUM DEPOSIT WHOLE LIFE
INSURANCE.

MINIMUM PREMIUM PLAN smallest acceptable premium for

which an insurance company will write a policy. This minimum
charge is necessary to cover fixed expenses in placing the policy on
the books.
MINIMUM STANDARDS lowest acceptable criteria that a risk
must meet in order to be insurable. For example, life insurance
companies require an applicant for individual (nongroup)
coverages to be free of terminal illness.
MINI TAIL automatically extended reporting period of 60 days,
during which claims may be made after a CLAIMS MADE BASIS LIABILITY
COVERAGE policy has expired. See also INCURRED BUT NOT REPORTED LOSSES (IBNR);

LONG-TAIL LIABILITY.

MINOR'S TRUST (2503(c)) TRUST whereby asset management is

provided until a child reaches the age of majority. Upon reaching
majority, the child has full use and control over the assets. The
GRANTOR of the trust cannot receive any income from the assets held

in the trust. All undistributed income is taxed at trust rates, which

are low. The grantor, through this type of trust, is able to control the
time at which the minor has access to the assets given to him or her
by the grantor (who wishes to take advantage of the annual GIFT TAX
exclusion). See also ESTATE PLANNING DISTRIBUTION; GIFT IN TRUST.
MISCELLANEOUS EXPENSES hospital charges in addition to
room and board. Miscellaneous expenses are covered under a basic
hospital plan, with the limits of coverage expressed either as a
multiple of the daily hospital benefit for room and board or as a flat
dollar amount. Expenses included in the coverage are X-rays,
drugs, bandages, operating room expenses, and ambulance
services. See also GROUP HEALTH INSURANCE; HEALTH INSURANCE; HEALTH MAINTENANCE
ORGANIZATION (HMO).

MISCELLANEOUS VEHICLES COVERAGE endorsement to the

PERSONAL AUTOMOBILE POLICY (PAP) that insures other motorized vehicles such

as golf carts and motorcycles owned by a policyholder.

MISREPRESENTATION (FALSE PRETENSE) intent to defraud.
An insured is required to answer truthfully all questions on the
application. The insurance company can void a contract if it would
not have issued a policy had it known the true facts. For example,
on a PERSONAL AUTOMOBILE POLICY application, if the insured answers that
the car is used only for pleasure (when in fact it is used in stock car
races), the insurance company can void the policy.
MISSTATEMENT OF AGE falsification of birth date by an
applicant for a life or health insurance policy. If the company
discovers that the
 Page 314
wrong age was given, the coverage will be adjusted to reflect the
correct age according to the premiums paid in.
MISSTATEMENT OF AGE OR SEX CLAUSE see MISSTATEMENT OF AGE.
MIXED AGENCY AGENCY that sells INSURANCE POLICIES from both a STOCK
INSURANCE COMPANY and a MUTUAL INSURANCE COMPANY.

MIXED INSURANCE COMPANY one that combines the two

forms of ownership, stock and mutual. A STOCK INSURANCE COMPANY is
owned by stockholders, whereas a MUTUAL INSURANCE COMPANY is owned by
its policyholders. A mixed company is owned in part by
stockholders and in part by policyholders. Most mixed companies
issue participating and nonparticipating policies.
MIXED PERILS several different types of perils covered under
one policy. See also HOMEOWNERS INSURANCE POLICY; PERSONAL AUTOMOBILE POLICY (PAP);
COMMERCIAL PACKAGE POLICY (CPP).

MOBILE EQUIPMENT INSURANCE see CONTRACTORS EQUIPMENT FLOATER.

MOBILE HOME INSURANCE coverage similar to a HOMEOWNERS
INSURANCE POLICY in that Section I covers property exposure and Section

II covers liability exposure.

1. Section I (property) Coverage Astructural coverage of the
mobile home; Coverage Bunscheduled personal property coverage;
Coverage Cadditions to the structure of the mobile home to include
equipment; Coverage Dadditional living expense.
2. Section II (liability) Coverage Eliability coverage for personal
acts and/or omissions; Coverage Fmedical payments to others.
MODE frequency of premium payment; for example annually,
semiannually, quarterly, or monthly.
MODEL INSURERS SUPERVISION, REHABILITATION, AND
LIQUIDATION ACT OF 1977 model law endorsed by the NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) giving state regulators broad new

powers to deal with financially troubled insurance companies. The

act was intended to replace the model Insurers Rehabilitation and
Liquidation Act, which the NAIC endorsed in 1969. The new
model would make it easier for insurance commissioners to gain
control of impaired insurers by listing new grounds for placing
them in LIQUIDATION AND REHABILITATION. The act also sets liquidation
standards for interstate cooperation among regulators.
MODEL SURPLUS LINES LAW law that requires that all SURPLUS
LINES insurance companies maintain a minimum specified amount of

CAPITAL and SURPLUS; also requires that ALIEN INSURERS maintain a trust fund

on location in the United States.

 Page 315
MODEM device that connects a computer to a telephone line. This
device permits the computer to communicate with other computers
through the telephone system.
MODE OF ENTRY
1. method of gaining illegal entry to perform a criminal act. If a
policyholder makes a claim for loss of jewelry or rugs under a
homeowners policy, or if a business owner makes a claim for
damage caused by vandals, the insurer must establish how the
vandal or burglar gained entry. The mode of entry is important both
(a) to determine that someone did actually enter the premises and
(b) to establish that the policyholder was not unduly negligent.
2. path by which a toxic substance enters the human body, such as
by inhalation, injection, ingestion, or absorption.
MODIFICATION OF CONTRACT adaptation of a standard
insurance contract for special needs. Standard forms do not cover
all needs but they can be adapted by an underwriter, broker, or an
insurance company at the request of an insured. Risk managers
may request many modifications in property and casualty coverage
to meet the needs they have diagnosed for their corporations. Some
risk managers even write their own contracts. Many insurers write
their own contracts as well rather than use forms designed by a
RATING BUREAU.

MODIFICATION RATING (also known as MERIT RATING) method of

setting property insurance rates by modifying or adjusting the
MANUAL RATE for various classifications of risks. Modifications may be

based on past or anticipated loss experience. The three types of

modification rating are EXPERIENCE RATING, RETROSPECTIVE RATING, and SCHEDULE
RATING.

MODIFIED CASH REFUND ANNUITY form of CASH REFUND ANNUITY

used by contributory pension or employee benefit plans. When
employee participants die before receiving all of their contributions
in the form of retirement benefits, this type of annuity guarantees to
repay the remainder of those contributions, with interest, to the
beneficiaries.
MODIFIED LIFE INSURANCE ORDINARY LIFE INSURANCE under which
premiums are calculated so that the first few years of premiums are
less than normal, and subsequent premiums are higher than normal.
See also GRADED PREMIUM, WHOLE LIFE INSURANCE.
MODIFIED PRIOR APPROVAL see RATING BUREAU.
MODIFIED PRIOR APPROVAL RATING form of state rating law
that requires prior approval of property and casualty insurance
premiums by the state insurance department for certain changes.
Here, a state generally allows new rates to go into effect
immediately after filing with the insurance department. However,
changes in classification
 Page 316
of risks or other substantial changes require prior insurance
department approval. There are four methods of rate approval. In
addition to modified prior approval, they are PRIOR APPROVAL RATING, open
competition, and file and use.
MODIFIED RESERVE METHODS accounting procedures that
defer the full funding of a life insurance NET LEVEL PREMIUM RESERVE to
accommodate the policy ACQUISITION COST in the early years of a policy.
First-year policy expenses, such as agent commission, MEDICAL
EXAMINATION, and PREMIUM TAX, often result in little of the PREMIUM remaining

for the premium reserve required under FULL VALUATION RESERVE standards.
In such cases, the difference comes out of the insurer's SURPLUS
ACCOUNT. To avoid this, two types of modified reserve methods are

used: (1) the FULL PRELIMINARY TERM RESERVE VALUATION method, and (2) the
modified preliminary term reserve valuation method, better known
as the commissioners' reserve valuation method. The full
preliminary term method does not require any TERMINAL RESERVE at the
end of the first year and in effect accounts for reserves like term
insurance during this period. This leaves more of the premium
available to cover acquisition cost and first-year claims. In
subsequent years, for reserve accounting purposes, the policy is
considered to have been issued one year later than its actual date on
an insured who was one year older than his actual age. This results
in stepping up additions to the premium reserve, eventually making
up for the first year's shortfall.
The commissioners' reserve valuation method limits first-year
expenses and thus the amount of deferred funding of policy
reserves. Policies whose premiums fall below a certain level can be
accounted for under the full preliminary term method. For policies
with premiums above that level, the full preliminary term method
is modified by a limitation on the amount of expenses that can be
used in figuring the schedule of deferred reserve funding.
MODIFIED RESERVE STANDARDS see MODIFIED RESERVE METHODS.
MODUS OPERANDI method of operation.
MONETARY POLICY federal regulation of the money supply
through changing commercial bank reserve requirements and
interest rates, thereby stimulating the economy or deflating the
economy.
MONEY AND SECURITIES BROAD FORM POLICY coverage
providing protection for a business against loss from a hazard
under the On-Premises Form, that provides ALL RISK protection
against the loss of money and securities; or the Off-Premises Form,
ALL RISK protection against loss of money and securities while they

are in possession of a messenger. There is no coinsurance

deductible requirement.
MONEY DAMAGES payments awarded by a court in a liability
suit. Money damages can be broken down into compensatory and
punitive. Compensatory damages reimburse a plaintiff for expenses
incurred for
 Page 317
such things as disability, disfigurement, and pain and suffering.
Punitive damages go beyond this to punish and make an example
of a defendant. In recent years, punitive damages have become
increasingly common, and insurers claim that the frequency of
multimillion dollar jury awards has made the business of
underwriting difficult.
MONEY MARKET INVESTMENTS short-term investments, to
include the following: commercial paper, interest-bearing balances
with banks, federal funds sold and securities purchased under
agreements to resell, trading account securities, and loans held for
resale.
MONEY MARKET MUTUAL FUND fund that concentrates
primarily on short-term government securities, certificates of
deposit with maturities less than one year, and high-quality
interest-bearing corporate debt. The fund is a pool of money from
many investors from which interest is paid to these investors on the
income earned by that pool of money. Income and yield fluctuate
on a daily basis, but each share in the mutual fund maintains a
constant value of $1, resulting in no capital gains or losses. These
funds are ideal for short-term needs.
Since these funds invest in financial instruments whose maturities
are very short, reinvesting is on a continuous basis. Thus, as
interest rates rise or fall, the funds' yields will correspond
accordingly.
MONEY PURCHASE PLAN contributions to a pension plan on a
fixed basis according to a formula, with variable benefits.
Contributions can be made under an ALLOCATED FUNDING INSTRUMENT (paid to
an insurance company that purchases an individual ANNUITY or a
group DEFERRED ANNUITY), or under an UNALLOCATED FUNDING INSTRUMENT.
Individual benefits will be determined by the person's age, sex,
normal retirement age, and rate schedules in effect at the time the
insurance company receives the contributions. These plans are
appropriate for an organization that must know its premium outlay
in the years ahead. See also DEFINED CONTRIBUTION PLAN.
MONOLINE POLICY insurance protection written in the form of
a single line policy.
MONOPOLISTIC STATE FUND state operated insurance
company used in WORKERS COMPENSATION INSURANCE in some states where the
risks are so great that the commercial insurance companies cannot
operate at affordable rates.
MONTHLY DEBIT ORDINARY INSURANCE (MDO) coverage
in which premiums are collected monthly on an ordinary life
insurance policy. See also DEBIT INSURANCE (HOME SERVICE INSURANCE, INDUSTRIAL
INSURANCE).

MONTHLY INDEMNITY monthly income payment provided by a

DISABILITY INCOME INSURANCE policy to the insured wage earner when

income has been interrupted or terminated because of illness,

sickness, or accident.
 Page 318
MONTHLY REPORTING FORM type of INLAND MARINE insurance
used to provide coverage for domesticated animals, including
poultry, cattle, horses, sheep, and swine. See also LIVESTOCK INSURANCE;
LIVESTOCK MORTALITY (LIFE) INSURANCE. For application to inventory and other

fluctuating values, see also OPEN FORM (REPORTING FORM).

MOP see MANUFACTURERS OUTPUT INSURANCE.
MORALE HAZARD circumstance that increases the probability of
loss because of the insured's indifferent attitude. For example, if an
insured leaves the doors unlocked and the windows open when
leaving home, a morale hazard is created.
MORAL HAZARD circumstance which increases the probability
of loss because of an applicant's personal habits or morals; for
example, if an applicant is a known criminal.
MORBIDITY frequency of illness, sickness, and diseases
contracted.
MORBIDITY ASSUMPTION statistical projection of future
illness, sickness, and disease.
MORBIDITY RATE relationship of the frequency of illness,
sickness, and diseases contracted by individual members of a group
to the entire group membership over a particular time period.
MORBIDITY TABLE number of individuals exposed to the risk of
illness, sickness, and disease at each age, and the actual number of
individuals who incurred an illness, sickness, and disease at each
age.
MORTALITY frequency of death.
MORTALITY ADJUSTMENT additions or subtractions of a
MORTALITY TABLE to reflect changing levels of mortality due to

advancement in medicine, geriatrics, and sanitation. These

adjustments make a mortality table more representative of probable
future death experience.
MORTALITY ASSUMPTION statistical projection of future
deaths.
MORTALITY CHARGES see MORTALITY ADJUSTMENT; MORTALITY RATE; MORTALITY
TABLE.

MORTALITY RATE relationship of the frequency of deaths of

individual members of a group to the entire group membership
over a particular time period.
MORTALITY RISK measure of the sensitivity of the insurance
company's liability for resultant higher mortality rates than charged
for in the premium.
MORTALITY SAVINGS difference between the actual mortality
experience and the expected mortality experience. In statistical
terms, this is known as the deviation of the actual (X) from the
expected (X). The MORTALITY TABLE is conservative by nature in that the
table assumes
 Page 319
more people will die than is the case. When fewer people die than
was assumed by the table, the savings results.
MORTALITY TABLE chart showing rate of death at each age in
terms of number of deaths per thousand.
MORTALITY TABLE WITH PROJECTION MORTALITY TABLE whose
statistics have been adjusted to show expected mortality
experience.
MORTGAGE DEFAULT RATIO insurance company's investment
in mortgages that have defaulted (MORTGAGES IN DEFAULT) divided by its
ADJUSTED SURPLUS account. The smaller this ratio, the more financially

sound the insurance company.

MORTGAGEE CLAUSE attachment to a property insurance
policy to protect the interest of the mortgagee in the mortgaged
property. If the property is damaged or destroyed, the mortgagee is
indemnified up to his or her stated interest in the property.
MORTGAGEE INSURANCE see MORTGAGEE CLAUSE.
MORTGAGE GUARANTEE INSURANCE see MORTGAGE INSURANCE.
MORTGAGE INSURANCE life insurance that pays the balance of
a mortgage if the mortgagor (insured) dies. Coverage is usually in
the form of decreasing term insurance, with the amount of
coverage decreasing as the debt decreases.
MORTGAGE INSURANCE PREMIUM PREMIUM paid by the
mortgagor for MORTGAGE INSURANCE to either a private mortgage
insurance company or to the Federal Housing Administration.
MORTGAGE PROTECTION INSURANCE see MORTGAGE INSURANCE.
MORTGAGE REDEMPTION INSURANCE see MORTGAGE INSURANCE.
MORTGAGES IN DEFAULT total of the insurance company's
mortgages whose interest has not been paid for at least three
months. These are mortgages upon which the insurance company is
in the process of foreclosing, and foreclosed property. See also
MORTGAGE DEFAULT RATIO.

MORTICIANS PROFESSIONAL LIABILITY INSURANCE

coverage for malpractice suits resulting from professional acts
and/or omissions of morticians. See also PROFESSIONAL LIABILITY INSURANCE.
MOTOR TRUCK CARGO INSURANCE protection required
under the Motor Carrier Act of 1935. The policy covers the motor
truck carrier if it is legally liable for the damage, destruction, or
other loss of the customer's property being shipped. This includes
lost packages, broken contents, and stolen articles. Two types of
policies are available: (1) those that list the specific trucks to be
covered in which the
 Page 320
property may be damaged or destroyed; and (2) those that cover all
of the insured's trucks, with no trucks listed specifically. This
coverage is on the Gross Receipts Form, which in essence covers
all operations of a motor carrier.
MOTOR TRUCK CARGO RADIOACTIVE CONTAMINATION
INSURANCE coverage for a common carrier (the insured) for
damage or destruction due to radioactive contamination from
commercial radioisotopes of a property in the custody of the
insured or that of a connecting carrier. Transport of nuclear waste is
excluded.
MOTOR VEHICLES see MOTOR TRUCK CARGO INSURANCE.
MOVING AVERAGE RATING METHOD procedure, in
insurance, used in time series analysis to smooth out irregularities
in projections of loss expectations. Irregularities to be smoothed
out include: (1) loss experience that is not homogeneous, (2) loss
experience from early policy years not representative of current
loss experience, (3) adverse selection by policyholders, (4) changes
in loss experience due to changing social values, and (5) loss
experience distortion due to misleading averages.
MOVING INSURANCE (FOR A MOVING COMPANY) INLAND
MARINE policy to cover liability for goods that belong to clients while

in a mover's possession.
MPL see MAXIMUM POSSIBLE LOSS; MAXIMUM PROBABLE LOSS.
MULTIEMPLOYER PLAN pension or other employee benefit to
cover employees at two or more financially unrelated companies.
The companies may employ workers from the same labor union or
those in the same industry. Employer contributions go into a
common pool from which benefits are paid. Employees may
transfer between employers in the fund and still retain their
benefits. Multiemployer plans have grown rapidly in recent years
as smaller employers band together to provide pension benefits to
employees. See also MULTIEMPLOYER TRUST.
MULTIEMPLOYER TRUST one that provides group health or
pension benefits for a MULTIEMPLOYER PLAN. To lower the cost, small
firms band together to take advantage of the economies of large
group underwriting.
MULTIPERIL POLICY see MULTIPLE PERIL INSURANCE.
MULTIPLE EMPLOYER TRUST see MULTIEMPLOYER TRUST.
MULTIPLE EMPLOYER WELFARE ARRANGEMENT
(MEWA) arrangement by which two or more employers form a
coalition to offer a health plan to their employees. The purpose of
the coalition is not to purchase health insurance. The MEWAs can
be self-insured or fully insured and are subject to the regulations of
each state. The objective of the MEWA is to provide a mechanism
through which the small
 Page 321
employers can have access to affordable health care for their
employees through their combined purchasing power.
MULTIPLE INDEMNITY see ACCIDENTAL DEATH CLAUSE.
MULTIPLE LINE CONTRACT see MULTIPLE LINE INSURANCE.
MULTIPLE LINE INSURANCE combination of coverages from
property and liability policies. See also HOMEOWNERS INSURANCE POLICY;
PERSONAL AUTOMOBILE POLICY (PAP); COMMERCIAL PACKAGE POLICY.

MULTIPLE LINE INSURANCE COMPANY INSURANCE COMPANY that

underwrites and sells more than one LINE of insurance.
MULTIPLE LINE LAW state legislation that allows insurers to
offer both property and casualty insurance. At one time, U.S.
insurers sold only one type of insurance, a practice that gradually
became written into state law. Most significantly, New York State,
where many insurers want to be licensed, allowed insurers to write
only one line of insurance early in this century. But in 1949 New
York passed a multiple line law, and most other states followed.
MULTIPLE LOCATION FORMS type of coverage of property
owned by one person at several locations, including merchandise,
materials, fixtures, furniture, specified machinery, betterments, and
improvements made by tenants.
MULTIPLE LOCATION POLICY see MULTIPLE LOCATION FORMS.
MULTIPLE LOCATION RISKS see MULTIPLE LOCATION FORMS.
MULTIPLE PERIL INSURANCE personal and business property
insurance that combines in one policy several types of property
insurance covering numerous perils. However, no liability
insurance is provided.
MULTIPLE PROTECTION LIFE INSURANCE POLICY single
LIFE INSURANCE policy combining TERM LIFE INSURANCE and ORDINARY LIFE INSURANCE.

If the INSURED dies during the term period, a multiple of the FACE AMOUNT
is paid to the BENEFICIARY. If the insured dies after the term period has
expired, only the face amount is paid to the beneficiary. For
example, if the insured dies during the first 10 years that the policy
is in force, three times the face amount is paid to the beneficiary;
after the 10 years expires, the single face amount is paid to the
beneficiary. Thus, during the multiple protection period both term
insurance and ordinary life insurance are in force; after the multiple
protection period expires, only ordinary life insurance is in force.
MULTIPLE RETIREMENT AGES arrangement by which an
employee can retire and receive full benefits without reduction, or
reduced benefits subject to a penalty. These ages can be classified
in the following manner:
1. normal retirementearliest an employee can retire and receive full
benefits, having reached a minimum age with a minimum number
of years of service.
 Page 322
2. early retirementearliest an employee can retire, having reached a
minimum age and a minimum number of years of service, but with
a penalty in the form of a reduction in benefits. The reduction is
usually a percentage of benefit subtracted for each month of
retirement earlier than the normal retirement age.
3. deferred retirementwork beyond the normal retirement age. This
may or may not result in an increase of benefits.
MUNICIPAL BOND INSURANCE coverage that guarantees
bondholders against default by a municipality. This form of
financial guarantee was introduced in the early 1970s and became a
runaway success. Municipalities embraced it because their
offerings took on the credit rating of the company that wrote the
insurance, rather than their own ratings. It meant that most
municipal bond offerings were elevated to Triple-A, and
municipalities could raise money at a lower rate of interest. For
investors, it made municipal bonds less risky.
MUNICIPAL INSURANCE property and/or liability coverage for
a municipality. Municipalities are responsible for maintenance of
throughways as well as a myriad of public services. Liability
insurance for municipalities became an issue in the insurance
crunch of 1985-1986, when this coverage became difficult to find,
or became overly expensive. The problem was aggravated by court
decisions in negligence cases in which the doctrine of joint and
several liability came into play. This doctrine provides that a
judgment against several defendants could be collected from one if
the others were unable to pay. A municipality found to have been
10% liable in a traffic accident because of the improper placement
of a stop sign might end up paying 100% of the judgment if the
driver who was 90% responsible had no assets. This resulted in
sharply higher premiums for municipal insurance.
MUSICAL INSTRUMENTS INSURANCE coverage for
musicians and other providers of musical services such as musical
instrument dealers. Musical instruments, service equipment, and
sheet music are insured on an ALL RISKS basis at any location, subject
to exclusions of wear and tear, war, and nuclear disaster. Each item
must be specifically listed in the policy.
MUTUAL ASSENT offer and acceptance upon which an
agreement is based. For a contract to be legal (and thus enforceable
in a court of law), an offer must be made by one party to another
party, who accepts the offer. If properly negotiated, the insurance
contract is deemed to be a contract of mutual assent.
MUTUAL ATOMIC ENERGY REINSURANCE POOL group of
mutual insurers that provides insurance for nuclear reactors that
standard property and liability policies exclude. The federal
government provides supplementary coverage. See also NUCLEAR
ENERGY LIABILITY INSURANCE.
 Page 323
MUTUAL BENEFIT ASSOCIATION see ASSESSMENT COMPANY; ASSESSMENT
INSURANCE; ASSESSMENT PERIOD.

MUTUAL FUND combination of contributions of many investors

whose money is used to buy stocks, bonds, commodities, options,
and/or money market funds, or precious metals such as gold, or
foreign securities. In theory, mutual funds offer investors
professional money management and diversification into
conservative investments, aggressive investments, or combinations
of these. Mutual funds are sold either with a sales charge (load), no
sales charge (no-load), or a moderate sales charge (low load).
These funds charge a management fee as a percentage of assets
under management, usually 1% per year on a downward sliding
scale as the asset base increases. Many insurance companies sell
mutual funds.
MUTUAL FUND INSURANCE financial guarantee policy that
insures against loss of principal invested in a mutual fund.
MUTUAL INSURANCE COMPANY company owned by its
policy-owners; no stock is available for purchase on the stock
exchanges. See also DIVIDEND OPTION, PARTICIPATING INSURANCE; STOCK INSURANCE
COMPANY.

MUTUALIZATION transformation of a STOCK INSURANCE COMPANY into a

MUTUAL INSURANCE COMPANY, in which the stock company buys up and

retires its shares.

MUTUALIZATION OF RISK process of distributing the costs
associated with losses and risks over a number of insureds.
MUTUALLY EXCLUSIVE describing an instance where the
occurrence of one event precludes the occurrence of a second
event; for example, if a long-distance runner dies during a track
meet, the runner cannot enter future track meets.
MUTUAL MORTGAGE INSURANCE FUND fund that insures
mortgages on homes for one to four families; also insures property
improvement loans and loans to repair homes after a disaster. It is
one of three funds operated by the Federal Housing Administration,
which oversees mortgage guarantee insurance.
MYSTERIOUS DISAPPEARANCE EXCLUSION policy clause
that excludes coverage for loss of property if the cause of the loss
cannot be identified. Mysterious disappearance is an exclusion in a
standard INLAND MARINE insurance all-risks policy. Because some theft
insurance policies do not contain this exclusion, they implicitly
insure against mysterious disappearance and would cover the loss
of a diamond necklace, for example, even if the owner did not
recall how it had been lost.
 Page 324

N
NAIB see NATIONAL ASSOCIATION OF INSURANCE BROKERS (NAIB).
NAIC see NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC).
NAIC: ACCELERATED BENEFITS GUIDELINE FOR LIFE
INSURANCE NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS model state law of the NAIC that stipulates
that the prospective purchaser of a DREAD DISEASE INSURANCE policy
(catastrophic illness insurance policy) must be provided a
quantitative illustration of the accelerated payout's effect on the
DEATH BENEFIT, POLICY LOAN, PREMIUMS, and CASH VALUE of the life insurance policy.

In addition, the prospective purchaser must be furnished a

summary of the accelerated benefits to be provided.
NAIC: INFORMATION AND PRIVACY PROTECTION MODEL
ACT NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS model state law designed to govern use of
information collected from insurance applications. The law forbids
any insurer or agent from impersonating someone else to gain
information about an applicant, unless there is reasonable cause to
suspect criminal activity. The law also provides that an insurer
must give timely notice of renewal and other company policies. It
also governs the method in which an insurer can gain information
about a policyholder and the use that can be made of it. All
applicants are allowed access to information that the insurer has
collected about them, the right to correct it if wrong, and to learn
the reason they were turned down for insurance.
NAIC: INVESTMENT IN MEDIUM GRADE AND LOWER
GRADE OBLIGATIONS NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS MODEL LAW model state law
of the NAIC that stipulates that the total sum of medium grade
bonds (bonds carrying a rating of 3, assigned by the Securities
Valuation Office of the NAIC) and lower grade bonds (bonds
carrying a rating of 4, 5, or 6, assigned by the Securities Valuation
Office of the NAIC) cannot be greater than 20% of the insurance
company's ADMITTED ASSETS. The total sum of bonds rated 4, 5, or 6
cannot exceed 10% of the company's admitted assets. In addition,
no more than 3% of the admitted assets can be in bonds carrying a
rating of 5 or 6; and no more than 1% of the admitted assets can be
in bonds carrying a rating of 6. Bonds are rated by the Securities
Valuation office from 1 (highest rating representing debt
obligations of companies in excellent financial condition) to 6
(lowest rating representing debt obligations of companies in very
poor financial condition).
NAIC: LIFE INSURANCE DISCLOSURE MODEL
REGULATION NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS model state law of the NAIC that requires that
two interest
 Page 325
adjusted cost indices must be illustrated within each life insurance
policy issued: (1) NET PAYMENTS INDEX; and (2) SURRENDER COST INDEX.
NAIC: LONG-TERM CARE INSURANCE MODEL ACT
NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS model state law of the NAIC setting minimum
standards with which insurance products must comply if they are to
qualify under the definition of a LONG-TERM CARE (LTC) insurance policy.
These minimum standards include the following:
1. Policies must be a GUARANTEED RENEWABLE CONTRACT.
2. Specific illnesses (health problems) cannot be excluded from
coverage.
3. Summary of the policy in outline form must be provided the
insured.
4. FREE EXAMINATION ''FREE LOOK" PERIOD must be included in the policy during
which time the POLICYHOLDER may cancel the policy for any reason and
receive the return of the premiums paid in.
5. Essentially the same benefits for custodial care and skilled
nursing care must be provided by the policy.
NAIC: MODEL ACT FOR LIFE AND HEALTH INSURANCE
POLICY LANGUAGE SIMPLIFICATION NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS model
state law of the NAIC that requires that the insurance policy
contain language that meets a readability test (usually, the Flesch
readability test that uses a formula approach to measure ease of
reading), print used is subject to a minimum size, and a table of
contents or index is to be included.
NAIC: MODEL ANNUITY AND DEPOSIT FUND
DISCLOSURE REGULATION NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS model state law of the NAIC
that requires that APPLICANT be furnished a Buyer's Guide to Annuities
and a contract summary. The Buyer's Guide must contain
information concerning: (1) the various kinds of annuity contracts
available to fit the prospective ANNUITANT'S requirements; (2) the
characteristics of annuities in general; and (3) benefits of the
annuity contract.
The contract summary must contain: (1) the CASH VALUES at the end of
each year for the initial ten-year contract period; (2) DIVIDENDS (if a
participating contract) each year for the initial ten-year contract
period; (3) DEATH BENEFIT each year for the initial ten-year contract
period; (4) yield on the GROSS PREMIUMS paid at the end of the initial ten-
year contract period; and (5) date income payments are scheduled
to commence to the annuitant.
NAIC: MODEL ASSET VALUATION ACT NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS model
state law providing guidelines by regulators for valuation of
securities on the books of insurance companies. The act has two
sections: one for valuation of fixed rate bonds and debt securities,
and the other covering valuation
 Page 326
of other securities such as common and preferred stocks as well as
stock in an insurance company's subsidiaries. The model law
provides that bonds be valued at cost, adjusted for any purchase
discounts or premiums. Preferred and guaranteed stocks while
paying dividends can be carried at par value, while other securities
such as common stocks are carried at market or appraised value.
Valuation of stock in subsidiaries is limited by the law to no more
than the value of the subsidiary's ADMITTED ASSETS when valued as if
they were on the books of the insurance company parent.
NAIC: MODEL BILL TO PROVIDE FOR THE REGULATION
OF CREDIT LIFE INSURANCE NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS model state law of the NAIC
that stipulates that the purchaser (debtor) of a CREDIT LIFE INSURANCE
(CREDITOR LIFE INSURANCE) policy must be provided a descriptive policy; the

policy must terminate if the indebtedness is discharged or if the

indebtedness is transferred to another creditor; there must be
complete disclosure of the premium charges to the debtor, and any
unearned premiums must be refunded to the debtor.
NAIC: MODEL GROUP LIFE INSURANCE DEFINITION AND
GROUP LIFE INSURANCE STANDARD PROVISIONS
MODEL ACT model state law of the NAIC setting general
standards for group life insurance contracts. It specifies which
types of organizations can sponsor group life insurance plans and
outlines the authority of the state regulator, including the power to
require reasonable premiums. It contains consumer protection
provisions such as a 31-day GRACE PERIOD for late payment of
premiums, a clause making the policy not contestable after two
years except for nonpayment of premium, and a CONVERSION PRIVILEGE,
allowing an insured to convert a group insurance policy to an
individual policy, regardless of state of health.
NAIC: MODEL LIFE INSURANCE DISCLOSURE
REGULATION NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS model state law of the NAIC that requires that
the insurance company and agent provide a prospective insured
with written information concerning the cost and benefits of the life
insurance policy under consideration for purchase. The information
to be provided must be in the form of a buyer's guide and a policy
summary. The buyer's guide is written in language that is dictated
by regulation and must contain information concerning: (1) the
appropriate amount of life insurance to purchase; (2) a comparison
of the costs associated with the purchase of similar life insurance
policies; and (3) the various kinds of life insurance policies
available to fit the prospective insured's requirements.
The policy summary must contain: (1) premiums to be paid each
year for the initial five-year policy period; (2) CASH VALUES at the end
of each year for the initial five-year policy period; (3) DIVIDENDS (if a
PARTICIPATING POLICY) each year for the initial five-year period; and (4)
 Page 327
each year for the initial five-year period. In addition, the
DEATH BENEFIT

name and address of the insurance company must be listed, as well

as the insurance policy's generic name.
NAIC: MODEL LIFE INSURANCE SOLICITATION
REGULATION NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS model state regulation that governs method of
selling life insurance to prevent fraud or misrepresentation by
agents or insurers. A life insurance disclosure model regulation to
help buyers understand the basic policy features and evaluate costs
of similar insurance plans was adopted on an interim basis in 1973
and revised in 1976 and 1983. Today, insurers must provide a
buyer's guide and a policy summary to prospective buyers. Insurers
must keep files of authorized documents; agents must identify
themselves and the company they represent and cannot represent
themselves as financial planners or investment advisers unless they
in fact are. In addition, reference to a dividend or any
nonguaranteed item must be identified as such.
NAIC: MODEL POLICY LOAN INTEREST RATE BILL
NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS bill that allows the insurance company to
include a CLAUSE in its POLICY that permits the POLICYHOLDER to make a
POLICY LOAN at a variable interest rate on new policies. Under this

clause, the following must be instituted by the insurance company:

(1) interest rate cannot be changed more than four times each year;
(2) at least once each year, an evaluation must be made of the
requirement for any change in the interest rate; (3) interest rate
cannot be changed to that of a rate higher than Moody's Composite
Yield on seasoned corporate bonds, which is in effect two months
prior to the establishment of the new rate or to a rate higher than
the interest rate being credited to the CASH VALUE plus 1%. The
rate change calculation that is utilized is the decision of the
insurance company. No change in the interest rate can be made
unless the adjustment is for an increase of at least one-half of 1%.
Should the interest rate charged on policy loans currently decrease
to an amount at least equal to one-half of 1% of that rate currently
being charged, then the variable loan rate must be lowered in turn.
There remains no requirement for the insurance company to
actually increase the interest rate or to use a variable interest rate;
the sole use of fixed interest rates is still permissible.
NAIC: MODEL RATING LAWS NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS state laws based on a model
law of the NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) that allow
insurers to (1) set rates independently; or (2) adopt those rates
developed by a rating bureau that must first be approved by the
appropriate state regulator. Because state regulators believe that
rate wars can be disastrous to the financial health of insurers,
insurance companies are allowed to band together to set standard
rates through rate making bureaus. Model rating laws also allow
independent insurers to
 Page 328
set their own rates, but prohibit the return of part of a premium to
the insured other than as a dividend. Legislation developed from
this model bill is called a prior approval law because the
appropriate insurance commissioner must approve the rates
involved. Other major types of rating laws are FILE-AND-USE RATING LAWS
and OPEN COMPETITION LAWS.
NAIC: MODEL UNIFORM INDIVIDUAL ACCIDENT AND
SICKNESS POLICY PROVISIONS LAW model state law of the
NAIC that stipulates minimum benefits that must be contained in
the policy's 12 required provisions and 11 optional provisions. The
most significant stipulations of the required provisions include: (1)
GRACE PERIOD; (2) REINSTATEMENT clause; and (3) INCONTESTABLE CLAUSE. The most

significant stipulation of the optional provisions include the

MISSTATEMENT OF AGE clause.

NAIC: MODEL UNIVERSAL LIFE INSURANCE

REGULATION NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS model state law of the NAIC that stipulates
minimum NONFORFEITURE VALUES, minimum VALUATION OF ASSETS requirements,
and specific minimum policy PROVISIONS in UNIVERSAL LIFE INSURANCE
products.
NAIC: 1984 MODEL REPLACEMENT REGULATION
NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS model state law of the NAIC that requires the
insurance agent who is replacing the policy to: (1) give the
POLICYHOLDER a replacement notice; (2) forward a signed copy of the

replacement notice to the replacing insurance company; and (3)

forward copies of all sales proposals made to the policyholder.
Model also requires the agent who is making a CONSERVATION effort to
provide the policyholder and insurance company a copy of all
materials associated with that effort.
NAIC: STANDARD NONFORFEITURE LAW NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS model
state statute that governs terms for surrender of individual deferred
annuities and CASH VALUE LIFE INSURANCE. This model, adopted by most
states in the late 1970s and early 1980s, requires that annuity and
whole-life contracts have certain minimum values that are not
forfeited by policyholders even if a policy is canceled. A formula is
given for computing the present value, cash surrender value, and
paid-up annuity benefits. The model requires insurers to state
clearly if an annuity has limited or no death benefits.
NAIC: STANDARD VALUATION LAW NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS law that
stipulates the minimum RESERVE the life insurance company
must maintain for its LIFE INSURANCE policies and ANNUITY contracts. This
law was first developed by the NAIC as a method of calculation for
reserves that would incorporate the first-year expenses incurred by
the insurance company.
 Page 329
NAIC: VARIABLE ANNUITY MODEL REGULATION
NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS model state law of the NAIC that stipulates
that the contract owner must receive annual reports concerning the
annuity unit values, the manner in which the variable benefits are
calculated, and how separate account categories are maintained for
the investments.
NAIC: VARIABLE LIFE INSURANCE MODEL REGULATION
ACT NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS model state law that stipulates minimum
benefits that must be contained in the policy provisions, restrictions
on policy illustrations, minimum reserve requirements, and
minimum qualifications necessary for the insurance company to
sell VARIABLE LIFE INSURANCE (VLI). Some of the policy provisions, in
addition to those found under the STANDARD PROVISIONS, LIFE INSURANCE,
particular to VLI required by the NAIC regulation include: (1) if
REINSTATEMENT of a VLI policy is to be effected, past-due premiums

paid cannot be less than 110% of the increase in the policy's CASH
VALUE immediately prior to the reinstatement; and (2) loans against

the cash value may be made on either a fixed or a variable interest

rate for an amount up to 90% of the cash value.
NAII see NATIONAL ASSOCIATION OF INDEPENDENT INSURERS (NAII).
NAMED INSURED person, business, or organization specified as
the insured(s) in a property or liability insurance policy. In some
instances, the policy provides broader coverage to persons other
than those named in the policy if they have the insured's permission
to use the property that is insured. For example, someone who
drives a car with the permission of the owner is protected by a
 . In other cases, if the owner of a property
PERSONAL AUTOMOBILE POLICY (PAP)

is not named as an insured party, his or her interests may not be

protected by the policy. For example, if two persons own a home
and only one is named on the HOMEOWNERS INSURANCE POLICY, the interest of
the other may not be covered. See also OTHER INSUREDS.
NAMED NONOWNER COVERAGE insurance under the PERSONAL
AUTOMOBILE POLICY (PAP) through a named nonowner coverage

endorsement offering protection for LIABILITY, uninsured motorists,

and medical payments to a named insured who does not own an
automobile.
NAMED PERIL POLICY insurance contract under which covered
perils are listed. Benefits for a covered loss are paid to the
policyowner. If an unlisted peril strikes, no benefits are paid. For
example, under the standard fire policy, fire is a particular listed
peril. If an insured's home burns, he will be indemnified. See also
ALL RISKS.

NAME POSITION BOND FIDELITY BOND that covers a business if

employees in listed positions commit dishonest acts, such as
stealing money. See also BLANKET BOND; NAME SCHEDULE BOND.
 Page 330
NAME SCHEDULE BOND FIDELITY BOND under which an insured
employer is reimbursed for loss caused by the dishonest act of two
or more employees named or listed in a schedule attached to the
bond. The specific amount of coverage is listed beside the name of
each employee on the schedule. Coverage is the same as that found
under the individual fidelity bond. See also INDIVIDUAL FIDELITY BOND.
NATIONAL ASSOCIATION OF INDEPENDENT INSURANCE
ADJUSTERS (NAII) trade group of independent claims adjusters
who settle claims for insurance companies on a fee basis. Some
insurers use their own staff adjusters to settle a claim. Others use
an INDEPENDENT ADJUSTER or, perhaps, both.
NATIONAL ASSOCIATION OF INDEPENDENT INSURERS
(NAII) trade association of property and casualty insurance
companies that do not have membership in a rating bureau. These
companies do not follow standard rates and forms authored by a
rating bureau.
NATIONAL ASSOCIATION OF INSURANCE BROKERS
(NAIB) trade association of commercial insurance brokers whose
objective is to further the interests of these brokers through
education, lobbying, and adherence to professional ethics.
NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS (NAIC) membership organization of state
insurance commissioners. One of its goals is to promote uniformity
of state regulation and legislation as it concerns the insurance
industry. The NAIC opposes federal regulation of insurance. The
organization has achieved considerable national uniformity through
the adoption of a uniform blank for insurance companies' annual
financial reports, a ZONE SYSTEM for the triennial examinations of
insurance companies, a standard valuation law for reserves,
standard nonforfeiture benefits, and model laws for valuation of the
insurance company's securities.
NATIONAL ASSOCIATION OF INSURANCE WOMEN
(NAIW) educational organization for insurance women whose
objective is to further the interests of these women through
education and adherence to professional ethics.
NATIONAL ASSOCIATION OF LIFE COMPANIES (NALC)
membership organization primarily of medium and small life and
health insurance companies. It represents the views and interests of
smaller companies in various political forums.
NATIONAL ASSOCIATION OF LIFE UNDERWRITERS
(NALU) organization of local life underwriter associations
representing life and health insurance agents on practices of selling
and servicing life and health insurance products. NALU sponsors
public service programs nationally.
NATIONAL ASSOCIATION OF MUTUAL INSURANCE
COMPANIES (NAMIC) largest property and casualty insurance
company
 Page 331
trade association in the world (international membership) whose
objectives include the service of its membership through positive
legislation information, education, and communication. The
international membership is comprised of over 1,250 companies
and celebrated its 100th year anniversary in 1995.
NATIONAL ASSOCIATION OF PROFESSIONAL INSURANCE
AGENTS see PROFESSIONAL INSURANCE AGENTS (PIA).
NATIONAL ASSOCIATION OF PROFESSIONAL SURPLUS
LINES OFFICES, LTD. (NAPSLO) trade association of SURPLUS LINES
agents and INSURERS.
NATIONAL ASSOCIATION OF PUBLIC INSURANCE
ADJUSTERS trade association whose objective is to further the
interests of its membership, as well as to inform the public on the
role of its members.
NATIONAL ASSOCIATION OF SECURITIES DEALERS
(NASD) organization of brokers and securities dealers in the over-
the-counter market operating under the auspices of the Securities
and Exchange Commission (SEC). Its purpose is to enforce, on a
self-regulating basis, the rules of the SEC, which are designed to
protect investors against fraud and market manipulation of stocks.
The NASD also publishes quotations of both national and regional
stocks. Insurance agents selling VARIABLE LIFE INSURANCE, variable
annuities and MUTUAL FUNDS are required to be licensed by the NASD.
NATIONAL AUTOMOBILE THEFT BUREAU (NATB)
organization of property insurance companies whose goal is to
prevent and uncover fraudulent automobile fire and theft claims.
NATIONAL BOARD OF FIRE UNDERWRITERS now-defunct
bureau founded by fire insurance underwriters in 1866 to work for
fire prevention and loss control. The board helped standardize the
fire insurance policy. In the mid-1960s, the National Board of Fire
Underwriters merged into the American Insurance Association. In
1971, 30 national and regional rating bureaus merged to form the
INSURANCE SERVICES OFFICE (ISO).

NATIONAL BUILDING CODE set of standard safety guidelines

adopted by many states to help provide uniformity in building
construction and guard against fire hazards and other unsafe
conditions in buildings.
NATIONAL COMMISSION ON STATE WORKERS
COMPENSATION LAWS group appointed by President Nixon in
1971 to study workers compensation laws under the authorization
of the OCCUPATIONAL SAFETY AND HEALTH ACT (OSHA). It issued sweeping
recommendations to upgrade state workers compensation laws,
including higher disability benefits, compulsory coverage, and
unlimited medical care and rehabilitation benefits. Most states
adopted the recommendations with a resulting increase in
premiums for the new benefits.
 Page 332
NATIONAL CONFERENCE OF STATES ON BUILDING
CODES AND STANDARDS group responsible for developing,
updating, and publishing the NATIONAL BUILDING CODE.
NATIONAL COUNCIL ON COMPENSATION INSURANCE
membership organization of insurance companies that write WORKERS
COMPENSATION INSURANCE. The organization collects statistics on the

FREQUENCY and severity of job-related injuries to establish a rate

structure for member companies, files rate plans with insurance

commissioners offices for member companies, and generates forms
and policies for member companies.
NATIONAL EMERGENCY MANAGEMENT ASSOCIATION
(NEMA) association comprised of 59 state and territorial
emergency management directors having as its purpose the
reduction of losses from natural disasters. The respective directors
work directly for their state governors to plan for, respond to, and
recover from disasters in their states.
NATIONAL FIRE PROTECTION ASSOCIATION (NFPA)
private, not-for-profit-group that develops and publishes safety
codes and standards relating to protection of people and property
against fire. The NFPA is financed by fees for technical manuals
and other material. Most fire safety laws are developed from
research done by this organization.
NATIONAL FLOOD INSURANCE PROGRAM coverage against
flooding for personal and business property under the National
Flood Act of 1968, which encourages participation by private
insurers in the program through an industry flood insurance pool.
Property insurance companies with assets of $1 million or more
may become members, either as risk bearers (who may issue their
own policies) or as nonrisk bearers (who are limited to act as fiscal
agents for the pool, and hence must use a syndicate-type policy as
dictated by the pool). National Flood Insurance makes reasonable
coverage available to those who could not buy it through private
insurers before the 1968 act, and it encourages maximum
participation extent by the private sector.
NATIONAL FLOOD INSURERS ASSOCIATION pool of private
insurers that provide initial flood insurance in cooperation with the
U.S. Department of Housing and Urban Development (HUD). In
1978, the association was superseded by the NATIONAL FLOOD INSURANCE
PROGRAM administered by HUD.

NATIONAL HEALTH INSURANCE government health care

program in several European countries that has been proposed in
various forms for the U.S., to be administered by the federal
government.
1. Plan Awould cover all U.S. residents. Comprehensive benefits,
financed by a combination of payroll taxes and general revenues,
would include physician services, inpatient and outpatient hospital
care, home health services, and supporting services such as
optometry, podiatry, devices and appliances, and dental care.
 Page 333
2. Plan Bwould expand MEDICARE to cover the general population.
3. Plan Cwould pay premiums for the needy and allow income tax
credits for others to purchase private health insurance. The entire
U.S. population would be covered. Individuals with no federal
income tax liability would receive full payment of health insurance
premiums.
NATIONAL INSTITUTE FOR OCCUPATIONAL SAFETY AND
HEALTH federal agency that researches injury and illness arising
from workplace hazards and recommends standards for maximum
exposures to hazardous substances.
NATIONAL INSURANCE DEVELOPMENT CORPORATION
government group that provides reinsurance for private insurers
that write RIOT AND CIVIL COMMOTION INSURANCE. Riot losses in major cities in
the 1960s caused insurers to stop writing this coverage in certain
urban areas, whereupon Congress created FEDERAL CRIME INSURANCE and
the National Insurance Development Corporation.
NATIONAL INSURANCE PRODUCERS CONFERENCE
organization of insurance broker and agent associations that
includes the Independent Insurance Agents of America, National
Association of Professional Insurance Agents, National
Association of Insurance Brokers, National Association of Casualty
and Surety Agents, and National Association of Surety Bond
Producers.
NATIONAL SAFETY COUNCIL nonprofit organization of
members of various industries nationwide that collects and
publishes information and statistics on accidents. The council was
established by Congress in 1913. Its statistics on injury in the
workplace are an important source of information for loss
prevention efforts. It also publishes and disseminates information
on safety.
NATIONAL SERVICE LIFE INSURANCE (NSLI) see GOVERNMENT
LIFE INSURANCE.

NATIONAL TSA ASSOCIATION trade association whose

member-ship is comprised of SECTION 403 (B) PLAN providers and
practitioners. This association has an educational institute that
grants the Certified Specialist in Tax-Sheltered Accounts (CSTSA)
designation upon the successful completion of a six-course
curriculum.
NATIONWIDE DEFINITION OF MARINE INSURANCE see
NATIONWIDE MARINE DEFINITION.

NATIONWIDE MARINE DEFINITION statement of the types of

exposures classified under marine, inland marine or transportation
insurance by placing them in the following categories: imports,
exports, domestic shipments (goods in transit), communication
vehicles (tunnels, bridges, piers, and power transmission lines),
personal property floaters (stamp collections, coin collections, fine
arts, paintings, musical instruments, silverware, and furs),
commercial property
 Page 334
floaters (accounts receivable, valuable papers, valuable records,
and physicians' and surgeons' instruments). The definition also
makes use of the following differences in condition: electronic
data, property in a bailee's custody, and property for sale by a
dealer (such as musical instruments, cameras, fine arts, and
jewelry).
NATURAL DEATH death from other than accidental means. See
also ACCIDENTAL DEATH CLAUSE; RIDERS, LIFE POLICIES.
NATURAL LOSSES property damage, accident, or injury resulting
from vagaries of nature, including tornadoes, hurricanes, and
floods.
NATURAL PREMIUM see PURE PREMIUM RATING METHOD.
NAVIGATION RISK INSURANCE coverage during the operation
of a ship for: (1) Property of Ship (ship's hull, tackle, passenger
fittings, equipment, stores, boats), and ordnance; (2) Property
Damage Liability (ship's owner and/or operator is protected if the
ship collides with another, causing damage and loss of use).
Excluded is liability to the owner and/or operator for damage to
piers, wharves, bodily injury, or loss to the insured ship's hull
and/or cargo (this coverage amount is in addition to the amount of
coverage on the insured ship's hull and cargo); and (3) Bodily
Injury Liability Insurance.
NCCI see NATIONAL COUNCIL ON COMPENSATION INSURANCE.
NECESSITIES OF LIFE basic needs, such as food, water, clothing,
and shelter, that a person requires to survive. These needs are the
first layer of Maslow's Hierarchy of Needs, and are the minimum
that should be provided by any LIFE INSURANCE plan.
NEEDS APPROACH personal insurance method used to analyze
the amount necessary to maintain a family in its customary life-
style, should the primary wage earner die. This includes such
considerations as:
1. immediate needs ("cleanup fund")expenses associated with final
medical treatments and burial, inheritance taxes, estate taxes,
probate costs, outstanding debt.
2. continued incomewhile children are still in school and depend on
family support.
3. continued incomefor the surviving spouse after children no
longer depend on family support.
4. continued incometo pay a mortgage, education expenses,
emergency expenses, and miscellaneous expenses.
5. retirement fundfor the surviving spouse.
From the sum of these expenses, subtract sources of income
available to the surviving spouse (Social Security, investments,
employee benefit plans such as group life insurance and pensions),
to arrive at a final figure on which to base the amount of life
insurance the wage earner should consider.
NEGLECT failure to exercise proper care. Many property
insurance policies exclude losses that result from negligence.
Neglect is also the
 Page 335
basis for many liability suits. If an injury can be demonstrated to
result from negligence on the part of a homeowner, a product
manufacturer, or a municipality responsible for maintaining streets,
an injured party can often collect damages.
NEGLIGENCE failure to act with the legally required degree of
care for others, resulting in harm to them. See also TORT, UNINTENTIONAL.
NEGLIGENCE, COMPARATIVE see COMPARATIVE NEGLIGENCE.
NEGLIGENCE, CONTRlBUTORY see CONTRIBUTORY NEGLIGENCE.
NEGLIGENCE, GROSS see GROSS NEGLIGENCE.
NEGLIGENCE, PRESUMED see RES IPSA LOQUITOR.
NEGLIGENT LIABILITY INSURANCE POLICY see LIABILITY
INSURANCE.

NEGLIGENT MANUFACTURE charge against a business firm in

a PRODUCT LIABILITY INSURANCE lawsuit. Manufacturers have been held
responsible for their products. When consumers become injured
while operating a lawnmower, flying in an airplane, driving a car,
or any of hundreds of other ways, they have grounds to sue the
manufacturer of these products for negligence. Product liability has
become one of the most rapidly growing areas of liability exposure
for businesses and one of the most difficult to insure against.
NEGOTIATED CONTRIBUTION PLAN defined contribution
pension plan in which employer contributions are set under a
collective bargaining agreement. It usually covers the employees of
a number of firms and is administered by a board of trustees on
which participating employers and unions are equally represented.
NEON AND ELECTRIC SIGNS FLOATER coverage on an ALL
RISKS basis through an endorsement to a business PROPERTY INSURANCE

policy in which each sign is specifically scheduled, subject to the

exclusions of wear and tear, and damage caused by nuclear hazard,
war, and electricity.
NEON AND FLUORESCENT SIGN INSURANCE coverage
through an endorsement to the glass insurance policy on an ALL RISKS
basis, subject to the exclusions of wear and tear, and damage
caused by nuclear hazard, war, and electricity.
NET AMOUNT AT RISK in life insurance, difference between the
face value of a life insurance policy and its cash value (also known
as ''pure amount of protection").
NET ASSETS EQUATION income (premiums + investment
earnings) minus disbursements (DIVIDENDS + death claims + policies
surrendered for benefits + general expenses).
 Page 336
NET COST see LIFE INSURANCE COST.
NET COST METHOD see LIFE INSURANCE COST.
NET GAIN FROM OPERATIONS STATUTORY ACCOUNTING principles
(SAP), as listed in the insurance company's annual financial
statements filed with the insurance commissioner of each state in
which it is licensed. Income that is equal to the net income is filed
under GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP).
NET INCOME AFTER TAXES total of OPERATING INCOME plus real-ized
capital gains (losses) from investment and underwriting operations
minus federal income taxes.
NET INCOME MAKE-UP CHARITABLE REMAINDER
UNITRUSTS (NIMCRUTs) type of CHARITABLE REMAINDER TRUST (CRT) that
pays interest income for life or for a specified term to a nonchari-
table beneficiary. The remainder of the interest is received by a
charity. This trust pays a specified percentage of its fair market
value with the beneficiary receiving only the interest and dividends
earned by the trust for the current year. The trust does not pay out
any unrealized income. If this payout of interest and dividends is
less than the specified percentage as stated in the trust documents,
the shortage is accumulated and paid to the beneficiary at some
future date (the net income make-up provision goes into effect).
For example, assume that the trust earns 6% in interest and 16% in
UNREALIZED CAPITAL GAINS during the current year. The beneficiary receives

only the 6% earned interest with the 16% in unrealized capital

gains being accumulated for distribution to the beneficiary at a
future date when the recognized income in the trust is sufficient to
affect the payout. In those situations where the trust has no income
from interest and dividends, the shortage owed to the beneficiary is
accumulated for future distribution to that beneficiary.
NET INCREASE amount of the increase in the BOOK OF BUSINESS of an
INSURANCE COMPANY over a specified time interval. This increase is

calculated as follows:

NET INTEREST EARNED average interest earned by an insurer

on its investments after investment expense, but before federal
income tax.
NET INVESTMENT INCOME total of interest, dividends, and
other earnings derived from the insurance company's invested
assets minus the expenses associated with these investments.
Excluded from this income are capital gains or losses as the result
of the sale of assets, as well as any unrealized capital gains or
losses.
NET LEVEL see NET LEVEL PREMIUM; NET LEVEL PREMIUM RESERVE.
 Page 337
NET LEVEL PREMIUM life insurance payment that is constant
from year to year. The premium may be paid throughout the life of
an insured or may be limited to a maximum number, such as 30
annual premiums. The premium is based only on interest and a
mortality assumption and does not consider an expense
assumption. See also GROSS PREMIUM.
NET LEVEL PREMIUM RESERVE fund that comes into
existence because premiums for ordinary life insurance policies in
their early years are higher than necessary for the pure cost of
protection. These excess premiums, plus the interest credited,
create the net level reserve. When an insured dies, the reserve
comprises part of the death benefit. The net premium is calculated
according to this fundamental actuarial equation: present value of
future premiums = present value of future benefits.
This relationship holds only at the point of issue of a life insurance
policy. Thereafter, future benefits will exceed future premiums
because fewer premiums are left to be paid and benefits are coming
closer to being due. The reserve makes up the difference between
the future benefits and future premiums at any point. This reserve
can be calculated on either a prospective or retrospective basis, but
it is important to note that the various state minimum reserve
valuation laws are stated in terms of the prospective basis. See also
FULL PRELIMINARY TERM RESERVE PLAN; PROSPECTIVE RESERVE; RETROSPECTIVE METHOD RESERVE

COMPUTATION.

NET LINE see NET RETAINED LINES.

NET LINE LIMIT maximum amount of INSURANCE that an INSURANCE
COMPANY will issue on a particular risk exposure. This limit is used by
the insurance company to avoid having to pay for a loss on the
exposure in excess of that which is acceptable to the company.
NET LOSS amount of the loss absorbed by an INSURANCE COMPANY after
deducting any REINSURANCE applicable to the loss, as well as SUBROGATION
and ABANDONMENT AND SALVAGE rights.
NET PAYMENT METHOD OF COMPARING COSTS see INTEREST
ADJUSTED COST; LIFE INSURANCE COST.

NET PAYMENTS INDEX table charting relative costs of a group

of CASH VALUE LIFE INSURANCE policies derived by using the net cost method
of comparing costs (traditional net cost method of comparing
costs; net payment method). The net payments index contrasts with
the interest adjusted SURRENDER COST INDEX and the INTEREST ADJUSTED COST
index, which are derived by using the interest adjusted method of
comparing policy costs.
NET PREMIUM see NET SINGLE PREMIUM.
NET PREMIUMS WRITTEN total premiums written by a CEDING
COMPANY minus premiums ceded to its REINSURER.

NET RATE see NET SINGLE PREMIUM.

 Page 338
NET RETAINED LINES amount of insurance remaining on a CEDING
COMPANY'S books, net of the amount reinsured.

NET RETENTION see NET RETAINED LINES.

NET SINGLE PREMIUM pure cost of protection, or the premium
covering the present value of future claims (not including loadings
for the various expenses).
NET UNDERWRITING PROFIT (OR LOSS) statutory UNDERWRITING
GAIN minus (or LOSS plus) POLICYHOLDER'S dividends.

NET VALUATION PREMIUM see VALUATION PREMIUM.

NET WORTH total assets minus liabilities. It is used by
underwriters to evaluate the financial standing of applicants for
surety bonds.
NET YIELD gross yield minus total costs (expenses).
NEW ACQUIRED CAR REPLACEMENT CAR or ADDITIONAL CAR as used in the
PERSONAL AUTOMOBILE POLICY.

NEW FUNDS injection of fresh capital from investors or from a

parent corporation that is not an insurance company.
NEW YORK INSURANCE CODE standard for insurance
regulation in New York State and a model for insurance regulation
elsewhere. For example, the standard fire policy was first adopted
in New York State. Similarly, following the ARMSTRONG INVESTIGATION, the
New York Insurance Code of 1906 became a model for cleaning up
life insurance industry abuses. New York is widely viewed as the
toughest state to get an insurance license, but because of the size of
the insurance market there, many companies are willing to meet the
stiff requirements.
NEW YORK INSURANCE EXCHANGE reinsurance marketplace
modeled after LLOYD'S OF LONDON. Like Lloyd's, the New York Insurance
Exchange is a market for hard-to-place risks and for the placement
of excess or surplus lines. See also SURPLUS LINES (EXCESS SURPLUS LINES).
NEW YORK STANDARD FIRE POLICY contract first written in
1918 that provided the basis for modern-day property insurance,
both personal and commercial. Forms and endorsements must be
added to complete the policy and tailor it to cover the particular
insured property. This policy is also known as the "165 Line"
policy, for the number of lines in its text that covers CONCEALMENT or
MISREPRESENTATION (FALSE PRETENSE), property and perils excluded; OTHER

INSURANCE; cancellation due to increase in hazards; obligations to a

mortgagee; pro rata contribution of a company; requirements of an

insured in case of loss; conditions when a company must pay a loss
incurred by an insured; and SUBROGATION. The New York Standard Fire
Policy has become largely obsolete since 1980, but its provisions
have been incorporated into many other property insurance
policies.
 Page 339
NEW YORK STATE COLLEGE CHOICE TUITION SAVINGS
PROGRAM (NEW YORK'S COLLEGE SAVINGS PROGRAM)
vehicle that is available to anyone in the United States as a means
for savings in a tax-exempt fashion for college, graduate, or
professional schools or other eligible accredited business, trade,
occupational, or technical schools domiciled in the United States.
Under the plan, there is a deferral of federal taxes on earnings of
the account until the funds are distributed for education expenses
by the beneficiary of the account. The account earnings are not
subject to New York state taxes either. Upon withdrawal by the
beneficiary, the earnings distribution is federally taxed at the
beneficiary's tax rate and not subject to New York state tax
provided the distribution is used for the above-approved education
expenses. Any distributions not used for the approved education
expenses are taxed at the regular federal and state income tax rate,
and a 10% withdrawal penalty on the earnings must be paid.
NFIA see NATIONAL FLOOD INSURERS ASSOCIATION.
NFPA see NATIONAL FIRE PROTECTION ASSOCIATION.
NICHE WRITERS insurance companies that seek an economic
advantage, thereby increasing their returns on equity by utilizing
their specialized knowledge about a given line of insurance,
territory, or risk classification.
NO-FAULT AUTOMOBILE INSURANCE type of coverage in
which an insured's own policy provides indemnity for bodily injury
and/or property damage without regard to fault. In many instances
it is difficult if not impossible to determine the original causesuch
as who is at fault in a chain car collision. In states with no-fault
liability insurance, an insured cannot sue for general damages until
special damages including medical expenses exceed a minimum
amount. This is an effort to eliminate groundless suits for general
damages.
NO FAULT LIABILITY INSURANCE see NO-FAULT AUTOMOBILE INSURANCE.
NO-FAULT THRESHOLD amount for which financial loss for
bodily injury incurred by the plaintiff must exceed before a TORT
liability action may be brought.
NO LAPSE GUARANTEE agreement by the insurance company
to keep the UNIVERSAL LIFE INSURANCE policy in force, even if the CASH VALUE
becomes zero or less than zero, provided that a specified MINIMUM
CONTINUATION PREMIUM is made at the required time.

NO-LAPSE VARIABLE UNIVERSAL LIFE INSURANCE policy

of VARIABLE UNIVERSAL LIFE INSURANCE (VUL) under which, if the accumulation of
the premiums paid at any point in time (minus policy loans, and
withdrawals) equals or exceeds the minimum premiums due at that
point in time, the policy is prevented from lapsing. This
 Page 340
lapse prevention is guaranteed regardless of the underlying
portfolio return or policy changes. Usually this feature is the same
per option A (level death benefit) or option B (increasing death
benefit) under VUL.
NO LOAD INSURANCE see FLOW-THROUGH COST (NO LOAD INSURANCE).
NOMINAL INTEREST RATE interest rate credited on three-
month United States Treasury bills.
NONADMITTED ASSETS assets, such as furniture and fixtures,
that are not permitted by state law to be included in an insurance
company's ANNUAL STATEMENT. See also ADMITTED ASSETS.
NONADMITTED INSURANCE policy purchased by an insured
from an insurer in another state. This insurer is not licensed in the
state where the insured's risk is located.
NONADMITTED INSURER company not licensed by a particular
state to sell and service insurance policies within that state.
NONADMITTED REINSURANCE see SURPLUS LINES (EXCESS SURPLUS LINES).
NONASSESSABLE MUTUAL insurance company whose
corporate charter and bylaws prevent assessment of its
policyowners, regardless of how adverse its loss and expense
experience may become. See also ASSESSMENT COMPANY.
NONASSESSABLE POLICY insurance contract under which a
policy owner cannot be assessed for adverse loss and expense
experience of the insurance company. See also ASSESSMENT INSURANCE.
NONASSIGNABLE POLICY insurance policy, particularly PROPERTY
AND LIABILITY INSURANCE, which the owner cannot assign to a third party.
See also ASSIGNMENT; ASSIGNMENT CLAUSE, LIFE INSURANCE.
NONBOARD COMPANY INSURANCE COMPANY that does not utilize the
rates and policies of a RATING BUREAU.
NONCANCELLABLE DISABILITY INCOME INSURANCE
type of DISABILITY INCOME INSURANCE that provides income payments to the
wage earner when income is interrupted or terminated because of
illness, sickness, or accident and can continue to remain in force at
the option of the INSURER until some stipulated age has been reached.
NONCANCELLABLE GUARANTEED RENEWABLE POLICY
health insurance that is not subject to alteration, termination, or
increase in premium upon renewal.
NONCANCELLABLE HEALTH INSURANCE see COMMERCIAL HEALTH
INSURANCE.

NONCANCELLABLE INSURANCE POLICY INSURANCE contract

that cannot be cancelled by the INSURANCE COMPANY. Since the insurance
 Page 341
policy is a UNILATERAL CONTRACT instead of a BILATERAL CONTRACT, the INSURED
may cancel at will. Only the insurer makes a promise of future
performance and only the insurer can be charged with breach of
contract.
NONCONCURRENCY circumstance under which several
insurance policies cover an insured's property against damage or
destruction, but since the limits of coverage, kinds of property, and
perils covered are not the same under all policies, the insured may
not be fully covered in the event of a loss.
NONCONCURRENT APPORTIONMENT RULES standards used
to determine claims payments in cases of overlapping
property/liability insurance coverage. At one time, each type of
insurance had its own rules to govern claims where more than one
policy provided coverage. In 1963, several property/casualty
industry groups agreed on a set of principles to be used in
apportioning claims among insurers.
NONCONFINING SICKNESS sickness incurred by the insured
that does not require restriction of activity to the indoors. See also
HEALTH INSURANCE.

NONCONTRIBUTION MORTGAGE CLAUSE endorsement to

standard fire policy to protect the interests of a mortgage lender
without providing for APPORTIONMENT. A mortgage lender may choose
to have his or her rights to the property protected by a MORTGAGE CLAUSE.
Where an insured has more than one policy, claims are normally
paid by assigning a portion of the loss among the insurance carriers
under terms of the policy's PRO RATA LIABILITYCLAUSE. A full contribution
mortgage clause provides that losses on the lender's interest would
be apportioned in the same manner as the rest of the policy. But
with a noncontribution mortgage clause, the lender's interest would
be protected up to the policy limits with no apportionment.
NONCONTRIBUTORY EMPLOYEE BENEFIT INSURANCE PLAN under which an
employer pays the entire direct cost of the plan; employees do not
share in the cost, except perhaps through comparatively lower
wages.
NONDEDUCTIBILITY OF EMPLOYER CONTRIBUTIONS law
that payments by an employer to a NONQUALIFIED PLAN are not deductible
as a business expense for federal tax purposes.
NONDISABLING INJURY injury that does not qualify either for
partial or total disability income under a disability income or
Workers Compensation policy.
NONDISCRIMINATION RULES rules stating that, under the TAX
EQUITY AND RESPONSIBILITY ACTS OF 1982 AND 1983 (TEFRA), a plan cannot discriminate

in favor of key employees regarding contributions and benefits if

favorable tax treatment is to be retained. For example, the
premiums the employer pays on behalf of the employee for the first
 Page 342
$50,000 of group term life insurance are not considered taxable
income to the employee if the plan does not discriminate.
NONDUPLICATION COORDINATION-OF-BENEFITS
(CARVEOUT COB) requirement that the combination of MEDICARE
and the employer's plan can not be greater than the amount the
employer's plan would pay without Medicare.
NONDUPLICATION OF BENEFITS see COORDINATION OF BENEFITS.
NONECONOMIC DAMAGES CAP statutory law that lowers the
defendant's liability by restricting the monetary recovery of the
plaintiff incurring a specified injury, such as pain and suffering, or
by restricting the total amount of recoverable damages.
NONFORFEITABILITY
1. provision in a CASH VALUE INSURANCE policy that an insured will receive
the equity in some form even if the insurance is canceled.
2. vested benefit to a retirement plan participant. It is enforceable
against the plan.
See also NONFORFEITURE BENEFIT (OPTION); NONFORFEITURE CASH SURRENDER BENEFIT;
NONFORFEITURE EXTENDED TERM BENEFIT; NON-FORFEITURE REDUCED PAID-UP BENEFIT.

NONFORFEITURE BENEFIT (OPTION) provision that the

equity of an insured in a life insurance policy cannot be forfeited.
There are four benefits a policyholder can select under the option:
CASH SURRENDER VALUE, EXTENDED TERM INSURANCE, LOAN VALUE, and PAID-UP INSURANCE. If

none is elected, a clause in the policy will stipulate the option that
automatically goes into effect, usually extended term insurance.
NONFORFEITURE CASH SURRENDER BENEFIT amount in a
cash value life insurance policy that a policyowner will receive
upon surrender of the policy, minus any outstanding loan and
accrued interest. A table in the policy shows the amount of cash
surrender values. With some policies, the insurance company
reserves the right to hold the cash surrender value for six months
from time of notification, but this is rarely if ever applied today.
NONFORFEITURE EXTENDED TERM BENEFIT right of a
policyholder, in life insurance with cash values, to continue full
coverage for a limited period, as shown in a table in the policy,
with no further premiums payable.
NONFORFEITURE FACTOR modified premium used to calculate
CASH SURRENDER VALUES in excess of that required by the NAIC: STANDARD

NONFORFEITURE LAW.

NONFORFEITURE PROVISION value in life insurance policies

that entitle the insured to these choices:
 Page 343
(1) to relinquish the policy for its CASH SURRENDER VALUE. (Note that in the
beginning years the cash value may be minimal because of
expenses such as agent's commission, premium tax, and the cost of
putting the policy on the insurance company's books.)
(2) to take reduced paid-up insurance instead of the cash surrender
value.
(3) to take EXTENDED TERM INSURANCE for the full face amount instead of
the cash surrender value.
(4) to borrow from the company, using the cash value as collateral.
Each policy provides a table illustrating the first 20 years of its
guaranteed cash values.
NONFORFEITURE REDUCED PAID-UP BENEFIT right of a
policyholder in life insurance with cash value to elect a smaller,
fully paid-up policy, without any further premiums to pay. The
amount of the paid-up policy is determined by the insured's age and
the cash surrender value.
NONFORFEITURE VALUES see NONFORFEITURE CASH SURRENDER BENEFIT;
NONFORFEITURE EXTENDED TERM BENEFIT; NONFORFEITURE REDUCED PAID-UP BENEFIT.

NONHAZARDOUS describing a RISK whose PROBABILITY of loss is less

than the norm or the standard EXPECTATION OF LOSS for that UNDERWRITING
classification.
NONINVESTMENT GRADE BONDS bonds that are less than
investment grade plus the bonds that are in or approaching default,
which comprise part of the insurance company's investment bond
portfolio.
NONINSURANCE RISK see UNINSURABLE RISK.
NONINSURANCE TRANSFER risk management technique for
shifting a corporation's exposure from itself. A risk manager looks
at many alternatives to insurance to limit the risks a business firm
faces. One transfer method is by contract, such as HOLD-HARMLESS
AGREEMENTS, or to insert in an existing contract an endorsement stating

that the business firm will not be responsible for something that
would normally fall within its responsibility.
NONINSURED DRIVER operator with no liability insurance. If a
noninsured driver hits another car, the victim sometimes has no
recourse against the driver. For this reason, many motorists carry
UNINSURED MOTORIST COVERAGE, an endorsement to the PERSONAL AUTOMOBILE POLICY

(PAP) that covers them if they are involved in a collision with a driver

without liability insurance. Some states also maintain an UNSATISFIED

JUDGMENT FUND to pay claims to innocent victims of automobile

accidents.
NONLEDGER ASSETS assets of an INSURER that are due and
payable in the current year but have yet to be received by the
insurer.
 Page 344
NONLIQUID ASSETS assets that are not readily convertible into
cash without a significant loss of principle, such as an automobile,
a house, a television set, a radio, etc.
NONMEDICAL APPLICATION see NONMEDICAL LIFE INSURANCE.
NONMEDICAL LIFE INSURANCE coverage in which an
applicant not required to take a medical examination, instead
answers written questions to ascertain his current physical
condition.
NONMEDICAL LIMIT dollar ceiling on a life insurance policy for
applicants who are not given a medical examination. The insurer
accepts a health questionnaire in the place of a physical
examination. At one time, a medical examination was a
requirement for anyone buying life insurance. In recent years,
however, most companies write NONMEDICAL LIFE INSURANCE because the
savings in expenses for the company have been found to offset the
higher risk of underwriting insurance without the benefit of an
examination. However, nonmedical policies are written only for a
STANDARD RISK.

NONOCCUPATIONAL DISABILITY condition that results from

injury or disease that is not job related. Workers compensation
applies to employees disabled by on-the-job injuries or disease. In
addition, five states require employers to pay income (not medical
expense) benefits if a worker is disabled by illness or injury that
did not occur at work: Rhode Island, California, New Jersey, New
York, and Hawaii. Except for Rhode Island, employers may buy
private coverage; in Rhode Island, they must get coverage from a
state fund. Hawaii is the only state without an optional state fund.
NONOCCUPATIONAL HEALTH INSURANCE POLICY
insurance coverage for accidents and sickness that are not job
related.
NONOCCUPATIONAL POLICY health and medical insurance
that excludes coverage for job-related injuries and illnesses. Most
medical insurance policies do not provide benefits for job-related
claims, which are covered by WORKERS COMPENSATION BENEFITS.
NONOWNERSHIP AIRCRAFT LIABILITY INSURANCE
coverage in a separate policy or as an endorsement to the COMMERCIAL
GENERAL LIABILITY (CGL) form, for insureds responsible for aircraft they do

not own. If an aircraft is leased from another firm or owned by

employees who operate it for a business owner, the insured's
liability exposure is not covered by the CGL policy; a special
endorsement is necessary.
NONOWNERSHIP AUTOMOBILE LIABILITY INSURANCE
coverage in a separate policy or as an endorsement to the COMMERCIAL
GENERAL LIABILITY (CGL) form, for liability exposures for an employee who

drives a leased car or his or her own automobile for business

purposes.
NONOWNERSHIP LIABILITY INSURANCE coverage for an
employer against liability for property damage or physical injury
caused by an employee operating a personally owned vehicle for
the
 Page 345
business firm. Employers can be held liable if an employee has an
accident while driving a leased automobile or operating a
motorboat that the employee owns, if it is done for the benefit of
the employer. See also NONOWNERSHIP AIRCRAFT LIABILITY INSURANCE; NONOWNER-SHIP
AUTOMOBILE LIABILITY INSURANCE.

NONPARTICIPATING GUARANTEED INSURANCE

CONTRACT (GIC) type of GUARANTEED INSURANCE CONTRACT in which the
term is fixed, the rate is fixed, and the contract owner does not
participate in the insurance company's earnings.
NONPARTICIPATING INSURANCE policy not designed to pay
the policyowner a dividend. See also CURRENT ASSUMPTION; PARTICIPATING
INSURANCE.

NONPARTICIPATING LIFE INSURANCE see NONPARTICIPATING

INSURANCE.

NONPARTICIPATING POLICY see NONPARTICIPATING INSURANCE.

NONPROFIT INSURER company formed and operated without
the profit motive as its normal business objective; normally sells
and services health insurance policies. See also BLUE CROSS; BLUE SHIELD.
NONPROPORTIONAL AUTOMATIC REINSURANCE
obligatory reinsurance contract in which a reinsurer agrees to pay
for all or a large portion of losses up to a limit, when these losses
exceed the retention level of the cedent. The reinsurance premium
paid by the cedent is calculated independently of the premium
charged to the insured. It is not expected that every treaty will pay
for itself or that every loss will be recouped by the reinsurer. When
a cedent reinsures on a nonproportional basis, it retains
substantially more of its profits than reinsuring on a proportional
basis. Nonproportional differs from proportional reinsurance in that
it does not involve the sharing of risks.
NONPROPORTIONAL FACULTATIVE REINSURANCE
coverage in which an insurer is not bound to CEDE and a reinsurer
is not bound to accept a risk. A separate reinsurance contract
covers each cession. The contract is automatically renewed if the
original insurance is renewed. Casualty facultative reinsurance is
usually written on excess of loss basis, and the reinsurer shares
only in losses which exceed retention level of the cedent.
NONPROPORTIONAL REINSURANCE arrangement in which a
reinsurer makes payments to an insurer whose losses exceed a
predetermined retention level. Nonproportional reinsurance is
either facultative or automatic. See also CATASTROPHE LOSS; EXCESS OF LOSS
REINSURANCE; STOP LOSS REINSURANCE.

NONQUALIFIED PLAN employee benefit plan that does not have

the federal tax advantages of a qualified pension plan, in which
employers receive a federal tax deduction for contributions paid
into the plan on behalf of their employees. For an employer, not
having a tax deduction
 Page 346
can be a serious disadvantage, but a nonqualified plan has these
advantages:
1. otherwise discriminatory coverage for some employees is
allowed.
2. benefits can be allocated to certain employees whom the
employer wishes to reward. The result could be that the total cost
of the benefits for a particular group of employees may be less
under a non-qualified plan than for all employees under a qualified
plan.
NONRENEWAL CLAUSE provision in a policy that states the
circumstances under which an insurer may elect not to renew the
policy.
NONRESIDENT AGENT agent who is licensed and who markets
and services insurance policies in a state in which he or she is not
domiciled.
NONSMOKER health characteristic considered by an insurer
under-writing an applicant for life or health insurance. Many
insurance companies charge reduced premiums for nonsmokers.
NONSTOCK INSURANCE COMPANY INSURANCE COMPANY that has no
outstanding shares of stock, such as a MUTUAL INSURANCE COMPANY.
NONTRADITIONAL REINSURANCE types of REINSURANCE
instruments under which the amount of RISK transferred is more
limited than under TRADITIONAL RISK REINSURANCE instruments. The
limitations on risk transfer take the form of an aggregate dollar
amount or loss ratio limits according to the reinsurance coverage in
effect. Premiums for nontraditional reinsurance instruments are
usually larger than those for traditional reinsurance instruments.
NONVALUED INSURANCE POLICY POLICY under which the
INSURER will pay the actual cash value of the property at the time the

property was damaged or destroyed provided the loss falls within

the LIMITATIONS of the policy.
NONWAIVER AGREEMENT agreement by the insured that,
simply because the INSURER investigates and determines a value for
the CLAIM, the insurer does not admit liability for the claim.
NOON CLAUSE CLAUSE in the INSURANCE POLICY that stipulates the exact
time the policy coverage begins and terminates.
NORMAL ANNUITY FORM cost computation form that assumes
retirement and commencement of annuity payments on the first day
of the month nearest the birthday when a retiree reaches normal
retirement age. Most employee pension plans provide for a normal
retirement age of 65, with pension or annuity payments to begin at
that time. But many also provide an optional annuity form for those
who wish to either retire before or continue working past the
normal retirement age. These employees receive reduced benefits,
in the case of the early retirees, or, possibly, enhanced benefits for
those who work longer.
NORMAL LOSS particular type of loss which is expected by an
organization and for which provision is usually made in the
budgeting
 Page 347
process of the organization. See also SELF INSURANCE; SELF-INSURED RETENTION
(SIR).

NORMAL RETIREMENT AGE earliest age at which an employee

can retire without a penalty reduction in pension benefits after
having (1) reached a minimum age and (2) served a minimum
number of years with an employer. Historically, this has been 65
years, but many private pension plans now envision earlier or later
normal retirement ages.
NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)
OF 1993 agreement that eliminates tariffs among the United States,
Canada, and Mexico over a 15-year period. Approximately 65% of
United States agricultural and industrial exports would be eligible
for duty-free entry into Mexico and Canada, either on an
immediate basis or within five years. This could very well expand
insurance operations both south and north of the border.
NOTICE OF CANCELLATION CLAUSE provision in an
insurance policy that permits an insured to cancel the policy and
recoup the excess of the paid premiums above the customary short
rate for the expired time. The clause also permits a company to
cancel the policy at any time by sending the insured five days'
written notice and repaying the excess of the paid premium above
the pro rata premium for the expired time.
NOTICE TO COMPANY written notice, to be submitted by the
CLAIMANT, required by the insurance company in the event of an INSURED

PERIL. This notice is part of the standard PROPERTY AND CASUALTY INSURANCE

PROVISIONS defining the insured's obligations after a loss.

NSC see NATIONAL SAFETY COUNCIL.

NUCLEAR ENERGY LIABILITY INSURANCE coverage for
bodily injury and property damage liability resulting from the
nuclear energy material (whether or not radioactive) on the insured
business's premises or in transit. This insurance has become more
significant since the Three Mile Island accident. In order to obtain
a license for a nuclear facility, there must be evidence of financial
responsibility such as insurance. Nuclear energy liability is
excluded from nearly all other liability policies.
NUCLEAR REACTION EXCLUSION clause in most property
insurance policies that excepts coverage for loss from a nuclear
reaction or radiation, or radioactive contamination. (However, a
fire resulting from one of these perils would be covered.) Because
of this exclusion, insurer pools have been formed to write coverage
for nuclear reactors. In addition, the NUCLEAR REGULATORY COMMISSION is
authorized to provide coverage under the PRICE-ANDERSON ACT.
NUCLEAR REGULATORY COMMISSION U.S. government
agency (formerly the Atomic Energy Commission) responsible for
regulating the nuclear energy industry. The commission also
provides
 Page 348
supplemental insurance for nuclear facilities to augment coverage
by private insurance pools.
NUISANCE product or service that does more harm than good to
society, or endangers life or health. Society would probably be
better off without such a product or service. See also ATTRACTIVE
NUISANCE.

NUMERICAL RATING SYSTEM underwriting method used in

classifying applicants for life insurance according to certain
demographic factors and assigning weights to these factors. Factors
include physical condition, build, family history, personal history,
habits, and morals. For example, if an applicant is 5 feet 8 inches
and weighs 250 pounds, his mortality expectation based on this
height-weight ratio may be 160% of a standard risk who weighs
150 pounds at that height. In this instance a debit of 60 percentage
points would be listed next to the weight factor on the applicant's
underwriting sheet. If the applicant has an excellent family history
(no hereditary diseases such as diabetes), his mortality expectation
based on this factor is 90% of the standard risk. Here a credit of 10
percentage points would be listed next to the family history factor.
Upon completion of the debiting/crediting process, debits and
credits would be totaled for a final rate, which would classify the
applicant as standard, substandard, or an uninsurable risk.
 Page 349

O
OASDHI see OLD AGE, SURVIVORS, DISABILITY, AND HEALTH INSURANCE (OASDHI).
OBLIGATORY REINSURANCE see AUTOMATIC REINSURANCE.
OBLIGEE see FIDELITY BOND; LIABILITY, BUSINESS EXPOSURES; SURETY BOND.
OBLIGOR individual or other entity who has promised to perform
a certain act. For example, an insurance company promises to pay a
death benefit if a life insurance policy is in force at the time of the
death of an insured.
OBSOLESCENCE decrease in value of property as the result of
technological advancement and/or changing social mores. This
factor is used to measure the amount of depreciation in determining
the ACTUAL CASH VALUE of damaged or destroyed property protected by
PROPERTY INSURANCE COVERAGE.

OCCUPANCY AND FIRE RATES direct relationship between the

use to which a building is put and the likelihood that it will catch
on fire. Occupancy is one of the most important factors in setting
fire insurance rates. For example, a building that houses an
explosives manufacturer is at much greater risk than one occupied
by a jewelry boutique. Other factors that influence the risk of fire
are geographical location, construction, nature of the
neighborhood, and the adequacy of protective devices.
OCCUPATION see OCCUPATIONAL HAZARD.
OCCUPATIONAL ACCIDENT work-related accident.
Occupational accidents that injure employees are the responsibility
of the employer and are covered by WORKERS COMPENSATION INSURANCE. In
recent years, the term occupational accident has been expanded to
include job-related long-term exposure to hazardous substances
that result in occupational diseases, and such emotional injuries as
nervous breakdowns and even heart attacks.
OCCUPATIONAL CLASSIFICATION classification of
occupations according to the DEGREE OF RISK inherent in that occupation.
See also OCCUPATIONAL HAZARD; OCCUPATION, RISK.
OCCUPATIONAL DISEASE illness contracted as the result of
employment-related exposures and conditions. Coverage for such
diseases is found under WORKERS COMPENSATION INSURANCE.
OCCUPATIONAL HAZARD condition surrounding a work
environment that increases the probability of death, disability, or
illness to a worker. This class of hazard is considered when writing
WORKERS
 Page 350
or determining which underwriting classification
COMPENSATION INSURANCE

to place an applicant for life or health insurance.

OCCUPATIONAL INJURY see OCCUPATIONAL ACCIDENT; OCCUPATIONAL HAZARD;
OCCUPATION RISK.

OCCUPATIONAL SAFETY AND HEALTH ACT (OSHA) 1970

legislation that set federal standards for workplace safety and
imposed fines for failure to meet them. A controversial law, it took
much of the power from the states for regulating workplace safety.
It authorized the U.S. Department of Labor to have federal
compliance officers make surprise inspections of business firms. It
set up the NATIONAL COMMISSION OF STATE WORKERS COMPENSATION LAWS to recommend
upgrade of worker protection, including higher disability benefits,
compulsory coverage, and unlimited medical care and
rehabilitation. Most states adopted the recommendations, which
incidentally led to increases in workers compensation insurance
premiums.
OCCUPATIONAL SAFETY AND HEALTH ADMINISTRATION
STANDARD ON BLOOD-BORNE PATHOGENS standard
designed to reduce occupational exposure to blood-borne
pathogens (microorganisms in human blood that can cause diseases
in humans, such as HIV and hepatitis B). The standard emphasizes
using a combination of personal protective clothing and equipment,
vaccination, engineering controls, work practice controls, and
training.
OCCUPATION, RISK relationship between occupation of an
insured and degree of risk in such coverages as life, health, and
workers compensation. Some occupations are more risky than
others; for example, a high wire performer would have to pay more
for life insurance than a banker. But the impact of occupation goes
further. Claims resulting from exposure to toxic substances that
result in occupational disease have been one of the most costly
business insurance expenses of recent years. Life and health
insurance underwriters also consider whether the occupation of a
potential insured is likely to encourage a reckless lifestyle. For
example, certain high-pressure occupations, like acting or Wall
Street trading, might be considered to lead to overconsumption of
alcohol or drug abuse. Occupation is one of many factors weighed
by the underwriter in RISK SELECTION.
OCCURRENCE event that results in bodily injury and/or property
damage to a THIRD PARTY. A CLAUSE that is common to most LIABILITY
INSURANCE policies stipulates that all bodily injuries and/or property

damages resulting from the same general conditions are interpreted

as resulting from one occurrence and thus subject to the policy
limits per occurrence.
OCCURRENCE BASIS coverage, in liability insurance, for harm
suffered by others because of events occurring while a policy is in
force, regardless of when a claim is actually made. See also CLAIMS
MADE BASIS LIABILITY COVERAGE.
 Page 351
OCCURRENCE FORM see OCCURRENCE BASIS.
OCCURRENCE/INJURY THEORY viewpoint that an insurer
whose liability policy is in force at the time of an accident or injury
should pay a claim. See also LONG-TAIL LIABILITY; MANIFESTATION/INJURY THEORY.
OCCURRENCE LIMIT maximum amount that an insurance
company is obligated to pay all injured parties seeking recourse as
the result of the occurrence of an event covered under a LIABILITY
INSURANCE policy. In order for the coverage to apply, the policy must

have been written on an OCCURRENCE BASIS.

OCEAN ACCIDENT AND GUARANTEE CORPORATION
major credit insurer of the early 20th century that merged into the
London Guarantee and Accident Co. in 1931.
OCEAN MARINE EXPOSURE possibility of loss associated with
water transportation, including hull damage or destruction, cargo
damage or destruction, liability to others for bodily injury, and
property damage or destruction.
OCEAN MARINE INSURANCE coverage in the event of a
marine loss. Marine loss is damage or destruction of a ship's hull
and the ship's cargo (freight) as the result of the occurrence of an
insured peril. Perils insured against include collision of the ship
with another ship or object; the ship sinking, capsizing, or being
stranded; fire; piracy; jettisoning (throwing overboard of property
to save other property); barratry (fraud or other illegal act by a
ship's master or crew, resulting in damage or destruction of the ship
and/or cargo), and various other liability exposures. To be covered,
an act cannot involve prior knowledge by the owner of the ship or
its cargo. Excluded are wear and tear, dampness, decay, mold, and
war. See also OCEAN MARINE INSURANCE, WAR RISKS.
OCEAN MARINE INSURANCE, WAR RISKS coverage on cargo
in overseas ships for war-caused liability excluded under standard
OCEAN MARINE INSURANCE. Not covered is cargo awaiting shipment on a

wharf, or on ships after 15 days of arrival at a port. Confiscation of

the cargo by a government is covered. Most policies have an
automatic termination clause that goes into effect within 60 days of
the declaration of war between countries specified in the policy.
OCEAN MARINE PROTECTION AND INDEMNITY
INSURANCE coverage for bodily injury and property damage
liability excluded under standard OCEAN MARINE
INSURANCE. Coverage includes protection of wharfs, docks, and
harbors; bodily injury; cost of removing the wreck if ship is sunk;
and the cost of disinfecting and quarantining a ship.
ODDS probable number of times that a specified event is likely to
occur.
For example, if E is the event, then the odds for E occurring are X
to Y according to the following relationship:
 Page 352

where P = probability. The odds against E occurring are Y to X. For

example, if the probability of E occurring equals 0.6 [P(E) = 0.6],
then

Therefore, the odds for E occurring are 6 to 4. The odds against E

occurring are 4 to 6.
OFF-BALANCE-SHEET RISK risk associated with excessive rate
of growth in premiums and contingencies such as affiliate company
requirements.
OFFER application for a policy, in life insurance, accompanied by
the first premium; in property and casualty insurance, the insurance
application itself.
OFFER AND ACCEPTANCE submission of the APPLICATION and the
first premium by the prospective INSUREDthe ''offer"and the issuance
of the INSURANCE POLICY by the insurance companythe "acceptance."
OFFEREE
1. in life insurance, receipt by a company of an insurance
application accompanied by the first premium.
2. in property and casualty insurance, a company's receipt of an
application.
OFFICE BURGLARY AND ROBBERY INSURANCE coverage
for the office of a business, or an individual in a general office
building or other structure. Includes burglary of a safe; damage
caused by robbery and burglary, actual or attempted; theft of office
furniture, equipment, supplies and fixtures within an office;
robbery inside and outside an office; kidnapping so as to force
managers of an office and/or their representatives to open the office
from the outside; and theft of securities and monies from the home
of a messenger of the office and/or from a night depository of a
bank.
OFFICE CONTENTS FORM see OFFICE BURGLARY AND ROBBERY INSURANCE.
OFFICE PERSONAL PROPERTY FORM endorsement to many
commercial property insurance policies that covers office
equipment. Coverage includes all equipment, whether or not owned
by an insured, improvements an insured has made to his or her
office (if leased), and valuable documents such as manuscripts.
This also applies to property that has been purchased for the office
while in transit.
OFFICERS AND DIRECTORS LIABILITY INSURANCE see
DIRECTORS AND OFFICERS LIABILITY INSURANCE.
 Page 353
OFFICERS PROTECTIVE MARINE INSURANCE type of
insurance providing ALL RISKS coverage for personal property of the
crew and passengers aboard a ship. Marine cargo insurance does
not cover personal property of the crew and passengers, thus
necessitating the purchase of an Officers Protective Policy.
OFFICIAL BONDS see PUBLIC EMPLOYEES BLANKET BOND; PUBLIC OFFICIAL BONDS.
OFF PREMISES location that is different from an insured's home
or place of business. Under the standard HOMEOWNERS INSURANCE POLICY, the
property of the insured is covered off premises; for example, if it is
stolen from an airport. Likewise, an employer is liable for physical
injury and property damage caused by an employee or by
equipment, even if it does not occur at the place of business. If a
truck spills chemicals on the highway or at another business site, or
if a salesperson injures a client on a sales call, the employer is
responsible. Business liability policies insure against such risks.
OFFSET APPROACH method of integrating an employee's Social
Security or other retirement benefits with a qualified retirement
plan. Some employers offset (reduce) retirement or disability
income benefits from an employee's Social Security income,
reasoning that since Social Security taxes are a business expense
for them, they should reduce or offset employee pension benefits
by a percentage of the Social Security money. An employer with a
100% offset would subtract the entire Social Security payment
from the earned pension and pay only the difference as the
employee pension. A 50% offset means the employer subtracts half
of the Social Security benefit from the pension benefit and pays the
difference.
OL&T see OWNERS, LANDLORDS, AND TENANTS LIABILITY POLICY.
OLD AGE, SURVIVORS, DISABILITY, AND HEALTH
INSURANCE (OASDHI) federal social insurance program that
provides monthly benefits to qualified retirees, their dependents,
their survivors, and, in some cases, disabled workers. OASDHI
was created by the Social Security Act of 1935. Federal taxes are
withheld from the paychecks of all covered workers, which
includes most workers with the exception of public employees and
certain union employees. Self-employed persons are also required
to pay the tax. Benefits are paid to retired workers after age 65,
with a partial benefit for retirees at age 62. Dependents and
survivors of qualified workers also qualify for benefits, as do some
categories of disabled workers and their dependents.
OLD LINE COMPANY imprecise term still occasionally used by
commercial or PROPRIETARY INSURERS to differentiate them from fraternal
insurers. "Old line" was apparently meant to make these companies
sound more established and distinguished.
 Page 354
OLD LINE LEGAL RESERVE COMPANY commercial life
insurers that operate on the LEGAL RESERVE system as opposed to
FRATERNAL LIFE INSURANCE companies, many of which now operate on a

legal reserve basis.

OMISSIONS wrongful inaction; failure to act; inactivity.
OMISSIONS CLAUSE provision of a treaty reinsurance contract
stating that if an insurer fails to report a risk that would normally
be covered, the reinsurer is still liable for the risk.
OMNIBUS BUDGET RECONCILIATION ACT OF 1987:
IMPLICATIONS FOR ESTATE PLANNING legislation that
provides for the inclusion in the estate of the decedent of lifetime
transfers that involve a retained life interest in the following
manner:
1. decedent sells or gives to a family member a remainder interest
in a business.
2. decedent transfers more than 50% of appreciation interest into a
general partnership but retains the limited partnership interest.
3. decedent sells or gives to a family member more than 50% of
common stock interest in a corporation but retains the preferred
stock interest in the corporation.
OMNIBUS BUDGET RECONCILIATION ACT OF 1993 act
designed to help reduce the federal deficit by approximately $496
billion over five years through a restructuring of the tax code. The
following include some of the major provisions that will have an
impact on financial planning:
1. Establishment of a new top tax rate on ordinary income (wages,
interest, dividends, etc.) of 36% on taxable income alone:

ApplicableMarried $140,000
Thresholdindividuals
Filing filing joint
Status returns
Heads of 127,500
households
Unmarried 115,000
individuals
Married 70,000
individuals
filing
separate
returns
Estates and 5,500
trusts

2. Establishment of a new 10% surtax on individuals with taxable

income in excess of $250,000; except for married individuals filing
separately the surtax applies to taxable income over $125,000.
3. Establishment of a new 39.6% marginal tax rate, which includes
the above 10% surtax, to be applied to taxable income in excess of
the $250,000. Long-term capital gains are not subject to the higher
rates, and will not be taxed at a rate higher than 28%. Since the
passage of this Act, the maximum long-term capital gains tax has
been reduced to 20%.
4. Establishment of a new two-tiered progressive Alternative
Minimum Tax rate schedule for noncorporate taxpayers as follows:
 Page 355
(a) married individuals filing a joint return would pay a 26% rate
on Alternative Minimum Taxable Income up to $175,000, and a
28% rate on Alternative Minimum Taxable Income in excess of
$175,000;
(b) married individuals filing separate returns would pay a 28%
rate on Alternative Minimum Taxable Income in excess of
$87,500.
5. Exemptions under the Alternative Minimum Tax increased as
follows:
(a) to $45,000 from $40,000 for married individuals filing joint
returns;
(b) to $22,500 from $20,000 for married individuals filing
separate returns, as well as estates and trusts;
(c) to $33,750 from $30,000 for single individuals.
6. Examples for various 1993 taxable income levels for married
individuals filing a joint return are as follows:

Taxable Tax Before Tax After Tax

Income '93 Act '93 Act Increase
$ 50,000 $ 9,203 $ 9,203 $0
100,000 23,529 23,529 0
150,000 39,029 39,529 500
200,000 54,529 57,529 3,000
7. Elimination of the dollar limitation cap on self-employment
income and wages subject to medicare hospital insurance.
8. Establishment of new maximum estate and gift tax rates as
follows:
(a) for transfers between $2.5 million and $3 million, a 53% rate
is applied;
(b) for transfers in excess of $3 million, a 55% rate is applied.
9. Deductible of allowable meals and entertainment to the extent of
50% of costs.
10. No deduction for club dues permitted; however, particular
business expenses such as meals and entertainment incurred at a
club are deductible to the extent of 50% of costs.
11. For the publicly held corporation, no deduction permitted for
compensation paid over $1 million for any one of its highest five
executives.
12. For qualified retirement plan contributions, a reduced
compensation ceiling from $235,840 in 1993 to $150,000
beginning in 1994. The $150,000 ceiling is to be indexed according
to the inflation index each year beginning in 1996.
13. For Social Security recipients, up to 85% of Social Security
benefits taxable for married retirees with income in excess of
$44,000 and for single retirees income in excess of $34,000.
14. For self-employed individuals, a deduction as a business
expense up to 25% of the premiums paid for health insurance
coverage for that individual, spouse, and dependents.
 Page 356
15. Repeal of the luxury excise tax of 10% on boats, aircraft,
jewelry, and furs. The luxury excise tax of 10% indexed for
inflation remains for automobiles in excess of $30,000.
16. Maximum corporate tax rate increased to 35% on taxable
income above $10 million. For the personal service corporation,
the flat rate is increased to 35%.
OMNIBUS CLAUSE provision in PERSONAL AUTOMOBILE POLICY (PAP)
providing coverage to persons driving an automobile with
permission of the NAMED INSURED.
OPEN CARGO FORM see SINGLE RISK CARGO INSURANCE.
OPEN CERTIFICATE see OPEN FORM (REPORTING FORM); OPEN POLICY.
OPEN COMPETITION LAW form of state rating legislation that
allows each property/liability insurer to choose between using rates
set by a bureau or its own rates. Individual states regulate insurers
and approve their property insurance rates. There are three methods
of rate approval in addition to open competition: PRIOR APPROVAL RATING,
MODIFIED PRIOR APPROVAL RATING and file and use. At one time the insurance

industry operated like a cartel, with rates set by bureaus and filed
with the insurance commissioners of each state. Experts believed
that competition would result in either unfairly high rates or
unreasonably low rates that would lead to mass insurance company
insolvencies. But open competition became widespread after New
York State adopted it in 1969.
OPEN COMPETITION STATE see RATING BUREAU.
OPEN DEBIT circumstance in which no agent is servicing a DEBIT.
See also DEBIT INSURANCE (HOME SERVICE INSURANCE, INDUSTRIAL INSURANCE).
OPEN END POLICY see OPEN FORM (REPORTING FORM); OPEN POLICY.
OPEN FORM (REPORTING FORM) single policy covering all
insurable property of specified type(s) at all locations of an insured
business. The form is appropriate for the business that has several
locations. There are several different types of reporting forms: (1)
Form ML.1 insures businesses with substantial risk exposures on a
multiple location basis; (2) Form ML.2 insures businesses with a
distilled spirits risk exposure; and (3) Form A insures businesses
with relatively small risk exposures, at either a single or multiple
locations. See also BLANKET INSURANCE.
OPEN POLICY coverage normally used on an indefinite basis
under OCEAN MARINE INSURANCE and INLAND MARINE INSURANCE (TRANSPORTATION INSURANCE):
BUSINESS RISKS for the damage or destruction of a shipper's goods in

transit. While the policy is in force, the shipper is required each

month to submit to the insurance company reports on goods being
shipped to be covered by the policy; premiums are also submitted
at that time.
 Page 357
OPEN STOCK BURGLARY POLICY see MERCANTILE OPEN-STOCK BURGLARY
INSURANCE.

OPERATING INCOME total of NET INVESTMENT INCOME plus UNDERWRITING

INCOME plus other miscellaneous income. This type of income is an

indication of how the UNDERWRITING function and the INVESTMENT function

of the insurance company are performing.
OPERATING LEVERAGE RATIO premium income divided by
the SURPLUS ACCOUNT.
OPERATIONS LIABILITY business liability for bodily injury or
property damage resulting from operations of the business.
Business firms can buy insurance for this risk with a variety of
liability policies, including the COMMERCIAL GENERAL LIABILITY INSURANCE (CGL).
OPIC see OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC).
OPPORTUNITY COST value of a foregone opportunity, one
rejected in favor of a presumably better opportunity. For example,
investment of a sum into a MUTUAL FUND instead of a variable annuity
with a comparable equities portfolio, thereby foregoing the tax
deferred advantages of the investment build-up under the variable
annuity.
OPTION see OPTIONAL MODES OF SETTLEMENT.
OPTIONAL ANNUITY FORM see ANNUITY.
OPTIONAL BENEFITS choice of a lump sum payment for an
injury incurred instead of a series of periodic payments, available
under a health insurance policy.
OPTIONALLY RENEWABLE CONTRACT health insurance
contract that is renewable at the option of the insurer. On the
anniversary date of the contract, the insurer has the right to decide
whether or not to renew.
OPTIONALLY RENEWABLE HEALTH INSURANCE see HEALTH
INSURANCE.

OPTIONAL MODES OF SETTLEMENT choice of one of the

following available to a life insurance policyowner (or beneficiary,
if entitled to receive a death benefit in a lump sum at the death of
an insured):
1. INTEREST OPTIONdeath benefit left on deposit at interest with the
insurance company with earnings paid to the beneficiary annually.
The beneficiary can withdraw part or all of the principal of the
death proceeds, subject to any restrictions the policyowner may
have placed on this option.
2. fixed amount optiondeath benefit paid in a series of fixed amount
installments until the proceeds and interest earned terminate.
3. fixed period optiondeath benefit left on deposit with the
insurance company with the death benefit plus interest thereon paid
out in equal payments for the period of time selected.
4. life income optiondeath benefit plus interest paid through a life
ANNUITY. Income continues under a straight life income option, for
 Page 358
as long as the beneficiary lives; or whether or not the beneficiary
lives, under a life income with period certain option.
OPTIONAL PERIL ENDORSEMENT provision in many property
insurance policies that allows an insured to pick coverage for
selected perils. The choices are (1) explosion; (2) explosion, riot
and civil commotion; (3) explosion, riot and civil commotion, and
vandalism and malicious mischief; and (4) aircraft and vehicle
damage to property.
OPTIONS CONTRACT arrangement between the seller and the
buyer in which the buyer has the right to buy (CALL OPTION) or sell (PUT
OPTION) a security at some time in the future at a price stipulated at

present.
ORDINARY AGENCY local life insurance office that sells and
services ordinary life insurance as well as other forms of life
insurance except DEBT INSURANCE.
ORDINARY LIFE INSURANCE policy that remains in full force
and effect for the life of the insured, with premium payments being
made for the same period. See also LIMITED PAYMENT LIFE INSURANCE; TERM LIFE
INSURANCE.

ORDINARY LIFEWHOLE LIFESTRAIGHT LIFE three terms

that are synonymous. See also ORDINARY LIFE INSURANCE.
ORDINARY PAYROLL see ORDINARY PAYROLL COVERAGE ENDORSEMENT.
ORDINARY PAYROLL COVERAGE ENDORSEMENT policy
provision that provides coverage for continuing payroll expense of
all employees of an insured business (except for officers and
executives) for the first specified number of days of business
interruption. Applies when the business's continuing operation is
interrupted by damage or destruction by an insured peril.
ORDINARY PAYROLL EXCLUSION ENDORSEMENT
provision in BUSINESS INTERRUPTION INSURANCE that excludes coverage for
continuing the wages of rank and file employees. Business
interruption insurance covers anemployer for loss of earnings,
including payroll expense, that occurs when a business must be
shut down as a result of a direct insurable loss, such as a fire.
However, in order to save on the premium, an employer may not
want payroll coverage for ordinary workers because if the business
were temporarily shut down, the workers could be replaced. In this
case, the endorsement would be written to cover only officers and
key employees.
ORDINARY REGISTER record of ordinary policies that a
COMBINATION AGENT is responsible for servicing.

OREGON HEALTH PLAN plan that provides a legal resident of

the state of Oregon access to basic health care through three major
components:
 Page 359
1. Medicaid Reform (rationing)extends Medicaid eligibility to
those individuals below the federal poverty level, and requires, if
possible, that Medicaid benefits be provided through MANAGED CARE
plans.
2. Employer Mandateemployers must provide health insurance for
all permanent (working at least 17.5 hours per week) employees on
a play or pay basis, where the employer plays by providing the
employees with a health insurance plan or pays by paying a payroll
tax that is passed through to the state's Insurance Pool Fund.
3. Market Reformbenefits available must be substantially similar to
those provided by Medicaid.
The indemnity insurance plan and the Health Maintenance
Organization (HMO) provide similar benefits, and both plans must
be accessible to all businesses whose employment is in the range of
3 to 25 employees. The indemnity insurance plan has the following
characteristics: (1) $15 copayment for preventive services (most
other services require a 50% copayment); (2) no deductible; (3)
out-of-pocket expenses to be limited to $3750 annually on an
individual basis and $7500 annually on a family basis. After these
annual limits have been reached, 100% of the expenses are paid by
the insurance plan up to a $1,000,000 lifetime maximum; and (4)
preventive services to include children's immunizations, dental
examinations, basic medical examinations, vision examinations
through age 18, basic blood pressure and cholesterol screening for
adults every five years through age 39 and every two years
beginning at age 40, maternity care, mental health benefits, alcohol
and chemical dependence benefits.
All insurance companies that sell and/or service insurance plans to
employers who have 3 to 25 employees must offer at least those
basic benefits and cannot refuse to sell this plan to any such
employer. In addition, no employee or employee's dependent can
be excluded from the plan; there must be portability from any
previous individual or group health insurance plan; benefits cannot
be denied because of preexisting conditions to include pregnancy;
policies cannot be cancelled on a selective basis, even for those
employees who develop high-risk health care problems; and
premium rates cannot exceed the geographic premium rate
maintained for a stipulated geographic area.
ORIGINAL AGE insured's age at the date a TERM LIFE INSURANCE policy
is issued. An original age or retroactive conversion option permits
the insured to convert the term policy to a cash value policy as of
the original date of issue. Conversion is made without a physical
examination, but a correction factor is charged to reflect the
difference in premiums between the policies that would have been
payable beginning at the original date of issue. This difference is
accumulated at interest to reflect the time value of money. See also
ATTAINED AGE.

ORIGINAL AGE CONVERSION see ORIGINAL AGE.

 Page 360
ORIGINAL COST actual price paid for property when it was
acquired. The original cost might apply to a piece of jewelry, to a
piece of equipment, or to a building. For insurance purposes,
original cost is often different from replacement cost or ACTUAL CASH
VALUE.

ORIGINAL COST LESS DEPRECIATION actual price paid for

property when acquired, minus depreciation. Original cost less
depreciation is used to compute ACTUAL CASH VALUE, which is often the
insurable interest in a property.
OTHER INSURANCE presence of other contract(s) covering the
same conditions. When more than one policy covers the exposure,
each policy will pay an equal share of the loss.
OTHER INSURANCE CLAUSE provision in a property, liability,
or health insurance policy stipulating the extent of coverage in the
event that other insurance covers the same property. See also
APPORTIONMENT; COORDINATION OF BENEFITS.

OTHER INSUREDS individuals or organizations covered by

PROPERTY AND LIABILITY INSURANCE other than the named insured. For

example, under the PERSONAL AUTOMOBILE POLICY (PAP), other insureds under
Coverage ALiability are the named insured's spouse, other relatives
living with the insured, and any other person using the automobile
with the permission of the insured or the insured's spouse. See also
RIDERS, LIFE POLICIES.

OUTAGE INSURANCE see EXTRA EXPENSE INSURANCE.

OUTBOARD MOTOR BOAT INSURANCE coverage on an ALL
RISKS basis for physical damage loss. Coverage applies to property

damage to the insured boat or damage caused by the insured boat to

a third party boat (property damage liability). Excluded perils are
war damage, use of boat in a race or speed contest, nuclear loss,
and so forth. Bodily injury liability coverage is excluded from this
policy since the operator of the boat would be covered for this risk
under a COMPREHENSIVE PERSONAL LIABILITY INSURANCE policy, HOMEOWNERS INSURANCE
POLICY, or TENANTS INSURANCE.

OUT-OF-AREA EMERGENCY SERVICES see HEALTH MAINTENANCE

ORGANIZATION (HMO).

OUTPATIENT individual receiving medical treatment who is not

required to be hospitalized overnight.
OUTPATIENT HEALTH SERVICES AT HMO FACILITY see
HEALTH MAINTENANCE ORGANIZATION (HMO).

OUTPATIENT HOSPITAL CARE, HMO see HEALTH MAINTENANCE

ORGANIZATION (HMO).

OUTSTANDING PREMIUMS payments due to an insurance

company but not yet paid.
 Page 361
OVERCHARGING charging the insured an amount that is above
the actual PREMIUM required for placing and maintaining the POLICY in
force.
OVERHEAD EXPENSE DISABILITY INCOME POLICY type of
DISABILITY INCOME POLICY used to provide funds for the ongoing monthly

business expenses (such as employee salaries, utility charges, rent,

and equipment payment due) necessary to maintain continuing
operations in the event an owner/key person becomes disabled.
Generally, there is a 60-day ELIMINATION PERIOD after which monthly
income payments commence until a stipulated aggregate limit has
been reached.
OVERHEAD INSURANCE see BUSINESS INCOME COVERAGE FORM.
OVERINSURANCE situation in which insurance benefits exceed
the actual loss of an insured. Overinsurance can be a problem for
the insurer because it may tempt the insured to make a false claim
in order to profit financially. Various safeguards are designed to
prevent overinsurance. For example, in group health insurance,
companies break down benefits paid by the primary carrier and the
secondary carrier through COORDINATION OF BENEFITS. Still, some types of
coverage, particularly disability income insurance, are subject to
overinsurance abuse.
OVERLAPPING INSURANCE coverage by at least two insurance
policies providing the same coverage for the same risk. See also
APPORTIONMENT; CONCURRENCY; COORDINATION OF BENEFITS; NONCONCURRENCY; PRIMARY INSURANCE.

OVER LINE coverage that exceeds the normal insurance capacity

of an insurer or reinsurer.
OVERRIDING COMMISSION payment to a broker, master
general agent, general agent, or agent on any particular line of
insurance written by other agents within a particular geographical
area.
OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC)
federal program to insure private U.S. investments in foreign
countries, created by the Foreign Assistance Act of 1961. It is a
joint government and private effort to encourage U.S. investments
abroad by providing protection against three political risks: (1)
inability to convert foreign currency; (2) expropriation of facilities
by a foreign country; and (3) war or revolution. The program is
guaranteed by the full faith and credit of the U.S. government.
OVER-THE-COUNTER SELLING OF INSURANCE method of
selling insurance in which the INSURED purchases the product directly
from the insurance company and not through an AGENT. See also
SAVINGS BANK LIFE INSURANCE (SBLI).

OVERWRITING COMMISSION see OVERRIDING COMMISSION.

 Page 362
OWNERS AND CONTRACTORS PROTECTIVE LIABILITY
INSURANCE endorsement to OWNERS, LANDLORDS, AND TENANTS LIABILITY POLICY,
MANUFACTURERS AND CONTRACTORS LIABILITY INSURANCE, or other liability policies

for business firms that provides liability coverage for an insured

who is sued because of negligent acts or omissions of an
independent contractor or subcontractor resulting in bodily injury
and/or property damage to a third party.
OWNER'S DESIGNATED BENEFICIARY designated individual
who is to receive the POLICYHOLDER's interest in the policy should the
policyholder die prior to the distribution of all of the policyholder's
interest in the policy.
OWNERSHIP OF EXPIRATIONS retention of all files of policies
sold by the agent of record who, according to written agreement
with the insurance company, has the exclusive rights to solicit
renewals. See also INDEPENDENT AGENCY SYSTEM INDEPENDENT AGENT.
OWNERSHIP OF LIFE INSURANCE see OWNERSHIP RIGHTS UNDER LIFE
INSURANCE; POLICYHOLDER.

OWNERSHIP PROVISION see OWNERSHIP RIGHTS UNDER LIFE INSURANCE;

POLICYHOLDER.

OWNERSHIP RIGHTS UNDER LIFE INSURANCE right of the

policyowner as listed in a policy. An insured has the right to
exercise all privileges and receive all benefits of the policy except
when restricted by the right of an irrevocable beneficiary or an
assignee of record. A policyowner can transfer ownership of the
policy by making an absolute assignment (rights transferred to
another individual without any conditions) or a COLLATERAL ASSIGNMENT
(policy is security for a loan), transfer ownership by endorsement,
change the plan of insurance (apply the cash value of present
policy to purchase another type of policy with the original policy's
date), reinstate the policy, select an OPTIONAL MODE OF SETTLEMENT, make a
POLICY LOAN, select the DIVIDEND OPTION (if it is a participating policy), or

select the NON-FORFEITURE BENEFIT OPTION.

OWNERS, LANDLORDS, AND TENANTS LIABILITY
POLICY coverage for bodily injury and property damage liability
resulting from the ownership, use, and/or maintenance of an
insured business's premises as well as operations by the business
anywhere in the U.S. or Canada. Businesses that qualify for the
Owners, Landlords, and Tenants Policy include mercantile
establishments, apartment buildings, and office buildings. The only
ineligible firms are those engaged in manufacturing. Excluded
perils are: operation of an automobile, aircraft, contractual liability
resulting from an agreement by the insured, war, nuclear disaster,
and liquor liability.
 Page 363

P
PACKAGE INSURANCE see MULTIPLE LINE INSURANCE.
PACKAGE POLICY several basic property and/or liability policies
combined to form a single policy. For example, the HOMEOWNERS
INSURANCE POLICY is composed of such basic coverages as BROAD FORM

PERSONAL THEFT INSURANCE, COMPREHENSIVE PERSONAL LIABILITY, and FIRE INSURANCE-STANDARD

FIRE POLICY.

PAID BUSINESS life and health insurance business for which the
prospective insured or insureds have signed the APPLICATION,
completed the MEDICAL EXAMINATION, and paid the required PREMIUM.
PAID FOR insurance policy for which the required PREMIUM has been
paid. See also PAID BUSINESS.
PAID-IN CAPITAL sum received by an insurance company at the
sale of its stock. This capital represents the interest of the
stockholders in the company.
PAID-IN SURPLUS excess of the value of an insurer's admitted
assets over the total value of its liabilities and minimum capital
requirements established by applicable statutes designed to assure
the insurer's solvency.
PAID LOSSES actual amount of total losses paid by an insurance
company during a specified time interval.
PAID-LOSS RETRO PLAN see RETROSPECTIVE RATING.
PAID-UP ADDITIONS option under a participating life insurance
policy by which the policyowner can elect to have the dividends
purchase paid-up increments of permanent insurance.
PAID-UP INSURANCE life insurance policy under which all
premiums have already been paid, with no further premium
payment due. See also LIMITED PAYMENT LIFE INSURANCE.
PAID-UP POLICY RESERVE present value of future benefits.
This type of reserve would be applicable for SINGLE PREMIUM LIFE INSURANCE,
PAID-UP INSURANCE, single premium ANNUITY, and a paid-up annuity.

PAIR CLAUSE see SET CLAUSE (PAIR OR SET CLAUSE).

PAIRED PLAN plan that combines a PROFIT SHARING PLAN with a MONEY
PURCHASE PLAN. It permits the participant to maximize the flexible part

of the combination (profit sharing plan) after satisfying the

requirements for the annual contributions to the money purchase
plan. Under this combination plan, the maximum annual
contribution is 25% of the earned income subject to a maximum of
$30,000. For
 Page 364
example, if the participant desired to contribute annually the 25%
maximum amount of earned income, the participant could commit
to making a 15% annual contribution to the money purchase plan
and then contribute the remainder to the profit sharing plan if
business conditions permit. The only mandate contribution each
year would be the 15% of earned income to the money purchase
plan.
P&I see PROTECTION AND INDEMNITY INSURANCE (P&I).
PAR see PARTICIPATING INSURANCE.
PARAMEDICAL EXAMINATION medical check of an applicant
for life or health insurance by a medical professional who is not a
physician.
PARASOL POLICY see DIFFERENCE IN CONDITIONS INSURANCE.
PARCEL POST INSURANCE coverage for a shipper
(owner/sender) for property damage or loss of goods in transit
through the post office. A TRIP TRANSIT INSURANCE policy specifically
excludes coverages on property sent through the post office since
that agency is not a common carrier and does not incur the liability
of a common carrier. This is why additional coverage must be
purchased in the form of parcel post insurance, even if a business
has a trip transit insurance policy. Parcel post insurance is sold by
the post office in the form of a certificate, which covers property in
its custody. It is issued on an ALL RISKS basis, subject to exclusions of
spoilage, and financial instruments such as bills, currency, deeds,
notes, and securities.
PARENT COMPANY insurer in a group of companies that act as
subsidiaries. See also FLEET OF COMPANIES.
PARENT LIABILITY liability incurred by a parent by reason of a
TORT committed by his or her minor child.

PAROL EVIDENCE RULE rule that prohibits the introduction into

a court of law of any oral or written agreement that contradicts the
final written agreement. For example, an insurance contract
containing clauses and provisions is in writing, and as such this
contract cannot be contradicted or modified by any oral statements
or agreements that are inadmissible in a court of law.
PARTIAL DISABILITY see PERMANENT PARTIAL DISABILITY.
PARTIAL DISABILITY BENEFIT an amount usually expressed
as 50% of the MONTHLY INDEMNITY for the TOTAL DISABILITY BENEFIT provided by
a DISABILITY INCOME INSURANCE POLICY. This amount becomes payable when
the insured wage earner's income has been interrupted or
terminated because of illness, sickness, or accident. Payments
continue up to the time and amount limitations as stipulated in the
policy. This type of benefit has been replaced, in large part, by the
RESIDUAL DISABILITY INCOME INSURANCE policy.
 Page 365
PARTIAL LOSS damage of property that is not total; average (in
sense of partial) loss. See also SET CLAUSE.
PARTIAL PLAN TERMINATION scheme to recapture excess
pension assets by splitting a qualified plan in two, and terminating
one of them. In the mid-1980s, many pension plans became
''overfunded" because their investments had performed so well. In
order to recapture the "extra" money, some business firms split the
pension plan into two plans, one for current employees and an
overfunded one for retirees. The company buys annuities to pay the
required benefits to retirees and reclaims the excess assets. The
other plan is kept in place for current employees.
PARTIAL VESTING a procedure effective January 1, 1989, under
the TAX REFORMACT OF 1986. The entitlement of an employee to a specified
portion of the pension benefits accrues in the following manner:
vesting of 20% after the completion of three years of service with
an employer, increasing by 20% for each year of service thereafter,
until 100% vesting is achieved at the end of seven years of service.
PARTICIPANT person covered under an EMPLOYEE BENEFIT INSURANCE PLAN.
PARTICIPATING see PARTICIPATING INSURANCE.
PARTICIPATING GUARANTEED INVESTMENTS
CONTRACT (GIC) type of GUARANTEED INVESTMENTS CONTRACT in which the
interest credited is adjusted on a periodic basis to reflect the
investment earnings of the underlying assets of the contract.
PARTICIPATING INSURANCE policy that pays a dividend to its
owner. See also PARTICIPATING POLICY DIVIDEND.
PARTICIPATING POLICY DIVIDEND life insurance contract that
pays its owner dividends, which can be: (1) taken as cash; (2)
applied to reduce a premium; (3) applied to purchase an increment
of PAID-UP INSURANCE; (4) left on deposit with the insurance company to
accumulate at interest; and (5) applied to purchase term insurance
for one year.
PARTICIPATING POLICY DIVIDEND OPTION see PARTICIPATING
POLICY DIVIDEND.

PARTICIPATING REINSURANCE see PROPORTIONAL REINSURANCE; QUOTA

SHARE REINSURANCE; SURPLUS REINSURANCE.

PARTICIPATION see PARTICIPATING INSURANCE.

PARTICIPATION CLAUSE CLAUSE found in HEALTH INSURANCE
CONTRACTS that requires the INSURED to pay a specified percentage of the

covered health care expenses.

PARTICULAR AVERAGE
1. expenses and damages incurred as the result of damage to a ship
and its cargo, and/or of taking direct action to prevent initial or
further damage to the ship and its cargo. These expenses and
damages
 Page 366
are paid by the owner of the part of the ship and cargo which
actually suffers a loss. Contrast with GENERAL AVERAGE.
2. partial loss of property resulting from an OCEAN MARINE EXPOSURE for
which the owner of that property must bear the entire loss. See also
FREE OF PARTICULAR AVERAGE (FPA).

PARTNERSHIP ENTITY PLAN see PARTNERSHIP LIFE AND HEALTH INSURANCE.

PARTNERSHIP INSURANCE see PARTNERSHIP LIFE AND HEALTH INSURANCE.
PARTNERSHIP LIFE AND HEALTH INSURANCE protection to
maintain the value of a business in case of death or disability of a
partner. Upon the death or long-term disability of a partner,
insurance can provide for the transfer of a deceased or disabled
partner's interest to the surviving partner according to a
predetermined formula. Funding can be achieved through either of
two plans:
1. Cross Purchase Planeach partner buys insurance on the lives of
the other partners. The beneficiaries are the surviving partners who
use the proceeds to buy out the deceased's interest. This plan can
become complicated when there are more than two partners. For
example, if there are four partners, partner A will buy insurance on
the lives of partners B, C, and D. The procedure would be repeated
with partners B, C, and D. Total policies would be 12.
2. Entity Planbecause of the number of policies required, the entity
plan is most often used for buy-and-sell agreements by larger
partnerships. The partnership owns, is beneficiary of, and pays the
premiums on the life insurance of each partner. When one of the
partners dies, the partnership as a whole purchases the deceased
partner's interest. Premiums are not tax deductible as a business
expense. If whole life insurance is used, the cash values are listed
as assets on the balance sheet of the partnership and are available
as collateral for loans.
Partners use insurance to fund other objectives. In personal service
partnerships of doctors, lawyers, and accountants, when it is
important to retain a deceased partner's name on the title of the
firm, the heirs may agree to this for a share in subsequent partner-
ship profits. An income continuation insurance plan funded
through life insurance by the partnership, serves this purpose.
Disability of partner buy and sell insurance can be used by a
partnership to provide income for the firm if a partner becomes
disabled. The policy would pay a monthly income to the
partnership for the duration of the partner's disability.
PARTY individual or entity who enters into a contract or other
legal proceeding, such as a lawsuit.
PASSENGER BODILY INJURY LIABILITY INSURANCE
coverage for automobile or aircraft operators if they are sued for
negligently
 Page 367
killing or injuring a passenger. The PERSONAL AUTOMOBILE POLICY (PAP)
provides MEDICAL PAYMENTS INSURANCE for doctor and hospital bills for
passengers of the insured, and BODILY INJURY liability insurance for
anyone who is accidentally disabled, injured, or killed by the
insured. Aviation policies split bodily injury liability into general
and passenger. Passenger liability covers a passenger who is
injured, killed, or disabled; general liability covers anyone else.
PASSIVE LOSS RULES rules passed as part of the TAX REFORMACT OF
1986 that limit the amount of income investors can shelter from

current tax. Losses can be deducted from passive activities only in

the amount to which income results from passive activities.
Furthermore, losses from one passive activity can be used only to
offset the passive income earned from a similar passive activity.
For example, losses from publicly traded partnerships can be
applied only to offset passive income earned from publicly traded
partnerships.
PASSIVE RETENTION practice in which no funds are set aside on
a mathematical basis to pay for expected losses. This occurs when
a risk manager is not aware of an exposure, when the cost of
treating an exposure positively is prohibitive, or if the severity of a
loss (should it occur) would be inconsequential. See also SELF
INSURANCE.

PAST DUE ACCOUNTS funds receivable or payable that have not

been paid in a timely manner. COMMERCIAL CREDIT INSURANCE protects an
insured against declines in the value of receivables due to
insolvency of a debtor. The insured may turn over to the insurer
accounts that are up to 12 months past due or, by special
endorsement, those that are 6 months overdue. For insurance
purposes, these past due accounts will be treated as if they were
accounts due from an insolvent company.
PAST SERVICE BENEFIT private pension plan credit given for an
employee's past service with an employer prior to establishment of
a pension plan. Usually, a lower percentage of compensation is
credited for benefits for past service than for future service
benefits.
PAST SERVICE CREDIT see PAST SERVICE BENEFIT.
PAST SERVICE LIABILITY employer's obligation to fund a
pension plan for the time period when employees were qualified to
participate but the plan was not yet established. For example, a
pension plan is established at XYZ Co. in 1985. Because John
Smith started at the firm in 1975, he would have a past service
credit for his 10 years of service before the plan started. For
funding purposes, annual contributions are broken down into FUTURE
SERVICE BENEFITS and PAST SERVICE BENEFIT. Past service liability is not funded

entirely in the initial year of a plan, primarily because it would be

too expensive, and the IRS requires that deductions be spread over
10 years.
PAST SERVICE LIABILITYINITIAL funding of an employee's
benefits in a pension plan for his or her beginning past service of
 Page 368
employment. This is a significant cost factor in pension planning
and financing of future benefits.
PATENT AND COPYRIGHT INFRINGEMENT see UNFAIR TRADE
PRACTICE.

PATENT INSURANCE coverage for a loss incurred by the INSURED

resulting from an infringement of the insured's patent or coverage
for a claim made against the insured resulting from infringement by
the insured against another's patent.
PATTERSON v. SHUMATE legal case in which the United States
Supreme Court held that pension assets are to be excluded from the
bankruptcy estate of the plan participant.
PAUL v. VIRGINIA U.S. Supreme Court case in 1868 in which the
decision (since overruled) was that an insurance policy was not an
instrument of commerce, and thus did not involve interstate
commerce transactions that would make it subject to federal
regulation. See also McCARRAN-FERGUSON ACT (PUBLIC LAW 15); SOUTH-EASTERN
UNDERWRITERS ASSOCIATION (SEUA) CASE.

PAY abbreviation for premium payment. It usually applies to a

limited number of annual premium payment policies such as a ten-
day policy.
PAY-AS-YOU-GO PLAN see CURRENT DISBURSEMENT.
PAY-AT-THE-PUMP PLAN automobile insurance plan, debated
for a number of years, that is financed through a surcharge of a
given number of cents per gallon (estimates run from 30 to 40
cents) to be paid by the purchaser of the gasoline. The plan would
operate on the NO-FAULT AUTOMOBILE INSURANCE basis. Claims would be paid
from an insurance pool whose funds would be generated by the
surcharge. Drivers would receive unlimited medical coverage, up
to $25,000, for missed wages and collision damage. Drivers would
be required to pay a $250 deductible. Those drivers desiring
additional lost wages or damage coverage, could purchase it
separately.
PAYEE
1. recipient.
2. insurance company that receives a premium payment from a
payer.
3. insured or beneficiary who receives a loss or benefit payment
from an insurer.
PAYEE CLAUSE CLAUSE in an INSURANCE POLICY that provides for the
payment of a monetary sum to the individual(s) who incurred the
loss.
PAYMASTER ROBBERY INSURANCE coverage for robbery of
the payroll of a business. Coverage applies to money and checks
from the time the payroll is withdrawn from the bank until it is
distributed to the employees, whether inside or outside of the
premises of the business. Employees are covered if robbed of their
pay when the business itself
 Page 369
is being robbed of the payroll. Excluded are manuscripts and
records of accounts.
PAYMENT BOND bond guaranteeing that a contractor will pay
fees owed for labor and materials necessary for construction of a
project. If these fees are not paid, an owner who has paid the
contractor might be confronted with subcontractor's or worker's
liens filed against the completed project. If this happens, the owner
could end up paying many times the value of the work done. See
also PERFORMANCE BOND.
PAYMENT CERTAIN phrase used to describe a method of annuity
payout that guarantees a specified number of years, regardless of
whether an annuitant remains alive.
PAYMENT OF EXPOSURES INSURED BY COMPANY see CLAIM,
OBLIGATION TO PAY; HOMEOWNERS INSURANCE POLICY; INTERINSURANCE COMPANY CLAIMS;

INTERPLEADER; PERSONAL AUTOMOBILE POLICY (PAP); PROPERTY AND CASUALTY INSURANCE

PROVISIONS.

PAYMENT OF PREMIUMS ON BONDS act that seals a contract

and is noncancellable. SURETY BONDS and FIDELITY BONDS resemble
insurance contracts in many ways. However, the surety, which is
often an insurance company, cannot cancel a bond once the
premium has been paid.
PAYOR CLAUSE provision found in JUVENILE INSURANCE that waives the
premiums due on the insured child's policy provided that the payor
of the premiums becomes totally disabled or dies before the child
reaches a stipulated age.
PAYOUT PHASE period when the accumulated assets in an ANNUITY
are returned to the annuitant. An annuity may be purchased either
with a single payment or with many payments over the life of the
contract. At some point, usually upon retirement, the annuitant
elects to have the payments, plus earnings, returned. The 1982
Federal Tax Code declared that any money received during the
payout phase is considered earnings first and is taxable.
PAYROLL AUDIT insurance company's examination of an insured
business's payroll records in order to determine the final premium
due on a WORKERS COMPENSATION INSURANCE policy.
PAYROLL BUYUP DISABILITY INSURANCE basic GROUP
DISABILITY INSURANCE policy for all employees purchased by the

employer. In addition, the employer usually purchases an

individual disability policy for key executives. Employees purchase
supplemental group disability insurance for themselves.
PAYROLL DEDUCTION INSURANCE plan under which an
employee authorizes his or her employer to deduct from each
paycheck premiums due on an insurance plan.
PAYROLL ENDORSEMENTS see ORDINARY PAYROLL EXCLUSION ENDORSEMENT.
 Page 370
PAYROLL SAVINGS INSURANCE see PAYROLL DEDUCTION INSURANCE.
PAYROLL STOCK OWNERSHIP PLANS (PAYSOP) EMPLOYEE STOCK
OWNERSHIP PLAN (ESOP); TRUST (ESOP) under which an employer received tax

credit instead of a tax deduction for contributions. Until passage of

the TAX REFORM ACT OF 1986, the tax credit was limited to the lesser of the
value of the stock contributed to the plan or .5% of the employer's
payroll. The PAYSOP must have met all of the requirements of a
qualified plan, and all participants must have had 100% immediate
VESTING. The Tax Reform Act of 1986 repealed PAYSOP.

PEAK SEASON ENDORSEMENT endorsement attached to

PROPERTY INSURANCE COVERAGE that provides additional limits of protection

on a merchant's inventories during specific time intervals. The time

intervals generally are the periods during the year when shopping is
most intense.
PEL see PERMISSIBLE EXPOSURE LIMIT.
PENALTY liability limit on a FIDELITY BOND or SURETY BOND. A fixed-
penalty bond is one with a fixed liability limit that the surety
company will pay in the event of nonperformance.
PENSION ADMINISTRATION PLAN see IMMEDIATE PARTICIPATION
GUARANTEE PLAN (IPG).

PENSION BENEFIT GUARANTY CORPORATION (PBGC)

independent federal government organization authorized by the
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA) to administer the PENSION PLAN

TERMINATION INSURANCE program. Its function is to ensure that vested

benefits of employees, whose PENSION PLAN is being terminated, will be

paid as they come due. The PBGC board of directors consists of
the U.S. Secretaries of Labor, Commerce, and Treasury. Only
qualified DEFINED BENEFIT PLANS are guaranteed; PROFIT SHARING PLANS, stock
bonus plans, and MONEY PURCHASE PLANS are not. Plan termination
insurance covers both voluntary termination and terminations
ordered by the PBGC. Employers pay an annual premium rate per
employee in their pension plans to the PBGC to finance the plan
termination insurance program.
PENSION BENEFIT GUARANTY CORPORATION
PARTICIPANT NOTICE REQUIREMENT notice added to the
EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) requiring the employer to

disclose the following information concerning the PENSION PLAN to the

employee:
1. the ratio of plan assets to current liability (value of the employer
retirement benefits earned to date). This ratio is known as the
funded percentage.
2. statement that the employer is responsible for paying all earned
pension benefits, but such payment could be at risk should the
 Page 371
employer have severe financial difficulties. A statement that, if the
plan terminates, the PENSION BENEFIT GUARANTY CORPORATION (PBGC) becomes
responsible for paying the employees their earned retirement
benefits.
3. statements indicating any late funding of minimum contributions
and the date the contributions were paid into the plan.
4. statement of any late quarterly contributions (more than 60 days
late) and the actual date contributions were made.
A plan is subject to this notice requirement for a plan year if the
plan paid to the PBGC is a variable premium during that plan year
and the minimum funding requirement for the plan year is based on
the DEFECIT REDUCTION CONTRIBUTION for the prior or the current plan year.
Plans that are subject to this notice requirement for a plan year
must notify all plan participants (current employees, VESTED
employees who have terminated, retired employees, and
beneficiaries of deceased employees).
PENSION EQUITY PLAN (PEP) modifications of the traditional
DEFINED BENEFIT PLAN in which employees are credited with a specified

percentage for each year of recognized service with the employer.

Upon termination of service, the percentages are summed and
multiplied times the final average pay. The resultant calculation is
the employee's annual retirement benefit. These plans provide for
an even accrual of the employee's retirement benefits and thus
provide greater benefit for employees that have shorter periods of
service.
PENSION FUND see PENSION PLAN.
PENSION MAXIMIZATION plan under which life insurance is
substituted for retirement income. Under the plan, a married
individual selects a SINGLE LIFE ANNUITY payout from the pension plan,
which will generate the maximum monthly income benefit while
that individual is alive, with nothing being paid to the surviving
spouse after the death of that individual. The higher income
generated from the single life annuity, compared with that from a
JOINT LIFE AND SURVIVOR-SHIP ANNUITY, is used to buy a life insurance policy on

the married individual's life. If this individual dies first, the

proceeds of the policy will be used to purchase an ANNUITY for the
lifetime of the spouse. Should the spouse die first, the married
individual still has the higher income benefit from the single life
annuity.
PENSION PLAN retirement program to provide employees (and
often, spouses) with a monthly income payment for the rest of their
lives. To qualify, an employee must have met minimum age and
service requirements. Benefit formulas can be either the DEFINED
CONTRIBUTION PENSION (MONEY PURCHASE PLAN) or the DEFINED BENEFIT PLAN. The EMPLOYEE

RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA) requires a pension plan to provide

an income for the rest of a retired employee's life, and at least 50%
of that amount to the surviving spouse of a retired employee for the
rest of her life, unless the spouse
 Page 372
waives this right in writing. Death and disability benefits are also
provided by most pension plans. The TAX REFORM ACT OF 1986 has changed
the VESTING requirements. Funds for these plans can be generated
under numerous PENSION PLAN FUNDING INSTRUMENTS.
PENSION PLAN: FUND COLLEGE EDUCATION group of
plans (to include SECTION 401(k) PLANS and SECTION 403(b) PLANS) that permit in-
service withdrawals to fund a college education if a HARDSHIP exists.
PENSION PLAN FUNDING: GROUP DEPOSIT
ADMINISTRATION ANNUITY pension plan funding instrument
in which contributions paid by an employer are deposited to
accumulate at interest. (These plans are usually
NONCONTRIBUTORY.) Upon retirement, an immediate annuity
is purchased for the employee. The benefit is determined by a
formula, and the investment earnings on funds left to accumulate at
interest. Since the annuity is purchased at point of retirement, the
deposit administration plan can be used with any benefit formula.
PENSION PLAN FUNDING: GROUP IMMEDIATE
PARTICIPATION GUARANTEED (IPG) CONTRACT
ANNUITY modification of the group deposit administration
annuity under which an employer participates in the investment
(which may prove to be adverse as well as favorable), mortality,
and expense experience of the plan on an immediate basis. Under
the IPG, contributions are paid into a fund to which interest is
credited. At retirement, an IMMEDIATE ANNUITY is purchased for the
employee. The size of the benefit will depend on the benefit
formula used and the investment, mortality, and expense
experience of the plan.
PENSION PLAN FUNDING: GROUP PERMANENT
CONTRACT insurance policy under which the value equals the
benefits to be paid to the plan participants (employees) at normal
retirement age, assuming that (1) their rate of earnings remains the
same until NORMAL RETIREMENT AGE, and (2) the contributions to the plan
are sufficient to meet funding requirements for benefits under the
plan. Adjustments to contributions are made as employee earnings
increase. Retirement benefits depend on the benefit formula used,
and the investment, mortality, and expense experience of the plan.
PENSION PLAN FUNDING: IMMEDIATE PARTICIPATION
GUARANTEE CONTINGENT ANNUITY see PENSION PLAN FUNDING:
GROUP IMMEDIATE PARTICIPATION GUARANTEED (IPG) CONTRACT ANNUITY.

PENSION PLAN FUNDING: INDIVIDUAL CONTRACT

PENSION PLAN retirement plan for an individual based on a
single contract with a benefit based on current earnings, as if they
will remain static until NORMAL RETIREMENT AGE. As the earnings of the
plan participant
 Page 373
increase, additional contracts are purchased (with an increase in the
contributions to the plan). The amount of retirement benefits
depends on the benefit formula used and the investment experience
of the company underwriting the plan.
PENSION PLAN FUNDING INSTRUMENTS means of paying
the cost of benefits of pension plan participants including
retirement, death, and disability. See also GROUP PERMANENT LIFE INSURANCE;
PENSION PLAN; PENSION PLAN FUNDING: GROUP DEPOSIT ADMINISTRATION ANNUITY; PENSION PLAN

FUNDING: GROUP IMMEDIATE PARTICIPATION GUARANTEED (IPG) CONTRACT ANNUITY.

PENSION PLAN FUNDING METHODS see PENSION PLAN FUNDING, GROUP

DEPOSIT ADMINISTRATION ANNUITY; PENSION PLAN FUNDING, GROUP IMMEDIATE PARTICIPATION

GUARANTEED (IPG) CONTRACT ANNUITY; PENSION PLAN FUNDING, GROUP PERMANENT CONTRACT;

PENSION PLAN FUNDING, INDIVIDUAL CONTRACT PENSION PLAN.

PENSION PLAN INTEGRATION WITH SOCIAL SECURITY

offset or subtraction of Social Security benefits from earned
benefits in a qualified pension plan to reduce a pension benefit.
Many business firms offset their pension payments by the amount
of a retiree's Social Security benefit. For example, John Smith has
earned a monthly pension benefit of $950. His monthly Social
Security payment is $688. If his employer applies 100%
integration, his pension is reduced by the entire Social Security
benefit; he will receive $950 minus $688, or $262 monthly. More
commonly, integration is based on a percentage of Social Security.
With 50% integration, 50% of the Social Security benefit ($344)
would be subtracted from the $950 pension for a monthly benefit
of $606. Offsets were limited by the TAX REFORM ACT OF 1986.
PENSION PLAN LIMITS dollar limitations under the Internal
Revenue Service code as follows:
1. The elective annual deferral limit is $10,000.
2. A highly compensated employee's annual compensation limit is
$80,000.
3. QUALIFIED PLANS and SIMPLIFIED EMPLOYEE PENSION (SEP) plan annual
compensation limit for contributions is $160,000.
4. SIMPLIFIED RETIREMENT ACCOUNT annual compensation limitation is $6000.
5. SIMPLIFIED EMPLOYEE PENSION (SEP) plan annual compensation minimum is
$400.
6. State, local government, and tax-exempt organizations' annual
limitation on deferrals under DEFERRED COMPENSATION PLANS is $8000.
7. The DEFINED BENEFIT PLAN maximum annual benefit under Section 415
(b)(1)(a) is $130,000.
8. The DEFINED CONTRIBUTION PLAN maximum annual contribution under
Section 415 (c)(1)(a) is $30,000.
 Page 374
9. The maximum account balance dollar amount permitted for
determining the tax credit under an EMPLOYEE STOCK OPTION PLAN (ESOP)
subject to a five-year period of distribution is $735,000.
PENSION PLANS: DISTRIBUTIONS prior to 1988, right to
withdraw retirement assets before age 59 1/2 without having to pay
a 10% penalty under the following circumstances:
1. medical expenses are incurred.
2. the plan participant becomes disabled. With the passage of the
TECHNICAL AND MISCELLANEOUS REVENUE ACT OF 1988 (TAMRA): EMPLOYEE BENEFITS a third

option is available to the plan participant:

3. distribution must be a part of a scheduled series of substantially
equal periodic payments. The distributions must be made in such a
manner that they will continue for the lifetime of the plan
participant or the joint lifetime of the plan participant and his or her
beneficiary.
PENSION PLANS: WITHDRAWAL BENEFITS rights of
employees who leave an employer with a qualified plan to
withdraw their accumulated benefits. With a CONTRIBUTORY plan,
employees have immediate rights to their own contributions, plus
earnings. If they leave the employer, the accumulated money
belongs to them. But they are not entitled to employer
contributions, unless vested. VESTING depends on the terms of the
plan, but maximum time limits are set by law. A vested employee
who withdraws accumulated benefits upon separation may either
pay tax on the amount contributed by the employer and spend it, or
roll it over into an INDIVIDUAL RETIREMENT ACCOUNT (IRA).
PENSION PLAN TERMINATION INSURANCE coverage
provided by the PENSION BENEFIT GUARANTY CORPORATION (PBGC) that guarantees
participants a certain level of pension benefits even if the plan
terminates without assets. The PBGC was authorized under the
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA). The insurance, paid for

by employers, protects vested interest only.

PENSION PLAN VALUATION FACTORS present value
computation of the accrued or projected benefits of a retirement
plan. This computation is known as the actuarial valuation because
it is based on (1) probability (retirement event will take place); (2)
demographic changes (increase or decrease in employee's
earnings); (3) interest rate (discount rate used to derive present
value of future benefits).
PENSION PORTABILITY employee's right to transfer pension
benefit credits from a former employer to a current employer.
PENSIONS see PENSION PLAN.
PENSION TRUST provision that funds a tax-qualified plan. Trust
funds are the oldest, and still the most common, method of funding
pensions. All contributions made by employer and employees are
deposited into
 Page 375
a trust fund, with a trustee responsible for investing the money,
administering the plan, and paying benefits.
PER ACCIDENT LIMIT maximum amount that an insurance
company will pay under a liability insurance policy for claims
resulting from a particular accident. This maximum amount applies
regardless of the amount of property damage or the number of
persons injured in that accident.
PER CAPITA distribution of a deceased beneficiary's share of an
estate among all of his or her living heirs. Contrast with PER STIRPES.
PER CAUSE DEDUCTIBLE requirement that the deductible must
be met for each separate illness or accident before benefits are
payable under major medical insurance.
PERCENTAGE-OF-LOSS DEDUCTIBLE deductible, applied to
every loss, expressed as a percentage of that loss. As the loss
increases, the deductible amount increases.
PERCENTAGE PARTICIPATING DEDUCTIBLE (stop loss)
amount over which a health insurance plan pays 100% of the costs
in a PERCENTAGE PARTICIPATION plan. Here, an insured shares costs with the
insurer according to some predetermined ratio. For example, an
insured may pay 20% of covered costs and the insurer 80%.
However, most group medical plans pick up all covered expenses
over a certain deductible amount or specified dollar limit. For
example, once the insured has paid a $2000 deductible amount, the
plan may pay 100% of covered expenses for the remainder of the
policy year.
PERCENTAGE PARTICIPATION (COINSURANCE) plan where a portion
of medical expenses are paid by an insured. Some health insurance
policies provide that the insured shares expenses with the insurer
according to a predetermined ratio. For example, many group
health plans provide that, after paying a deductible amount, the
insured pays a portion (usually 20-25%) of covered medical
expenses. For some types of services, such as psychiatry or
dentistry, the percentage participation, which the insured pays, may
go as high as 50% of covered services.
PER DIEM BUSINESS INTERRUPTION POLICY type of BUSINESS
INTERRUPTION INSURANCE policy that provides a specific daily dollar

amount benefit to the business owner for each day the business is
unable to resume normal business operations because of property
damage or destruction resulting from an INSURED PERIL.
PERFORMANCE BOND bond guaranteeing that a contractor will
perform under the contract in accordance with all specifications of
the bid submitted.
PERIL see ALL RISKS.
PERIOD see POLICY PERIOD.
 Page 376
PERIOD CERTAIN see ANNUITY.
PERIODIC LEVEL see LEVEL.
PERMANENT DISABILITY see DISABILITY.
PERMANENT LIFE INSURANCE see ORDINARY LIFE INSURANCE.
PERMANENT PARTIAL DISABILITY disability in which a wage
earner is forever prevented from working at full physical capability
because of injury or illness. See also DISABILITY INCOME INSURANCE.
PERMANENT TOTAL DISABILITY disability in which a wage
earner is forever prevented from working because of injury or
illness suffered. See also DISABILITY INCOME INSURANCE.
PERMISSIBLE EXPOSURE LIMIT (PEL) standard set under the
OCCUPATIONAL SAFETY AND HEALTH ACT that sets allowable levels of worker

exposure to such toxic substances as asbestos, certain chemicals,

and radiation. In many cases workers must wear devices to
determine their exposure to toxic workplace substances, and when
the maximum is reached, they must be transferred to another
workplace. Business firms that violate the standard can be fined.
PERMISSIBLE LOSS RATIO see EXPECTED LOSS RATIO.
PERMISSION GRANTED CLAUSE provision in most property
insurance policies on real property that permits a policyholder to
use an insured place for normal purposes related to occupancy.
This might include storing remodeling materials or hobby
equipment. This clause is important because a policy may be
voided for fraud, concealment, or misrepresentation. A policy may
also be suspended for increased hazard by an insured. The
permission granted clause provides a defense against a charge that
a policyholder has increased the hazard of covered property if the
materials in question are a part of the insured's everyday lifestyle.
PERMISSIVE LAW see FILE-AND-USE RATING LAWS.
PERMISSIVE USER person who uses personal property such as
an automobile with permission of an owner. For example, for
insurance purposes, someone who uses an automobile with the
owner's permission would be covered by the latter's PERSONAL
AUTOMOBILE POLICY (PAP). On the other hand, the owner of property may

not be responsible for a TRESPASSER.

PERMIT BOND contract guaranteeing that a person licensed by a
city, county, or state agency will perform activities for which the
bond was granted, according to the regulations governing the
license.
PER PERSON LIMIT maximum amount that an insurance
company will pay under a liability insurance policy for bodily
injury incurred by any single person as a result of any one accident.
 Page 377
PERPETUAL INSURANCE coverage on real property written to
have no time limit. A single deposit premium pays for insurance
for the life of the risk. The insurer earns enough investment income
on the deposit to cover losses and costs. Upon cancellation, the
insured is entitled to return of the initial deposit premium.
Perpetual insurance, first issued in the U.S. in Philadelphia in 1752,
is still used for fire and home-owner's insurance.
PERPETUAL MUTUAL INSURANCE COMPANY type of MUTUAL
INSURANCE COMPANY that requires a substantial initial premium payment.

After the initial premium payment is made, future premium

payments required will be paid from the investment earnings of the
initial premium payment. See also PERPETUAL INSURANCE.
PER RISK EXCESS INSURANCE see EXCESS OF LOSS REINSURANCE.
PERSISTENCY percentage of life insurance or other insurance
policies remaining in force; percentage of policies that have not
lapsed. The higher the percentage, the greater the persistency.
Since it is an important measure of a company's retention of its life
insurance business, most companies extend every effort to increase
persistency. See also CONSERVATION.
PERSISTENCY BONUSES (ENHANCEMENTS) financial
incentives credited to the policy to encourage the POLICYOWNER to keep
the policy in force. The incentives may be utilized by: (1) applying
them to the policy cash value after a stipulated time period that the
policy has been in force has expired; (2) after a stipulated
minimum number of premium payments has been paid into the
policy; or (3) after the policy's cash value has attained a stipulated
minimum value. These financial incentives may be added to the
policy in the following manner:
1. Additional interest may be added to the policy's cash value.
2. Mortality credit may be added to the policy's cash value.
3. The policy's death benefit may be increased.
PERSONAL ACCIDENT CATASTROPHE REINSURANCE see
AUTOMATIC NONPROPORTIONAL REINSURANCE; AUTOMATIC PROPORTIONAL REINSURANCE; AUTOMATIC

REINSURANCE; EXCESS OF LOSS REINSURANCE; FACULATIVE REINSURANCE; NONPROPORTIONAL

REINSURANCE; PROPORTIONAL REINSURANCE; QUOTA SHARE REINSURANCE; STOP LOSS REINSURANCE;

SURPLUS REINSURANCE.

PERSONAL ARTICLES INSURANCE coverage for all kinds of

personal property whether inside or outside an insured's (home) to
include jewelry, musical instruments, cameras, fine arts, and
precious stones. The insurance policy can be issued separately as
an INLAND MARINE INSURANCE policy or as an endorsement to the HOMEOWNERS
INSURANCE POLICY. Protection is on an ALL RISKS basis subject to exclusions

of wear and tear, war, and nuclear disaster. Each piece of jewelry
and other expensive items must be specifically listed in the policy.
See also PERSONAL EFFECTS INSURANCE.
 Page 378
PERSONAL AUTOMOBILE POLICY (PAP) replacement for the
earlier Family Automobile Policy (FAP) with these nine basic
coverages:
1. Coverage ALiability. (a) The company pays damages for which
an insured becomes legally obligated because negligent acts or
omissions resulted in bodily injury and/or property damage to a
third party; (b) the company defends the insured against liability
suits for damages caused to the third party, paying various
expenses in this connection; and (c) vehicles covered include the
insured's own cars, a newly acquired car, and a temporary
substitute car.
2. Coverage BMedical Payments. The company pays medical
expenses for bodily injury incurred by the insured (including
spouse and relatives) and any other person while they occupy the
insured car.
3. Coverage CUninsured Motorist Coverage. The company pays
damages that the insured is legally entitled to collect from the
owner or driver of an uninsured motor vehicle.
4. Coverage DComprehensive. The company pays for loss to the
insured's car for all damages, in excess of a deductible amount,
except due to collision.
5. Coverage ECollision. The company pays for loss to the insured's
car for all damages in excess of a deductible amount caused by
collision.
6. Coverage FCar Rental Expense (optional). The company pays
for car rental up to a daily dollar limit, when the insured's car
cannot run due to a loss incurred.
7. Coverage GDeath, Dismemberment, and Loss of Sight
(optional). The company pays the insured or beneficiary for death
or loss caused by an accident to the insured.
8. Coverage HTotal Disability (optional). The company pays the
insured a monthly disability income benefit because of bodily
injury in an accident while occupying or being struck by a motor
vehicle.
9. Coverage ILoss of Earnings (optional). The company pays the
insured a percentage of his or her loss of monthly earnings because
of bodily injury as the result of an accident while occupying or
being struck by a motor vehicle.
PERSONAL CATASTROPHE INSURANCE excess coverage over
the first layer of medical insurance to provide for catastrophic
medical payments. The first layer may be either group or individual
medical insurance, or an individual may choose to pay for ordinary
medical payments and buy insurance for those losses above a
certain amount.
PERSONAL COMPREHENSIVE LIABILITY INSURANCE see
COMPREHENSIVE PERSONAL LIABILITY INSURANCE.

PERSONAL CONTRACT agreement concerning an insured

individual, not the insured's property. A property and casualty
insurance contract cannot be assigned, since it follows the insured,
not the property.
 Page 379
For example, a HOMEOWNERS INSURANCE POLICY cannot be transferred with
the home upon its sale because the insured no longer has an
insurable interest (expectation of monetary loss) in the home. But a
LIFE INSURANCE contract can be assigned (for example, to secure a line

of credit for a business). Banks use the American Bankers Form for
the assignment of life insurance policies pledged as security for a
loan.
PERSONAL EFFECTS INSURANCE coverage outside an
insured's home for personal items usually carried or worn while
traveling. Protection is for personal property (apparel and jewelry),
not for real property or property not usually carried by the traveler
(a piano, household furniture). Coverage applies anywhere in the
world for the named insured and insured's spouse and unmarried
children if residents of the household.
PERSONAL EXCESS LIABILITY INSURANCE see UMBRELLA
LIABILITY INSURANCE.

PERSONAL FINANCIAL INVENTORY detailed descriptive list

made available to the survivor(s) of the insured showing: attorney,
accountant, insurance agent, and location of important documents
such as wills, power of attorney, property deeds, insurance policies
by account number, bank accounts by account number, investments
by account number, loans by account number, credit cards by
account number, and any other important financial papers. Safe
deposit boxes and keys location should also be listed.
PERSONAL FLOATER POLICY see PERSONAL ARTICLES INSURANCE; PERSONAL
EFFECTS INSURANCE.

PERSONAL FURS INSURANCE see FURRIERS BLOCK INSURANCE; FURS

INSURANCE.

PERSONAL HAZARD see MORAL HAZARD.

PERSONAL HISTORY insurance applicant's life and health
record, financial standing, driving record, general character,
vocation, and habits. These factors are evaluated by a home office
underwriter in classifying the applicant as insurable, preferred,
extra-risk, or uninsurable. See also NUMERICAL RATING SYSTEM.
PERSONAL INCOME measurement of income received by
households from employment, self-employment, or investment and
transfer payments, as provided monthly by the United States
Department of Commerce.
PERSONAL INJURY wrongful conduct causing false arrest,
invasion of privacy, libel, slander, defamation of character, and
bodily injury. The injury is against the person in contrast to
property damage or destruction. See also BUSINESS LIABILITY INSURANCE
(Insuring Agreements Section).
 Page 380
PERSONAL INJURY INSURANCE LIABILITY INSURANCE that provides
coverage for the INSURED in the event the insured's negligent acts
and/or omissions result in libel, slander, invasion of privacy, or
false arrest suit.
PERSONAL INJURY PROTECTION (PIP) coverage to pay basic
expenses for an insured and his or her family in states with NO FAULT
AUTOMOBILE INSURANCE. No-fault laws generally require drivers to carry

both LIABILITY INSURANCE and personal injury protection (PIP) coverage

to pay for basic needs of the insured, such as medical expenses, in
the event of an accident.
PERSONAL INSURANCE see ACCIDENTAL DEATH AND DISMEMBERMENT
INSURANCE; ACCIDENT AND HEALTH INSURANCE; ADDITIONAL LIVING EXPENSE INSURANCE; ADJUSTABLE

LIFE INSURANCE; ANNUITY; BROAD FORM PERSONAL THEFT INSURANCE; COMPREHENSIVE HEALTH

INSURANCE; COMPREHENSIVE PERSONAL LIABILITY INSURANCE; DISABILITY INCOME INSURANCE;

ENDOWMENT INSURANCE; FAMILY INCOME POLICY; FAMILY INCOME RIDER; FAMILY MAINTENANCE POLICY;

FAMILY POLICY; FARMERS COMPREHENSIVE PERSONAL LIABILITY INSURANCE; HOMEOWNERS INSURANCE

POLICY; LIFE INSURANCE; MINIMUM DEPOSIT WHOLE LIFE INSURANCE; PAID-UP INSURANCE; PERSONAL

AUTOMOBILE POLICY (PAP); PERSONAL INJURY PROTECTION (PIP); PLEASURE BOAT COVERAGE; PURE

ENDOWMENT.

PERSONAL INSURANCE NEEDS see NEEDS APPROACH.

PERSONAL JEWELRY INSURANCE coverage on jewelry and
precious stones on an ALL RISKS basis at any location subject to
exclusions of wear and tear, war, and nuclear disaster. Each item
must be specifically listed in the policy. This coverage is of
importance to insureds with valuable jewelry since most property
insurance policies such as the HOMEOWNERS INSURANCE POLICY have relatively
low limits of coverage for jewelry and precious stones.
PERSONAL LEGAL EXPENSE LIABILITY INSURANCE
coverage for routine personal legal expenses, including probate,
criminal defense, and divorce.
PERSONAL LIABILITY CLAIM INSURANCE see COMPREHENSIVE
PERSONAL LIABILITY INSURANCE; HOMEOWNERS INSURANCE POLICY; PERSONAL AUTOMOBILE POLICY

(PAP).

PERSONAL LIABILITY EXPOSURES see LIABILITY, PERSONAL EXPOSURES.

PERSONAL LIABILITY INSURANCE see COVERAGE E POLICY SECTION II
HOMEOWNERS INSURANCE POLICYSECTION II (LIABILITY COVERAGE).

PERSONAL LINES insurance written on the personal and real

property of an individual (or individuals) to include such policies
as the HOMEOWNERS INSURANCE POLICY and PERSONAL AUTOMOBILE POLICY (PAP).
 Page 381
PERSONAL LOSS see PROPERTY INSURANCE COVERAGE.
PERSONAL PRODUCING GENERAL AGENT (PPGA)
individual appointed by the insurance company as an independent
contractor. The agent receives various expense allowances for
office-associated expenses and direct commissions on products
sold as well as overriding commissions on products sold by other
company agents. The PPGA usually has contracts to sell products
from many different insurance companies. Insurance companies
usually make available to the PPGA advanced sales technical
support by supplying technicians and computer software and, in
some instances, computer hardware.
PERSONAL PROPERTY see HOMEOWNERS INSURANCE POLICY; PERSONAL ARTICLES
INSURANCE; PERSONAL EFFECTS INSURANCE; PERSONAL PROPERTY FLOATER.

PERSONAL PROPERTY FLOATER coverage for all personal

property, regardless of location of an insured and household
residents, including children away at school. Written on an ALL
RISKS basis, subject to excluded perils such as war, wear and tear,
mechanical breakdown, vermin, and nuclear disaster. ''Personal
property" includes clothing, television, musical instruments,
cameras, jewelry, watches, furs, furniture, radios, and appliances.
Coverage can be extended to damage of real property as the result
of theft of personal property.
PERSONAL-RESIDENCE TRUST trust in which a home is
transferred directly to the children while the parent(s) remain in the
home for a fixed period of time, resulting in a substantially reduced
estate tax cost. These trusts have a great flexibility in that the home
in trust may be sold during the term of the trust, provided the
proceeds from the sale is reinvested in another home within two
years of the sale of the home. The primary drawbacks of this trust
are that if the parent(s) die before the term of the trust expires, the
home is included in the estate of the parent(s), and if the parent(s)
outlive the term of the trust and has a desire to remain in the home,
the parent(s) must rent that home from the children at its fair
market value.
During the term of the trust, the parent(s) has the right to the
income from the trust's property as well as the use of that property.
As such, income and expenses associated with that property are
reported on the income tax return of the parent(s). If the parent(s) is
still alive at the time the term of the trust expires, the interest in the
home that is transferred to the children is valued as a remainder
interest. The tax advantage results from this remainder interest as
the remainder interest in the home is valued at a substantially lower
value for federal tax purposes than the full market value of the
home.
PERSONAL THEFT INSURANCE see BROAD FORM PERSONAL THEFT
INSURANCE; HOMEOWNERS INSURANCE POLICY.

PER STIRPES distribution of a deceased beneficiary's share of an

estate among that beneficiary's children. Contrast with PER CAPITA.
 Page 382
PET INSURANCE see LIVESTOCK FLOATER; LIVESTOCK INSURANCE; LIVESTOCK
MORTALITY (LIFE) INSURANCE; LIVESTOCK TRANSIT INSURANCE.

PHANTOM STOCK see STOCK APPRECIATION RIGHTS.

PHANTOM STOCK PLANS plans that are similar to STOCK
APPRECIATION RIGHTS (SARS) in that an employee is granted a contractual

right by the employer to a stipulated number of units in the

business, which is really a percentage of the business. As the value
of the business increases, the value of these units increase. At the
end of a stipulated period of time, the employee either can receive
additional income based on the appreciation of the value of these
units or can convert these units into an equity ownership in the
business. Thus, the employee has a vested interest in the business
increasing in value.
PHYSICAL CONDITION see APPLICATION; DISABILITY INCOME INSURANCE;
INSPECTION REPORT; PREEXISTING CONDITION; PREFERRED RISK; UNDERWRITING; UNIQUE IMPAIRMENT.

PHYSICAL DAMAGE INSURANCE property damage coverage

for a vehicle under the COLLISION INSURANCE and COMPREHENSIVE INSURANCE
sections of the BUSINESS AUTOMOBILE POLICY (BAP) and the PERSONAL AUTOMOBILE
POLICY (PAP).

PHYSICAL DAMAGE TO PROPERTY OF OTHERS see

HOMEOWNERS INSURANCE POLICYSECTION II (LIABILITY COVERAGE); PERSONAL AUTOMOBIL E POLICY

(PAP); PROPERTY AND LIABILITY INSURANCE.

PHYSICAL EXAMINATION PROVISION see APPLICATION; DISABILITY

INCOME INSURANCE; REINSTATEMENT.

PHYSICAL HARM see HOMEOWNERS INSURANCE POLICYSECTION II (LIABILITY

COVERAGE); LIABILITY; PERSONAL AUTOMOBILE POLICY (PAP); PROPERTY AND LIABILITY INSURANCE.
PHYSICAL HAZARD see HAZARD; INCREASED HAZARD.
PHYSICALLY IMPAIRED RISK see IMPAIRED RISK (SUBSTANDARD RISK).
PHYSICIAN HOSPITAL ORGANIZATION (PHO) separate legal
entity formed by one or more physicians and one or more hospitals
whose objective it is to negotiate contracts with payer
organizations. The PHO provides financial, marketing, and
administrative services to its members.
PHYSICIANS AND SURGEONS EQUIPMENT INSURANCE
coverage for equipment normally carried from location to location
by a physician or surgeon; written on an ALL RISKS basis to
include supplies and scientific books used in medical practice.
PHYSICIANS AND SURGEONS SERVICES IN HOSPITAL,
HMO see HEALTH MAINTENANCE ORGANIZATION (HMO).
 Page 383
PHYSICIANS CARE see DISABILITY INCOME INSURANCE.
PHYSICIANS INSURANCE see PHYSICIANS AND SURGEONS EQUIPMENT
INSURANCE; PHYSICIANS, SURGEONS, AND DENTISTS INSURANCE.

PHYSICIANS, SURGEONS, AND DENTISTS INSURANCE

coverage for a practicing physician, surgeon, or dentist, when
bodily injury, personal injury, and/or property damage is incurred
by a patient and the patient sues for injuries and/or damages. The
cost of defending the physician, surgeon, or dentist is in addition to
the upper limits of the policy, and includes legal fees, court costs,
and other general expenses. There is a crisis in this type of
coverage, in that fewer companies are writing these policies. See
also MALPRACTICE LIABILITY INSURANCE.
PIA see PRIMARY INSURANCE AMOUNT (PIA); PROFESSIONAL INSURANCE AGENTS (PIA).
PIERS, WHARVES, DOCKS, AND SLIPS INSURANCE
coverage in the event of damage or destruction resulting from
collision by a vessel or high waves. Excluded are fire, lightning,
windstorm, earthquake, and explosion, since these perils are
included under the Standard Fire Policy and the other business
property policies. Piers, wharves, docks, and slips were the few
properties that could be covered for flood damage under
commercial insurance prior to passage of the Natural Disasters Act
of 1968, of which the Federal Flood Insurance Program is a part.
PILFERAGE stealing small amounts of property. Insurance
coverage is available under a number of policies. See also BLANKET
CRIME POLICY; BROAD FORM PERSONAL THEFT INSURANCE; BURGLARY INSURANCE; BUSINESSOWNERS

POLICY (BOP); DISHONESTY, DISAPPEARANCE, AND DESTRUCTION POLICY ("3-D" POLICY), HOMEOWNERS

INSURANCE POLICY; PERSONAL AUTOMOBILE POLICY (PAP); COMMERCIAL PACKAGE POLICY.

PIP see PERSONAL INJURY PROTECTION (PIP).
PIPELINE INSURANCE type of INLAND MARINE insurance that covers
pipelines. Although pipelines are stationary, the coverage is written
on inland marine forms because they are considered part of the
transportation system.
PITI abbreviation for Principal, Interest, Taxes, and Insurance.
Generally, for the time period of the loan, the principal and interest
amount remains fixed; however, tax and insurance amounts will
vary according to changing economic conditions.
PLACED BUSINESS delivered insurance policy to the POLICYHOLDER
in which the policy's first premium has been paid, the application
has been reviewed, and all policy parts completed.
PLAINTIFF party who asserts a claim against another party in a
legal proceeding.
 Page 384
PLAINTIFF'S REPLEVIN BOND see JUDICIAL BOND.
PLAN ADMINISTRATION see ADMINISTERING AGENCY; ADMINISTRATIVE CHARGE;
ADVISORY COMMITTEE.

PLAN DOCUMENT formal, written, legal statement listing the

provisions of an EMPLOYEE BENEFIT INSURANCE PLAN.
PLANNED PREMIUM PAYMENT/TARGET PREMIUM
PAYMENT premium payment made by the POLICYOWNER under a
UNIVERSAL LIFE INSURANCE policy, usually on an automatic monthly

preauthorized bank draft basis. The amount of the payment is

established according to how much the policyowner wants to save
each month.
PLAN PARTICIPANTS employees participating in and covered
under an EMPLOYEE BENEFIT INSURANCE PLAN.
PLANS COVERED, INSURANCE see BUSINESS INSURANCE; GROUP INSURANCE;
INDIVIDUAL INSURANCE.

PLAN SPONSOR employer, association, labor union, or other

group offering a qualified employee benefit plan such as a pension
or profit sharing plan.
PLAN TERMINATION INSURANCE see PENSION PLAN TERMINATION
INSURANCE.

PLATE GLASS INSURANCE see COMPREHENSIVE GLASS INSURANCE.

PLEASURE BOAT COVERAGE insurance for private pleasure
boats.
Coverage is not standard, but is generally broken down into
insurance for (1) yachts, including sailboats; (2) boats with inboard
motors under marine policies; and (3) outboard motor boats under
INLAND MARINE policies.

Yacht insurance, which is written on an ALL RISKS or a named peril

basis, is broken down into (1) hull insurance; (2) bodily injury and
property damage liability insurance; (3) federal compensation
insurance for crew members; and (4) medical payments insurance.
Outboard coverage insures a boat on land or in the water on an ALL
RISKS or named peril basis.

PLEDGE OF A LIFE INSURANCE POLICY transfer of the CASH

VALUE of the policy from the POLICYOWNER to the policyowner's creditor

as security for a loan.

PLUVIOUS INSURANCE see RAIN INSURANCE.
PML see MAXIMUM FORESEEABLE LOSS (MFL); MAXIMUM PROBABLE LOSS (MPL).
POINT 1% of the loan amount paid to the lender for making a loan.
POINT-OF-SERVICE (POS) device that enables the HEALTH
MAINTENANCE ORGANIZATION (HMO) to present a premium quotation to the
 Page 385
employer that would encourage the employer to replace the current
health carrier. The POS offers three options for the delivery of
health care:
1. traditional gatekeeper (GK) optionHMO network provides the
care and there is a gatekeeper director.
2. open access (OA) optionHMO network provides the care but
there is no gatekeeper director. At the time care is required, the
member selects the provider.
3. out-of-network option (OON)care is permitted outside the HMO
network and there is no gatekeeper director. At the time care is
required, the member selects the provider.
The member has increasing payments under the OA and OON
options as compared with the GK option. For example, the GK
option may have a $15 physician COPAYMENT and provide total hospital
benefits. The OA option may have a $30 physician copayment with
a 10% COINSURANCE requirement. The OON option may provide for a
$500 DEDUCTIBLE, an 80/20 coinsurance requirement until the
employee's out-of-pocket medical expenses reach $5000, and then
the plan would pay all expenses up to a $750,000 lifetime
maximum.
POLICY written agreement that puts insurance coverage into
effect. See also HEALTH INSURANCE CONTRACT; INSURANCE CONTRACT, GENERAL; INSURANCE
CONTRACT, LIFE; INSURANCE CONTRACT, PROPERTY AND CASUALTY.

POLICY ANNIVERSARY 12-month period from the date of issue

of a policy as stated in its DECLARATIONS SECTION.
POLICY CONDITION see CONDITION.
POLICY DATE see EFFECTIVE DATE.
POLICY DECLARATION see DECLARATION.
POLICY DIVIDEND see PARTICIPATING POLICY DIVIDEND.
POLICY FACE see FACE AMOUNT (FACE OF POLICY).
POLICY FEE flat amount added to the basic premium rate to
reflect the cost of issuing a policy, establishing the required
records, sending premium notices, and other related expenses.
POLICY FEE SYSTEM flat dollar amount added to arrive
(premium rate per $1000 of FACE AMOUNT x face amount) at the
premium.
POLICYHOLDER individual or other entity who owns an
insurance policy. Synonymous with policyowner.
POLICYHOLDER DIVIDEND see DIVIDEND.
POLICYHOLDER SURPLUS excess of an insurance company's
assets above its legal obligations to meet the benefits (liabilities)
payable to its policyholders. Also, the net worth in an insurance
company adjusted for the overstatement of liabilities. See also
SURPLUS ACCOUNT; SURPLUS LINES.
 Page 386
POLICY JACKET see JACKET.
POLICY LIMIT see BUSINESS LIABILITY INSURANCE (Insuring Agreement
Section); COORDINATION OF BENEFITS.
POLICY LOAN amount that the owner of a life insurance policy
can borrow at interest from the insurer, up to the cash surrender
value. If interest is not paid when due, it is deducted from any
remaining cash value. When the cash value is exhausted, the
insurance ceases. If the insured dies, any outstanding policy loan
and interest due are subtracted from the death benefit.
The policyowner may repay the loan in whole or in part at any
time; or may continue the loan, as long as the interest plus the
principal of the loan do not equal or exceed the cash value (in
essence only the interest on the loan must be serviced) or until the
policy matures. Insurance companies reserve the right to delay
payment of a policy loan for up to six months to protect their
solvency, but this has rarely been done since the Depression of the
1930s. See also AUTOMATIC PREMIUM LOAN PROVISION.
POLICYOWNER see OWNERSHIP RIGHTS UNDER LIFE INSURANCE; POLICYHOLDER.
POLICYOWNERS EQUITY portion of a life insurance policy
cash value after the deduction of all the policyowner's
indebtedness.
POLICY PERIOD time interval during which policy is in force.
See also CLAIMS MADE BASIS LIABILITY COVERAGE; CLAIMS OCCURRENCE BASIS LIABILITY
COVERAGE.

POLICY PROVISIONS words, sentences, and paragraphs in an

insurance policy. See also ANALYSIS OF PROPERTY AND CASUALTY POLICY; HEALTH
INSURANCE CONTRACT; HOMEOWNERS INSURANCE POLICY; INSURANCE CONTRACT, GENERAL; INSURANCE

CONTRACT, LIFE; INSURANCE CONTRACT, PROPERTY AND CASUALTY; PERSONAL AUTOMOBILE POLICY

(PAP).

POLICY PROVISIONS, LIFE stipulations of the rights and

obligations of an insured and an insurer under a policy. See also
ACCIDENTAL DEATH CLAUSE; ASSIGNMENT CLAUSE, LIFE INSURANCE; BENEFICIARY CLAUSE; DISABILITY

INCOME RIDER; DIVIDEND OPTION; GRACE PERIOD; INCONTESTABLE CLAUSE; LIFE INSURANCE, CREDITOR

RIGHTS; MISSTATEMENT OF AGE; NONFORFEITURE PROVISION; OPTIONAL MODES OF SETTLEMENT; POLICY

LOAN; REINSTATEMENT; SPENDTHRIFT TRUST CLAUSE; SUICIDE CLAUSE; WAR EXCLUSION CLAUSE.

POLICY PURCHASE OPTION see GUARANTEED INSURABILITY.

POLICY REPLACEMENT see CONSERVATION; REPLACEMENT, LIFE INSURANCE.
POLICY RESERVE see FULL PRELIMINARY TERM RESERVE PLAN; PROSPECTIVE RESERVE;
RETROSPECTIVE METHOD RESERVE COMPUTATION.
 Page 387
POLICY STRUCTURE general arrangement of a contract between
an insurer and an insured. The policy defines the insured and the
type of coverage, lays out what the insurer must do, lists exceptions
and limitations, and states the conditions for coverage. In a
standard property and liability contract, the provisions are grouped
into these four categories: DECLARATION, INSURING AGREEMENT, EXCLUSIONS, and
CONDITIONS FOR QUALIFICATION.

POLICY SUMMARY policy report issued to the POLICYOWNER that

must include at least the following: (1) first five years of premiums,
cash values, death benefits, and dividends (if PARTICIPATING INSURANCE); (2)
tenth year, twentieth year, and at least one year between the
insured's age 60 and 65 and policy maturity year of premiums, cash
values, death benefits, and dividends (if participating insurance);
(3) effective interest rate at which POLICY LOANS may be made by the
policyowner; (4) tenth and twentieth year cost surrender value; (5)
the net premium payment cost indices; (6) insurance company
name and address; (7) the insurance agent name and address; and
(8) the type (generic) of life insurance policy.
POLICY TERM see POLICY PERIOD.
POLICY YEAR see POLICY YEAR EXPERIENCE.
POLICY YEAR EXPERIENCE 12-month loss on a policy or line
of business.
POLITICAL RISK investment risk associated with the changes in
government policies that may have a dramatic effect on financial
instruments. For example, if federal legislation is passed removing
the tax-exempt status of tax-deferred buildup of the cash values in
 policies and ANNUITIES, one of the primary reasons
LIFE INSURANCE

for purchase of these products would be eliminated.

POLITICAL RISK INSURANCE coverage for business firms
operating abroad to insure them against loss due to political
upheavals including war, revolution, confiscation,
incontrovertibility of currency, and other such losses. See also
OVERSEAS PRIVATE INVESTMENT CORPORATION.

POLITICAL RISK INSURANCE: CONFISCATION,

EXPROPRIATION AND NATIONALIZATION insurance
coverage that protects a company's and/or individual's assets
against financial loss resulting from acts of confiscation,
expropriation, or nationalization by a foreign government. Asset
protected may be mobile or permanent and include: structures,
inventory, bank accounts, prepaid supplies, receivables, vacation
homes owned by individuals, and personal belongings of
employees on overseas assignment. The coverage may be
purchased on a single asset basis or several asset basis worldwide,
subject to limits per country and an aggregate policy limit.
 Page 388
POLITICAL RISK INSURANCE: CONTINGENCY
INSURANCE insurance coverage that protects a contractor or
other type of business providing a service for expenses incurred in
the event a contract is not ratified by a foreign government. For
example, if a contractor decides to start building a structure prior to
the foreign government ratifying the agreement and the ratification
fails, the contractor would be indemnified for expenses incurred.
POLITICAL RISK INSURANCE: CONTRACT FRUSTRATION
insurance coverage that will INDEMNIFY the INSURED in the event a
foreign government or company does not abide by the terms and
conditions of the contract in such instances as:
1. Exportationexporter incurs a loss because the buyer in a foreign
country does not adhere to the contractual obligations.
2. Deterioration and repudiationinsured sells services to buyer who
refuses to honor contractual obligations.
3. Importationinsured incurs a loss resulting from the nondelivery
of products purchased and paid for in advance.
POLITICAL RISK INSURANCE: UNFAIR CALLING OF
DEMAND BONDS insurance coverage that protects the exporter
(even though the exporter may be in total compliance with the
terms and conditions of the contract) in the event a foreign
government calls the demand bonds. For example, after the Shah of
Iran was over-thrown, the new government called in the demand
bonds posted by United States exporters and contractors to show its
animosity toward the United States.
POLLUTION EXCLUSION liability insurance exception for
pollution coverage that is not both sudden and accidental from the
insured's standpoint. As a result of the damage suits from such
incidents as the chemical pollution at Love Canal, insurance
companies began to modify pollution coverage in their liability
policies in the 1970s. First, companies changed coverage to apply
only if pollution was "sudden and accidental," rather than
"gradual." But some courts ruled that "sudden and accidental"
could encompass several years of pollution problems.
Consequently, the INSURANCE SERVICES OFFICE(ISO) introduced a new
COMPREHENSIVE GENERAL LIABILITY INSURANCE (CGL) policy in 1985 (replaced today

by the COMMERCIAL GENERAL LIABILITY form) that excluded coverage for

nearly all types of pollution damage, leaving only limited liability
coverage for pollution originating away from an insured's premises.
POOL syndicate or association of insurance companies or REINSURANCE
companies organized to underwrite a particular risk, usually with
high limits of exposure. Each member shares in premiums, losses,
and expenses according to a predetermined agreement.
POOLED INCOME FUNDS separate trust established by a
charitable entity whose purpose is to receive contributions from
numerous
 Page 389
donors. All the donors' contributions are commingled. Each donor
can retain a life-income interest in the donation. The donor's
income payment is based on the number of units of participation
calculated at the time the donation is made and the value of each
unit. The value of each unit in turn is determined by the investment
performance of the commingled funds.
POOLED INVESTMENT ACCOUNT combination of the funds of
many POLICYHOLDERS held in a single account and invested as a single
entity.
POOLING method by which each member of an insurance POOL
shares in each and every risk written by the other members of the
pool.
POOLING CHARGE amount that each member of a POOL
contributes to that pool. See also POOLING.
POPULATION DECREMENTS reduction in a retirement plan's
population resulting from the death, disability, and termination of
its members.
POPULATION INCREMENTS additions of new entrants into an
EMPLOYEE BENEFIT INSURANCE PLAN.

PORTABILlTY see PENSION PORTABILITY.

PORTFOLIO insurance company's total investments in financial
securities.
PORTFOLIO AVERAGE METHOD see PORTFOLIO RATE OF RETURN.
PORTFOLIO RATE FIXED ACCOUNT account in which the
same interest rate is credited on all premiums regardless of the time
period and amount contributed.
PORTFOLIO RATE OF RETURN weighted average of the returns
earned on the insurance company's investments in stocks, bonds,
real estate, etc., made at different times and earning different rates
of return at these times. It has been argued that this rate of return
does not reflect the true rate of return on investments being earned
today. This led to the development of the CURRENT ASSUMPTIONS products.
PORTFOLIO REINSURANCE coverage in which an insurance
company's portfolio is ceded to a reinsurer who reinsures a given
percentage of a particular line of business.
PORTFOLIO RETURN process whereby a CEDING COMPANY resumes
the insuring of a portfolio of insurance policies which it had
previously CEDED to a REINSURER.
PORTFOLIO RUNOFF process of the continual REINSURANCE of a
CEDING COMPANY'S portfolio of insurance policies. All premiums that

have been CEDED become EARNED PREMIUMS.

 Page 390
PORT RISK INSURANCE coverage for ships in port for a lengthy
stay and/or those that are under repair. Insures on an ALL RISKS basis to
include the exposures associated with the ship moving from one
dock to another.
POSITION SCHEDULE BOND see FIDELITY BOND.
POSSIBLE MAXIMUM LOSS see MAXIMUM FORESEEABLE LOSS (MFL).
POSTMORTEM DIVIDEND dividend in a participating policy
paid after the death of an insured, representing dividends earned
between the last dividend date and the insured's death.
POSTMORTEM PLANNING see ESTATE PLANNING; ESTATE PLANNING
DISTRIBUTION; HUMAN LIFE VALUE APPROACH (ECONOMIC VALUE OF AN INDIVIDUAL LIFE) (EVOIL); NEEDS

APPROACH.

POSTRETIREMENT FUNDING method of funding a pension

plan after a worker retires. An employer purchases an annuity or
sets aside a sum when an employee retires that will pay monthly
lifetime benefits. Postretirement funding is no longer permitted
under the EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA), which requires
current funding of future pension liabilities.
POSTSELECTION OF INSURED underwriting practice involving
regular review of insurance contracts in force with the intent of
either canceling a policy or not offering renewal for risks no longer
deemed acceptable. See also CANCELLATION PROVISION CLAUSE; NONCANCELLABLE
GUARANTEED RENEWABLE POLICY; NONRENEWAL CLAUSE; RENEWAL PROVISION.

POWER INTERRUPTION INSURANCE ENDORSEMENT

addition to boiler and machinery insurance that covers loss to
property or equipment caused by an interruption of power by a
public utility. Coverage is available either on an hourly or daily
basis for loss of use or for actual loss sustained.
POWER OF APPOINTMENT see ESTATE PLANNING DISTRIBUTION.
POWER OF ATTORNEY legal instrument whereby an individual
is given the right to act on behalf of another individual. For
example, the right to buy and sell stock and to sign all brokerage
papers relating to buying and selling in a stockholder's account is
given by the stockholder to another individual through power of
attorney. Or the right to decide which settlement option is to be
used under a life insurance policy may be given by a policyowner
to another individual. Experts often advise extreme care in
assigning a power of attorney since that person becomes free to
make financial decisions that can enhanceor ruin an individual
represented.
POWER PLANT INSURANCE
1. form of BOILER AND MACHINERY INSURANCE that covers power generating
plants.
 Page 391
2. form of BUSINESS INCOME COVERAGE FORM that covers a utility customer's
losses resulting from interruption of power from a public utility.
PREAUTHORIZED CHECK PLAN plan for the automatic
payment of premiums due through drafting by the insurer of the
policyowner's preauthorized bank account. Usually, the insurer
drafts this account on a monthly basis for the premium payment
owed. Studies show that PERSISTENCY is highest when premium
payments are made through bank draft plans.
PREAUTHORIZED CHECK SYSTEM (PAC) arrangement by
which a policyowner authorizes an insurance company to draft his
checking account for premiums due on an insurance policy. The
drafting is usually monthly. PERSISTENCY of policies paid this way is
substantially higher than when insureds pay them directly to an
insurance company.
PREDICTABILITY see EXPECTED LOSS.
PREEXISTING CONDITION illnesses or disability for which the
insured was treated or advised within a stipulated time period
before making application for a life or health insurance policy. A
preexisting condition can result in cancellation of the policy.
PREFERENCE BENEFICIARY CLAUSE see BENEFICIARY: BENEFICIARY
CLAUSE.

PREFERRED BENEFICIARY see BENEFICIARY; BENEFICIARY CLAUSE.

PREFERRED PROVIDER ORGANIZATION (PPO) hospital,
physician, or other provider of health care that an insurer
recommends to insureds. A PPO allows insurance companies to
negotiate directly with hospitals and physicians for health services
at a lower price than would be normally charged. A PPO tries to
combine the best elements of a fee-for-service and HEALTH MAINTENANCE
ORGANIZATION (HMO) systems.

PREFERRED RISK insured, or an applicant for insurance, with

lower expectation of incurring a loss than the standard applicant.
For example, an applicant for life insurance who does not smoke
can usually obtain a reduced premium rate to reflect his or her
greater LIFE EXPECTANCY.
PRELIMINARY TERM life insurance accounting method that
does not require any TERMINAL RESERVE for a policy at the end of the first
year. First-year policy acquisition expenses, such as agent
commission, MEDICAL EXAMINATION, and PREMIUM TAX, are often too large to
leave enough of the end-of-the-year PREMIUM for addition to the
premium reserve required under state FULL VALUATION RESERVE standards.
In order to avoid taking the difference between the amount of the
premium remaining and the required addition to reserves out of the
insurance company's SURPLUS ACCOUNT, the FULL PRELIMINARYTERM
 Page 392
method is sometimes used. This leaves more of the
RESERVE VALUATION

premium available to cover acquisition cost and first-year claims.

See also MODIFIED RESERVE METHODS.
PREMISES AND OPERATIONS LIABILITY INSURANCE part
of a business liability policy that covers an insured for bodily
injury or property damage liability to members of the public while
they are on his premises. This coverage is available in basic
business policies that include COMMERCIAL GENERAL LIABILITY INSURANCE (CGL);
MANUFACTURERS AND CONTRACTORS LIABILITY INSURANCE; OWNERS, LANDLORDS, AND TENANTS

LIABILITY POLICY; STOREKEEPERS LIABILITY INSURANCE.

PREMISES LIABILITY see LIABILITY, BUSINESS EXPOSURES; LIABILITY, PERSONAL

EXPOSURES.

PREMISES MEDICAL PAYMENTS INSURANCE supplemental

coverage written into or endorsed onto many business and personal
liability policies. Covers medical costs and loss of income of
persons injured on an insured's property, regardless of whether the
insured was at fault in causing those injuries. This coverage
enables the insured to volunteer to pay these medical costs and
income losses when doing so serves the insured's business purposes
or preserves personal relationships.
PREMISES SOLD EXCLUSION in a COMMERCIAL GENERAL LIABILITY
(COMPREHENSIVE GENERAL LIABILITY) policy, exclusion of coverage for sold

premises. The objective of this exclusion is to eliminate coverage

for property damage and/or bodily injury due to inherently
dangerous risks associated with property sold by the insured. For
example, the insured may sell property that has defects that should
have been repaired prior to the sale. These defects could then result
in damage to the property, as well as bodily injury to a person or
persons who came in contact with that property.
PREMIUM rate that an insured is charged, reflecting his or her
expectation of loss or risk. The insurance company will assume the
risks of the insured (length of life, state of health, property damage
or destruction, or liability exposure) in exchange for a premium
payment. Premiums are calculated by combining expectation of
loss and expense and profit loadings. Usually, the periodic cost of
insurance is computed by multiplying the premium rate per unit of
insurance by the number of units purchased. The rate class in
which the insured is placed includes large numbers of individuals
with like characteristics who pose the same risk. Every individual
in a given class will not incur the same loss; rather each has
approximately the same expectation of loss (known as the
Principle of Equity). See also EQUITY; GROSS PREMIUM; PURE PREMIUM RATING METHOD.
PREMIUM ADJUSTMENT ENDORSEMENT provision in an
insurance policy allowing an INITIAL PREMIUM to be charged, but subject
to
 Page 393
adjustment during the period of coverage or at the end of coverage
depending on the actual loss experience of the insured risk.
PREMIUM ADJUSTMENT FORM see PREMIUM ADJUSTMENT ENDORSEMENT.
PREMIUM ADVANCE see DEPOSIT PREMIUM.
PREMIUM, ANNUITY (consideration) cost of annuity based on
expectation of life of the ANNUITANT and the expense and profit
loadings of the insurance company. See also ANNUITY; CONSIDERATION.
PREMIUM BASE see BASE PREMIUM.
PREMIUM CHARGE see PREMIUM.
PREMIUM COMPUTATION see PREMIUM; PURE PREMIUM RATING METHOD.
PREMIUM DEFAULT see DISCONTINUANCE OF CONTRIBUTIONS; LAPSE.
PREMIUM DEFICIENCY RESERVE supplementary life
insurance reserve required by state regulators when the GROSS PREMIUM
is lower than the VALUATION PREMIUM. Some life insurers are able to
charge policyholders a premium that is lower than required by the
reserve valuation system they use. This may be because mortality
tables are outdated and their own experience reflects different loss
statistics. But if the insurer charges a premium lower than that
dictated in the calculation of policy reserves, it must set up a
deficiency reserve for the difference.
PREMIUM DEPOSIT see DEPOSIT PREMIUM.
PREMIUM DEPOSIT RIDER RIDER attached to an ORDINARY LIFE
INSURANCE policy that allows the POLICYOWNER to deposit excess premium
payments into a separate account from which they can be
withdrawn to meet premium payment requirements.
PREMIUM DISCOUNT reduction in rate reflecting the present
value of a premium due on an annuity one year hence.
PREMIUM DISCOUNT PLAN plan whereby adjustments are
made in the premium, as the premium increases to reflect the
nonproportionate increases in expenses. Generally, the expenses of
acquisition costs, administrative costs of placing the policy on the
insurer's books, taxes, and claims do not increase in proportion to
the increase in the premium. Thus, the GROSS PREMIUM should not reflect
a proportionate increase in expenses as the NET SINGLE PREMIUM increases.
PREMIUM, EARNED see EARNED PREMIUM.
PREMIUM, GROSS see GROSS PREMIUM.
PREMIUM LOAN amount borrowed against the cash value of a
life insurance policy to pay the premium due. See also AUTOMATIC
PREMIUM LOAN PROVISION.
 Page 394
PREMIUM, MINIMUM see MINIMUM PREMIUM PLAN.
PREMIUM MODE frequency of premium payment, monthly,
quarterly, or annually.
PREMIUM, NET see NET LEVEL PREMIUM.
PREMIUM NOTICE message from an insurance company or
insurance agency informing a policyowner that a premium is due
by a specified date.
PREMIUM, PURE see PURE PREMIUM RATING METHOD.
PREMIUM RATE see PREMIUM.
PREMIUM RATE EQUITY see EQUITY.
PREMIUM RECEIPT written evidence given to a policyowner by
an insurance company or insurance agency that it has received a
premium.
PREMIUM REFUND in some life insurance policies, provision
that permits the beneficiary, upon the death of the insured, to
receive not only the DEATH BENEFIT payable under the policy but also all
premiums paid into the policy.
PREMIUM, RESTORATION see RESTORATION PREMIUM.
PREMIUM RETURN see RETURN OF PREMIUM.
PREMIUMS, ESTIMATED see ESTIMATED PREMIUM.
PREMIUMS IN-FORCE initial premiums on all insurance policies
in force (those policies that have not been cancelled or expired).
See also IN-FORCE BUSINESS.
PREMIUM, SINGLE see SINGLE PREMIUM.
PREMIUMS WRITTEN see WRITTEN PREMIUMS.
PREMIUM TAX payment to a state or municipality by an
insurance company based on premiums paid by residents.
PREMIUM-TO-SURPLUS RATIO ratio commonly used by the
property and casualty insurance industry as a measure of financial
strength or to indicate to what degree a particular insurance
company is leveraged. A low ratio can be a sign of financial
strength, but it also may indicate insufficient loss reserves or
premium growth.
PREMIUM, UNEARNED see UNEARNED PREMIUM RESERVE.
PRE-NEED FUNERAL INSURANCE SINGLE PREMIUM LIFE INSURANCE POLICY,
from which the death benefit is used to pay the predetermined
expenses of the insured's funeral. The funeral home agrees to
provide the funeral in exchange for the life insurance policy
proceeds.
PREPAID GROUP PRACTICE PACKAGE health insurance plan
where a group of physicians and dentists provide medical services
to
 Page 395
a group of individuals for a predetermined fee. It is a basic type of
HEALTH MAINTENANCE ORGANIZATION (HMO).

PREPAID INSURANCE EXPENSE expense listed on the Income

and Expenditure accounting statement for the unexpired insurance
policy owned.
PREPAID LEGAL INSURANCE see LEGAL EXPENSE INSURANCE.
PREPAYMENT see ADVANCE PAYMENTS.
PREPAYMENT OF PREMIUMS see ADVANCE PREMIUM.
PRESCRIPTION DRUG PLAN see COMMERCIAL HEALTH INSURANCE; COPAYMENT;
COVERED EXPENSE; GROUP HEALTH INSURANCE; HEALTH MAINTENANCE ORGANIZATION (HMO).

PRESELECTION OF INSURED see INSPECTION REPORT; PREEXISTING CONDITION;

PREFERRED RISK; UNDERWRITING; UNIQUE IMPAIRMENT.

PRESENT EXPECTED VALUE ACTUARIAL EQUIVALENT method of

calculating the PREMIUM rate through the development of the
following equation: PROBABILITY that the event insured against occurs x
FACE AMOUNT of policy x PRESENT VALUE FACTOR.

PRESENT INTEREST (GIFT) see ESTATE PLANNING DISTRIBUTION; GIFT; GIFT TAX.
PRESENT VALUE see PRESENT VALUE FACTOR.
PRESENT VALUE FACTOR discount interest rate factor used to
determine the present value of a sum in the future. The present
value equation is:

where: P = present value of a sum in the future (discounted value

of R) R = sum of money in the future (accumulated value at the end
of N periods)
N = number of periods a sum of money is to be discounted in the
future i = interest rate per period For example, if one wished to
determine a sum (P) that must be invested today in order for it to
accumulate to $1000 (R) at the end of 20 years, (N) assuming an
8% interest rate (i), then the equation is:

PRESENT VALUE OF ANNUITY DUE present value of a series

of payments such that the first payment is due immediately, the
second payment one period from hence, the third payment two
periods hence, and so forth. The continued payment is contingent
upon the designated beneficiary (the ANNUITANT) continuing to live.
See also PRESENT VALUE OF ANNUITY IMMEDIATE.
 Page 396
PRESENT VALUE OF ANNUITY IMMEDIATE present value of
a series of payments such that the first payment is due one period
hence, the second payment two periods hence, and so forth. The
continued payment is contingent upon the designated beneficiary
(the ANNUITANT) continuing to live. See also PRESENT VALUE OF ANNUITY DUE.
PRESENT VALUE OF FUTURE BENEFITS see PRESENT VALUE FACTOR.
PRESENT VALUE TABLES tables used to determine the present
value of a sum in the future by taking into consideration the
assumed interest rate and time period involved. See also PRESENT VALUE
FACTOR.

PRESUMED NEGLIGENCE see RES IPSA LOQUITUR.

PRESUMPTIVE DISABILITY assumption of total disability when
an insured loses sight, hearing, speech, or a limb. When such a loss
occurs to an insured with disability income insurance, the insurer
often assumes that the individual is disabled, even if he or she later
returns to work. Here insurers may pay a lump sum in addition to
monthly disability payments for the maximum benefit period set by
the policy.
PREVENTION see LOSS PREVENTION AND REDUCTION.
PREVENTIVE CARE program of health care designed for the
prevention and/or reduction of illnesses by providing such services
as regular physical examinations. This care is in opposition to
curative care, which goes into effect only after the occurrence of an
illness. See also HEALTH MAINTENANCE ORGANIZATION (HMO).
PREVENTIVE HEALTH SERVICES see HEALTH MAINTENANCE ORGANIZATION
(HMO).
PRICE-ANDERSON ACT 1957 federal law setting a limit on the
liability of operators of nuclear facilities. The law, an amendment
to the Atomic Energy Act of 1954, authorized establishment of
private insurance pools to provide liability insurance for nuclear
facilities, giving the Atomic Energy Commission (now the NUCLEAR
REGULATORY COMMISSION) authority to sell additional insurance in excess of

the amount of pool coverage available. See also MUTUAL ATOMIC ENERGY
REINSURANCE POOL; NUCLEAR ENERGY LIABILITY INSURANCE.

PRICING INADEQUACY RISK one of four types of risks

affecting the life insurance company as identified by the SOCIETY OF
ACTUARIES. This risk is associated with losses that the life insurance

company may incur as the result of the premium rates charged not
being sufficient to pay for the adverse changes in MORTALITY
experience, MORBIDITY experience, inflation effects on health care
claims, changes in social values and their general adverse effects
on claims, etc. See also ASSET DEPRECIATION RISK; GENERAL BUSINESS RISK; INTEREST RATE
CHANGE RISK.

PRIESTLY v. FOWLER 1837 British case that established that an

employer was not responsible for injury to an employee if the
injury
 Page 397
was caused by another employee. Prior to this, English common
law provided that an employer took responsibility for his
employees; Priestly v. Fowler was the first crack in that
relationship. Later, other exceptions to employer responsibility
were established until finally the employee shouldered all
responsibility for his own welfare because, it was argued, he or she
had, after all, agreed to accept the job. Late in the 19th century in
Great Britain, and early in the 20th century in the U.S., workers
compensation laws were passed in which the employer accepts
responsibility for on-the-job injuries and pays benefits according to
an established schedule. In exchange, the employee accepts this as
the exclusive remedy. However, in the past decade there have been
many challenges to this system, including cases in which injured
employees have been allowed to sue their employers.
PRIMA see PUBLIC RISK AND INSURANCE MANAGEMENT ASSOCIATION (PRIMA).
PRIMA BENEFICIARY see BENEFICIARY.
PRIMACY property, liability, or health coverage that takes
precedence when more than one policy covers the same loss. In
order to avoid OVERINSURANCE, or paying an insured more than the
actual loss, the covering policies accept responsibility for insurance
in an established order. For example, if a husband and wife cover
each other as dependents in group medical insurance, the injured
person's own policy assumes primacy. Therefore if the wife gave
birth to a child, her policy would apply to obstetrical and hospital
fees up to its limits. Only then would the husband's policy apply,
covering the amount that had not been paid by his wife's policy up
to the limits of his plan.
PRIMARY BENEFICIARY see BENEFICIARY.
PRIMARY INSURANCE property or liability coverage that
provides benefits (usually after a deductible has been paid by an
insured) up to the limits of a policy, regardless of other insurance
polices in effect. See also APPORTIONMENT; COORDINATION OF BENEFITS; EXCESS
INSURANCE; GROUP HEALTH INSURANCE.

PRIMARY INSURANCE AMOUNT (PIA) monthly benefit

payable to retired or disabled worker under Social Security. It is
calculated by using the average monthly earnings of the covered
person while working. Under this formula, lower-income workers
receive a greater percent of the income they had earned while
employed than do more highly paid workers. Benefits for spouse,
other dependents, and survivors are figured as a percentage of the
PIA. A worker who takes early retirement may receive a portion of
the PIA at age 62. The PIA is used to calculate most other benefits.
PRIMARY INSURER see PRIMARY INSURANCE.
PRIMARY PLAN see COORDINATION OF BENEFITS.
PRINCIPAL insurance company that employs or contracts with an
insurance AGENT to represent it. See also SURETY BOND.
 Page 398
PRINCIPAL SUM accidental death benefit option that can be
added to a DISABILITY INCOME (DI) policy under which a lump sum is
payable at the loss of life, dismemberment, or loss of sight.
PRINCIPLE OF INDEMNITY see INDEMNITY.
PRINCIPLE OF INSURABLE INTEREST see INSURABLE INTEREST.
PRIOR ACTS COVERAGE liability insurance coverage for claims
arising from acts that occurred before the beginning of the policy
period. Policies written on a claims made basis, such as MALPRACTICE
LIABILITY INSURANCE and ERRORS AND OMISSIONS LIABILITY INSURANCE, cover only

claims during the policy period. Prior acts coverage is necessary

for covering a claim made during a current policy period for an
event that happened before a policy was in force.
PRIOR APPROVAL RATING requirement of state approval of
property insurance rates and policy forms before they can be used.
Individual states regulate insurers and approve their rates. There
are three methods of rate approval, in addition to prior approval:
modified prior approval, open competition, and file and use.
PRIOR-APPROVAL STATES those states requiring insurers to
obtain PRIOR APPROVAL RATING of rates and policy forms before they use
them. Although most states once fell into this category, many
followed the lead of New York State in 1969 when it moved to a
system of open competition.
PRIOR CONFINEMENT REQUIREMENT requirement that the
insured must have stayed in a hospital or other health care facility
for at least a specified period of time before being entitled to
receive insurance benefits. This requirement is usually found in
LONG-TERM CARE (LTC) insurance policies.

PRIOR INCOME average earned monthly income (AEMI) for the

tax year in which the insured wage earner has income interrupted
or terminated because of illness, sickness, or accident. This AEMI
is important to the calculation of the MONTHLY INDEMNITY benefit and the
LOSS OF INCOME amount provided under the DISABILITY INCOME INSURANCE policy.

PRIOR INSURANCE insurance in force previous to the present

insurance policy.
PRIOR SERVICE BENEFIT PENSION PLAN participant's retirement
benefit credited for prior years of recognized service with the
employer prior to a specific date.
PRIVATE ANNUITY payment to the seller over the seller's LIFE
EXPECTANCY for the sale of the seller's ASSETS. This procedure provides

for the immediate removal of assets that have appreciated from the
estate.
PRIVATE INSURANCE see SOCIAL INSURANCE.
 Page 399
PRIVATE MORTGAGE INSURANCE (PMI) insurance written by
a COMMERCIAL INSURANCE COMPANY that indemnifies the mortgage lender in
the event there is a default on the mortgage.
PRIVATE NONCOMMERCIAL HEALTH INSURANCE see HEALTH
INSURANCE.

PRIVATE PENSION PLAN see PENSION PLAN; PENSION PLAN FUNDING, GROUP
DEPOSIT ADMINISTRATION ANNUITY; PENSION PLAN FUNDING, GROUP IMMEDIATE PARTICIPATING

GUARANTEED (IPG) CONTRACT ANNUITY; PENSION PLAN FUNDING, GROUP PERMANENT CONTRACT;

PENSION PLAN FUNDING, INDIVIDUAL CONTRACT PENSION PLAN.

PRIVATE PLACEMENT technique used by insurance companies

in the purchasing of debt obligations of corporations as a means to:
(1) avoid the uncertainties of the market; (2) replace market
negotiations with private negotiations; and (3) avoid Securities and
Exchange Commission restrictions. See also DIRECT PLACEMENT.
PRIVATE REPLACEMENT VARIABLE LIFE (PPVL) life
insurance policy in which the CASH VALUE and in some circumstances
the DEATH BENEFIT will vary according to the investment performance of
an underlying portfolio usually comprised of equities. Thus, this
product is considered to be a VARIABLE LIFE INSURANCE policy. In order for a
PPVL policy to be sold in any state, the insurance company must
be approved to distribute that product in the state and the product
must be approved for distribution. Section 817 of the Internal
Revenue Code, which discusses the tax treatment of variable
policies, and Regulation 1.817.5, which discusses the
diversification requirements for life insurance policies, VARIABLE DOLLAR
ANNUITIES, and ENDOWMENT INSURANCE POLICIES, pertain to the tax

considerations for the PPVL. All variable life insurance policies are
considered securities and are subject to federal securities law. One
life insurance product currently being directed on a private
placement basis is CORPORATE-OWNED VARIABLE LIFE INSURANCE.
PROBABILITY chance that an event will occur. The foundation of
insurance is probability and STATISTICS. By pooling a large number of
homogeneous exposures an insurance company can predict with a
given degree of accuracy the chance that a policyholder will incur a
loss. The company reflects this expectation in the pure cost of
insurance, known as the pure premium. The chance that an event
will occur can be expressed as follows:

For example, the probability of rolling a six on one die can be

expressed as:
 Page 400
PROBABILITY DISTRIBUTION outcomes of an experiment and
their probabilities of occurrence. If the experiment were to be
repeated any number of times, the same probabilities should also
repeat. For example, the probability distribution for the possible
number of heads from two tosses of a fair coin having both a head
and a tail would be as follows:

Number of Tosses Probability of

Heads Event
0 (tail, tail) .25
1 (head, tail) .50
+
(tail, head)
2 (head, .25
head)

PROBABILITY OF LOSS see PROBABILITY.

PROBABLE MAXIMUM LOSS (PML) see MAXIMUM PROBABLE LOSS (MPL).
PROBATE legal proceeding whereby the will of a deceased is
tested for validity.
PROBATE BOND see JUDICIAL BOND.
PROBATE COURT court that presides over estate distribution
settlements, documentation of wills, and the appointment of legal
guardians.
PROBATIONARY PERIOD time, in health insurance, from the
first day of a disability, illness, or accident during which no
benefits are payable. The longer the probationary period, the lower
the premium. See also ELIMINATION PERIOD.
PROCEEDS benefits payable under any insurance policy or
annuity contract.
PRODUCER see AGENT.
PRODUCERS COOPERATIVE health plans established by
associations of hospitals and physicians to provide hospital service
and care, and medical and surgical care. See also BLUE CROSS; BLUE SHIELD.
PRODUCT DEVELOPMENT design, testing, packaging, and
marketing of an insurance policy.
PRODUCT FAILURE EXCLUSION see BUSINESS RISK EXCLUSION.
PRODUCT LIABILITY CATASTROPHE REINSURANCE see
AUTOMATIC NONPROPORTIONAL REINSURANCE; AUTOMATIC PROPORTIONAL REINSURANCE; AUTOMATIC

REINSURANCE; EXCESS OF LOSS REINSURANCE; FACULTATIVE REINSURANCE; NONPROPORTIONAL

REINSURANCE; PROPORTIONAL REINSURANCE; QUOTA SHARE REINSURANCE; STOP LOSS REINSURANCE;

SURPLUS REINSURANCE.
 Page 401
PRODUCT LIABILITY INSURANCE coverage usually provided
under the COMMERCIAL GENERAL LIABILITY INSURANCE (CGL); it can also be
purchased separately. See also PRODUCTS AND COMPLETED OPERATIONS INSURANCE.
PRODUCT LIABILITY RISK RETENTION ACT act first passed
by the United States Congress in 1981 and later amended in 1986
that provides for the establishment of RISK RETENTION GROUPS whose
purpose is to sell PRODUCT LIABILITY INSURANCE to its membership.
PRODUCT RECALL EXCLUSION exception in general liability
policies for all expenses associated with product recall. In recent
years, there have been increasing instances of federal recalls. In
addition, there have been many instances of deliberate tampering
and of manufacturers issuing their own recalls. In either event, the
cost of identifying the products, communicating with consumers,
inspecting the returned products, and repairing or replacing them
can be enormous. These costs are excluded from general liability
policies, but PRODUCT RECALL INSURANCE can be purchased for this purpose.
PRODUCT RECALL INSURANCE coverage for the expenses
incurred by a business resulting from the recall of products,
whether defective or not. See also PRODUCT LIABILITY INSURANCE; PRODUCT AND
COMPLETED OPERATIONS INSURANCE; PRODUCT RECALL EXCLUSION.

PRODUCTS AND COMPLETED OPERATIONS INSURANCE

coverage for an insured manufacturer for claims after a
manufactured product has been sold and/or a claim results from an
operation which the manufacturer has completed. See also COMPLETED
OPERATIONS INSURANCE.

PRODUCT VARIABILITY uneven quality of a product made by

the same manufacturer. A manufacturer is responsible for
producing products of similar quality, and can be held liable for
those that deviate materially from a model, sample, or standard.
PROFESSIONAL see PROFESSIONAL LIABILITY INSURANCE.
PROFESSIONAL INSURANCE AGENTS (PIA) (NATIONAL ASSOCIATION
OF PROFESSIONAL INSURANCE AGENTS). Independent agent membership group,

originally mutual agents but today open to both mutual and stock
agents. Association views are presented both nationally and locally
on insurance legislation. There is an extensive education program
for members.
PROFESSIONAL LIABILITY see LIABILITY, PROFESSIONAL.
PROFESSIONAL LIABILITY INSURANCE coverage for
specialists in various professional fields. Since basic liability
policies do not protect against situations arising out of business or
professional pursuits, professional liability insurance is purchased
by individuals who hold themselves out to the general public as
having greater than average expertise in particular areas. See also
ACCOUNTANTS PROFESSIONAL
 Page 402
LIABILITY INSURANCE; DRUGGISTS LIABILITY INSURANCE; ERRORS AND OMISSIONS LIABILITY INSURANCE;

INSURANCE AGENTS AND BROKERS LIABILITY INSURANCE; LAWYERS (ATTORNEYS PROFESSIONAL)

LIABILITY INSURANCE; PHYSICIANS, SURGEONS, AND DENTISTS INSURANCE.

PROFESSIONAL REINSURER company formed to sell and

service PROPORTIONAL REINSURANCE and NONPROPORTIONAL REINSURANCE with profit
motive as the normal business objective.
PROFESSIONAL STANDARDS REVIEW ORGANIZATION
(PSRO) group that monitors government health insurance
programs. Authorized by the 1972 amendment to the Social
Security Act, PSROs were set up to cut costs and minimize abuses
by checking on the need of applicants for care and the cost and
quality of care.
PROFITABILITY UNDERWRITING degree of UNDERWRITING profit
that an insurance company's book of business shows. See also
UNDERWRITING GAIN (LOSS).

PROFITS AND COMMISSIONS FORM coverage protecting

future profits to be earned from a manufacturer's inventory. A
manufacturer may lose all or part of an inventory of finished goods
due to a peril such as fire and still be able to operate. But in the
event that an inventory and other merchandise is destroyed by an
insured peril, the insured is indemnified for the loss profit or
commissions.
PROFITS AND COMMISSIONS INSURANCE see PROFITS AND
COMMISSIONS FORM.

PROFIT SHARING/MONEY PURCHASE COMBINATION

PLAN joint PROFIT SHARING and MONEY PURCHASE plan that is appropriate for
businesses that desire the funding flexibility of the profit sharing
plan and the higher tax-deductible (25% vs. 15%) contribution of
the money purchase plan. This combination of the two plans
provides that the profit sharing contributions remain discretionary
and the money purchase contributions remain mandatory.
PROFIT-SHARING PLAN arrangement by an employer in which
employees share in profits of the business. To be a qualified plan, a
predetermined formula must be used to determine contributions to
the plan and benefits to be distributed, once a participant attains a
specified age, becomes ill or disabled, severs employment, retires,
or dies. When a profit-sharing plan is first installed, employees
with considerable past service usually do not receive such credit.
An advantage to an employer is that in low or no profit years, the
business does not have to contribute to the plan, since contributions
are voluntary and the Internal Revenue Code does not require a
minimum contribution, as with a deferred benefit plan or a MONEY
PURCHASE PLAN.

PROGRESSIVE IMPAIRMENT gradual or accelerated

deterioration of the body resulting from a disease such as cancer.
 Page 403
PROGRESSIVE INCOME TAX structure under which tax rates
increase with increases in income. One way to minimize such taxes
is to purchase tax advantaged financial instruments. See also TAX
DEFERRED ANNUITY; TAX BENEFITS OF LIFE INSURANCE.

PROGRESSIVELY DIMINISHING DEDUCTIBLE see DISAPPEARING

DEDUCTIBLE.

PROHIBITED RISK uninsurable risk.

PROHIBITED TRANSACTIONS actions not allowed between a
trust and a DISQUALIFIED PERSON under the EMPLOYEE RETIREMENT INCOME SECURITY ACT
OF 1974 (ERISA). The disallowed actions are designed to prevent a conflict

of interest between the trust plan and those who have a vested
interest in that plan. The disallowed actions between the trust plan
and the disqualified person include the sale, lending, exchange, and
leasing of goods or services between the two parties.
PROJECTED DIVIDEND estimated future dividends to be paid by
a PARTICIPATING INSURANCE POLICY. These dividend estimations cannot be part
of the policy since they are not guaranteed. They are normally
shown in a separate computer printout and are only as accurate as
the basic interest rate assumptions made.
PROJECTION FACTORS expectations of investment return,
mortality experience, and expenses used in projecting future cash
values for life insurance and annuities. These projections cannot be
part of the actual policy since they are not guaranteed. Rather, they
take the form of separate computer printouts and are used in sales
presentations.
PROOF OF DEATH see PROOF OF LOSS.
PROOF OF INTEREST see INSURABLE INTEREST; INSURABLE INTEREST, LIFE
INSURANCE; INSURABLE INTEREST, PROPERTY AND CASUALTY INSURANCE.

PROOF OF LOSS documentation of loss required of a

policyowner by an insurance company. For example, in the event
of an insured's death, a death certificate (or copy) must be
submitted to the company for a life insurance death benefit to be
paid to the beneficiary.
PROPERTY real (land and attachments) and personal (movable
effects not attached to land). Both classifications of property give
rise to an insurable interest. See also INSURABLE INTEREST; PROPERTY AND
CASUALTY INSURANCE PROVISIONS.

PROPERTY AND CASUALTY INSURANCE CONTRACT see

INSURANCE CONTRACT, PROPERTY AND CASUALTY.

PROPERTY AND CASUALTY INSURANCE PROVISIONS

specifications dealing with exclusions, policy requirements,
cancellations and related matters.
1. PerilsMost policies exclude enemy attack, invasions,
insurrection, rebellion, revolution, civil war, unsurped power,
neglect of an
 Page 404
insured to reasonably preserve damaged property from further loss,
and explosion or riot unless caused by fire. Other exclusions may
be specified in a policy. Among them are concealment and fraud by
the insured; increased hazard by an insured's actions; and vacancy
in an insured building for at least 60 consecutive days.
2. RequirementsIn the event of a loss the insured must give
immediate written notice to the insurance company; protect the
insured property from further damage; separate damaged from
undamaged property; give the company a complete inventory of
the damaged or destroyed property, with signed proof of loss
within 60 days; and submit to the company's examination of
damaged or destroyed property.
3. OTHER INSURANCEIf two or more separate policies over the same loss,
each will pay no more than its pro rata share of the loss.
4. SUBROGATIONAfter the company pays the insured for a loss incurred
as the result of actions of a third party, the company reserves the
right to seek recovery for damages against that third party. (The
insured has passed the right of suit against the third party to the
insurance company.)
5. CancellationThe insured and the insurance company can
terminate the policy under specified circumstances. The insured
can terminate the policy at any time, and will receive a return of
part of the premium, less an amount for administrative expenses.
The insurance company can cancel a property policy by sending
the insured written notice at least 5 days before the intended date of
cancellation. For a liability policy, after the policy has been
renewed the first time, or has been in force for at least 60 days, the
insurance company can cancel only for causes such as failure of an
insured to pay a premium when due, if an insured is involved in
illegal activities, drives while intoxicated, or is under the influence
of drugs.
PROPERTY AND LIABILITY INSURANCE coverage for an
insured whose property is damaged or destroyed by an insured
peril, or whose negligent acts or omissions damage or destroy
another party's property or cause bodily injury to another party. See
also BUSINESS AUTO COVERAGE FORM; BUSINESS PROPERTY AND LIABILITY INSURANCE PACKAGE;
BUSINESSOWNERS POLICY; CONDOMINIUM INSURANCE; HOMEOWNERS INSURANCE POLICY; PERSONAL

AUTOMOBILE POLICY (PAP); COMMERCIAL PACKAGE POLICY; TENANTS INSURANCE.

PROPERTY AND LIABILITY INSURANCE PLANNING FOR

BUSINESS see BUSINESS AUTO COVERAGE FORM; BUSINESS CRIME INSURANCE; BUSINESS
INSURANCE; BUSINESS INCOME COVERAGE FORM; BUSINESS LIABILITY INSURANCE; BUSINESS PROPERTY

AND LIABILITY INSURANCE PACKAGE; BUSINESSOWNERS POLICY.

PROPERTY AND LIABILITY INSURANCE PLANNING FOR

INDIVIDUALS AND FAMILIES see COMPREHENSIVE PERSONAL LIABILITY
INSURANCE; HOMEOWNERS INSURANCE POLICY; LIABILITY,
 Page 405
PERSONAL EXPOSURES; LIABILITY, PROFESSIONAL; PERSONAL AUTOMOBILE POLICY (PAP); TENANTS

INSURANCE.

PROPERTY CATASTROPHE see FIRE CATASTROPHE [Link];

REINSURANCE, PROPERTY AND CASUALTY-CASUALTY CATASTROPHE

PROPERTY DAMAGE see BUSINESS LIABILITY INSURANCE (Insuring

Agreement Section); PERSONAL AUTOMOBILE POLICY (PAP).
PROPERTY DAMAGED OR DESTROYED see PROPERTY INSURANCE
COVERAGE.

PROPERTY DAMAGE LIABILITY INSURANCE coverage in

the event that the negligent acts or omissions of an insured result in
damage or destruction to another's property. Coverage can be
purchased with BODILY INJURY liability under various insurance policies.
See also BUSINESS AUTO COVERAGE FORM; BUSINESS PROPERTY AND LIABILITY INSURANCE
PACKAGE; HOMEOWNERS INSURANCE POLICY; PERSONAL AUTOMOBILE POLICY (PAP).

PROPERTY DEPRECIATION INSURANCE coverage that

provides for replacement of damaged or destroyed property on a
new replacement cost basis without any deduction for depreciation.
This is equivalent to replacement cost property insurance.
PROPERTY INSURANCE indemnifies an insured whose property
is stolen, damaged, or destroyed by a covered peril. The term
property insurance encompasses numerous lines of available
insurance.
PROPERTY INSURANCE COVERAGE coverage for direct or
indirect property loss that can be analyzed under the following
headings:
1. Perila particular peril may be included or excluded. For
example, the Standard Fire Policy names specific perils such as
fire and lightning; the ALL RISKS policy covers all entities unless
specifically excluded.
2. Propertya policy may cover only specified or scheduled property
such as an automobile; all of an insured's personal property up to a
specified amount on each item regardless of its location (PERSONAL
PROPERTY FLOATER); or all property of the insured with no specific limit

(BLANKET POLICY).

3. Personthe person covered must be specifically identified as the

named insured in a policy. Residents of that household also
covered are the spouse, relatives of either, and anyone else below
the age of 21 under the insured's care, custody, and control.
4. Durationpolicies are usually written for one year; a personal
automobile policy is usually for six months.
5. Limitslimits are stated as a face amount in a policy. The insurer
will never pay more than the lesser of the following amounts:
limits stated in a policy; actual cash value of destroyed or damaged
property; or amount resulting from the coinsurance formula.
 Page 406
6. Locationa policy may cover perils that strike only the premises
of the insured, or it may provide off-premises coverage subject to a
geographic restriction. For example, the personal automobile
policy covers only the U.S. and Canada.
7. HAZARDthe exclusions and suspension section states that if the
insured increases a covered hazard the company can suspend or
exclude the coverage. For example, the insured starts processing
explosives at home.
8. LOSSinsurance contracts cover either direct or indirect (CONSEQUENTIAL)
loss. For example, a homeowners policy covers damage due to the
direct loss by fire, lightning, and other perils. It does not cover
consequential losses such as loss of income by an insured who is
unable to go to work because of fatigue.
PROPORTIONAL REINSURANCE system whereby the reinsurer
shares losses in the same proportion as it shares premium and
policy amounts. Proportional reinsurance may be divided into the
two basic forms: AUTOMATIC PROPORTIONAL REINSURANCE and facultative
proportional reinsurance. See also REINSURANCE.
PROPOSAL see APPLICATION.
PROPOSAL BOND see BID BOND.
PROPOSITION 103: CALIFORNIA legislation mandating that
factors taken into account in the calculation of premium rates for
automobile insurance include the insured's driving record, annual
miles driven, and years of driving experience. Excluded from
consideration is territorial rating. Also included in the provision is
a required dis-count of 20% for being a good driver. The
proposition repeals previous laws which prohibited insurance
brokers and agents from REBATING premiums or commissions as
an inducement to prospective insureds to purchase insurance from
them. Also repealed by the proposition was the law that prohibited
banks from becoming licensed to sell insurance. The proposition
requires California to be a prior-approval state for any rate changes
concerning automobile insurance, as well as to submit certain
specified rate-change requests to a public hearing.
PROPRIETARY INSURER for-profit insurance company, such as
a mutual or stock company or LLOYD'S OF LONDON association. Proprietary
insurers contrast with cooperative insurers, or Blue Cross/Blue
Shield plans, or FRATERNAL LIFE INSURANCE organizations.
PRO RATA see PRO RATA CANCELLATION; PRO RATA DISTRIBUTION CLAUSE; PRO RATA LIABILITY
CLAUSE; PRO RATA REINSURANCE.

PRO RATA CANCELLATION revocation of a policy by an

insurance company that returns to the policyholder the unearned
premium (the portion of the premium for the remaining time period
that the policy will not be in force). There is no reduction for
expenses already paid by the insurer for that time period. See also
SHORT RATE CANCELLATION.
 Page 407
PRO RATA CLAUSE CLAUSE in an INSURANCE POLICY that stipulates that
the policy will pay for losses in proportion to the amount of
insurance coverage that the policy has in force in relation to the
total amount of insurance in force from all other policies.
PRO RATA DISTRIBUTION CLAUSE provision in many
property insurance policies that automatically distributes coverage
over insured property at various locations in proportion to their
value. For example, if an insured buys a $100,000 policy to cover
three properties worth $75,000, $30,000 and $20,000, the insurance
(which would not be enough to cover a total loss) would be
distributed in the same manner. If the $75,000 property were totally
destroyed, the insured would receive 60% of the value of the
insurance, or $60,000, because that property represents 60% of the
covered property. If the insured buys adequate coverage, this clause
is important because it can spread the insurance to different
locations as inventories decrease or increase, rather than forcing the
insured to constantly revise the coverage. See also DOUBLE RECOVERY.
PRO RATA LIABILITY CLAUSE provision in many property
insurance policies that spreads the obligation to pay a claim among
various insurers covering that claim in proportion to the insurance
each has written on the property. For example, there are three
different policies covering a $130,000 building. Co. A wrote a
$60,000 policy, Co. B a $50,000 policy, and Co. C a $20,000
policy. A fire results in $25,000 damage. The loss would be spread
in the same ratio as the coverage: Co. A's share would be $11,750,
or 47%; Co. B would pay $9500, or 38%; and Co. C would pay
$3750, or 15%. One purpose of this clause is to prevent an insured
from capitalizing on a loss. In the case cited, the insured could
collect the full amount ($25,000) twice from the first two insurers,
and $20,000 from the third, giving him or her $70,000 to cover a
$25,000 loss.
PRO RATA RATE premium rate charged for a particular time
interval which is less than the normal time interval. For example, if
the time interval of coverage is one month, the premium due each
month would be one-twelfth of the annual premium payment.
PRO RATA REINSURANCE see PROPORTIONAL REINSURANCE; QUOTA SHARE
REINSURANCE; SURPLUS REINSURANCE.

PRO RATA TREATY see PROPORTIONAL REINSURANCE; QUOTA SHARE REINSURANCE;

SURPLUS REINSURANCE.

PRO RATA UNEARNED PREMIUM RESERVE see UNEARNED

PREMIUM RESERVE.

PRORATION see PRO RATA CANCELLATION; PRO RATA LIABILITY CLAUSE.

PRORATION OF COVERAGE see OTHER INSURANCE CLAUSE.
PROSPECT individual or organization that is a potential purchaser
of an insurance product.
 Page 408
PROSPECTING soliciting of customers for the purchasing of an
insurance product. See also PROSPECT.
PROSPECTIVE AGGREGATE EXCESS OF LOSS
REINSURANCE type of EXCESS OF LOSS REINSURANCE in which the
insurance company (CEDENT) is guaranteed REINSURANCE for future
covered losses once they exceed a specified amount on either a per
loss, per risk, or aggregate basis. The cedent pays at the inception
of the contract the excess of loss reinsurance contract.
PROSPECTIVE COMPUTATION see PROSPECTIVE RATING.
PROSPECTIVE EXPERIENCE RATING see PROSPECTIVE RATING.
PROSPECTIVE RATING determination of (1) a future property or
liability insurance or reinsurance rate or (2) a premium for a
specified future period of time. It is based on the loss experience of
a specified past period of time.
PROSPECTIVE RESERVE amount designated as a future liability
for life or health insurance to meet the difference between future
benefits and future premiums. NET LEVEL PREMIUM is determined so that
this basic relationship holds: the present value of a future premium
equals the present value of a future benefit. This relationship,
incidentally, exists in fact only at the point of issuance of a life
insurance policy. After that, the value of future premiums is less
than the value of future benefits because fewer premiums are left to
be paid. Thus, a reserve must be maintained at all times to make up
this difference.
PROSPECTIVE VALUATION calculations involving the MORTALITY
RATE of a company's insureds and the rate of return on the company's
investments. It is used in calculating the PROSPECTIVE RESERVE.
PROTECTED RISK property to be insured, or that is insured,
which is located within the specific geographical region falling
under the auspices of the fire department.
PROTECTION see COVERAGE.
PROTECTION AND INDEMNITY INSURANCE (P&I) broad
type of marine legal liability coverage. HULL MARINE INSURANCE is limited
to an insured ship. With the addition of a RUNNING DOWN CLAUSE, a policy
can be extended to cover liability in case of collision with another
ship. But many shipowners desire the much broader coverage
offered by protection and indemnity insurance since it covers the
ship operator for liability to crew members and other people on
board, damage to fixed objects like docks, and other miscellaneous
claims.
PROTECTIVE LIABILITY INSURANCE see OWNERS AND CONTRACTORS
PROTECTIVE LIABILITY INSURANCE.

PROVISIONAL PREMIUM (RATE) see DEPOSIT PREMIUM.

 Page 409
PROXIMATE CAUSE see DIRECT LOSS.
PRUDENT MAN RULE see TORT, UNINTENTIONAL.
PS-58 COST METHOD OF THE SPLIT DOLLAR LIFE
INSURANCE PLAN payment of that portion of the annual
premium by the employee necessary to cover the PS-58 cost for
that given year. Any unpaid premium balance for that particular
year is paid by the employer. See also PS-58 RATE TABLE; SPLIT DOLLAR LIFE
INSURANCE.

PS-58 RATE TABLE table used by the Internal Revenue Service

(IRS) in evaluating SPLIT DOLLAR LIFE INSURANCE plans as to the extent of the
economic benefit that is considered taxable ordinary income to the
employee. The taxable ordinary income to the employee is the
premium cost of one-year term insurance on the life of the
employee minus that portion of the premium paid by the employee.
If the employee pays that portion of the premium that is in excess
of the economic benefit, the employee incurs no ordinary income
tax liability. The premium cost of one-year term insurance at each
age is listed in this IRS table.
PUBLIC ADJUSTER representative of an insurance claimant in
situations only where an adjuster can act for an insurance company
or an insured. See also ADJUSTER, STAFF.
PUBLIC EMPLOYEE DEFERRED COMPENSATION PLAN
qualified retirement plan under the INTERNAL REVENUE CODE Section 457
for employees of the states and political subdivisions within the
states.
PUBLIC EMPLOYEES BLANKET BOND fidelity bond provided
under a BLANKET POSITION BOND (in which each position is covered on an
individual basis) or a COMMERCIAL BLANKET BOND (in which a loss is
covered on a blanket basis regardless of the number of employees
causing the loss) for employees of public institutions and agencies.
PUBLIC LAW 15 see McCARRAN-FERGUSON ACT (PUBLIC LAW 15).
PUBLIC LAW 87-311 1961 federal legislation that allows the U.S.
Export-lmport Bank to set up insurance protection for U.S.
exporters against credit risk and political risk in order to help make
U.S. exports more competitive and bolster the U.S. trade balance.
The Foreign Credit Insurance Association oversees the insurance
program, which is written by private insurers.
PUBLIC LAW 91-156 1969 federal legislation requiring states to
treat national banks, including those whose principal offices are out
of state, the same way for tax purposes as they treat their own state-
chartered banks.
PUBLIC LAW 92-500 amendments to the WATER QUALITY IMPROVEMENT ACT
OF 1970 that extends liability of shipowners to any hazardous

substances discharged by their ships. The 1970 act made

shipowners
 Page 410
responsible for cleanup of oil spills. Public Law 92-500 (the
Federal Water Pollution Control Act Amendments of 1972)
extended responsibility to other hazardous substances.
PUBLIC LIABILITY INSURANCE very broad term for insurance
covering liability exposures for individuals and business owners. It
provides broad coverage, generally including all exposures for
property damage and bodily injury, except exposures that relate to
owner-ship of airplanes and automobiles, and to employees.
Liability insurance may be written to cover specified hazards, as a
COMMERCIAL GENERAL LIABILITY INSURANCE (CGL) policy, PACKAGE POLICY, or SCHEDULED

POLICY.

PUBLIC OFFICIAL BOND type of SURETY BOND that guarantees the

performance of public officials. Public officials are responsible for
a broad range of property including fees that they collect, money
that they handle, and bank accounts that they oversee. They may
also be held responsible for misdeeds that result in a loss of public
funds by those they supervise. In some cases coverage is available
for an entire group of employees under a PUBLIC EMPLOYEES BLANKET BOND.
PUBLIC RISK AND INSURANCE MANAGEMENT
ASSOCIATION (PRIMA) organization based in Washington, D.C.,
that is composed of risk and insurance managers of various public
entities, to include municipalities and school boards.
PUBLIC TRUCKMENS LEGAL LIABILITY FORM INLAND MARINE
policy that covers truck drivers for loss or damage to merchandise
they haul. The Interstate Commerce Commission requires this
coverage for trucks engaged in interstate commerce.
PUNITIVE DAMAGES see LIABILITY, CIVIL DAMAGES AWARDED.
PUP COMPANY subsidiary, smaller company that is owned and
controlled by a much larger company. In many instances pup
companies are used to write SPECIAL RISK INSURANCE for which the larger
company does not have UNDERWRITING facilities.
PURCHASE see OWNERSHIP RIGHTS UNDER LIFE INSURANCE; POLICY-HOLDER.
PURCHASE PAYMENT premium payment.
PURCHASE PRICE cost of an ANNUITY. Annuities are often paid for
in a lump sum rather than annual or other periodic payments. This
sum, which guarantees an income, usually for life, is called the
purchase price rather than the PREMIUM, which is generally associated
with payments for insurance.
PURCHASING GROUP see GROUP HEALTH INSURANCE; GROUP LIFE INSURANCE; MASS
MERCHANDISING; MASS UNDERWRITING; MASTER POLICY.
 Page 411
PURCHASING POWER RISK investment risk associated with the
relationship between the yield (interest, dividends, and capital) of
financial instruments and the rate of inflation in the economy. For
fixed income financial instruments such as a FIXED DOLLAR ANNUITY and
fixed dollar LIFE INSURANCE, the financial security of the recipient is
diminished in proportion to the rise of inflation.
PURE see PURE ANNUITY; PURE ENDOWMENT; PURE PREMIUM RATING METHOD; PURE RISK.
PURE AMOUNT OF PROTECTION see NET AMOUNT AT RISK.
PURE ANNUITY contract sold by insurance companies that pays
a monthly (quarterly, semiannual, or annual) income benefit for the
life of a person (the ANNUITANT). The annuitant can never outlive the
income from the annuity. Upon the death of the annuitant all
income payments cease. There are no beneficiary benefits under
this type of annuity. Contrast with REFUND ANNUITY.
PURE ASSIGNMENT MUTUAL INSURANCE COMPANY see
ASSESSABLE MUTUAL.

PURE ENDOWMENT life insurance policy under which its face

value is payable only if the insured survives to the end of the stated
endowment period; no benefit is paid if the insured dies during the
endowment period. Few if any of these policies are sold today.
Contrast with ENDOWMENT INSURANCE.
PURE LOSS COST RATIO see BURNING COST RATIO.
PURE PREMIUM see PURE PREMIUM RATING METHOD.
PURE PREMIUM RATING METHOD approach that reflects
losses expected. It is a calculation of the pure cost of property or
liability insurance protection without loadings for the insurance
company's expenses, premium taxes, contingencies, and profit
margins. The pure premium is calculated according to the
relationship:

PURE RISK situation involving a chance of a loss or no loss, but

no chance of gain. For example, either one's home burns or it does
not; this risk is insurable. See also STANDARD RISK.
PUT OPTION right to sell a given security at a stipulated price
until a future expiration date. For example, assume the ''None-Do-
Well" company's stock has a market value of $20. Investor A sells
Investor B an option (right) to buy Investor A's shares in the
"None-Do-Well" company at a price of $25, good until 60 days
hence. Investor B pays a premium of $4 per share for this right. If
the stock's market value
 Page 412
increases to a price greater than $29, Investor B will make a profit
on the transaction. If, however, the stock falls below its original
price of $20, Investor A will keep the stock as well as the $4
premium right per share it received from Investor B. If the 60-day
limit expires without the right being executed, the option becomes
void and worthless.
PYRAMIDING situation in which several liability insurance
policies are in force to cover the same risk, thereby resulting in
higher limits of coverage than is required to adequately insure the
risk.
 Page 413

Q
Q SCHEDULE provision of the NEW YORK INSURANCE CODE and regulations
under which (1) the life insurance company must file with the
Insurance Commissioner all expenses associated with selling new
life insurance policies; and (2) a limit is set on expenses to acquire
new business.
The expense limitation serves to restrict agent commissions in New
York State. This is one important reason why many national
insurance companies do not sell life insurance in New York, or
why some organize subsidiary companies for the sole purpose of
conducting life insurance business only in New York. Many life
insurance companies feel the expense limitation too restrictive to
attract brokerage business.
QUADRUPLE INDEMNITY see ACCIDENTAL DEATH CLAUSE.
QUALIFIED DOMESTIC TRUST type of TRUST established for the
purpose of permitting the federal estate MARITAL DEDUCTION for ASSETS
transferred from the decedent's estate to a surviving spouse who is
not a citizen of the United States. The TRUSTEE for this trust must be a
United States corporation or citizen, and if the assets are in excess
of $2,000,000, the trustee must be a United States bank. Income
from this trust can be distributed to the surviving spouse without
incurring any estate tax consequences; however, any distributions
of principal are subject to the federal estate tax. Upon the death of
the surviving spouse and/or termination of the trust, the distributed
principal of the trust is subject to federal estate tax.
QUALIFIED IMPAIRMENT INSURANCE waiver of an
impairment of an applicant for health insurance by attaching an
 to the health insurance policy stating that the policy will
ENDORSEMENT

pay no benefits in connection with the impairment. This waiver

enables an applicant, who otherwise would not qualify, to be
insured. See also SUBSTANDARD HEALTH INSURANCE (QUALIFIED IMPAIRMENT INSURANCE).
QUALIFIED JOINT AND SURVIVOR ANNUITY see ANNUITY, JOINT-
LIFE AND SURVIVORSHIP ANNUITY; PENSION PLAN.

QUALIFIED PENSION PLAN see PENSION PLAN.

QUALIFIED PERSONAL RESIDENCE TRUST (QPRT) TRUST
instrument that permits the owner of a residence (grantor) to
transfer ownership of that residence with the grantor still being
allowed to stay in that residence for a stipulated period of time on a
tax advantage basis. The procedure in establishing such a trust
would be for: (1) the grantor to establish an irrevocable trust that
would allow the grantor to stay in that residence for a given period
of time (for example 15, 20, or 30 years); and (2) the grantor to
contribute the residence to the trust. At the end of that given time
period, the residence will then be trans-
 Page 414
ferred to the beneficiary(s) of the trust as selected by the grantor at
the inception of the trust. The tax rules value the residence that
transfers to the beneficiary(s) of the trust at a substantial discount
from the actual value of the residence on the date the grantor
contributed it to the trust. The disadvantages of the QPRT include
the following: (1) at the end of the given period of time, the grantor
can no longer stay in the residence and the beneficiary(s) own the
residence outright; and (2) if the grantor dies before the expiration
of the QPRT, the residence's actual value on the day it was
contributed to the trust is included in the grantor's estate and thus
becomes subject to FEDERAL ESTATE TAX. For example, a father retains, for
a given time period, the right to use and possess the home. At the
end of that time, the home's ownership reverts to the children but
the father can continue to live in the home. If the father dies during
the given time period, the home is taxed at full value as part of the
father's estate. The life insurance policy previously purchased with
the children as the beneficiary will override the lost estate tax
savings because of the death of the father within that term period.
QUALIFIED TERMINABLE INTEREST PROPERTY (Q TIP)
TRUST strategy that provides that all income from assets in trust
be paid at least annually for the life of the surviving spouse. This
trust, which prohibits transfer of any assets to anyone else, can
provide for the surviving spouse to will the property to one or more
individuals among a group previously designated by the deceased
spouse. For example, a husband establishes a Q TIP trust that gives
his widow income for life. At the death of the wife, the corpus of
the Q TIP trust will go the children, even though the corpus is part
of the wife's estate. Since the husband elects how much of the
estate is to be treated as Q TIP property, the estate tax strategy is to
have only that portion of Q TIP property necessary to achieve zero
estate death tax. See also ESTATE PLANNING, ESTATE PLANNING DISTRIBUTION.
QUALIFIED TRUST see PENSION PLAN.
QUALITY INSURANCE CONGRESS (QIC) organization
founded in 1993, the thesis of which is to apply quality
management principles to insurance functions. To this end, the
organization is involved in insurance industry-wide customer
research and the needs and perceptions of the insurance buyer is
studied. See also TOTAL QUALITY MANAGEMENT (TQM).
QUANTITY DISCOUNT see GROUP INSURANCE; MASS MERCHANDISING.
QUARTER OF COVERAGE quarter credited, for retirement
benefits under Social Security, when the worker's earnings exceed a
minimum amount in a given quarter. Credited quarters are
extremely important for FULLY INSURED and CURRENTLY INSURED status to
qualify for Social Security benefits. The minimum amount of
earnings required for a quarter credited is subject to annual
increases.
 Page 415
QUICK ASSETS liquid property that can be converted easily to
cash. For example, a policyowner can borrow readily against the
cash value of a life insurance policy. See also POLICY LOAN.
QUID PRO QUO exchange, in insurance, of an adequate
consideration (premium paid by an insured) for the promise of an
insurance company to pay benefits in the event the insured incurs a
loss.
QUOTA SHARE REINSURANCE automatic reinsurance that
requires the insurer to transfer, and the reinsurer to accept, a given
percentage of every risk within a defined category of business
written by the insurer. For example, in the case of a 20% quota
share, the insurer transfers 20% of its liability and premiums on
every risk to the rein-surer, who must pay 20% of any loss
sustained, whether total or partial. The percentage is constant
throughout and applies to premiums and losses alike. See also
REINSURANCE.

QUOTA SHARE TREATY see QUOTA SHARE REINSURANCE.

 Page 416

R
RABBI TRUST TRUST named from a private-letter ruling by the IRS
that involved a trust established by a Jewish congregation on behalf
of its rabbi. The operation of the trust involves the employer's
making contributions to the trust that are irrevocable. An
independent trustee has control of the trust and must pay benefits
from it if a stipulated event occurs, such as the death, disability, or
retirement of the employee. If the employer becomes bankrupt or
insolvent, the funds held in the trust are subject to the claims of the
employer's creditors. The employer cannot take income tax
deductions for its contributions to the trust until the funds in the
trust are actually distributed to the employee.
RACKETEER INFLUENCED AND CORRUPT
ORGANIZATIONS ACT OF 1970 (RICO) legislation that
provides support for legal actions against individuals or
organizations involved in systematic illegal activities. This act has
been applied against insurance organizations when they were
accused of bad-faith failure to pay claims or when there was a
question of insolvency.
RADIOACTIVE CONTAMINATION INSURANCE form of INLAND
MARINE INSURANCE under which an insured is indemnified for damage or

destruction of his or her on-premises property if it is due to

radioactive material stored or used within the premises. See also
MOTOR TRUCK CARGO RADIOACTIVE CONTAMINATION INSURANCE; SHIPPERS RADIOACTIVE

CONTAMINATION INSURANCE.

RADIO AND TELEVISION TRANSMITTING EQUIPMENT,

TRANSMISSION LINES, PIPELINES, TRAFFIC LIGHTS
INSURANCE coverage if transmission equipment is damaged or
destroyed on an ALL RISKS basis excluding the perils of war, wear and
tear, inherent defect, and nuclear damage. CONSEQUENTIAL LOSS (indirect
loss) may be added by endorsement to include such eventualities as
lost revenue because of damage to a radio-transmitting line. This
endorsement can be of special importance to businesses, such as
stock brokerages, that transmit buy and sell orders.
RADIUM FLOATER see RADIOACTIVE CONTAMINATION INSURANCE.
RADIX base upon which a MORTALITY TABLE is built by beginning with a
randomly selected group of people who are alive at the earliest age
for which statistics are available on the number of people alive at
that age. From this data, the rates of mortality can be used to build
"the number of people alive at a given age" and "the number of
people who die at a given age" columns in the mortality table.
RAILROAD RETIREMENT ACT see RAILROAD RETIREMENT SYSTEM.
RAILROAD RETIREMENT SYSTEM insurance established
under the federal Railroad Retirement Act for railroad employees,
covering
 Page 417
death, retirement, disability, and unemployment. Benefits are
adjusted for cost of living increases according to the formula used
for Social Security.
RAILROAD ROLLING STOCK INSURANCE coverage for
railroad equipment, liability of a railroad for damaging another
railroad's equipment, or the damage to goods under its care,
custody, and control. Coverage is provided on an ALL RISKS basis
subject to perils specifically excluded in the policy.
RAILROAD SIDETRACK AGREEMENT see SIDETRACK AGREEMENT.
RAILROAD TRAVEL POLICY see TRAVEL ACCIDENT INSURANCE.
RAIN INSURANCE business interruption insurance in which the
insured is indemnified for loss of earnings and payment of
expenses resulting from adverse weather conditions. For example,
the raining out of a fair, horse race, or boxing match can cause a
substantial loss of money for a promoter who may have spent huge
sums in advance of the event for rental, advertising, and site
conditioning. However, the policy does not cover damage to
property because of rain.
RANCHOWNERS INSURANCE see FARMOWNERS AND RANCHOWNERS
INSURANCE.

RANDOM INSURANCE coverage up to specific limits for

payments demanded by kidnappers for the release of an insured
held against his or her will. Most random insurance policies have a
deductible and exclude abductions within certain geographical
areas from coverage.
RANDOM SAMPLE sample of n elements selected from a
population of N elements in such a way that the sample has
essentially the same characteristics as the population. The random
sample serves as the foundation of all PROBABILITY theory as it relates
to probability in sampling. In theory, all subsets drawn from the
same sample have an equal chance of being drawn. Sampling is
extremely important to the calculation of premium rates. For
example, if the INSURER wants to predict the probability that a
wood-frame house will burn, the sample must be drawn from the
population of wood-frame houses, not brick-frame houses.
RATE see RATE MAKING; RATE MANUAL; RATING; RATING BUREAU.
RATE, BLANKET AVERAGE RATE applied when two or more
separate buildings are insured under one policy, and/or when two
or more separate contents are insured under one policy.
RATE CARDS record prepared by the RATING BUREAU describing the
particulars of an insured property and the applicable PREMIUM RATE.
RATE CREDIT OR DEFICIENCY annual contributions to a
pension plan that exceed or are smaller than (1) the minimum
required for future employee benefits currently being earned; and
(2) any supple-mental liability for past benefits earned but not
previously funded.
 Page 418
RATED POLICY statement in which a life insurance applicant is
charged a higher-than-standard premium to reflect a unique
impairment, occupation, or hobby, such as a history of heart
disease or a circus performer or sky diver.
RATED UP see RATED POLICY.
RATE FACTORS see RATE MAKING.
RATE MAKING process of calculating a PREMIUM so that it is (1)
adequatesufficient to pay losses according to expected FREQUENCY and
severity, thereby safeguarding against the insurance company
becoming insolvent; (2) reasonablethe insurance company should
not be able to earn an excessive profit; and (3) not unfairly
discriminatory or inequitable. Theoretically, it can be said that each
insurance applicant should pay a unique premium to reflect a
different expectation of loss, but this would be impractical. Instead,
classifications are established for applicants to be grouped
according to similar expectation of loss. Statistical studies of a
large number of nearly homogeneous exposures in each
underwriting classification enable the projection of losses after
adjustments for future inflation and statistical irregularities. The
adjusted statistics are used to calculate the pure cost of protection,
or pure premium, to which the insurance company adds on loads
for agent commissions, premium taxes, administrative expenses,
contingency reserves, other acquisition costs, and profit margin.
The result is the GROSS PREMIUM to be charged to the insured.
RATE MANUAL publication that lists premiums charged for
products sold by an insurance company. A manual also has
underwriting guidelines for agents. A life insurance rate manual
includes minimum guaranteed NONFORFEITURE values; and if a
participating policy, dividend scales.
RATE OF RETURN METHOD OF COST COMPARISON
approach advocated by the Federal Trade Commission (FTC) in its
1979 LIFE INSURANCE COST disclosure report. It calculates the rate of return
earned by the savings element of a life insurance policy in these
steps:
1. determine pure cost of protection (mortality expectation).
2. determine amount of dividends paid (if it is a participating
policy).
3. subtract the pure cost of protection plus dividends from the GROSS
PREMIUMS paid into the policy. This is the savings element.

4. the rate of return equals the interest rate at which the savings
element must be accumulated in order to equal the cash value of
the policy at some future specified time period. See also INTEREST
ADJUSTED COST.

RATE OF SURPLUS FORMATION RATIO insurance company's

growth rate of ADJUSTED SURPLUS divided by its ADJUSTED LIABILITIES. The
greater this ratio, the more financially sound the insurance
company, as the surplus would be increasing at a faster rate than
the liabilities.
 Page 419
RATES cost per unit of insurance. See also RATE MAKING.
RATES AND SELECTION see RATE MAKING.
RATIFICATION BY AGENCY sanction or affirmation by an
insurance company of acts of its agents that become the acts of the
company, with all the legal obligations these acts entail.
RATING a valuation of risk of an individual or organization.
RATING BUREAU cooperative organization among insurers that
rates and prepares new policy forms according to guidelines and
regulations of the state INSURANCE DEPARTMENT. Loss experience, collected
according to the line of business in specific geographical areas, is
used to suggest rates for use by the rating bureau member
companies. They may either use these rates or file their own
deviated rates for approval by the state insurance department if it is
a prior approval state. In an open competition state, a company
does not need approval for a deviated rate. In a file-and-use state, a
company can use a deviated rate without approval, after having
filed it with the state insurance department. In a modified prior
approval state, a company can use a deviated rate after filing it
with the state insurance department provided it is a modest
deviation and not a new rate classification.
RATING CLASS see CLASS RATE.
RATING CLAUSE see RATE MAKING.
RATING DOWN see AGE SETBACK.
RATING, EXPERIENCE see EXPERIENCE RATING.
RATING, MERIT see MERIT RATING.
RATING ORGANIZATION see RATING BUREAU.
RATING, RETROSPECTIVE see RETROSPECTIVE RATING.
RATING, SCHEDULE see SCHEDULE RATING.
READJUSTMENT INCOME see ADJUSTMENT INCOME.
REAL ESTATE land and attached structures. Interest in real estate
can be protected through various insurance policies. See also BUSINESS
PROPERTY AND LIABILITY INSURANCE PACKAGE; BUSINESSOWNERS POLICY; HOMEOWNERS INSURANCE

POLICY.

REAL ESTATE SWAP transaction in which the property owner

(for example, a pension fund) agrees to pay the insurance company
a rate of return tied to the fluctuations in real estate prices. In
return, the insurance company stipulates that it will pay the
property owner a rate of return that is more predictable, such as a
floating interest rate, if the insurance company believes that the
depressed real estate market has an attractive potential for capital
gains but has no desire to own and/or manage property. Meanwhile
a pension fund owns more property than
 Page 420
it deems prudent. The solution, through the swap, would entail the
pension fund passing on to the insurance company any gains or
losses generated by the property in return for the insurance
company paying the pension fund a floating interest rate. This
floating interest rate to be paid would be tied to a stipulated index
such as the U.S. Treasury Bill rate. The result would be that the
pension fund lowers its real estate portfolio to a more acceptable
level, and the insurance company has increasing capital gains
expectations.
REAL INTEREST RATE NOMINAL INTEREST RATE minus the rate of
inflation.
REALIZED CAPITAL GAINS (LOSSES) increases (decreases) in
capital assets (such as stocks and bonds) between the date of
purchase and the date of sale.
REAL PROPERTY see REAL ESTATE.
REASONABLE AND CUSTOMARY CHARGE fee that is most
consistent with that of physicians, hospitals, or other health
providers for a given procedure; usual fee for a procedure charged
by the majority of physicians with similar training and experience
within the same geographical area.
REASONABLE EXPENSES see EXCLUSIONS, MEDICAL BENEFITS.
REASONABLE MAN TEST see TORT, UNINTENTIONAL.
REASONABLENESS OF PREMIUM RATE see RATE MAKING.
REASSURED see CEDING COMPANY.
REBATING see ANTI-REBATE LAW.
RECAPTURE practice of a CEDING COMPANY whereby insurance
previously CEDED to a REINSURER is returned to that ceding company. See
also RECAPTURE OF PLAN ASSETS BY EMPLOYER.
RECAPTURE OF PLAN ASSETS BY EMPLOYER return of
employer contributions to a pension if that plan is (1) newly
established and is determined by the IRS not to be tax qualified; or
(2) long established but the IRS disallows a portion or all of the
employer contribution.
RECEIPT see PREMIUM RECEIPT.
RECEIVERSHIP/REHABILITATION case where an insurance
company is placed by the state court under the control of the STATE
INSURANCE DEPARTMENT. Claims are paid in the order filed until the

insurance company's ability to pay is exhausted.

RECIPIENT PROPERTY insurance against interruption of supply
of goods and services. If firm A depends on firm B for its supply of
goods and services, an interruption caused by damage or
destruction to B can jeopardize A. CONTINGENT BUSINESS INTERRUPTION FORM can
be used by A to protect against this possibility.
 Page 421
RECIPROCAL EXCHANGE unincorporated association with each
insured insuring the other insureds within the association. (Thus,
each participant in this pool is both an insurer and an insured.) An
attorney-in-fact administers the exchange to include paying losses
experienced by the exchange, investing premium inflow into the
exchange, recruiting new members, underwriting the inflow of new
business, under-writing renewal business, receiving premiums, and
exchanging reinsurance contracts. Members share profits and
losses in the same proportion as the amount of insurance purchased
from the exchange by that member.
RECIPROCAL INSURANCE EXCHANGE see RECIPROCAL EXCHANGE.
RECIPROCAL INSURER see RECIPROCAL EXCHANGE.
RECIPROCAL LEGISLATION law under which one state gives
favorable tax treatment to an insurance company domiciled in a
different state that is admitted to do business, provided the second
state does the same for companies domiciled in the first state. See
also RETALIATION LAWS.
RECIPROCITY see RECIPROCAL EXCHANGE; RECIPROCAL LEGISLATION.
RECISSION cancellation of a contract. Under the federal Truth in
Lending Act, a person who signs a contract can nullify it within
three business days of having signed it without penalty; funds paid
into the contract by the signer must be returned. Also, fraud or
misrepresentation provides legal grounds for cancellation of a
contract. For example, life insurance contracts with minors are
voidable (by minors but not by insurers) since they are under legal
age for making a contract.
RECORDING AGENT see AGENT OF RECORD.
RECORDING METHOD see ACCIDENT-YEAR STATISTICS; CALENDAR YEAR
EXPERIENCE.

RECORD KEEPING see DEBIT; DEBIT AGENT (HOME SERVICE AGENT); DEBIT INSURANCE
(HOME SERVICE INSURANCE, INDUSTRIAL INSURANCE).

RECOVERY damaged insured property in receipt by the insurance

company resulting from ABANDONMENT AND SALVAGE, SUBROGATION, and
REINSURANCE.

RECRUITING search, attraction, interview, and employment of

insurance agents. This is a primary function of the GENERAL AGENT (GA) or
AGENCY MANAGER.

RECURRENT DISABILITY see DISABILITY INCOME INSURANCE.

RECURRING CLAUSE time period in health insurance that must
elapse between a previous illness and a current one, if the current
one is to be considered a separate illness eligible for a new set of
benefits.
 Page 422
REDETERMINATION PROVISION PROVISION found in CURRENT
ASSUMPTION WHOLE LIFE INSURANCE policies under which the insurance

company retains the contractual right to recalculate the premium

(after a minimum period of time that the policy has been in force).
However, the company guarantees that, at the least, a minimum
interest rate will be credited to the cash value and, at the most, a
maximum mortality charge will be subtracted. The resultant new
premium may be greater than or less than the original premium. If
the new premium is greater than the original premium, the
POLICYOWNER may pay this greater premium, thereby retaining the

original death benefit under the policy, or the policyowner may still
pay the original premium, but the new death benefit will be lower
than it was originally. On the other hand, if the new premium is
less than the original premium, the policyowner may pay this lesser
premium, thereby retaining the original death benefit under the
policy, or the policyowner may still pay the original premium with
the death benefit becoming greater than it was originally, or the
difference in the new premium and the original premium can be
added to the policy's cash value.
REDLINING refusal by an insurance company to underwrite or to
continue to underwrite questionable risks in a given geographical
area. This is an important civil rights issue.
REDUCED PAID-UP INSURANCE see NONFORFEITURE REDUCED PAID-UP
BENEFITS.

REDUCED RATE CONTRIBUTION CLAUSE see COINSURANCE;

DOUBLE RECOVERY

RE-ENTRY TERM LIFE INSURANCE yearly renewable term

(YRT) life insurance under which an insured can usually re-apply
for term insurance every fifth year at a lower premium than the
guaranteed renewal rate. If the insured's health is good (as
documented by evidence of insurability), the guaranteed renewable
term premium can be reduced. If not, the guaranteed rate must be
continued to be paid on renewal.
RE-EQUITIZATION deleveraging of the insurance company's
balance sheet.
REFORMED correction of a contract containing a mistake in order
to prevent a party to that contract from gaining from that mistake.
For example, if $1,000,000, instead of the correct amount of
$100,000, is filled in the blank for property coverage, it will be
corrected to the intended $100,000 amount.
REFUND ANNUITY form of annuity returning premiums plus
interest to a beneficiary if the annuitant dies during the
accumulation period. A refund annuity costs more than a pure
annuity. If the annuitant dies during the liquidation period, benefits
paid to any beneficiary depend on whether the refund annuity is in
the form of a LIFE ANNUITY CERTAIN, INSTALLMENT REFUND ANNUITY, or CASH REFUND ANNUITY.
 Page 423
REFUND LIFE INCOME OPTION see ANNUITY.
REGIONAL OFFICE BRANCH OFFICE of an insurance company's home
office that markets, underwrites, and services the company's lines
of business within a specified geographical area.
REGISTER record of debit or industrial insurance policies. See
also DEBIT INSURANCE (HOME SERVICE INSURANCE, INDUSTRIAL INSURANCE).
REGISTERED MAIL AND EXPRESS MAIL INSURANCE
coverage for damage or destruction of property with relatively high
monetary value, such as stock brokerage house and bank
shipments, which involve the transfer of securities and monies to
different locations and whose loss would result in great expense.
Coverage is on an ALL RISKS basis excluding war, nuclear
disaster, and illegal trade items.
REGISTERED MAIL INSURANCE see REGISTERED MAIL AND EXPRESS MAIL
INSURANCE.

REGISTERED REPRESENTATIVE individual licensed to sell

securities to the public. For example, to sell variable annuities and
VARIABLE LIFE INSURANCE products and mutual funds, an insurance agent is

required to pass examinations given by the National Association of

Securities Dealers.
REGISTERED RETIREMENT SAVINGS PLAN (RRSP)
Canadian retirement plan much like U.S. INDIVIDUAL RETIREMENT ACCOUNT
(IRA). Here, an employee can contribute on a tax deductible basis C

$3500 each year as a member of an employer pension plan. A non-

member employee can contribute C $5500 tax deductible. Earnings
under this plan accumulate tax-deferred. RRSPs are issued by life
insurance companies and trust companies.
REGULAR MEDICAL EXPENSE INSURANCE INSURANCE
providing coverage for physicians' fees, expenses associated with
nonsurgical care whether in the insured's home, hospital, or the
physician's office, and expenses connected with X-rays and
laboratory tests. See also MEDICAL EXPENSE INSURANCE.
REGULAR MEDICAL INSURANCE health insurance that
provides coverage for physicians' fees for all services, with the
exception of surgeons' fees.
REGULATION OF INSURANCE COMPANIES see STATE SUPERVISION
AND REGULATION.

REGULATION OF LIFE INSURANCE see STATE SUPERVISION AND

REGULATION.

REGULATION Q the regulation that, prior to its repeal, limited the

amount of interest a time deposit at a bank could pay.
REHABILITATION see REHABILITATION CLAUSE.
 Page 424
REHABILITATION BENEFIT sum provided by a DISABILITY INCOME
INSURANCE that pays a multiple of the MONTHLY INDEMNITY to cover the costs

associated with a retraining course attended by the insured wage

earner when the wage earner's income is interrupted or terminated
because of illness, sickness, or accident. This retraining course is
designed to enable the disabled worker to be retrained to perform
another economic function.
REHABILITATION CLAUSE provision in health insurance under
which an insured disabled person is required to undertake (and is
reimbursed for) expenses associated with vocational rehabilitation
for retraining to perform another economic function.
REIMBURSE BENEFITS payment by the insurance company to
the insured for the actual expenses incurred by the insured, such as
medical expenses.
REIMBURSEMENT DISABILITY INCOME POLICY policy
used to provide the funds for BUY AND SELL AGREEMENTS under which an
income payment or a series of income payments is paid to the
buyer of the disabled partner's interest contained in a PARTNERSHIP LIFE
AND HEALTH INSURANCE PLAN or disabled stockholder's interest contained in a

CLOSE CORPORATION PLAN to reimburse that buyer for the sum paid. If this

sum to be paid the buyer by the insurance company exceeds the

actual market value of the business at the time of the sale, that sum
is reduced to the actual market value.
REIMBURSEMENT OF INSURED payment of benefits by an
insurance policy to a POLICYOWNER (usually the insured) if a loss
occurs.
REINSTATEMENT restoration of a policy that has lapsed because
of nonpayment of premiums after the grace period has expired. In
life insurance the reinstatement time period is three years from the
premium due date. The company usually requires the insured to
show evidence of continued insurability (for example, by taking a
medical examination); to pay all past premiums plus interest due;
and to either reinstate or repay any loans that are still outstanding.
Because the insured is now older and a new policy would require a
higher premium, it may be to the advantage of an insured to
reinstate a policy.
REINSTATEMENT CLAUSE see REINSTATEMENT.
REINSTATEMENT OF POLICY see REINSTATEMENT.
REINSTATEMENT PREMIUM see REINSTATEMENT.
REINSTATEMENT PROVISION see REINSTATEMENT.
REINSURANCE form of insurance that insurance companies buy
for their own protection, ''a sharing of insurance." An insurer (the
reinsured) reduces its possible maximum loss on either an
individual risk (FACULTATIVE REINSURANCE) or a large number of risks
(AUTOMATIC
 Page 425
by giving (ceding) a portion of its liability to another
REINSURANCE)

insurance company (the reinsurer).

Reinsurance enables an insurance company to (1) expand its
capacity; (2) stabilize its underwriting results; (3) finance its
expanding volume; (4) secure catastrophe protection against shock
losses; (5) withdraw from a class or line of business, or a
geographical area, within a relatively short time period; and (6)
share large risks with other companies.
There are two broad forms of reinsurance: PROPORTIONAL REINSURANCE and
NONPROPORTIONAL REINSURANCE.

REINSURANCE ASSOCIATION see REINSURANCE EXCHANGE.

REINSURANCE ASSUMED see CEDE.
REINSURANCE, AUTOMATIC see AUTOMATIC REINSURANCE.
REINSURANCE BROKER individual who represents a ceding
insurance company in placing its business with a reinsurer. See also
REIN-SURANCE.

REINSURANCE CAPACITY (1) largest amount of REINSURANCE

available from a company or from the general market; (2) large
amounts of reinsurance on one risk; or (3) maximum premium
volume that can be written by a reinsurer.
REINSURANCE CAPTIVE fronted program by the insured
acquires a licensed insurance company to issue insurance policies.
REINSURANCE, CARPENTER PLAN see CARPENTER PLAN (SPREAD LOSS
COVER, SPREAD LOSS REINSURANCE).

REINSURANCE CEDED see CEDE.

REINSURANCE CLAUSE provision that covers a business to be
protected under a reinsurance treaty. The class either can appear at
the beginning of the agreement or may be included in the RETENTION
AND LIMITS CLAUSE at a later stage of the contract.

REINSURANCE COMMISSIONS AND EXPENSES total amount

of commissions and expense allowances paid by the REINSURER to its
CEDING COMPANY minus the total amount of REINSURANCE commissions and

expense allowances that, in turn, its ceding company paid on its

assumption of reinsurance from another CEDENT. See also ADJUSTED
SURPLUS; SURPLUS RELIEF.

REINSURANCE CREDIT credit reflected on a CEDING COMPANY'S ANNUAL

STATEMENT, showing REINSURANCE PREMIUMS CEDED and losses recoverable from

the REINSURER.
REINSURANCE, EXCESS see EXCESS OF LOSS REINSURANCE.
REINSURANCE, EXCESS OF LOSS RATIO see STOP LOSS REINSURANCE.
 Page 426
REINSURANCE EXCHANGE group in which subscribing
members agree to (1) regulations governing their behavior, and (2)
the qualifications that REINSURANCE contracts ceded to them must meet
in order to be acceptable. The exchange is run by a manager who
has the power of attorney to represent each member and the
exchange in the conduct of the reinsurance business. However,
today these exchanges are no longer a factor in the reinsurance
market.
REINSURANCE FACILITY
1. pool that contains various reinsurance companies with each
sharing reinsurance contracts on a pro rata basis as they are
submitted to the pool.
2. market that operates much like the New York Stock Exchange in
that reinsurance contracts are bought and sold on a bid and asked
basis. See also REINSURANCE.
REINSURANCE, FACULTATIVE see FACULTATIVE REINSURANCE.
REINSURANCE, LIFE see LIFE REINSURANCE.
REINSURANCE, POOLING see POOL; REINSURANCE FACILITY.
REINSURANCE PREMIUM see AUTOMATIC REINSURANCE; BURNING COST RATIO
(PURE LOSS COST); CARPENTER PLAN (SPREAD LOSS COVER, SPREAD LOSS REINSURANCE); EXCESS OF LOSS

REINSURANCE; FACULTATIVE REINSURANCE; NONPROPORTIONAL REINSURANCE; PROPORTIONAL

REINSURANCE; QUOTA SHARE REINSURANCE; STOP LOSS REINSURANCE; SURPLUS REINSURANCE.

REINSURANCE, PROPERTY AND CASUALTYCASUALTY

CATASTROPHE see AUTOMATIC NONPROPORTIONAL REINSURANCE; AUTOMATIC
PROPORTIONAL REINSURANCE; AUTOMATIC REINSURANCE; EXCESS OF LOSS REINSURANCE; FACULTATIVE
REINSURANCE; NONPROPORTIONAL REINSURANCE; PROPORTIONAL REINSURANCE; QUOTA SHARE REIN-

SURANCE; STOP LOSS REINSURANCE; SURPLUS REINSURANCE.

REINSURANCE, QUOTA SHARE see QUOTA SHARE REINSURANCE.

REINSURANCE RESERVE (UNEARNED PREMIUM
RESERVE) fund in a segregated account to provide for the return
of unearned premiums on policies that are canceled. See also PRO RATA
CANCELLATION; SHORT RATE CANCELLATION.

REINSURANCE, SPECIFIC EXCESS see SPECIFIC EXCESS REINSURANCE.

REINSURANCE, SPREAD LOSS see CARPENTER PLAN (SPREAD LOSS COVER,
SPREAD LOSS REINSURANCE).

REINSURANCE, STOP LOSS see STOP LOSS REINSURANCE.

REINSURANCE, SURPLUS see SURPLUS REINSURANCE.
REINSURANCE TREATY contract between the REINSURER and the
CEDING COMPANY stipulating the manner in which insurance written on

various RISKS is to be shared.

 Page 427
REINSURED see CEDING COMPANY.
REINSURER insurance company that assumes all or part of an
INSURANCE or REINSURANCE policy written by a primary insurance

company (CEDING COMPANY). See also REINSURANCE; REINSURANCE BROKER; REINSURANCE

EXCHANGE; REINSURANCE FACILITY.

REJECTION refusal by an insurance company to underwrite a risk.

See also RISK CLASSIFICATION.
RELATIONSHIP BETWEEN RISK AND CHANCE see WAGERING v.
INSURANCE.

RELATIVE VALUE SCHEDULE (RVS) list of the values of

specific medical procedures in comparison with other medical
procedures.
RELATIVE VALUE STUDY (RVS) SCHEDULE assignment of a
unit value to each of various medical procedures for the purpose of
cost comparisons.
REMAINDER INTERESTS IN A RESIDENCE OR FARM
charitable planning strategy under which a donor transfers title to
his or her residence or farm to the charity. Upon transfer of title,
the donor reserves the right to occupy the property as well as enjoy
all the other benefits of property ownership for life, for a specified
number of years, or for the life of a given number of tenants. A
partial donation of the property may be made; the property does not
have to be donated as a whole unit.
REMOVAL insured peril in some property insurance policies that
encompasses any accidental damage to insured property while
being removed to safety from the immediate threat of damage by
another peril covered by that policy. For example, if an insured
removes a chair from a burning home, puts it on the lawn, and then
rain damages the chair, the loss insured would be covered by fire
insurance on the furnishings of the home.
REMOVAL BOND see JUDICIAL BOND.
RENEWABLE TERM HEALTH INSURANCE see COMMERCIAL HEALTH
INSURANCE.

RENEWABLE TERM LIFE INSURANCE coverage that is

renewable at the option of the insured, who is not required to take a
medical examination. Regardless of physical condition, the insured
must be allowed to renew the policy and the premium cannot be
increased to reflect any adverse physical condition. However, the
premium of each renewal increases to reflect the LIFE EXPECTANCY of the
individual at that particular age.
RENEWAL automatic reestablishment of an insurance policy's in-
force status, usually achieved through payment of the premium
due. See also COMMERCIAL HEALTH INSURANCE RENEWAL CERTIFICATE; RENEWAL PREMIUM;
RENEWAL PROVISION; RENEWABLE TERM LIFE INSURANCE.
 Page 428
RENEWAL CERTIFICATE form showing notification that an
insurance policy has been renewed with the same provisions,
clauses, and benefits of the previous policy.
RENEWAL COMMISSION commission paid to an AGENT after the
FIRST YEAR COMMISSION has been paid to that agent. Renewal commissions

generally form a substantial portion of an agent's income after four

years in the business and serve as an important incentive for him or
her to make every effort to keep the policies on an IN-FORCE BUSINESS
status.
RENEWAL EXPENSES costs associated with renewal
commissions as a percentage of the renewal premiums, and the
servicing charges for previously issued insurance policies.
RENEWAL PREMIUM payment due on the renewal of an
insurance policy. The premium may be adjusted up or down to
reflect the loss experience of the UNDERWRITING classification to which
the insured belongs. See also RENEWABLE TERM LIFE INSURANCE.
RENEWAL PROVISION clause in an insurance policy that
permits an insured to renew without having to take a medical
examination, regardless of his or her physical condition; the
premium cannot be increased to reflect an adverse medical
condition. See also RENEWABLE TERM LIFE INSURANCE.
RENEWALS see RENEWAL PREMIUM.
RENT see RENT INSURANCE.
RENTAL VALUE INSURANCE see RENT INSURANCE.
RENTERS INSURANCE see TENANTS INSURANCE.
RENT INSURANCE endorsement to an existing policy or a
separate policy covering loss of rental income to the property
owner, caused by the damage or destruction of a building,
rendering it unrentable. The coverage applies whether or not the
dwelling is rented at the time of loss. The insured can select a
coinsurance requirement of 50%, 80%, or 100%. The higher the
coinsurance amount, the lower the premium.
REPARATIONS payment made by a party causing harm to the
party incurring that harm.
REPLACEMENT CAR automobile purchased or leased by the
insured or the insured's spouse that takes the place of the insured or
the insured spouse's present car as covered in the PERSONAL AUTOMOBILE
POLICY (PAP). It will have the same coverage as the vehicle it replaced.

The insurance company must be notified within 30 days of delivery

of this car to the insured or the insured's spouse only if the insured
wishes to add or continue physical damage coverage. See also
ADDITIONAL CAR.

REPLACEMENT COST see REPLACEMENT COST LESS PHYSICAL DEPRECIATION AND

OBSOLESCENCE.
 Page 429
REPLACEMENT COST LESS PHYSICAL DEPRECIATION
AND OBSOLESCENCE sum it takes to replace an insured's
damaged or destroyed property with one of like kind and quality,
equivalent to the actual cash value, minus physical depreciation
(fair wear and tear) and obsolescence. The objective is to place the
insured in the same financial position after a loss as prior to it; the
insured should not profit or lose by incurring a loss.
REPLACEMENT, LIFE INSURANCE exchange of a new policy
for one already in force. See also CONSERVATION.
REPLACEMENT RATIO measure showing how much life
insurance an agent has lost through replacement. It is expressed as
a percentage of number of policies, face amount, or premium
volume.
REPLACEMENT, RECONSTRUCTION, AND
REPRODUCTION COST option to an insurance company to
replace, reconstruct (repair), or reproduce (rebuild) damaged or
destroyed property covered by property insurance rather than
indemnify an insured in cash. This is rarely done.
REPLEVIN BOND see JUDICIAL BOND.
REPORTABLE EVENT obligation of the insured to report losses
from a covered peril to the insurance company or its representative
as soon after its occurrence as possible.
REPORTING ENDORSEMENT see OPEN FORM (REPORTING FORM).
REPORTING FORM see OPEN FORM (REPORTING FORM).
REPORTING REQUIREMENTS see OPEN FORM (REPORTING FORM).
REPORT TO SOCIAL SECURITY ADMINISTRATION
requirement of an employer to report annually to the U.S. Treasury
Department the names of employees who terminated employment
with vested benefits, and the amount of the benefits. The Treasury
sends the Social Security Administration a copy, which is available
to an employee on request. A statement on vested benefits is given
by the Social Security Administration to an applicant for Social
Security benefits.
REPRESENTATIONS statements by an insurance applicant
concerning personal health history, family health history,
occupation, and hobbies. These statements are required to be
substantially correct; that is, applicants must answer questions to
the best of their knowledge.
REPRESENTATIVE see AGENT; BROKER-AGENT; CAPTIVE AGENT; INDEPENDENT AGENT.
REPRESENTATIVE SAMPLE sample in which the relative sizes
of the subpopulation samples are selected in such a manner as to be
equal to the relative sizes of the subpopulations. For example,
when measuring
 Page 430
the viewing audience of a particular television show, the audience
is stratified into several subpopulations: income groups, age
groups, vocational groups, and so on. Then random samples are
drawn from the various strata in proportion to the relative sizes of
the REPLACEMENT, RECONSTRUCTION, AND REPRODUCTION COST.
REQUIRED INSURANCE see COMPULSORY INSURANCE.
REQUIRED MINIMUM DISTRIBUTION (RMD) requirement
that an individual must withdraw a minimum sum annually from
retirement savings that have accumulated on a tax-deferred basis.
This withdrawal must begin by April 1 of the year one reaches age
70 1/2. All deferred tax retirement savings plans (with the
exception of the ROTH IRA) are subject to this rule to include the
traditional INDIVIDUAL RETIREMENT ACCOUNT (IRA), SIMPLIFIED EMPLOYEE PENSION (SEP), SAVINGS
INCENTIVE MATCH PLAN FOR EMPLOYEES (SIMPLE PLANS), SECTION 401 (K) PLAN (SALARY REDUCTION

. Withdrawals
PLAN), SECTION 403 (B) PLAN, QUALIFIED PENSION PLAN, AND PROFIT-SHARING PLAN

may be made based on the individual's LIFE EXPECTANCY or the joint life
expectancy of the individual and the individual's oldest PRIMARY
BENEFICIARY. The steps for calculating the RMD are

1. determining the total market value of the retirement plan as of

December 31 of the year prior to the retirement year.
2. determining the life expectancy factor according to the Internal
Revenue Service tables.
3. dividing the value of the retirement plan by the life expectancy
factor.
REQUIREMENTS see REQUIREMENTS OF INSURABLE RISK.
REQUIREMENTS OF INSURABLE RISK
1. a large number of homogeneous exposures (in order for the
deviation of actual losses from expected losses to approach zero,
and the creditability of the prediction to approach one).
2. loss must be definite in time and amount.
3. loss must be fortuitous. An insured cannot cause the loss to
happen; it must be due to chance.
4. must not be an exposure to catastrophic loss; risks must be
spread over a large geographical area to prevent their
concentration. REINSURANCE often is used to spread potentially
catastrophic risks.
5. premium must be reasonable in relation to the potential loss. In
theory, one could even insure against a pencil point breaking, but
the premium would be much greater than any possible loss.
RESERVE see RESERVES AND THEIR COMPUTATION.
RESERVE FACTORS see RESERVES AND THEIR COMPUTATION.
RESERVE, FULL PRELIMINARY TERM see FULL PRELIMINARY TERM
RESERVE PLAN.
 Page 431
RESERVE, INCURRED BUT NOT REPORTED LOSSES see
INCURRED BUT NOT REPORTED LOSSES (IBNR).

RESERVE LIABILITIES REGULATION

1. LIFE INSURANCE: specification by each state regarding (a) the
minimum assumptions that must be used in reserve calculations as
they pertain to the maximum interest rate that can be assumed; (b)
the mortality table that can be used (the more conservative the
table, the higher the death rates that will be shown that exceed the
death rates actually expected); and (c) the reserve valuation that
must be used (the minimum is established by the National
Association of Insurance Commissioners' Standard Valuation
Law).
2. PROPERTY AND LIABILITY INSURANCE specification by each state regarding the
minimum assumptions that must be used in reserve calculations as
they pertain to unpaid loss reserves and unearned premium
reserves.
RESERVE, LOSS see LOSS RESERVES.
RESERVE, PROSPECTIVE see PROSPECTIVE RESERVE.
RESERVE, RETROSPECTIVE see RETROSPECTIVE METHOD RESERVE
COMPUTATION.

RESERVES AND THEIR COMPUTATION see FULL PRELIMINARY TERM

RESERVE PLAN; PROSPECTIVE RESERVE; RETROSPECTIVE METHOD RESERVE COMPUTATION.

RESERVE, UNEARNED PREMIUM see UNEARNED PREMIUM RESERVE.

RESIDENCE AND OUTSIDE THEFT INSURANCE coverage
provided for the INSURED'S personal property in the event the insured
incurs a loss resulting from theft, burglary, robbery, or malicious
mischief, regardless of whether the loss occurred on or outside the
insured's premises. See also HOMEOWNERS INSURANCE POLICYSECTION I (PROPERTY
COVERAGE).

RESIDENT AGENT salesperson who markets and services

insurance policies in the state in which he or she is domiciled.
RESIDENTIAL CONSTRUCTION INSURANCE coverage in the
event an insured's negligent acts and/or omissions involving the
construction of a new one-or two-family residential structure result
in bodily injury and/or property damage to a third party. The
"insured" includes his or her employees and independent
contractors. This coverage is normally part of the HOMEOWNERS' INSURANCE
POLICY and extends coverage on an automatic basis for this exposure

at no extra premium.
RESIDENTIAL FORM see RESIDENTIAL CONSTRUCTION INSURANCE.
 Page 432
RESIDUAL AUTOMOBILE INSURANCE MARKET see BUSINESS
AUTO COVERAGE FORM; PERSONAL AUTOMOBILE POLICY.

RESIDUAL DISABILITY inability to perform one or more

important daily business duties, or inability to perform the usual
daily business duties for the time period usually required for the
performance of such duties. See also RESIDUAL DISABILITY INCOME INSURANCE.
RESIDUAL DISABILITY INCOME INSURANCE coverage for
an individual with a residual disability. Benefits are usually payable
for the unused portion of the total disability benefit period up to
age 65. If an individual is at least age 55 at the time of disablement,
and total disability lasts less than a year, residual benefits are
payable for the unused portion of the benefit period for up to 18
months, but not beyond age 65. If there is at least a 25% loss in
current earnings, the residual benefits will equal the percentage of
loss times the monthly benefit for total disability. The residual
disability monthly benefit can be expressed in this equation:

See also RESIDUAL DISABILITY.

RESIDUAL MARKET see AUTOMOBILE ASSIGNED RISK INSURANCE PLAN; RESIDUAL
DISABILITY; RESIDUAL DISABILITY INCOME INSURANCE.

RES IPSA LOQUITOR Latin phrase for "The facts speak for
themselves." This is a rule of evidence under which an individual is
deemed, under certain specific circumstances, to be negligent by
the mere occurrence of an accident. These circumstances are
defined as when the law presumes that an accident could not have
occurred had the individual not been negligent.
RESPONDEAT SUPERIOR Latin for "Let the superior reply."
That is, an employer is liable for the torts of employees that result
from their employment. For example, an insurance company (the
master) acts through its agent (servant); because of this master-
servant relationship, any wrongs the agent commits are deemed to
have been committed by the insurance company, which must
accept responsibility.
REST CURE care in a sanitarium, nursing home, or other facility
designed to provide CUSTODIAL CARE on behalf of the mental and
physical well-being of the patient. The cost may or may not be
provided by health insurance policies.
RESTORATION OF PLAN authority of the PENSION BENEFIT GUARANTY
CORPORATION (PBGC) to stop the termination of a pension plan and restore

it to its previous status by returning a portion or all of the plan's

assets and liabilities. For example, such an action could be taken by
the PBGC when a company whose pension plan is being
 Page 433
terminated has experienced a reversal in the adverse conditions that
originally caused the termination.
RESTORATION OF VESTED BENEFITS plan under the EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA) for employees who are less than

50% vested. An employee must be permitted to buy back

retirement benefits lost because of the withdrawal of his or her
contributions. The employee pays back to the pension plan the
withdrawal contributions, plus 5% interest compounded annually.
RESTORATION PREMIUM sum that an insurance company
charges a business firm to restore a property or liability insurance
policy, or a bond, to its initial face value after the insurance
company has paid a claim either to the insured business or to a
third party on behalf of the insured business.
RESUMPTION OF OPERATIONS CLAUSE in a BUSINESS INTERRUPTION
INSURANCE policy, clause that stipulates that if, by resuming

operations, the business can reduce a loss, the business is obligated

to so do. If the business refuses to resume operations, it will incur a
portion of the loss.
RETAIL CREDIT REPORT report developed by or supplied by a
credit agency to an insurer dealing with the financial standing and
character of an insurance applicant. These factors are carefully
weighted by the company's underwriter in deciding the INSURABILITY of
the applicant. See also NUMERICAL RATING SYSTEM.
RETAINED ASSET SERVICES (RAS) insurance company
program in which the beneficiary of an insurance policy is
encouraged to leave the death proceeds in an account on deposit
with the insurance company instead of receiving a LUMP SUM payment.
If the beneficiary elects to participate in the RAS, a bank account is
established in the beneficiary's name and the beneficiary will
receive a personalized checkbook. The RAS provides the insurer
with a vehicle to retain assets to invest as well as a means to cross-
sell additional insurance products to the beneficiary.
RETAINED EARNINGS net profit of a business, less dividends.
Reinvestment of retained earnings enables an insurance company
to write more business from a stronger capital base. Contributions
to retained earnings come from three sources: (1) excess interest
from investment earnings; (2) loss savings (fewer and/or smaller
losses than were loaded into premiums); and (3) expense savings
(less expense costs than were loaded into premiums). See also
SURPLUS ACCOUNT.

RETAINER CLAUSE provision in a nonproportional reinsurance

contract that the reinsurance will protect only the business retained
by the cedent for its own account. In this connection, losses must
be assumed by the cedent if it cannot enforce payment for any loss
falling under its other surplus or QUOTA SHARE REINSURANCE contract.
 Page 434
RETALIATION LAWS legislation by a state that taxes out-of-state
insurance companies operating in its jurisdiction in the same way
that the state's own insurance companies are taxed in the second
state. For example, state #1 charges a tax of 4% on its domiciled
insurers. But if these insured are charged a higher tax when
operating in state #2, then state #1 will charge the higher tax to
insurers of state #2 who wish to do business in state #1.
RETALIATORY PREMIUM TAX see RETALIATION LAWS.
RETENTION see RETENTION AND LIMITS CLAUSE; RISK MANAGEMENT; SELF INSURANCE.
RETENTION AND LIMITS CLAUSE provision in almost all
EXCESS OF LOSS REINSURANCE contracts under which payment is made by a

reinsurer of each and every loss incurred by the cedent in excess of

a specified sum, up to a fixed limit. Under this clause, there is no
restriction on the number of claims that may be recovered by the
cedent under the contract for any one event. The only stipulation is
that each claim must arise as a result of the event in question.
RETENTION DEDUCTIBLE in UMBRELLA LIABILITY INSURANCE clause that
stipulates that in the event of a loss where there are no underlying
policies providing coverage, the DEDUCTIBLE will apply.
RETENTION OF LOSS see RETENTION AND LIMITS CLAUSE; RISK MANAGEMENT; SELF
INSURANCE.

RETIRED LIVES RESERVE EMPLOYEE BENEFIT INSURANCE PLAN whose

objective is to provide the retired employee with life insurance.
This group life insurance product is composed of two basic parts:
(1) annually RENEWABLE TERM LIFE INSURANCE until age 100; and (2)
accumulation of a reserve element while the employee is working
from which premium payments will be made on the annually
renewable term life insurance after the employee retires. Premium
payments that the employer makes on behalf of the employee are a
tax-deductible expense, not considered taxable income to the
employee by the Internal Revenue Service. Should the employee
terminate service prior to retirement, regardless of the reason,
funds remaining in the employee's account are used to fund the
benefits of the remaining employees.
RETIREMENT AGE age at which a pension plan participant is
entitled to receive retirement benefits, or point at which retirement
benefits are payable: (1) NORMAL RETIREMENT AGE is the earliest age
permitted to retire and receive full benefits; (2) EARLY RETIREMENT is
earlier-than-normal age permitted to retire provided attained
minimum age and service requirement are met, but there is a
proportionate reduction in benefits; (3) DEFERRED RETIREMENT age beyond
automatic retirement age permitted to retire, usually with no
increase in benefits; (4) automatic retirement age is age at which
retirement is automatically effective.
 Page 435
RETIREMENT ANNUITY see ANNUITY; GROUP DEFERRED ANNUITY; GROUP DEPOSIT
ADMINISTRATION ANNUITY: PENSION PLAN FUNDING; GROUP IMMEDIATE PARTICIPATION GUARANTEED

(IPG) CONTRACT ANNUITY.

RETIREMENT BENEFITS see ALLOCATED FUNDING INSTRUMENT; DEFINED BENEFIT

PLAN; DEFINED CONTRIBUTION PENSION (MONEY PURCHASE PLAN); GROUP IMMEDIATE PARTICIPATION

GUARANTEED (IPG) CONTRACT ANNUITY; GROUP PERMANENT LIFE INSURANCE; PENSION PLAN FUNDING;

GROUP DEPOSIT ADMINISTRATION ANNUITY; INDIVIDUAL CONTRACT PENSION PLAN; PENSION PLAN

FUNDING INSTRUMENTS.

RETIREMENT EQUITY ACT OF 1984 act that makes it

mandatory for employees with spouses to be in receipt of
retirement income from a PENSION PLAN in the form of a JOINT LIFE AND
SURVIVORSHIP ANNUITY, unless the employee's spouse waives that right in

writing. This is to prevent the employee from writing the spouse

out of the benefit income.
RETIREMENT INCOME ENDOWMENT POLICY type of
ENDOWMENT INSURANCE that matures at a stipulated retirement age and

whose purpose is to provide retirement income to the INSURED.

RETIREMENT INCOME PAYMENTS see RETIREMENT BENEFITS.
RETIREMENT INCOME POLICY form of DEFERRED ANNUITY; a life
insurance policy that usually guarantees from 120 to 180 monthly
income payments to the annuitant at retirement. If the annuitant
dies during the deferral (or guaranteed) period, a beneficiary
receives a death payment of the face amount or the cash value,
whichever is larger. During the deferred period, the policyowner
can withdraw part or all of the annuity's cash value (the latter
terminating the annuity). See also ANNUITY.
RETIREMENT INSURANCE NEEDS see RETIREMENT ANNUITY; RETIREMENT
BENEFITS; RETIREMENT INCOME POLICY; RETIREMENT PLANNING.

RETIREMENT PLAN see ALLOCATED FUNDING INSTRUMENT; DEFINED BENEFIT PLAN;

DEFINED CONTRIBUTION PENSION (MONEY PURCHASE PLAN); GROUP DEPOSIT ADMINISTRATION ANNUITY;

PENSION PLAN FUNDING; PENSION PLAN FUNDING INSTRUMENTS; RETIREMENT BENEFITS; RETIREMENT

INCOME POLICY, RETIREMENT PLANNING; UNALLOCATED FUNDING INSTRUMENT.

RETIREMENT PLANNING formal process of setting aside funds

on a mathematical basis to provide deferred income benefits. See
also RETIREMENT PLAN.
RETIREMENT PLAN OPTIONS choice among the following
options made by retiree prior to retirement concerning the
distribution of benefits:
1. Monthly payments for lifetime of retiree with no SURVIVORSHIP
BENEFITincome payments are the largest to the retiree under this
 Page 436
option since all income payments cease upon the death of the
retiree.
2. Monthly payments for lifetime of retiree with 100% survivorship
benefitincome payments are paid during the time the retiree is alive
and continue at the 100 percent level to a beneficiary after the
death of the retiree. There is a significant reduction in the dollar
amount of each monthly income payment to the retiree because
beneficiary's number of payments are likely to continue for a long
time.
3. Monthly payments for lifetime of retiree subject to a minimum
number guaranteed to be paidincome payments are paid during the
time the retiree is alive. Should the retiree die before receiving a
minimum number of income payments, payments are made to a
beneficiary until the minimum number has been paid, at which
time all payments cease. The longer the minimum number of
payments guaranteed, the greater the reduction in the dollar
amounts of each monthly income payment to the retiree.
4. Monthly payments for lifetime of retiree with 50% survivorship
benefitincome payments paid during the time the retiree is alive
and continue at the 50% level to a beneficiary after the death of the
retiree. There is a reduction in the dollar amount of each monthly
income payment to the retiree because beneficiary's number of
payments are likely to continue for a long time.
5. Monthly payments for a guaranteed number of yearsincome
payments are made for a stipulated number of years (period
certain), not for the life of the retiree. The stipulated number of
years is usually 5 years, 10 years, 15 years, or 20 years. Should the
retiree die before receiving income payments for the stipulated
time period, the beneficiary would receive income payments until
the time period expires.
6. Lump sum (cash refund)accumulation in retiree's account
distributed in one sum.
Once income payments commence under any of the above options,
the retiree cannot change the option. The retiree cannot exclude the
spouse from the survivorship benefit unless the spouse waives his
or her right in writing.
RETIREMENT RATE ASSUMPTIONS see PENSION PLAN FUNDING
INSTRUMENTS.

RETIREMENT TEST requirement that a retired worker can have

annual earnings of no more than a stipulated amount in order to
receive a full retirement income under Social Security if under age
70. There is a reduction of $1 of every $3 earned in excess of that
amount. Once the retired worker reaches age 70, that worker can
earn any amount without a corresponding decrease in Social
Security income.
RETROACTIVE CONVERSION see ORIGINAL AGE.
 Page 437
RETROACTIVE DATE date after which losses may occur and be
covered under a CLAIMS-MADE BASIS LIABILITY COVERAGE.
RETROACTIVE INSURANCE see ORIGINAL AGE.
RETROACTIVE LIABILITY INSURANCE coverage that is
purchased to provide protection for a loss that has already
occurred. The severity of the loss, however, is uncertain.
RETROACTIVE PERIOD see ORIGINAL AGE.
RETROACTIVE RATE REDUCTION see RETROSPECTIVE RATING.
RETROACTIVE RESTORATION REINSTATEMENT of an INSURANCE POLICY or
BOND to its original FACE AMOUNT (FACE OF POLICY) after the payment by the

INSURER of a loss. The purpose of this type of coverage is to INDEMNIFY

the INSURED if, at a time period in the future, previous losses incurred
by the insured are discovered.
RETROCESSIONAIRE REINSURER of a reinsurer. See also RETROCESSION.
RETROCESSION REINSURANCE of a reinsurer. See also RETROCESSION
CATASTROPHE COVER.

RETROCESSION CATASTROPHE COVER REINSURANCE of a rein-

surer such that the reinsurer protects itself from a catastrophe
occurrence. Just as an insurer must decide to CEDE to the reinsurer a
portion of a risk it has underwritten, the reinsurer must make the
same decision as to which risks it can sustain within its resources,
and what portion of the risks it must retrocede. Retrocession may
be either proportional or nonproportional. See also NONPROPORTIONAL
REINSURANCE; PROPORTIONAL REINSURANCE.

RETRO-NOTE PLAN means of financing by which some large

organizations pay their property or liability insurance premiums to
reflect losses actually paid during the first year of coverage, plus
claims expenses, administrative and servicing expenses, and a
loading for the company's profit. The insured signs a promissory
note to the company for the difference in the normal or standard
premium that should have been charged.
RETROSPECTIVE AGGREGATE EXCESS OF LOSS
REINSURANCE type of EXCESS OF LOSS REINSURANCE in which the
insurance company (cedent) cedes its risk of loss on INCURRED BUT NOT
REPORTED LOSSES (IBNR) and previously reported losses.

RETROSPECTIVE COMPUTATION see RETROSPECTIVE PREMIUM.

RETROSPECTIVE METHOD RESERVE COMPUTATION
accumulated value of assumed past net life insurance premiums,
minus the accumulated value of past benefits (claims paid).
RETROSPECTIVE PREMIUM see RETROSPECTIVE RATING.
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RETROSPECTIVE RATING method of establishing rates in which
the current year's premium is calculated to reflect the actual current
year's loss experience. An initial premium is charged and then
adjusted at the end of the policy year to reflect the actual loss
experience of the business.
RETURN COMMISSION return of a pro rata portion of an agent's
commission for a policy that is canceled prior to its expiration date.
A commission is paid to an agent in the expectation that the
premium will be earned over the life of a policy. If the policy is
canceled, a portion of the unearned premium (either pro rata or
short rate) also must be returned to the policyowner.
RETURN OF CASH VALUE CLAUSE provision in a life
insurance policy that if an insured dies within a given period of
time, the beneficiary receives the face value of the policy plus its
cash value. See also CASH SURRENDER VALUE.
RETURN OF PREMIUM see CANCELLATION PROVISION CLAUSE.
RETURN ON ASSETS (ROA) net income expressed as a
percentage of average total assets. This percentage measures
profitability by expressing the efficiency of asset utilization.
RETURN ON EQUITY (ROE) net income expressed as a
percentage of average total equity. This percentage measures
profitability by expressing how efficiently invested capital or
equity is being utilized.
RETURN ON EQUITY RATIO insurance company's NET GAIN FROM
OPERATIONS divided by its ADJUSTED SURPLUS. This is the accounting rate of

return on stockholder's equity since the ratio shows the rate of

return the company is earning on its capital and surplus committed
to conducting its insurance business and investments made. The
greater this ratio, the greater the use the company is making of the
funds invested in it by its stockholders.
RETURN ON NET WORTH (RONW) ratio of net income after
taxes to total end of the year NET WORTH. This ratio indicates the return
on stockholder's total equity.
RETURN PREMIUM amount received by the POLICYHOLDER if the
policy is canceled, benefits are reduced, or the PREMIUM is reduced.
See also PRO RATA CANCELLATION; SHORT RATE CANCELLATION.
REVENUE BULLETIN 1988-52 ruling issued in 1988 by the
Internal Revenue Service that stipulates that, when computing the
pension benefits of an employee still working after 1987, the years
of service on the job after the employee reaches age 65 cannot be
disregarded. The issuance of this revenue bulletin makes it
mandatory that pension benefits reflect all years on the job, to
include those years after age 65.
REVENUE RECONCILIATION ACT OF 1993 see OMNIBUS BUDGET
RECONCILIATION ACT OF 1993.
 Page 439
REVENUE RULING 59-60 ruling that is the most significant
source for the valuation of closely held corporation capital stock
critical to the CLOSE CORPORATION PLAN. This ruling defines the fair market
value as ''the price at which the property would change hands
between a willing buyer and a willing seller when the former is not
under any compulsion to buy and the latter is not under any
compulsion to sell, both parties having reasonable knowledge of
the relevant facts." The valuation of the shares of closely held
corporations involves the comparison of "prices at which the stocks
of companies engaged in the same or similar line of business are
selling in a free and open market." This ruling stipulates that the
following factors must be carefully considered in such an
evaluation: (1) intangible values such as goodwill; (2) financial
ability to generate an ongoing dividend stream; (3) earnings
capability; (4) type of business and its financial and market history;
(5) economic outlook for the industry in which the business
resides; (6) financial condition of the corporation as well as the
book value of its stock; (7) size of the block of stock requiring a
valuation; and (8) market value of stocks actively traded on an
exchange or over-the-counter market of similar corporations
engaged in similar lines of business.
REVERSE-ANNUITY MORTGAGE (RAM) loan under which the
owner of a home receives the equity in the form of a series of
monthly income payments for life. Upon the owner's death, the
lender institution (usually a bank) gains title to the home and is free
to keep or sell it. The longer that monthly income payments are
made, the greater the reduction in the owner's equity in his or her
home. This type of mortgage is of value to older individuals who
own their homes free and clear. Their large equity enables them to
continue to live there and to receive a monthly income benefit.
REVERSE SPLIT DOLLAR LIFE INSURANCE policy that is the
opposite of the traditional SPLIT DOLLAR LIFE INSURANCE policy in that: (1)
the employee is the POLICYOWNER and as such can exercise all
ownership rights inherit to that policy; (2) the employee owns the
CASH VALUE of the policy; (3) the employees's beneficiary has the right

to that portion of the death benefit equal to the cash value; (4) the
employer retains the right to that portion of the death benefit equal
to the pure protection element (death benefit minus the cash value);
(5) the employer pays that portion of the premium charged for its
economic benefit gained according to the PS 58 RATE TABLE; and (6)
the employee pays that portion of the premium equal to the total
premium minus that part of the premium paid by the employer in
the above.
REVERSIONARY ANNUITY see SURVIVORSHIP ANNUITY.
REVERSIONARY INTEREST interest of a beneficiary in the
proceeds of a SURVIVORSHIP ANNUITY. See also SURVIVORSHIP ANNUITY.
REVIVAL see REINSTATEMENT.
REVOCABLE see BENEFICIARY.
 Page 440
REVOCABLE BENEFICIARY see BENEFICIARY.
REVOCABLE LIVING TRUST TRUST in which rights to make any
changes therein are retained by the GRANTOR. At the grantor's death all
rights become irrevocable. This type of trust has several
advantages: it can avoid PROBATE, it prevents public disclosure of the
assets of the trust, it can easily be revised or terminated, and it
promotes continuity for the transfer of the estate. However, since
the grantor retains ownership rights under this trust, the trust loses
all of the income and estate tax advantages available under an
IRREVOCABLE LIVING TRUST.

RIDER endorsement to an insurance policy that modifies clauses

and provisions of the policy, including or excluding coverage.
RIDERS, LIFE POLICIES endorsements to life insurance policies
that provide additional benefits or limit an insurance company's
liability for payment of benefits under certain conditions. These
include:
1. Waiver of Premium for Disability. An insured with total
disability that lasts for a specified period no longer has to pay
premiums for the duration of the disability. In effect, the company
pays the premiums.
2. Accidental Death Benefit.
3. GUARANTEED INSURABILITY.
4. COST-OF-LIVING ADJUSTMENT (COLA).
5. Other Insured. Term life insurance is added on a person other
than the primary insured, with the rate based on the other person's
age, sex, underwriting classification, and amount of coverage.
6. Children's Insurance. Term insurance on each child is added,
usually to the age of majority. Generally, a child cannot become
insured before the age of 15 days or after his or her eighteenth
birthday.
7. Additional Insurance. Term insurance can be added to ordinary
life policies as an additional layer of coverage for some specified
time interval.
8. Transfer of Insureds. In business situations, generally used to
insure key persons with the cash value and the insurance coverage
transferable from the initial insured person to another person.
RIGHT OF SURVIVORSHIP right of survivors to the interest in
property of a deceased joint tenant as the result of property held in
joint tenancy. See also SURVIVOR PURCHASE OPTION; SURVIVORSHIP BENEFIT; SURVIVORSHIP
LIFE INSURANCE.

RIMS see RISK AND INSURANCE MANAGEMENT SOCIETY (RIMS).

RIOT AND CIVIL COMMOTION INSURANCE coverage for
damage to property resulting from riot or civil commotion. Riot is
defined by most state laws as a violent disturbance involving three
or more (in some states two or more) persons. Civil commotion is a
more serious and prolonged disturbance or violent uprising. Losses
from riots in major cities during the 1960s caused insurers to stop
writing this type of coverage in certain urban areas. In response,
Congress enacted
 Page 441
legislation creating the FEDERAL CRIME INSURANCE program and providing
riot reinsurance in states that established acceptable pooling plans.
See also FAIR ACCESS TO INSURANCE REQUIREMENTS (FAIR) PLAN.
RIOT COVERAGE see RIOT AND CIVIL COMMOTION INSURANCE.
RIOT EXCLUSION clause in the Standard Fire Policy and many
other property insurance policies that excepts coverage for losses
caused by riot or civil commotion. Coverage for riot and civil
commotion can be added with the EXTENDED COVERAGE ENDORSEMENT.
RlSK uncertainty of financial loss; term used to designate an
insured or a peril insured against.
RISK AND CHANGE see RISK CLASSIFICATION.
RISK AND INSURANCE MANAGEMENT SOCIETY (RIMS)
society dedicated to the advancement of professional standards of
RISK MANAGEMENT. Its membership is composed of risk and insurance

managers of business organizations, public organizations, and

service organizations. Both profit and nonprofit organizations are
represented. The goal of RIMS is to upgrade the management of
risk and employee benefit plans in order to preserve the assets of
the organization in question. Included in the activities of RIMS are
research, conferences and seminars, and sponsorship of the INSURANCE
INSTITUTE OF AMERICAS (IIA) ASSOCIATE IN RISK MANAGEMENT (ARM) program.

RISK AND OCCUPATION FREQUENCY and severity of accidents

resulting from conditions and environment surrounding one's
workplace. Occupation is an important underwriting factor when
considering an applicant for insurance.
RISK APPRAISAL see RISK MANAGEMENT.
RISK ASSUMPTION see RETENTION AND LIMITS CLAUSE; RISK MANAGEMENT; SELF
INSURANCE.

RISK AVOIDANCE see AVOIDANCE.

RISK-BASED CAPITAL amount of required capital that the
insurance company must maintain based on the inherent risks in the
insurer's operations. These risks include ASSET DEPRECIATION RISK, CREDIT
RECEIVABLES RISK, UNDERWRITING RISK, and OFF-BALANCE-SHEET RISK.

RISK-BASED CAPITAL RATIO measurement of the amount of

capital (assets minus liabilities) an insurance company has as a
basis of support for the degree of risk associated with its company
operations and investments. This ratio identifies the companies that
are inadequately capitalized by dividing the company's capital by
the minimum amount of capital that the regulatory authorities feel
is necessary to support the insurance operations. A ratio of 1.00 or
greater is deemed to be satisfactory. This standard can be used to
identify inadequately
 Page 442
capitalized life and health companies, thereby enabling regulatory
authorities to intervene before a company becomes insolvent.
RISK-BASED CAPITAL STATISTIC (RBCS) ratio of AUTHORIZED
CONTROL LEVEL RISK-BASED CAPITAL of an insurance company to its TOTAL ADJUSTED

CAPITAL. This statistic determines regulatory action taken by the

state's insurance commissioner. If the RBCS is greater than 200%,

no regulatory action is required. If the RBCS is between 150 and
200%, the insurer must file a plan of corrective action with the
insurance commissioner as well as provide an explanation of why
the RBCS standards were not met. If the RBCS is between 100 and
150%, the insurer must file a plan of corrective action with the
insurance commission and the insurance commissioner will
examine the insurer. If the RBCS is between 70 and 150%, the
insurance commissioner may seize the insurer. If the RBCS is
below 70%, the insurance commissioner is required to liquidate or
rehabilitate the insurer.
RISK BEARER see SELF INSURANCE.
RISK CLASSIFICATION analysis of uncertainty of financial loss.
This classification can be according to whether a risk is FUNDAMENTAL,
PARTICULAR, PURE, SPECULATIVE, DYNAMIC, or STATIC. In life insurance the process

by which a company determines how much to charge for a policy

according to an applicant's age, occupation, sex, and health. See
also UNDERWRITING.
RISK CONTROL see RISK MANAGEMENT.
RISK, DEGREE OF see DEGREE OF RISK.
RISK EQUIVALENT see ACTUARIAL EQUIVALENT.
RISK EXPERIENCE LOSS RATIO see EXPERIENCE RATING; FREQUENCY AND
DISTRIBUTION OF LOSSES; LOSS RATIO.

RISK FINANCING utilization of source(s) of funds to pay for

losses. Source(s) of funds can be classified as:
1. internala RETENTION program is established to use funds from within
the organization to pay for losses.
2. externala transfer program (generally through the purchase of
INSURANCE) is established to use funds from without the organization

to pay for losses.

Usually, a RISK MANAGEMENT program combines retention and transfer to
form a comprehensive program for loss protection.
RISK IDENTIFICATION see RISK MANAGEMENT.
RISK IDENTIFICATION IN LIABILITY EXPOSURES process
of discovering sources of loss concerning the liability RISK faced by
individuals and business firms. The first step in risk management is
to identify the causes of a loss by analyzing possible negligent acts
and/or omissions that could result in bodily injury and/or property
damage. See also RISK MANAGEMENT.
 Page 443
RISK IDENTIFICATION IN PROPERTY EXPOSURES process
of discovering sources of loss concerning the property RISK faced by
individuals and business firms. The first step is to analyze possible
perils that can damage or destroy both real and personal property.
See also RISK MANAGEMENT.
RISK MANAGEMENT procedure to minimize the adverse effect
of a possible financial loss by (1) identifying potential sources of
loss; (2) measuring the financial consequences of a loss occurring;
and (3) using controls to minimize actual losses or their financial
consequences. See also BUSINESS PROPERTY AND LIABILITY INSURANCE PACKAGE;
CONDOMINIUM INSURANCE; DISABILITY INCOME INSURANCE; HEALTH INSURANCE; HOMEOWNERS

INSURANCE POLICY; HUMAN LIFE VALUE APPROACH (EVOIL); LIFE INSURANCE; LOSS PREVENTION AND

REDUCTION; PENSION PLAN; PERSONAL AUTOMOBILE POLICY (PAP); RISK IDENTIFICATION, LIABILITY

EXPOSURE; RISK IDENTIFICATION, PROPERTY EXPOSURES; SELF INSURANCE; TENANTS INSURANCE.

RISK MANAGER see RETENTION AND LIMITS CLAUSE; RISK MANAGEMENT; SELF
INSURANCE.

RISK MEASUREMENT see RISK MANAGEMENT.

RISK PHILOSOPHY personal view regarding how losses occur
and the validity of loss prevention and reduction; also, whether an
individual is a risk taker or a risk avoider. For example, if a driver
takes the view that dying in a serious automobile accident is
inevitable, then use of seat belts is unnecessary. On the other hand,
a driver's philosophy may be that wearing a seat belt will minimize
injury and reduce the chance of dying in an accident.
RISK PREMIUM INSURANCE see RENEWABLE TERM LIFE INSURANCE.
RISK RATING, INDIVIDUAL rating system under which a
specific premium rate, rather than a manual or class rate, is
assigned to each unit of exposure.
RISK REDUCTION see ENGINEERING APPROACH; HUMAN APPROACH; LOSS PREVENTION
AND REDUCTION.

RISK RETENTION see SELF INSURANCE.

RISK RETENTION ACT OF 1986 federal act composed of
amendments to the Product Liability Risk Retention Act of 1981
and enacted to make the procedures more efficient for creating RISK
RETENTION GROUPS (capitalized, member-owned INSURANCE COMPANY) and

PURCHASING GROUPS (INSURANCE buyers group formed to obtain coverage for

homogeneous LIABILITY RISKS, in many instances hard to insure, from an

insurance company).
RISK RETENTION GROUP see SELF INSURANCE.
RISK SELECTION methods by which a home office underwriter
chooses applicants that an insurer will accept. The underwriter's
job is
 Page 444
to spread the costs equitably among members of the group to be
insured. Therefore, the underwriter must determine which are
normal risks, or standard risks, to be charged the standard rate;
which are sub-standard risks, to be charged a higher rate; and
which are preferred risks, to receive a discount. This process is
made more difficult by SELF-SELECTION and ADVERSE SELECTION. The
underwriter must screen applicants who are looking for insurance,
specifically because they have a greater-than-normal chance of
loss, and set the correct PREMIUM rate for them.
RISK SOURCES, PERSONAL see HUMAN LIFE VALUE APPROACH (ECONOMIC
VALUE OF AN INDIVIDUAL LIFEEVOIL); RISK MANAGEMENT.

RISK SPREAD see POOLING.

RISK, SUBJECTIVE see SUBJECTIVE PROBABILITY.
RISK, SYSTEMATIC see STATIC RISK.
RISK TRANSFER shifting a PURE RISK by means of a two party
contract such as INSURANCE.
RISK, UNSYSTEMATIC see DYNAMIC.
ROBBERY use of the threat of violence or actual violence in
taking property from someone else's possession. This peril is
covered on a personal basis through the purchase of a HOMEOWNERS
INSURANCE POLICY or renters insurance or on a business basis through a

SPECIAL MULTIPERIL INSURANCE (SMP) policy. Specialty items such as coin and

stamp collections must be specifically scheduled on a property

policy in order for the insured to receive full value for a loss.
ROBBERY INSURANCE see HOMEOWNERS INSURANCE POLICY; RENTERS INSURANCE;
COMMERCIAL PACKAGE POLICY.
ROLLOUT method of terminating a SPLIT DOLLAR LIFE INSURANCE policy by
the company transferring its interest in the policy (after the
company has effected the largest POLICY LOAN permitted equal to the
cash value) to the insured employee. The insured employee, by
accepting this transfer, incurs the obligation to continue to service
the interest on the policy loan made by the company.
ROLLOVER payment of an employee's EMPLOYEE BENEFIT INSURANCE PLAN
benefits to the employee's INDIVIDUAL RETIREMENT ACCOUNT (IRA) or to another
plan maintained by the employer.
ROLLOVER AND WITHHOLDING RULES FOR QUALIFIED
PLAN DISTRIBUTIONS rules stating that every administrator of a
QUALIFIED PENSION PLAN, PROFIT SHARING PLAN, SECTION 401(K) PLAN (SALARY REDUCTION PLAN),

, and stock bonus plan must provide the employee the

SECTION 403(B) PLAN

option to directly roll over all or part of that employee's distribution

to an INDIVIDUAL RETIREMENT ACCOUNT (IRA) or to another qualified plan. Any
part of the distribution that has
 Page 445
not been directly transferred to another qualified plan is subject to a
mandatory 20% withholding subject to federal income taxes.
Employees have 60 days within which to directly transfer their
distribution to another qualified plan. The only distributions that
may not be rolled over are the following: (1) periodic payments
that continue for at least ten years; (2) minimum required
distribution amounts paid to employees who are at least age 70 1/2;
and (3) periodic payments made at least annually and based upon
the life or joint lives of the employee and the employee's
designated beneficiary.
ROLLOVER AND WITHHOLDING RULES FOR QUALIFIED
PLAN DISTRIBUTIONS: PAYMENT PAID TO EMPLOYEE
rules stating that, for any portion of the payment made to the
employee from an ELIGIBLE ROLLOVER DISTRIBUTION, the plan administrator is
required by federal law to withhold 20% of the distribution. The
amount withheld is sent to the IRS as income tax withholding to be
credited against the employee's tax obligations. If the employee is
paid an eligible rollover distribution, the distribution can still be
rolled over (in total or in part) into an eligible employer plan or an
IRA, provided the rollover is accomplished within 60 days of the
time the employee receives the payment. That portion of the
distribution that is rolled over will not be subject to taxes until the
employee withdraws it from the eligible employer plan or from the
IRA. If the employer should receive a distribution before reaching
age 59 1/2 and does not roll it over, it will be taxed as ordinary
income in the year received, plus an extra tax of 10% of the taxable
portion of the distribution must be paid. This extra 10% penalty
does not apply to the distribution under the following
circumstances: (1) the employee separates from service with the
employer during or after the year the employee attains age 55; (2)
distribution is paid to the employee in equal payment over the life
expectancy of the employee and/or that of the employee's
beneficiary; and (3) distribution is paid due to the retirement on
disability of the employee.
If the employee receives a lump sum distribution (payment within
one year of the employee's total funds on deposit under the EMPLOYEE
BENEFIT INSURANCE PLAN because the employee has attained age 59 1/2, or

has separated from the employer's service; or if self-employed, has

reached age 59 1/2 or has become disabled) after having
participated in the plan for at least five years, the distribution is
subject to special tax treatment as follows: (1) Five-Year
Averaging; (2) Ten-Year Averaging if the employee was born
before January 1, 1936; and (3) long-term capital gain treatment at
a rate of 20 percent if the employee was born before January 1,
1936. If the employee desires to roll over 100% of the eligible
rollover distribution to an employee benefit insurance plan or IRA,
including the 20% withheld for income tax purposes, other funds
must be contributed within the 60-day period to replace the 20%
withheld (if only 80% of the distribution received is rolled over, the
employee must pay ordinary income taxes on the 20% withheld).
 Page 446
ROLLOVER AND WITHHOLDING RULES FOR QUALIFIED
PLAN DISTRIBUTIONS: PAYMENT PAID TO SURVIVING
SPOUSES AND OTHER BENEFICIARIES rules that apply to
employee distributions (see ROLLOVER AND WITHHOLDING RULES FOR QUALIFIED PLAN
DISTRIBUTIONS: PAYMENT PAID TO EMPLOYEE) and that also apply to distributions to

surviving spouses of employees and other beneficiaries. The

surviving spouse can elect to have an ELIGIBLE ROLLOVER DISTRIBUTION paid
into a DIRECT ROLLOVER TO AN INDIVIDUAL RETIREMENT ACCOUNT (IRA) or to the
surviving spouse. If the distribution is paid directly to the surviving
spouse, that spouse may retain it or roll it over into an IRA.
Beneficiaries other than the surviving spouse cannot elect a direct
rollover, and cannot in turn roll over the distribution. Surviving
spouse's and other beneficiaries' distributions are not subject to the
additional 10% tax penalty, even if they are under the age of 59
1/2.
ROLLOVER INDIVIDUAL RETIREMENT ACCOUNT
individual retirement account (IRA) established to receive
distribution of assets from a qualified pension or retirement plan.
For example, if employees resign from their jobs and receive a
lump sum distribution of $75,000, they may roll it over into an IRA
without paying taxes. Rollover IRAs are governed by the same tax
rules as other IRAs. They provide a way to maintain the tax-
deferred status of distributions from pensions or other qualified
plans until an age specified by law, when withdrawals must begin.
ROTH INDIVIDUAL RETIREMENT ACCOUNT (IRA) separate
account created by the Tax Relief Act of 1997 and named after
Senator William Roth Jr. of Delaware. A working individual may
contribute up to 100% of compensation or $2000. The lesser
amount applies for each taxable year; and, the contribution must be
made by April 15 (or the tax filing deadline) of the following year.
A nonworking spouse can contribute up to $2000. These
contributions are subject to compensation limits (not included as
compensation is income received from pensions, annuities, or as
deferred compensation) for the adjusted gross income (AGI) in the
following manner: (1) single individuals with an AGI of less than
$95,000 may contribute up to $2000; (2) married individuals filing
a joint income tax return with an AGI less than $150,000 may
contribute up to $2000; (3) partial contributions may be made by
single individuals with an AGI between $95,000 and $110,000 and
by married individuals with an AGI between $150,000 and
$160,000; and, by married individuals filing separately with an
AGI of less than $10,000. These contributions are not deductible
for federal income tax purposes. The funds once contributed grow
on a tax-free basis. Tax-free withdrawals from this IRA may be
made after it has been in existence for at least five years and the
individual has reached at least age 59 1/2. If death or permanent
disability occurs, tax-free withdrawals can also be made. Tax-free
withdrawals up to $10,000 are also permitted for the purchase of a
first
 Page 447
home. Funds may be withdrawn for educational purposes subject to
the payment of income tax, but there is no 10% penalty paid, as is
the case with the traditional IRA. There is no maximum age by
which the individual must start taking distributions as there is at the
age of 70 1/2 with the traditional IRA. Even though contributions
are not tax-deductible, these contributions can be withdrawn tax-
free at any time while the earnings accumulate on a tax-deferred
basis after age 59, provided the funds have been in the account for
at least five years. Conversions from a traditional IRA to a Roth
IRA may be made provided the IRA owner has an AGI of
$100,000 or less. Upon conversion to a Roth IRA, income tax is
payable on the taxable portion of the amount converted from the
traditional IRA (earnings and deductible contributions). The
amount converted from a traditional IRA to a Roth IRA is subject
to a 10% tax penalty if withdrawn within five years of the
conversion.
RULE AGAINST ACCUMULATIONS state laws that prohibit for
an unreasonable period of time the accumulation of income under
the OPTION MODES OF SETTLEMENT of a LIFE INSURANCE policy unless the BENEFICIARY
of the policy is a minor; thus, if the INTEREST OPTION is selected under
the optional modes of settlement, the beneficiary must be a minor.
RULE AGAINST PERPETUITIES time limit on the deferred
owner-ship of property such that, 21 years after the property owner
dies, the deferred ownership of that property terminates.
RUNNING DOWN CLAUSE coverage in liability insurance for a
ship owner in the event of collision with another ship. A running
down clause, when added to basic HULL MARINE INSURANCE, protects
against liability for damage to the other vessel, its freight and
cargo, and for lost income to the other vessel's owner during the
time it cannot be used.
RUN-OFF liability of an insurance company for future claims that
it expects to pay and for which a reserve has been established.
 Page 448

S
SAFE BURGLARY INSURANCE coverage against a loss
resulting from the forcible entry of a safe. In order for this
coverage to be applicable, there must be signs of forcible entry into
the premises in which the safe is located. See also MERCANTILE SAFE
BURGLARY INSURANCE.

SAFE DRIVER PLAN procedure for offering reduced auto

insurance rates to drivers with good records, and imposing higher
rates on bad drivers. Typically, premiums are weighted under a
system that assigns points for traffic violations and accidents. The
more points awarded during a certain rating period, the higher the
premium. Most plans consider violations only during the past two
or three years, giving bad drivers who improve their records a
chance to reduce their premiums.
SAFETY important means of preventing accidents and injuries.
Insurers take corporate safety programs into account when rating
workers compensation and other business insurance policies. See
also ENGINEERING APPROACH; HUMAN APPROACH; LOSS PREVENTION AND REDUCTION.
SAFETY OF ASSETS quality of investments of insurance
companies. State insurance regulators establish rules for company
investments. Authorized investments vary, depending on whether a
company is a life insurer or property casualty company and, in
some instances, on whether it is a mutual or stock company.
Investments must meet standards for asset type, credit quality, and
diversification. Generally, insurance company assets are limited to
government securities, bonds, stocks, mortgages, and certain real
estate holdings. See also ADMITTED ASSETS; LIQUIDITY OF ASSETS; SEPARATE ACCOUNT
FUNDING.

SAFETY AUDIT study of an organization's operations, and real

and personal property to discover existing and potential HAZARD and
the actions needed to render these hazards harmless.
SAFETY MARGIN adjustment made to the statistics in a mortality
table to provide an increase in the mortality rates above that
expected for life insurance and a decrease in the mortality rates
below that expected for annuities.
SAFETY RESPONSIBILITY LAW see FINANCIAL RESPONSIBILITY LAW.
SALARY CONTINUATION PLAN arrangement, often funded by
life insurance, to continue an employee's salary in the form of
payments to a beneficiary for a certain period after the employee's
death. The employer itself may be the beneficiary, collecting the
death benefit and making payments to the employee's beneficiary.
SALARY DEDUCTION GROUP INSURANCE see PAYROLL DEDUCTION
INSURANCE; SECTION 401(K) PLAN (SALARY REDUCTION PLAN).
 Page 449
SALARY REDUCTION PLAN see SECTION 401(K) PLAN (SALARY REDUCTION
PLAN).

SALARY SAVINGS INSURANCE (DEDUCTION OR

ALLOTMENT) see SECTION 401(K) PLAN (SALARY REDUCTION PLAN).
SALARY SAVINGS PROGRAM see PAYROLL DEDUCTION INSURANCE.
SALARY SCALES system whereby benefits in an EMPLOYEE BENEFIT
INSURANCE PLAN vary according to the employee's earnings. See also

DEFINED BENEFIT PLAN; EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) TRUST; GROUP LIFE INSURANCE;

PENSION PLAN.

SALESMAN'S SAMPLE FLOATER coverage for sample

merchandise while in the custody of a salesperson.
SALES REPRESENTATIVE see AGENT; BROKER-AGENT; CAPTIVE AGENT;
INDEPENDENT AGENT.

SALVAGE see ABANDONMENT AND SALVAGE.

SALVAGE CHARGES expense of recovering property by a salvor.
Salvage charges are not provided for in insurance contracts. If the
owner and the salvor cannot agree on salvage charges, a court
makes a determination based on the value of the salvaged items
and the salvor's expenses. Rules governing payment of salvage
charges originated in marine insurance but are now used in other
policies, such as personal automobile insurance.
SAMPLE item given or sold to a buyer that establishes a standard
of quality by which later products will be judged. Since the UNIFORM
COMMERCIAL CODE does not distinguish between a sample and a model, a

sample may create an implied warranty that all goods will conform
to this standard. If other goods shipped later do not meet this
standard, the manufacturer may be held liable.
SAMPLE, RANDOM see RANDOM SAMPLE.
SAMPLE, REPRESENTATIVE see REPRESENTATIVE SAMPLE.
SAMPLING, STRATIFIED RANDOM see STRATIFIED RANDOM SAMPLING.
SAVINGS see SAVINGS ELEMENT, LIFE INSURANCE.
SAVINGS ARE VITAL TO EVERYONE RETIREMENT ACT
OF 1997 act that requires the Department of Labor (DOL) to have
a formal program to educate the public about the importance of
saving for retirement. The DOL is also required to educate the
public concerning the characteristics of the various PENSION
PLANS. The act requires the President to conduct three national
summits on retirement savings in the years 1998, 2001, and 2005.
 Page 450
SAVINGS BANK LIFE INSURANCE (SBLI) low-cost life
insurance sold by savings banks in the states of Connecticut,
Massachusetts, and New York. SBLI is a popular source of life
insurance in these states for two reasons: it is offered in bank
lobbies, which makes it convenient; and there are no commissions,
as with commercial life insurance, which makes it cheaper.
Although banks generally are barred from the insurance business,
SBLI was allowed by these three states at the urging of consumer
groups. Other states have refused to adopt similar legislation.
Maximum policy amounts are limited by state law.
SAVINGS ELEMENT cash value of life insurance that
accumulates according to a table in a policy. It reflects premiums in
the early years that exceed the pure cost of protection during that
period. If a policy is surrendered, the policyowner receives the cash
surrender value and the insurance ends. This is why a cash value
policy can be considered a savings or investment vehicle. Cash
value is also the part of a life insurance product used as an
investment for an INDIVIDUAL RETIREMENT ACCOUNT (IRA).
SAVINGS ELEMENT, LIFE INSURANCE buildup of policy cash
value, as distinguished from the death benefit. A policyholder has a
choice between surrendering the policy for its cash surrender value
or keeping it in force for its death benefit. The rates of return on
cash value policies, such as whole life insurance, universal life, or
variable life, depend on schedules in the insurance contract or, in
some types of policies, on prevailing interest rates or the
performance of an investment portfolio. See also CASH SURRENDER VALUE.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES
(SIMPLE PLANS) small business retirement plans created by the
Small Business Job Protection Act of 1996. These plans permit
small business owners who have fewer than 100 employees to
establish an employee retirement plan. Because the required
administration of these plans is much less than that required of
traditional plans, the cost is low as compared to traditional plans.
There are two types of simple plans made available under the 1996
act: the simple IRA and the simple 401 (k). Under both simple
plans, employers are required to contribute a 3% match for all plan
participants' salaries or a 2% match for eligible employees,
regardless of whether or not the employees participate in the plan.
An exemption to this rule is that under the simple IRA, but not
under the simple 401(k), the employer may lower the 3% match to
1% for every two years out of a five-year period of time. Under
both simple plans, all employer matches are immediately VESTED in
the employees, which is not the case with traditional retirement
plans.
The simple IRA must be the only retirement plan provided by the
employer and it must exclude any ROLLOVERS from any other non-
simple IRA plans. All employees that earn at least $5000 annually
must be eligible to participate on a SALARY REDUCTION PLAN basis if so
elected
 Page 451
by the employees. Contributions to this plan are not subject to
federal income tax and are not subject to nondiscrimination or top-
heavy rules applicable to qualified plans. Distributions made from
the plan prior to age 59 1/2 are subject to a 10% surcharge as a
penalty, and, in addition, if that distribution is made during the first
two years that the employee is participating in the plan, the
surcharge becomes 25% of the amount distributed. Transfer from a
simple IRA to a regular IRA is permitted only after the employee
has participated in the simple IRA for at least two years. If a
transfer is made earlier than the two-year requirement, it is subject
to a 25% surcharge. Upon termination of employment, the simple
plan becomes a regular IRA provided the two-year rule has
expired. Simple IRAs do not allow loans. The HEALTH INSURANCE
PORTABILITY AND ACCOUNTABILITY ACT OF 1996 (HIPA ACT) stipulates that the IRA

owner is not subject to the 10% penalty for distributions prior to

age 59 1/2 if the distributions are used to pay medical expenses in
excess of 7.5% of the adjusted gross income.
SAVINGS, NEED FOR LIFE INSURANCE see SAVINGS ELEMENT, LIFE
INSURANCE.

SCHEDULE BOND see NAME POSITION BOND; NAME SCHEDULE BOND.

SCHEDULED COVERAGE see SCHEDULED POLICY.
SCHEDULED LIMIT specified limit on the dollar amount of
coverage for a given loss.
SCHEDULED PERSONAL PROPERTY ENDORSEMENT
addition to a HOMEOWNERS INSURANCE POLICY, or other personal or business
property policies, to provide extra coverage for listed articles. The
standard policy has dollar limits on certain items, such as jewelry,
furs, art, or guns. This endorsement allows a policyholder to
purchase additional coverage for specific items of property, with
each item or group of items, and the amount of coverage, listed.
SCHEDULED POLICY policy permitting an insured to choose
desired coverages. These policies are important for items with
relatively low limits of coverage under standard property insurance
forms. For example, an insured would have to specifically schedule
expensive jewelry, furs, and paintings in order to receive full value
for a loss.
SCHEDULE FLOATER see FLOATER.
SCHEDULE INJURY injury covered under WORKERS COMPENSATION
INSURANCE. For every part of the body that may be injured, there is a

listed financial sum that will be paid. For example, a right severed
index finger in a particular state might be worth X dollars, whereas
a right severed toe might be worth Y dollars. The injured employee
is entitled to these benefits as a matter of right as established by
statutory law.
SCHEDULE OF BENEFITS see GROUP HEALTH INSURANCE (Schedule of
Benefits).
 Page 452
SCHEDULE OF INSURANCE see SCHEDULED POLICY.
SCHEDULE P RESERVE statutory reserve for automobile
liability, representing specific dollar estimates for future claims.
The NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) established formulas
to project the amount that liability insurers must put aside for
unpaid claims. These formulas are based on the assumption that
future claims will approximate those paid out in recent years. The
name comes from the NAIC convention ANNUAL STATEMENT blank, where
it is designated as Schedule P.
SCHEDULE PROPERTY FLOATER see FLOATER; PERSONAL ARTICLES
INSURANCE; PERSONAL PROPERTY FLOATER.

SCHEDULE Q see Q SCHEDULE.

SCHEDULE RATING method of pricing property and liability
insurance. It uses charges and credits to modify a class rate based
on the special characteristics of the risk. Insurers have been able to
develop a schedule of rates because experience has shown a direct
relationship between certain physical characteristics and the
possibility of loss. For example, for fire insurance, the underwriter
might make an additional charge above the standard rate for the
class if a building contains a flammable liquid. A credit may be
given if it has a sprinkler system. In automobile insurance, a credit
might be given for driver education. In life insurance, credit is
usually given for a nonsmoker. Schedule rating is commonly used
for fire, automobile and workers compensation insurance. See also
EXPERIENCE RATING; PREMIUM DISCOUNT; RETROSPECTIVE RATING.

SCLP see SIMPLIFIED COMMERCIAL LINES PORTFOLIO (SCLP).

''S" CORPORATIONS corporations that have elected to be taxed
according to the provisions of Subchapter S of the Internal
Revenue Code. In order to qualify under these provisions, the
corporation can have only one class of stock. By so qualifying, tax
is eliminated at the corporate level and the shareholders are taxed
on their proportionate share of the corporation's profit. This is
important because currently the highest individual income tax rate
is lower than the highest corporate income tax rate.
SCREENS system established for checking claims to determine
whether they should be paid immediately or checked further for
validity.
SEASONAL RISK exposure present only at certain times of the
year. For example, resort property faces a business interruption risk
only from damage that cannot be repaired in time for the resort
season.
SEAWORTHINESS ADMITTED CLAUSE part of a marine cargo
policy that exempts the policyholder from vouching for the
seaworthiness of the vessel. For example, while a purchaser of HULL
MARINE INSURANCE warrants that a ship is in proper condition for a

voyage, the
 Page 453
purchaser of CARGO INSURANCE, who has no control over the ship's
condition, is not expected to vouch for it.
SECONDARY BENEFICIARY see BENEFICIARY.
SECONDARY PLAN see COORDINATION OF BENEFITS.
SECOND DEATH INSURANCE life insurance policy with a death
benefit that is paid only when the second of two insureds dies. No
benefits are paid as long as both live or if just one lives.
SECOND-INJURY FUND insurance fund set up by most states to
encourage employers to hire handicapped workers. Where workers
with existing handicaps suffer further work-related injuries or
diseases that result in total disability, the employer is responsible
for the workers compensation benefit only for the second injury or
disease. The fund makes up the difference between the benefit for
total disability and the benefit for the second injury. Second-injury
funds are financed through general state revenues or assessments
on workers compensation insurers.
SECOND MORTGAGE mortgage loan secured by real estate that
already has a first mortgage. In case of default, the claim of the
second mortgage holder is subordinate to that of the first mortgage
holder. Generally, insurance companies are not permitted by state
laws to offer or invest in second mortgages.
SECOND SURPLUS REINSURANCE amount of REINSURANCE
accepted by a second REINSURER which is in excess of the original
insurer's retention limit and the first reinsurer's first surplus treaty's
limit. See also RETENTION AND LIMITS CLAUSE, SURPLUS REINSURANCE.
SECOND-TO-DIE see SECOND DEATH INSURANCE.
SECTION 79 PLAN group whole life insurance policy designed to
reduce an employee's exposure to income tax on the value of life
insurance provided by the employer. The policy separates the term
element from the cash value element, and apportions part of the
premium to each. The plan takes advantage of the tax exemption to
employees on a specified amount of group term insurance plans
and the special tax rate on the premium for the amount of insurance
over that amount.
SECTION 101 (a) (1) OF THE INTERNAL REVENUE CODE
section of the code that qualifies that the death benefit paid under a
life insurance policy is received by the BENEFICIARY income-tax free.
These tax consequences apply regardless of the size of the CASH VALUE
of the policy, total premiums paid, who the POLICYOWNER may be, who
the INSURED may be, who the premium payor may be, or who the
beneficiary may be.
SECTION 105 OF THE INTERNAL REVENUE CODE federal
statute that permits the self-employed a 100% tax deduction for the
family health care expenses to include HEALTH INSURANCE premiums,
DISABILITY
 Page 454
insurance premiums, and LONG-TERM CARE insurance premiums.
INCOME

Also deductible on a 100% basis are noninsured medical, dental,

and vision care expenses.
SECTION 105 MEDICAL REIMBURSEMENT PLAN eligible
employees reimbursed from the employer for family health care
expenses paid by those employees to include HEALTH INSURANCE
premiums, DISABILITY INCOME insurance premiums, and LONG-TERM CARE
insurance premiums. Also reimbursable to the employees from the
employer are non-insured medical expenses. The employer
receives a 100% tax deduction for this reimbursement.
SECTION 125 PLANS (CAFETERIA PLANS) additions made by
Congress in 1978 to the Internal Revenue Code that provide an
employee benefit plan under which the employee makes an
irrevocable decision to forego a portion of future income in
exchange for receiving future benefits not subject to income tax at
reception date. The employer deducts the cost of the employee's
future benefits from present income as a business expense. These
plans usually provide three options:
1. Premium ConversionEmployee contributes a proportionate share
of the family health care costs with pre-tax dollars.
2. Medical Reimbursement AccountEmployee is able to use a SALARY
REDUCTION PLAN to pay with dollars on a pre-tax basis for medical

expenses not covered by insurance; a separate medical

reimbursement account is established for each employee.
3. Dependent Care Reimbursement AccountEmployee is able to use
a salary reduction plan to pay with dollars on a pre-tax basis for
dependent care expenses.
An additional option sometimes provided for employees only
(family members are excluded) is TERM LIFE INSURANCE for an amount up
to $50,000 and DISABILITY INCOME INSURANCE. All employees must have
equal access to the plans whether they are highly compensated or
nonhighly compensated employees. Any monies left in the
employee's account not used by the end of the year revert back to
the company; this is known as the Use It or Lose It rule. As the
employee incurs expenses, that employee applies for
reimbursement through a form attached to the bill. When the
administrator of the plan issues a check to the employee for the
expenses, a statement is also provided that shows the amount
remaining in the employee's account.
SECTION 401 (h) PENSION PLAN TRUST trust established
under the auspices of the Internal Revenue Code that permits the
maintenance of a separate account within the employer's DEFINED
BENEFIT PENSION PLAN from which to pay the employee's life insurance and

medical expense costs. Contributions to this account are tax

deductible, and the investment's earnings accumulate on a tax
deferred basis.
 Page 455
SECTION 401 (k) PLAN (SALARY REDUCTION PLAN)
employer sponsored retirement savings program named for the
section of the Internal Revenue Code that permits it. These plans
allow employees to invest pre-tax dollars that are often matched in
some portion by employers. Because of their flexibility, 401 (k)s
became a popular employee benefit during the 1980s. But the TAX
REFORM ACT OF1986 limited their use as short-term savings plans by

imposing a 10% penalty on all money withdrawn before retirement.

It also reduced the maximum annual contribution from $30,000 to
$7000 and tightened nondiscrimination rules. Employees may still
borrow the money, however, and pay themselves interest.
SECTION 401 (k) PLAN SWITCHBACKS (KSOPs) device that
allows plan participants in EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) TRUST to
reinvest the dividends into their SECTION 401 (K) PLAN. Under the
switchback approach, plan participants are permitted to select
whether they wish to reinvest their dividends paid on the
company's stock into the KSOP on a tax-deferred basis or take the
dividends in cash and be subject to ordinary income tax. If the plan
participant elects to reinvest the dividends into the KSOP, the
participant's contribution to the Section 401 (k) is reduced by the
amount of the dividend. The KSOP concept allows dividends to be
retained in the retirement plan and permits the plan participant to
increase the amount of his or her contribution into the plan by the
amount of dividends reinvested.
SECTION 403 (b) PLAN retirement plan offered by public
employers and tax-exempt organizations. Under Section 403(b) of
the Internal Revenue Code, certain tax-exempt organizations such
as public school systems can make payments for retirement annuity
policies for their employees and have the payments excluded from
the employees' gross income for tax purposes, subject to certain
limitations.
SECTION 404 (c) OF THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974 section of the act stating that
regulation requires employers to offer plan participants at least
three diversified investment choices. Each choice must have
materially different risk and return characteristics. Participants
must be given the opportunity to switch from one fund to another
on at least a quarterly basis. Also, employers must provide
sufficient information for participants to make informed investment
decisions.
SECTION 408 (k) PLAN section of the Internal Revenue Code that
provides for SIMPLIFIED EMPLOYEE PENSIONS (SEP).
SECTION 457 DEFERRED COMPENSATION PLAN plan in
which a public employer (such as a university, state, county, or
municipality) sponsors a retirement savings program, named for
the section of the Internal Revenue Code that permits it. This plan
allows the employer, upon agreement with the employee, to reduce
the employee's salary by a specific amount and invest this amount,
with pre-tax dollars, in
 Page 456
various financial instruments. Upon termination of employment,
the principal amount invested and any investment earnings are
distributed to the terminating employee or the employee's estate. A
deferred FIXED DOLLAR ANNUITY or VARIABLE DOLLAR ANNUITY are among the
financial instruments that can be used to fund this plan.
SECTION 501 (c) (9) VOLUNTARY EMPLOYEES
BENEFICIARY ASSOCIATION (VEBA) trust established under
the Internal Revenue Service code that is used to provide accident
and sickness benefits to member employees.
SECTION 1035 EXCHANGE section of the Internal Revenue
Code that provides for the taking of the proceeds from one LIFE
INSURANCE policy or ANNUITY and the reinvesting of these proceeds

immediately in another life insurance policy or annuity of the same

type without being required to pay a tax on any gain. This
exchange should be handled by the seller of the REPLACEMENT, LIFE
INSURANCE policy or annuity.

SECTION 2503 (c) OF THE INTERNAL REVENUE CODE

section of the code that qualifies the establishment of a trust for
minors under which income can be accumulated until the minor
reaches age 21. At that point, the accumulated income can be
disbursed and the $10,000 annual GIFT TAX EXCLUSION for each
beneficiary can be utilized.
SECTION 4958 OF THE INTERNAL REVENUE CODE portion
of a federal law that imposes a penalty excise tax on an EXCESS BENEFIT
TRANSACTION of 25% of the excess benefit on the person from inside

the organization (DISQUALIFIED PERSON) receiving the benefit. Also

imposed is a penalty excise tax of 10% of the excess benefit on the
manager within the organization awarding the excess benefit. If
this excess amount is not repaid to the tax-exempt organization
within a reasonable period of time, the disqualified person incurs
an additional tax penalty of 200% of the excess benefit received.
SECULAR TRUST [402(b)] (NONEXEMPT TRUST) NONQUALIFIED
PLAN of DEFERRED COMPENSATION whose goal is to compensate KEY EMPLOYEES

without having to provide similar benefits to rank and file

employees. The TRUST is irrevocable, and funds placed in it are
protected against claims made by the company's creditors. Even
though funds in this trust are not in the employee's possession, they
are deemed by the Internal Revenue Service to have been
constructively received by the employee. The company is allowed
to take an income tax deduction for the funds it contributed to the
trust, even though these funds have not been distributed to the
employee while he or she has current taxable income. At the time
funds from the trust are actually distributed, the employee is taxed
only to the extent that these distributions are from earnings of the
trust or from current trust income, which will allow the employee
to pay taxes owed as the result of the company's contributions to
the trust. The employer is not taxed on the trust income: the
employee pays all taxes on this income. For example,
 Page 457
assume that the company is in the 34% tax bracket and contributed
$40,000 to the trust on behalf of John Employee, who is in the 28%
tax bracket. The result is that John Employee will have an $11,200
tax liability ($40,000 28%) and the company will incur a $13,600
tax deduction ($40,000 34%). In order that John Employee will
have the necessary funds to pay the taxes owed, the company
usually will bonus him the $11,200 required, which of course is tax
deductible as a business expense for the company.
SECURED CREDITOR creditor with a documented claim on a
specific asset of a debtor. See also COLLATERAL BORROWER; COLLATERAL CREDITOR
(ASSIGNEE).

SECURED LIEN see COLLATERAL BORROWER; COLLATERAL CREDITOR (ASSIGNEE);

SECURED CREDITOR.

SECURE MONEY ANNUITY OR RETIREMENT TRUST

(SMART) proposed new small business pension plan advocated in
President Clinton's administration's fiscal year 1999 budget. This
plan would be made available to small businesses with 100 or
fewer employees that do not currently provide employees with a
DEFINED BENEFIT PLAN or a DEFINED CONTRIBUTION PLAN (MONEY PURCHASE PLAN). In order

to qualify for this new pension plan, neither a defined benefit plan
nor a defined contribution plan could have been offered by the
business to its employees during the previous five years.
SECURITIES see SECURITIES AND EXCHANGE COMMISSION (SEC); SECURITIES BOND;
SECURITIES INVESTOR PROTECTION CORPORATION (SIPC).

SECURITIES ACT OF 1933 landmark legislation passed by

Congress providing the first regulation of the securities markets.
The law, enforced by the SECURITIES AND EXCHANGE COMMISSION (SEC), requires
registration of securities issues and disclosure of material
information about the financial condition of the issuers. Variable
annuity and VARIABLE LIFE INSURANCE policies have been determined to be
securities under the terms of this law and thus are subject to
regulation both by the SEC and by state insurance departments.
SECURITIES AND EXCHANGE COMMISSION (SEC) federal
agency that regulates the securities markets. The independent, five-
member commission was created under the Securities Exchange
Act of 1934 to enforce the SECURITIES ACT OF 1933. Members are appointed
by the president and serve five-year terms. The SEC has
responsibility to regulate securities exchanges and markets, to set
disclosure and accounting rules for most issuers of corporate
securities, and to oversee securities firms, investment companies,
and investment advisers.
SECURITIES AND EXCHANGE COMMISSION (SEC)
DIVISION OF CORPORATION FINANCE one of four SEC
divisions that administers the procedure through which public
companies must disclose all relevant material in order that a
potential investor might make an informed decision.
 Page 458
SECURITIES AND EXCHANGE COMMISSION (SEC)
DIVISION OF ENFORCEMENT one of four SEC divisions that
enforces the federal securities laws in federal courts and before
SEC's administrative law judges by bringing actions for violations.
SECURITIES AND EXCHANGE COMMISSION (SEC)
DIVISION OF INVESTMENT MANAGEMENT one of four SEC
divisions charged with regulating investment companies,
investment advisors, and variable insurance products. The SEC
requires variable insurance products to register with the SEC by
filing a registration statement. This statement must include a
prospectus, financial statement, exhibits, and a statement of any
additional relevant information. This division is permitted to
provide interpretive advice for laws and rulings that may seem to
be unclear. This division also has the authority to grant exemptions
from the SEC laws and rules if the insurance product does not fit
within the regulatory parameters that it administers.
SECURITIES AND EXCHANGE COMMISSION (SEC)
DIVISION OF MARKET REGULATION one of four SEC
divisions that regulates the securities markets and the participants
within these markets.
SECURITIES AND EXCHANGE COMMISSION (SEC) STAFF
ACCOUNTING BULLETIN NO. 92 (SAB92) bulletin issued
June, 1993, with disclosure requirements that strongly suggest that
insurance companies establish reserves or add to current reserves
for asbestos and environmental risks to the insured.
SECURITIES BOND forgery insurance covering securities issues
such as stocks and bonds. They protect the issuer of securities
against forgery of the securities.
SECURITIES INVESTOR PROTECTION CORPORATION
(SIPC) federal insurance fund that protects assets in client accounts
held by registered securities broker-dealers. The SIPC is a
nonprofit corporation created by Congress in 1970 under the
Securities Investor Protection Act. Membership in SIPC is
mandatory for all broker-dealers registered with the SECURITIES AND
EXCHANGE COMMISSION and with the national stock exchanges. When the

SIPC is unsuccessful in finding a healthy firm to acquire a failed

brokerage, it pays off account holders of the failed brokerage for
losses up to the coverage limit. Maximum coverage for cash and
securities in a customer's account is $500,000, with a limit of
$100,000 on the amount of cash that is insured.
SECURITIES VALUATION RESERVE see VALUATION RESERVE (SECURITIES
VALUATION RESERVE).

SECURITIZED BOND TRANSACTIONS (SECURITIZING

CATASTROPHE RISK/SECURITIZING INSURANCE RISK)
method of accessing capital by the insurance industry in order to
hedge against a future catastrophic occurrence. The mechanism
works as follows: Primary insurance company AJAX pays a
premium to
 Page 459
purchase a CATASTROPHE REINSURANCE contract from REINSURANCE company
BJAX. Reinsurance company BJAX then sells its bonds in an
amount equal to the catastrophe reinsurance contract issued to
insurance company AJAX. The proceeds from the bonds sold by
BJAX are then placed in a trust to securitize the reinsurance
contract. Interest is earned on the proceeds placed in the trust; the
proceeds are usually invested in United States Treasury issues. If
AJAX does not have any reinsurance claims, the purchasers of the
bonds receive the return of the amount they have invested (safely
on deposit in the trust) plus interest earned. If AJAX does have a
reinsurance claim, the claim is paid out of the trust with the
payment coming from the initial amount invested in the bonds plus
interest earned. The investors in the bonds incur a bond default.
The rating of these bonds uses the same criteria as used for all
types of bonds, whether corporate or government, that is the
probability of default. Just like any other type of bond, whether
corporate or government, the price of the bond and thus the yield
increases or decreases subject to market conditions.
SECURITY VALUATION rules used by state regulators to value
securities on the books of insurance companies. Bonds with
acceptable credit quality are carried at amortized value, which is
the face value plus or minus the amount of any purchase discount
or premium, as amortized over the life of the bond. Preferred stock
is valued at cost and COMMON STOCK INVESTMENTS at year-end market price.
Valuations for impaired securities such as bonds in default are
determined by the Committee on Valuation of Securities of the
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC). See also MANDATORY SECURITIES

VALUATION RESERVE.
SEGREGATION OF EXPOSURE UNITS risk management
practice designed to control losses by physically separating assets
or operations (on separating a single exposure unit into various
parts) to reduce maximum potential loss. The objective of such a
separation is to reduce the risk of loss to the whole exposure unit
through dispersion. For example, two related chemical processing
operations, both subject to loss from explosion or fire, would be
built a sufficient distance apartperhaps even on separate premisesso
that the explosion of one would not damage the other.
SELECTION see SELECTION OF RISK.
SELECTION, ADVERSE see ADVERSE SELECTION.
SELECTION OF RISK see RISK SELECTION; UNDERWRITING.
SELECT MORTALITY TABLE MORTALITY TABLE that includes data
only on people who have recently purchased life insurance.
Experience shows that such people have a lower mortality rate in
the years immediately following their purchase of insurance than
those who have been insured for some time, probably because they
have recently passed medical and other tests, and because they are
younger. For example, a
 Page 460
select mortality table would show the number of deaths per 1000 of
individuals age 30 who have been insured for one year. An ULTIMATE
MORTALITY TABLE shows the rate of the group, exclusive of the initial

period after the purchase of insurance. An aggregate mortality

table includes all data.
SELF-ADMINISTERED PLAN qualified pension or other
employee benefit where responsibility rests with an employer
rather than an insurer. A TRUST FUND plan, where assets are deposited
with and invested by a trustee, is the most common self-
administered plan. A TRUST AGREEMENT governs the plan administration
and retirees are paid benefits from the trust or the trustee buys
annuities for them. The self-administered, or trust fund plan,
contrasts with the insured (insurance company) pension plan.
SELF-DIRECTED ACCOUNT type of INDIVIDUAL RETIREMENT ACCOUNT (IRA)
allowed by the EMPLOYEES RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA) in which
contributions are paid into a custodial account sponsored by a bank
or stockbroker. The owner of the account selects the types of
investments into which the contributions are made.
SELF FUNDING see SELF INSURANCE.
SELF-INFLICTED INJURY intentional injury caused by the
person injured. For life and health insurance purposes, self-inflicted
injury typically is not covered by accident policies, because it is
intentional, not an accident. This applies for WORKERS COMPENSATION
INSURANCE purposes as well. However, for life insurance purposes,

suicide is covered after the policy has been in force for two years.
SELF INSURANCE protecting against loss by setting aside one's
own money. This can be done on a mathematical basis by
establishing a separate fund into which funds are deposited on a
periodic basis. Through self insurance it is possible to protect
against high-FREQUENCY, low-severity losses. To do this through an
insurance company would mean having to pay a premium that
includes loadings for the company's general expenses, cost of
putting the policy on the books, acquisition expenses, premium
taxes, and contingencies.
SELF-INSURED EXCESS PLAN plan for excess layer(s) of
insurance coverage over the primary coverage, for example, if a
corporation buys $8 million as excess above a $2 million SELF
INSURANCE retention level. Excess coverage can be purchased from

either a PRIMARY INSURER or a REINSURER. Before deciding on a self-

insurance plan, the corporation should review its past loss
experience according to pattern, timing, and types, as well as its
current financial position.
SELF-INSURED RETENTION (SIR) portion of a property or
liability loss retained by a policyholder. Most policyholders do not
purchase insurance to cover their entire exposure. Rather, they elect
to take a deductible, or portion that they will cover themselves. For
example, a
 Page 461
homeowner may purchase $150,000 worth of insurance with a
$500 deductible for certain losses, such as roof damage by hail.
The $500 deductible is one form of self insurance. It means the
homeowner will cover all losses for that amount or less. See also
SELF INSURANCE.

SELF-INSURER see SELF INSURANCE; SELF-INSURED RETENTION (SIR).

SELF-PROCURED INSURANCE policy purchased by the insured
from a NONADMITTED INSURER. This policy can be purchased directly from
the insurer by the insured.
SELF-REGULATION action by insurance companies and agents to
voluntarily refrain from business conduct that is misleading,
fraudulent, and in general would have adverse consequences for the
purchaser of the insurance product.
SELF-SELECTION effort of a poor risk to seek insurance
coverage. The onset of a health problem such as heart disease, for
example, may prompt a person to apply for life insurance before
seeking medical treatment. Such applicants, if not screened out,
would weight the insured pool toward bad risks. The UNDERWRITING
process is intended to counter the natural tendency toward self-
selection among insurance applicants, either by requiring higher
rates for poorer risks or by denying them coverage. See also ADVERSE
SELECTION.

SELF-TRUSTEED TRUST arrangement in which individuals

serve as trustees of their own LIVING TRUST and name another party
(successor trustee) to manage the assets if they should become
incapacitated. In this type of trust, individuals are assured that their
assets will continue to be managed as desired without interruption.
SELLING AGENTS' COMMISSION INSURANCE coverage that
provides for the indemnification of a salesperson for the amount of
his or her lost commission on a product to be sold that cannot be
produced because of damage incurred by the manufacturer or that,
once produced, cannot be delivered by the manufacturer because of
damage incurred. See also CONTINGENT BUSINESS INTERRUPTION FORM.
SELLING PRICE CLAUSE property insurance coverage available
to businesses that pays the established market (sales) value of
products that are damaged rather than simply their lower
(production) cost. This fills the gap between ACTUAL CASH VALUE, which
provides coverage only for the cost to the insured, and BUSINESS
INTERRUPTION INSURANCE. For manufacturers, it covers the cost of all

finished goods; for mercantile firms, it applies only to goods that

have been sold but are not yet delivered.
SEMIENDOWMENT INSURANCE modified ENDOWMENT INSURANCE
policy under which the insured receives one-half the DEATH BENEFIT as
the MATURITY VALUE of the policy.
 Page 462
SEPARATE ACCOUNT see SPLIT FUNDED PLAN.
SEPARATE ACCOUNT FUNDING see SPLIT FUNDED PLAN.
SEPARATE ACCOUNT GUARANTEED INVESTMENT
CONTRACT (GIC) type of GUARANTEED INVESTMENT CONTRACT in which
funds for the contract are placed in the insurance company's
separate account.
SEPARATE PROPERTY property acquired before marriageby gift,
by inheritance, or bought with separate monies.
SERIES EE SAVINGS BONDS bonds sold at a discount from their
face value; accumulated interest paid at maturity, as in the case of
ZERO COUPON BONDS. Interest rate minimum is guaranteed with the

prevailing interest rate adjusted semiannually. As with all U.S.

Treasury issues, interest earned on these bonds is exempt from state
and local taxes. Federal income tax on the interest earned does not
have to be prepaid until the bonds reach maturity.
SERIES OF CATASTROPHES hazard covered under catastrophe
reinsurance. This form of EXCESS OF LOSS REINSURANCE protects the CEDING
COMPANY for loss above the retention limit caused by multiple

catastrophic events. See also CATASTROPHE HAZARD; CATASTROPHE LOSS.

SERIOUS INJURY FREQUENCY RATE number of serious
injuries per 1,000,000 employee-hours worked. See also FREQUENCY.
SERVICE ADJUSTMENT change in YEARS OF SERVICE credited to
employee in calculating pension benefits and other employee
benefits.
SERVICE BENEFIT see SERVICE PLANS.
SERVICE INSURER AGREEMENT arrangement whereby an
insurance company agrees to pay specified health care service
vendors a predetermined sum for providing such services to the
covered individuals. See also BLUE CROSS; BLUE SHIELD.
SERVICEMEN'S GROUP LIFE INSURANCE (SGLI) U.S.
government group term life insurance for male and female
members of the federal uniformed forces on active duty,
underwritten by private insurance companies. Premiums reflect
peacetime mortality rates for this group, with any additional costs
of military risks (such as wartime exposure) being borne by the
federal government. Upon discharge, SGLI policies can be
converted either to five-year nonrenewable term VETERANS GROUP LIFE
INSURANCE (VGLI) or to a permanent policy at the veteran's attained age

(at higher cost) with one of the commercial insurance companies

participating in the servicemen's plan.
SERVICE PLANS types of insurance coverage under which health
care benefits are provided to the covered individuals instead of
monetary
 Page 463
reimbursement for health care expenses. See also BLUE CROSS; BLUE SHIELD.
SERVICES OFFERED POLICYHOLDERS range of
administrative and risk management services that can be purchased
by an insured. Increasingly, insurance can be purchased UNBUNDLED so
that policy-holders may pay for straight coverage without available
services. However, some policyholders may want to purchase from
the insurer additional services such as loss control, claims
adjustment, captive management, or other services.
SETBACK see AGE SETBACK.
SET CLAUSE (PAIR OR SET CLAUSE) provision in many
business and personal policies that loss or damage to one of a pair
or set of individual items does not represent the loss of the pair or
set. For example, the loss of one diamond earring would not entitle
an insured to be reimbursed for a pair of earrings, but for only the
resulting decrease in the overall pre-loss value of the pair.
SETTLEMENT disposition of a claim or policy benefit. Policies
may specify time limits for payment of claims or benefits and
designate various methods of settlement at the option of the insurer
or the insured. See also OPTIONAL MODES OF SETTLEMENT; SETTLEMENT OPTIONS;
PROPERTY AND CASUALTY INSURANCE.

SETTLEMENT AGREEMENT see OPTIONAL MODES OF SETTLEMENT; PROPERTY

AND CASUALTY INSURANCE; SETTLEMENT OPTIONS.

SETTLEMENT ARRANGEMENT see LIFE INSURANCE; OPTIONAL MODES OF

SETTLEMENT; PROPERTY AND CASUALTY INSURANCE; SETTLEMENT OPTIONS.

SETTLEMENT OPTIONS, LIFE INSURANCE see OPTIONAL MODES OF

SETTLEMENT.
SETTLEMENT OPTIONS, PROPERTY AND CASUALTY
INSURANCE methods for payment of the value of a policy. An
insurance company can select one of three options in settlement of
a loss: (1) make a cash payment; (2) take possession of damaged or
destroyed property and replace it with property of like kind and
quality; or (3) repair the property so that it is restored to its
structural condition prior to the loss, and return the repaired
property to the insured. Usually insurance companies settle losses
by a cash payment to the insured.
SEUA see SOUTH-EASTERN UNDERWRITERS ASSOCIATION (SEUA) CASE.
SEVERITY see SEVERITY RATE.
SEVERITY RATE size of the losses used as a factor in calculating
premium rates. For example, the U.S. Bureau of Labor Statistics
studies the number of days lost by injured employees per million
person-hours worked. See also FREQUENCY AND DISTRIBUTION OF LOSSES.
 Page 464
SEX demographic designation used in life insurance to calculate
premium rates for life and health insurance and annuity contracts.
Since females have a longer LIFE EXPECTANCY than males of the same
age, life insurance premiums for females are lower than for males
of the same age. Annuity income for females, by the same token, is
lower than for males of the same age. These differences are being
contested.
SEX DISCRIMINATION classification of insured life and health
risks based on the sex of the proposed insured. Gender has long
been one of many factors in classifying, accepting, and rating risks.
For example, because experience shows that women live longer
than men, life insurance rates for women are lower. By the same
token, annuity payments are lower for women because it is
expected that they will be paid out for more years. On the other
hand, women have sometimes paid lower rates for auto insurance.
Insurance rating by sex became an issue in the early 1980s when
many women charged that it was discriminatory. They demanded
through UNISEX LEGISLATION to be rated no differently. Although insurers
have resisted it, individual states have passed laws prohibiting the
use of sex in risk classification. See also RISK CLASSIFICATION.
SFP see FIRE INSURANCESTANDARD FIRE POLICY.
SHARE REINSURANCE see PROPORTIONAL REINSURANCE; QUOTA SHARE
REINSURANCE; SURPLUS REINSURANCE.

SHERMAN ANTITRUST ACT 1890 law prohibiting monopolies

and restraint of trade in interstate commerce. The Sherman Act was
strengthened in 1914 with amendments known as the Clayton Act
that added further prohibitions against price-fixing conspiracies.
These federal antitrust laws at first were not applied to the
insurance industry because of the 1869 Supreme Court ruling in
PAUL V. VIRGINIA that insurance was not commerce and thus not subject

to federal regulation. After the SOUTH-EASTERN UNDERWRITERS ASSOCIATION (SEUA)

CASE in 1944 and passage of the MCCARRAN-FERGUSON ACT (PUBLIC LAW 15) in

1945, Congress made it clear that states would retain the power to
regulate insurance but price-fixing and restraint of trade not
sanctioned by state laws and regulations would be subject to
federal antitrust prosecution.
SHIP INSURANCE, PLEASURE CRAFT AND COMMERCIAL
see MARINE INSURANCE.
SHIPPERS RADIOACTIVE CONTAMINATION INSURANCE
coverage for shippers of certain radioactive materials, such as
medical or commercial isotopes, for direct loss or damage by
radioactive contamination; does not cover transport of radioactive
waste or nuclear reactor fuel. Coverage has two forms: one for
transport on common carriers and the other for transport on
vehicles operated by or for an insured. See also MOTOR TRUCK CARGO
RADIOACTIVE CONTAMINATION INSURANCE; NUCLEAR ENERGY LIABILITY INSURANCE; RADIOACTIVE

CONTAMINATION INSURANCE.
 Page 465
SHIPPING INSURANCE see INLAND MARINE INSURANCE (TRANSPORTATION
INSURANCE): BUSINESS RISKS.

SHOCK LOSS loss so catastrophic in nature that the insurance

company will experience a significant UNDERWRITING LOSS. Protection
against such an event can be purchased through various REINSURANCE
instruments. See also REINSURANCE, PROPERTY AND CASUALTYCASUALTY CATASTROPHE.
SHORE CLAUSE provision in MARINE INSURANCE listing onshore perils
covered. In the case of marine cargo, these may include such occur-
rences as damage from flooding, sprinklers, collapse of docks, and
wharf or warehouse fires. It may also cover damage from accidents
during ground transportation.
SHORT PERIOD INSURANCE coverage for less than one year in
duration.
SHORT RATE CANCELLATION cancellation by the insured of a
property or disability insurance policy for which the returned
unearned premium is diminished by administration costs incurred
when the insurance company placed the policy on its books.
SHORT RATE PREMIUM premium charge for a policy that is
going to be in force for less than the normal period of time.
SHORT RATE, SHORT TERM INSURANCE coverage for less
than one year. Insurers generally charge higher rates for short-term
policies than for longer term insurance, such as an ANNUAL POLICY,
because of (1) the need to recoup relatively fixed administrative
and processing costs over a shorter policy life; and (2) the
likelihood of ADVERSE SELECTION, with buyers seeking insurance only at
times of the year when they know they face greatest likelihood of
loss.
SHORT RATE TABLE display of percentage of earned premiums
as a function of the time in days for term property insurance
policies originally written for one year or longer. These tables are
used to compute the refund or the excess of the paid premium
above the customary short rate for the expired term in the event the
INSURED cancels the policy (makes a SHORT RATE CANCELLATION).

SHORT TERM DISABILITY INCOME INSURANCE see DISABILITY

INCOME INSURANCE.

SHORT TERM INSURANCE see SHORT PERIOD INSURANCE.

SHORT TERM POLICY see SHORT RATE, SHORT TERM INSURANCE.
SHORT TERM REVERSIONARY TRUST financial instrument
established irrevocably for a minimum of 10 years, after which the
principal reverts to the grantor upon termination of the trust. A key
feature is that earnings from the principal traditionally have been
taxed at the beneficiary's tax rate instead of the presumably higher
tax rate
 Page 466
of the grantor. An example is the CLIFFORD TRUST commonly used to
save for a child's college expenses. Another example is the funded
irrevocable LIFE INSURANCE TRUST. Under a typical arrangement, a
grandparent might establish such a trust to fund premiums for
permanent insurance on the life of a son or daughter, with the
grandchildren as beneficiaries. At termination of the trust, the
grandchildren would have a fully paid policy on their parent's life,
and the trust assets would revert to the grandparent. Congress
curtailed the tax advantages of short-term reversionary trusts in the
Tax Reform Act of 1969 and again in the TAX REFORM ACT OF 1986.
SICK BUILDING SYNDROME condition in which buildings are
built with sealed windows resulting in poor ventilation causing
occupants to experience dizziness, nausea, respiratory problems,
headaches, fatigue, sinus congestion, and/or respiratory problems.
This health concern has the potential for substantially increasing
health and WORKERS COMPENSATION claims.
SICKNESS COVERAGE see HEALTH INSURANCE.
SICKNESS INSURANCE see HEALTH INSURANCE.
SIDETRACK AGREEMENT type of hold-harmless agreement
made by a property owner as a condition for being served by a
railroad spur. If the owner wants a special sidetrack, the railroad
requires the owner to assume responsibility for certain losses for
property damage or injury arising from use of the track, even if the
railroad is at fault. Most common in these agreements is
responsibility for loss due to fire.
SIDETRACK INSURANCE see SIDETRACK AGREEMENT.
SIGN FLOATER INSURANCE endorsement to a business
property floater policy that covers neon signs for all perils, both
while they are being moved and once they are in place. Signs that
are attached to a building can be covered under the underlying
property insurance. The sign floater policy provides broader
coverage for each sign that is listed on the policy.
SIMPLE INTEREST sum of money paid on the principal amount
of money invested or loaned. See also INTEREST.
SIMPLE PROBABILITY see PROBABILITY.
SIMPLIFIED COMMERCIAL LINES PORTFOLIO POLICY
(SCLP) policy that provides coverage through four parts:
1. Commercial propertycoverage is provided under the BUILDING AND
PERSONAL PROPERTY COVERAGE FORM (BPPCF), divided into three major categories:

owned buildings, owned business personal property, and nonowned

business personal property.
2. Crimecoverage is provided under the commercial crime
program, which includes the following coverages: forgery; theft,
dis-appearance, and destruction; employee dishonesty; safe robbery
 Page 467
and burglary; burglary of the premises; computer fraud; extortion;
and liability for the property of guests.
3. Boiler and machinerycoverage is provided according to four
items of classification: electrical, turbine, mechanical, and pressure
and refrigeration. Property covered in these four groups is that
which is owned by the insured or is under the care, custody, or
control of the insured.
4. Liabilitycoverage is provided for general liability, products and
completed operations liability, medical payments, advertising and
personal liability, and fire legal liability. Each of these categories
has a separate limit of liability that is applicable. However, an
annual AGGREGATE LIMIT of liability is applicable to the total of these
categories except for the products and completed operations
liability, which has a separate annual aggregate limit.
SIMPLIFIED EARNINGS FORM addition to a business property
insurance policy to cover loss of earnings, subject to a monthly
limit, in the event that property of an insured is destroyed and a
business cannot continue. The property insurance policy pays only
in the event that property of an insured is destroyed and a business
cannot continue. The property insurance policy pays only for DIRECT
LOSS of income-producing property. A building destroyed by fire

represents a direct loss. Lost income resulting from the shutdown

of a manufacturing facility housed in the burned building
represents an INDIRECT LOSS that would be covered by BUSINESS INTERRUPTION
INSURANCE, which is written on a number of separate forms.

SIMPLIFIED EMPLOYEE PENSION (SEP) employee INDIVIDUAL

RETIREMENT ACCOUNT funded by an employer or a self-employed person.
(Also known as SEP-IRA.) Differs from a pension plan in that
contributions are immediately vested and employees have control
of the investment of the SEP-IRA. IRS rules require that SEP-IRA
contributions be made according to a written allocation formula.
The maximum contribution is 15% of compensation or $30,000,
whichever is less. Employees may elect to take cash instead of their
SEP-IRA contribution but must pay income taxes on it. The TAX
REFORM ACT OF 1986 also allows a SEP-IRA to be used as an alternative to

a SECTION 401 (K) PLAN (SALARY REDUCTION PLAN) for an employer with 25 or fewer
employees. The maximum annual contribution limit per employee
for such salary-reduction SEP-IRAs is $7000.
SINE QUA NON RULE Latin phrase meaning ''without which
not," signifying a legal rule in TORT and NEGLIGENCE cases. Under this
rule, a plaintiff trying to prove that an injury was a direct result of a
negligent act by the defendant would have to establish that the
injury would not have occurred without the negligent act.
SINGLE ANNUITANT (SINGLE LIFE ANNUITY) ANNUITY that
continues income payments as long as the annuitant lives, ceasing
upon the individual's death.
 Page 468
SINGLE INTEREST POLICY property insurance coverage for
only one of the parties having an INSURABLE INTEREST in that property.
SINGLE LIFE ANNUITY see SINGLE ANNUITANT (SINGLE LIFE ANNUITY).
SINGLE LIMIT see COMBINED SINGLE LIMIT.
SINGLE PREMIUM ANNUITY see SINGLE PREMIUM DEFERRED ANNUITY; SINGLE
PREMIUM IMMEDIATE ANNUITY.

SINGLE PREMIUM DEFERRED ANNUITY DEFERRED ANNUITY under

which one premium payment is made and the annuity is paid up
(no further premium payments are required).
SINGLE PREMIUM GROUP ANNUITY one premium payment
made to fund the future benefits of a group of employees.
SINGLE PREMIUM IMMEDIATE ANNUITY IMMEDIATE ANNUITY
under which one premium payment is made and the annuity is paid
up (no further premium payments are required).
SINGLE PREMIUM LIFE INSURANCE coverage in which one
premium payment is made and the policy is fully paid up with no
further premiums required. See also LIMITED PAYMENT LIFE INSURANCE.
SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
INSURANCE type of UNIVERSAL VARIABLE LIFE INSURANCE policy that
provides guideline premiums to be paid usually by the POLICYOWNER.
Charges on a monthly basis usually include the COST OF INSURANCE,
administrative expenses, premium tax, and in some instances, a
contract fee. The policyowner may execute POLICY LOANS and in many
instances on a zero cost basis if the policy loans come from the
policy's gains. The policyowner may also make a partial CASH
SURRENDER VALUE of policy at no SURRENDER CHARGE for that portion of the
premium not previously surrendered. When surrender charges are
levied, they usually apply for the first 10 years that the policy is in
force and range from 6 to 15% in the first year decreasing to zero
by the end of the tenth year. Within the policy, the policyowner can
effect tax-free transfers of funds among the sub-accounts in order
to try to optimize the return.
SINGLE RISK CARGO INSURANCE marine cargo coverage for
a single shipment of goods. Also known as SPECIAL RISK INSURANCE and
trip cargo insurance. Contrasts with open policy cargo insurance
that covers all of a shipper's goods in transit.
SINKING FUND money set aside to pay for losses. Rather than
buy insurance coverage for all potential losses, some businesses
and individuals choose this form of SELF INSURANCE to cover all or a
portion of certain losses.
SIR see SELF-INSURED RETENTION (SIR).
SISTERSHIP CLAUSE see SISTERSHIP EXCLUSION.
 Page 469
SISTERSHIP EXCLUSION part of the BUSINESS RISK EXCLUSION in GENERAL
LIABILITY INSURANCE that denies coverage for subsequent claims if a

defective product is not recalled by an insured. For example, if a

consumer filed a damage suit against XYZ Co. claiming that he or
she became sick while eating a can of soup from a particular lot
that was contaminated, the insurer would not pay later claims filed
by other consumers if the XYZ Co. did not recall that lot of the
soup. The general liability insurance policy for businesses also
excludes costs associated with the withdrawal of a product from the
market whether it is ordered by a government agency or by
company management. A business that wants coverage for product
recall would need to buy PRODUCT RECALL INSURANCE to include the extra
wages and other costs of identifying the faulty product, notifying
consumers, correcting or repairing the product, and redistributing
it.
SIZE see FACE AMOUNT (FACE OF POLICY).
SKIP PERSON person (the transferee to whom the property is
transferred) who is at least two generations younger than the person
(the transferor) who is transferring the property. This type of
property transfer prompts the generation-skipping transfer tax.
SLANDER see TORT, INTENTIONAL.
SLIDING SCALE COMMISSION percentage that has an inverse
relationship to the loss experience on the business brought in. For
example, if a CEDING COMPANY laid off better risks that resulted in better
and more profitable business for the reinsurer, it would get a higher
commission.
SMALL BUSINESS PROTECTION ACT act passed in 1996 that
includes
1. an increase in the amount a nonworking spouse can contribute to
an INDIVIDUAL RETIREMENT ACCOUNT (IRA) increased from $250 to $2000.
2. creation of the SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES (SIMPLE PLANS).
3. the stipulation that, for the person covered under a QUALIFIED PENSION
PLAN who is age 70 1/2 and has not retired, that person is not

required to begin minimum distributions from that plan until April

1 of the year following the year in which he or she retires.
SMALL LOSS PRINCIPLE statement regarding an insured's
retention of low-severity risks because they are not catastrophic,
and can be absorbed without having a dramatic effect on the
financial structure of a business or individual. Insurance purchased
for small-loss coverage is, in effect, swapping dollars with the
insurance company, since the premium charged reflects the
individual's expected losses plus loadings for the insurance
company's expenses, profit margin, and contingencies. See also
LARGE LOSS PRINCIPLE.

SMOKE CLAUSE provision in the EXTENDED COVERAGE ENDORSEMENT stating

that smoke damage is covered when it results from the sudden,
 Page 470
unusual, and faulty operation of an on-premises cooking or heating
unit, provided that it has been connected to the chimney by means
of a vent.
SMOKE DAMAGE see SMOKE CLAUSE.
SMP see SPECIAL MULTIPERIL INSURANCE (SMP).
SNOWMOBILE COVERAGE see SNOWMOBILE FLOATER.
SNOWMOBILE FLOATER endorsement to a HOMEOWNERS INSURANCE
POLICY or a PERSONAL AUTOMOBILE POLICY (PAP) that covers physical damage to a

snowmobile wherever it happens to be. Coverage can be on named

peril or ALL RISKS basis.
SNOWMOBILE INSURANCE see SNOWMOBILE FLOATER.
SOCIAL INSURANCE compulsory employee benefit plan under
which participants are entitled to a series of benefits as a matter of
right. The plan is administered by a federal or state government
agency and has as its objective the provision of a minimum
standard of living for those in lower and middle wage groups. See
also SOCIAL SECURITY ACT OF 1935.
SOCIAL INSURANCE SUPPLEMENT additional coverage
designed to provide protection against economic losses incurred by
insured wage earners when their income is interrupted or
terminated because of illness, sickness, or accident, and these
losses are not covered under WORKERS COMPENSATION INSURANCE disability
income benefits or the disability income benefits of Social Security.
SOCIAL SECURITY ACT OF 1935 federal legislation that
established the OLD AGE SURVIVORS, DISABILITY, AND HEALTH INSURANCE (OASDHI).
SOCIAL SECURITY ACT, TITLE XIX 1965 federal law that
provides for medical assistance to those who cannot afford to pay
for it. Four categories of the needy can qualify: aged, blind,
disabled, and families with dependent children. The MEDICAID
program was enacted at the same time as MEDICARE.
SOCIAL SECURITY ADJUSTMENT OPTION choice an
employee can make of receiving higher private pension benefits
prior to eligibility for Social Security, and lower pension benefits
thereafter. For example, employees taking early retirement may
wish to receive higher-than-normal benefits in the months or years
before their Social Security benefits begin. In exchange, they
would have to accept reduced pension benefits once the Social
Security payments started.
SOCIAL SECURITY FREEZE maintenance of Social Security
benefits at current dollar or percentage levels. Social Security
benefits are indexed to the Consumer Price Index and rise in
tandem with the Index. A benefit freeze is one solution that
legislators and regulators have proposed to cope with a troubled
Social Security system, but many powerful lobbying groups oppose
such a remedy.
 Page 471
SOCIAL SECURITY OFFSET reduction of private pension
benefits to avoid "duplication" of Social Security benefits,
according to a formula. Many pension plans "offset," or reduce,
monthly pension benefits by a percentage of the employee's
monthly Social Security benefit. See also PENSION PLAN INTEGRATION WITH
SOCIAL SECURITY.

SOCIETY OF ACTUARIES (SA) membership organization of

individuals especially trained in the application of ACTUARIAL
mathematics, including compound interest, annuities, life
contingencies, measurement of mortality probability, and statistics.
The organization holds a series of actuarial examinations for
prospective members seeking the designation of Fellow or
Associate of the Society of Actuaries (FSA, ASA).
SOCIETY OF CHARTERED PROPERTY AND CASUALTY
UNDERWRITERS membership organization of individuals
especially trained in the application of property and casualty
insurance to personal and business situations. Membership is
achieved by passing a series of examinations administered by the
American Institute for Property and Liability Underwriters, plus
three years of industry experience. Successful completion of the
examinations results in the designation of Chartered Property
Casualty Underwriter (CPCU).
SOCIETY OF INSURANCE RESEARCH organization formed to
encourage research in insurance and to foster an exchange of ideas
and research methodology among the society members.
SOLE PROPRIETOR LIFE AND HEALTH INSURANCE
coverage for the owner of a business. When a proprietor dies, debts
of the business become the debts of the estate since in this
circumstance the law recognizes business and personal assets as
one. The executor is required to dispose of the business as quickly
as possible. Life insurance can fund the disposition in several
ways:
1. If the business is transferred through a will, the life insurance's
death benefit can be applied to the deceased proprietor's personal
and business debts and estate taxes.
2. If the executor conducts a forced sale or liquidation, a death
benefit can be used to reduce or eliminate any debts. The death
benefit can also be used as a source of working capital for interim
financing to operate the business in the short run.
3. If the business is to be transferred to a child or employee, the
death benefit can provide funds to effect the transfer.
4. If the business is to be sold to a key employee(s) through a buy-
and-sell agreement, the key employee(s) usually has previously
bought a life insurance policy on the sole proprietor and made all
premium payments. The buy-and-sell agreement stipulates the
formula to be used in valuing the business as well as other
conditions of the sale. Upon the death of the proprietor and the sale
of the business to the key employee(s), the proprietor's estate
receives the
 Page 472
cash amount according to the buy-and-sell agreement, and the key
employee(s) receives the deceased proprietor's business.
SOLICITING AGENT see SOLICITOR (SOLICITING AGENT).
SOLICITING OFFER see SOLICITOR (SOLICITING AGENT).
SOLICITOR (SOLICITING AGENT) insurance salesperson who
contacts potential customers and handles clerical responsibilities
but has no authority to make insurance contracts. See also BINDER;
GENERAL AGENT (GA).

SOLIDITY SURPLUS additional amount of SURPLUS generated by an

additional amount of capital to be included in the surplus above
that required by the STATUTORY REQUIREMENTS. This additional surplus is
necessary in the event unforeseen contingencies occur. Such
contingencies could impair the insurance company's ability to
make future benefit payments for which it has received the
premiums as well as to fund the growth of new sales.
SOLVENCY minimum standard of financial health for an
insurance company, where assets exceed liabilities. State laws
require insurance regulators to step in when solvency of an insurer
is threatened and proceed with rehabilitation or liquidation.
SOLVENCY SURPLUS additional amount of SURPLUS generated by
an additional amount of CAPITAL to be included in book value surplus.
This additional surplus is necessary to act as a supplement to the
STATUTORY RESERVES in the event unforeseen contingencies occur. Such

contingencies could impair the insurance company's ability to

make future benefit payments for which it has received the
premiums.
SONIC BOOM LOSSES property damage resulting from aircraft
traveling faster than the speed of sound. Although the vibrations
caused by such high speed can cause damage, it is excluded on
most property forms.
SOUND EQUIPMENT INSURANCE special endorsement to
PERSONAL AUTOMOBILE POLICY (PAP) covering loss of records, tapes, and other

sound equipment caused by an insured peril in an insured

automobile.
SOURCES OF INCOME in insurance, company revenues from
underwriting and investment. Insurance companies make money
first, by underwriting good risks so that their premium dollars
cover claims losses and expenses (the money left over being called
underwriting income), and second, by investing premium dollars
until claims have to be paid (called investment income), sometimes
many years later. In the late 1970s, for example, casualty insurers
lost money on under-writing but made up for the loss with a gain in
investment income.
SOURCES OF SURPLUS cash carried forward from the previous
year, plus gains from operations for the current year, plus any
capital gains.
 Page 473
SOUTH-EASTERN UNDERWRITERS ASSOCIATION (SEUA)
CASE important 1944 U.S. Supreme Court ruling that the
insurance business constituted interstate commerce and was thus
subject to the SHERMAN ANTITRUST ACT. This decision came in U.S. v.
South-Eastern Underwriters Association, a price-fixing case,
brought against a fire insurance rate-making group by the U.S.
Attorney General, at the urging of the state of Missouri. SEUA
relied for its defense on the 1869 PAUL V. VIRGINIA decision by the
Supreme Court that insurance activities were not commerce and the
Sherman Act did not apply. The high court subsequently accepted
the argument that the industry was subject to the antitrust law. In
response, Congress passed the MCCARRAN-FERGUSON ACT (PUBLIC LAW 15) in
1945, in effect overruling the court by stating affirmatively that
regulation of insurance was the job of the states, not the federal
government. The law exempted insurance from federal antitrust
rules if it was covered by state regulation.
SPECIAL ACCEPTANCE extension of a REINSURANCE treaty to
include a risk that was not originally in its terms.
SPECIAL AGENT individual who sells and services life insurance
in an exclusive territory; in property and casualty insurance, an
individual who represents a property and casualty insurance
company as a marketing representative.
SPECIAL BUILDING FORM endorsement to the SPECIAL MULTIPERIL
INSURANCE (SMP) policy that provides ALL RISKS damage coverage for real

property. This special form provides only minimum cover, leaving

the option for adding forms to the policyholder. The policyholder
has a choice of the general building form, which provides named
peril coverage, or the special building form for the broader all-risks
coverage.
SPECIAL CHARGE any fee imposed on insurance companies by a
state. Insurers pay special taxes, including premium taxes and
franchise taxes. In addition, various states have their own special
charges to cover costs of such things as maintaining fire
departments, licensing agents, or filing reports.
SPECIAL DAMAGES see LIABILITY, CIVIL DAMAGES AWARDED.
SPECIAL EXTENDED COVERAGE endorsement to a property
insurance policy providing ALL RISKS coverage for insured property.
Excluded properties include residences, farms, and manufacturing
properties. This endorsement is generally used for property that
does not qualify for a packaged form such as the standard
multiperil policy.
SPECIAL FEATURES see OPTIONAL BENEFITS.
SPECIAL FORM see SPECIAL PERSONAL PROPERTY FORM.
SPECIAL INSURANCE POLICIES see SPECIAL RISK INSURANCE.
SPECIAL MORTALITY TABLE one used to determine the life
expectancy of ANNUITANTS. Annuity buyers are not representative of
 Page 474
the population as a whole, or of life insurance buyers. Because
annuities pay an income for life, only those in good health, and
who expect to live a long time, will spend their money for an
annuity contract. Recognizing this, life insurers, who sell annuity
contracts, use special mortality tables, which chiefly consider age
and sex, to predict their deaths. For example, if a 50-year-old
applicant purchases an IMMEDIATE ANNUITY for life with $100,000, the
income would be less than that for a 70-year-old. Likewise,
because women have longer life expectancies, their monthly
income payments would be lower than men of the same age.
SPECIAL MULTIPERIL INSURANCE (SMP) coverage usually
provided for large businesses in four areas:
1. Section I (Property)The building(s) and contents are covered
against either any peril (ALL RISKS basis) or only perils listed in
Section I. It is to the advantage of the business to have coverage
written on an ALL RISKS basis. Endorsements can be added for
sprinkler leakage, business interruption, extra expense, water
damage, rental loss, valuable records and papers, mercantile
robbery and safe burglary, mercantile open stock burglary, glass
and fine arts, or these items can be covered separately.
2. Section II (Liability)The insured is covered for actions or
nonactions that result in liability exposure arising out of ownership,
use, possession and/or maintenance of the covered locations and
structures. Also covered are the business's activities conducted by
the insured whether at or from the covered locations and structures.
Endorsements can be added to cover for medical payments,
liability arising out of products and completed operations, and
liability arising out of operation of a nonowned automobile.
Additional endorsements can be added to this section to broaden
liability coverage.
3. Section III (Crime)Coverage for employee dishonesty, premises
loss both inside and outside of the structure, forgery by depositions,
paper currency that proves to be counterfeit, and money orders.
The comprehensive DISHONESTY, DISAPPEARANCE, AND DESTRUCTION POLICY (3-D POLICY)
and the BLANKET CRIME POLICY provide these coverages.
4. Section IV (Boiler and Machinery)Coverage for explosion of a
boiler, engine, turbines, and/or pipes owned or under the control of
the insured. Endorsements can be added to cover indirect and
consequential losses resulting from accidents associated with the
boiler and machinery expenses. The SMP has generally been
replaced by the COMMERCIAL PACKAGE POLICY.
SPECIAL PERSONAL PROPERTY FORM endorsement to the
SPECIAL MULTIPERIL INSURANCE (SMP) policy that provides ALL RISKS damage

coverage for personal property. There are special limitations on

amounts of coverage for furs, jewelry, precious stones and metals,
patterns and
 Page 475
dies, and stamps, tickets, and letters of credit. Certain electronic
equipment and fragile materials are only covered for specific perils.
SPECIAL RISK INSURANCE transfer of highly individualized
loss exposures that is not based on the usual pooling principles of
insurance such as risk identification and classification selection.
Rather than setting up an insurance pool of standard risks, the
underwriter accepts responsibility for a unique or special risk.
Some examples would be insurance by LLOYD'S OF LONDON underwriters
for athletes, artists, and entertainers; insurance on Betty Grable's
legs; or insurance for dangerous scientific experiments or moon
travel.
SPECIFIC COVERAGE see SPECIFIC INSURANCE.
SPECIFIC EXCESS CONTRACT policy in which an insurer
agrees to pay property or liability losses in excess of a specific
amount per occurrence. For example, this type of coverage
typically is used by an employer that self insures its workers
compensation but wants to limit the loss per accident to, say,
$40,000. Contrasts with stop loss aggregate contract that pays for
total losses above a certain amount during the year.
SPECIFIC EXCESS REINSURANCE EXCESS OF LOSS REINSURANCE written
on a FACULTATIVE REINSURANCE basis to provide cover for a particular PRIMARY
INSURANCE policy.

SPECIFIC INSURANCE single insurance policy for only one kind

of property at only one location of an insured. For example,
property insurance on a rare piano in the insured's home would
cover only that piano, not any other property of the insured.
SPECIFIC LIMIT maximum limit of LIABILITY of an insurance
company for a particular claim or kind of loss that is applicable in
general to all such claims or losses. This maximum limit of liability
is usually less than the POLICY LIMIT of liability.
SPECIFIC RATE property insurance premium rate that is
applicable to a single, particular piece of property.
SPECIFIC REINSURANCE see FACULTATIVE REINSURANCE.
SPECIFIC STOP LOSS INSURANCE coverage that goes into
effect when an individual's claim reaches a specific threshold
selected by the employer who has SELF-INSURANCE. After this threshold
is reached, the policy pays claims up to the health insurance's
lifetime limit per employee.
SPECIFIED DISEASE POLICY see DREAD DISEASE INSURANCE.
SPECIFIED PERIL INSURANCE policy covering loss only for a
named peril in the policy. For example, the Standard Fire Policy
covers only the two named perils of fire and lightning. Other perils
can be added by endorsement, such as theft, vandalism, malicious
mischief, and burglary.
 Page 476
SPECULATIVE see SPECULATIVE RISK.
SPECULATIVE RISK uncertain prospect of financial gain or loss.
A business investment that could either return a profit or sustain a
loss, such as the purchase of a common stock, is an example of a
speculative risk. In most instances, speculative risks are not
insurable. See also PURE RISK; STANDARD RISK.
SPELL OF ILLNESS period of time an insured is sick and entitled
to receive health insurance benefits. See also DISABILITY INCOME INSURANCE,
GROUP HEALTH INSURANCE.

SPENDTHRIFT TRUST see SPENDTHRIFT TRUST CLAUSE.

SPENDTHRIFT TRUST CLAUSE provision in a life insurance
policy that protects its proceeds from the beneficiary's creditors.
On payment, the beneficiary loses the protection of the spendthrift
trust clause and the beneficiary's creditors can then bring suit to
attach the proceeds.
SPINOUT method of terminating a SPLIT DOLLAR LIFE INSURANCE policy in
which the company transfers its interest in the life insurance policy
to the insured employee. Through such a transfer, the insured
employee incurs a tax liability on the policy's transferred value.
SPLIT ANNUITY division of a sum of money between a DEFERRED
ANNUITY and an immediate LIFE ANNUITY CERTAIN.

SPLIT DEDUCTIBLE deductible applicable to each loss so that

the amount of each loss retained by the insured varies according to
the PERIL that caused the loss. For example, the split deductible in a
policy may specify that the insured must retain the first $300 of any
fire loss and $100 of any vandalism and malicious mischief loss.
SPLIT DOLLAR LIFE INSURANCE policy in which premiums,
ownership rights, and death proceeds are split between an employer
and an employee, or between a parent and a child. The employer
pays the part of each year's premium that at least equals the
increase in the cash value. The employee may pay the remainder of
the premium, or the employer may pay the entire premium. When
the increase in cash value equals or exceeds the yearly premium,
the employer pays the entire premium. If the employee dies while
in the service of the employer, a beneficiary chosen by the
employee receives the difference between the face value and the
amount paid to the employer (the cash value or the total of all
premiums paid by the employer whichever is greater). Thus, during
employment, the employee's share of the death benefit decreases. If
the employee leaves the employer, the latter has the option of
surrendering the policy in exchange for return of all premiums, or
selling the policy to the employee for the amount of its cash value.
There are two types of split dollar life insurance policies: (1)
Endorsementthe employer owns all policy privileges; the
employee's only rights are to choose beneficiaries and to select the
manner in which the death benefit is paid. (2) Collateral
 Page 477
the employee owns the policy. The employer's contributions toward
the premiums are viewed as a series of interest-free loans, which
equal the yearly increase in the cash value of the policy. The
employee assigns the policy to the employer as collateral for these
loans. When the employee dies, the loans are paid from the face
value of the policy. Any remaining proceeds are paid to the
beneficiary.
SPLIT FUNDED PLAN retirement arrangement in which
contributions are divided between allocated (insured) and
unallocated funding instruments (an uninsured plan). It seeks to
combine the advantages of guarantees-of-income of the allocated
funding instrument with the investment flexibility (and possible
higher yields) of an unallocated funding instrument. For example,
60% of contributions could be placed in a RETIREMENT INCOME POLICY (or
other permanent life insurance policy) and 40% in a DEPOSIT
ADMINISTRATION PLAN (or other fund held and invested by a trustee).

SPLIT FUNDING see SPLIT FUNDED PLAN.

SPLIT LIFE INSURANCE combination life insurance policy
composed of TERM LIFE INSURANCE and an INSTALLMENT REFUND ANNUITY.
SPLIT LIMIT see SPLIT LIMITS COVERAGE.
SPLIT LIMITS COVERAGE technique for expressing limits of
liability coverage under a particular insurance policy, stating
separate limits for different types of claims growing out of a single
event or combination of events. Coverage may be split (limited)
per person, per occurrence, between bodily injury and property
damage, or in other ways. Property damage liability is listed with a
limit per accident. For example, a policy with split limits quoted as
$100,000/$300,000/ $25,000 would provide a maximum of
$100,000 bodily injury coverage per person, $300,000 total bodily
injury coverage per accident, and $25,000 total property damage
liability coverage per accident.
SPOUSAL INDIVIDUAL RETIREMENT ACCOUNT (IRA)
INDIVIDUAL RETIREMENT ACCOUNT established under the TAX REFORM ACT OF 1986, for a

spouse who has unearned income. The maximum annual combined

contribution into the worker's and spouse's IRA is $2250. The
contributions can be apportioned between the two accounts in any
manner desired.
SPOUSE'S BENEFIT insured sum paid regularly to a married
partner (usually a wife but sometimes a husband) of a retired
worker. There are several forms:
1. The Federal Retirement Equity Act mandates a spouse's benefit
payable out of a husband's pension, unless cancelled under
specified conditions.
2. Under Social Security, a spouse receives a benefit upon reaching
age 65, whether or not that person has earned Social Security
credits.
3. Some business firms provide for a spouse's benefit at the death
of
 Page 478
a retired worker, usually a percentage of the deceased worker's last
highest salary, funded out of the deceased's pension.
4. A joint and survivor annuity can provide a spouse's benefit. For
example, a joint and two-thirds annuity gives the couple an income
for as long as both are alive, and when one dies the survivor
receives two-thirds of the amount they had been getting.
SPREAD LOSS see CARPENTER PLAN (SPREAD LOSS COVER, SPREAD LOSS REINSURANCE).
SPREAD LOSS COVER see CARPENTER PLAN (SPREAD LOSS COVER, SPREAD LOSS
REINSURANCE).

SPREAD LOSS REINSURANCE see CARPENTER PLAN (SPREAD LOSS COVER,

SPREAD LOSS REINSURANCE).

SPREAD ON INTEREST-BEARING FUNDS difference between

the yield on earning assets and the cost of interest-bearing
liabilities.
SPREADSHEET risk management tool to determine risk exposure
and to help spread the risk. A risk manager considers a business
firm's individual exposures separately. As the number of exposures
increases, the threat that all units will suffer loss decreases, and the
manager is able to spread the risk.
SPRINKLER DAMAGE INSURANCE see SPRINKLER LEAKAGE INSURANCE;
SPRINKLER LEAKAGE LEGAL LIABILITY INSURANCE.

SPRINKLER LEAKAGE INSURANCE coverage for property

damage caused by untimely discharge from an automatic sprinkler
system. This coverage, available through an endorsement to the
Standard Fire Policy, typically excludes losses from fire, lightning,
windstorm, earthquake, explosion, rupture of steam boiler, riot,
civil commotion, and order of civil authority.
SPRINKLER LEAKAGE LEGAL LIABILITY INSURANCE
coverage for liability for damage to property of others from
untimely discharge of fire-fighting sprinkler systems. This
coverage is available as an endorsement to broad-form COMPREHENSIVE
GENERAL LIABILITY INSURANCE (CGL).

SPRINKLING TRUST trust in which the TRUSTEE distributes capital

and income to the beneficiaries of the trust according to their
economic needs.
STACKING circumstance under which the insured maintains that,
if an insurance policy covers at least two scheduled items of real or
personal property, in the event of a loss applicable coverage should
be twice the stated limit in the policy. In an effort to avoid the
stacking issue, automobile policies include a stipulation that the
limit of liability stated in the DECLARATIONS SECTION is the maximum
amount the INSURER will pay for all damages resulting from one
accident, regardless of the number of insureds, claims made,
vehicles, or premiums stated in the declarations section, or vehicles
involved in an accident.
 Page 479
STAFF ADJUSTER see ADJUSTER.
STAFF (GROUP) HEALTH MAINTENANCE ORGANIZATION
(HMO) traditional HMO made up of physicians who are salaried
by the HMO. These physicians treat solely HMO members who are
covered only if they use HMO physicians and hospitals.
STAFF UNDERWRITER see UNDERWRITER, LAY.
STAMP AND COIN COLLECTIONS INSURANCE coverage on
an ALL RISKS basis at any location for stamp and coin collections,
excluding wear and tear, war, nuclear disaster, and mysterious
disappearance. Usually each item is specifically listed and valued
in the policy. This insurance is of particular importance for
insureds with valuable stamp and coin collections. Standard
property insurance policies such as the HOMEOWNERS INSURANCE POLICY have
a relatively low limit of coverage of specialty items such as stamp
and coin collections.
STAMP AND COIN DEALERS INSURANCE coverage on an ALL
RISKS basis, subject to exclusions of war, wear and tear, loss resulting

from delay, loss of market, infidelity of the insured's employee,

loss due to rain, sleet, snow, or flood, except while the stamps or
coins are in transit. This is a special INLAND MARINE insurance
coverage designed specifically for dealers.
STANDARD method of UNDERWRITING insurance in which the INSURANCE
COMPANY utilizes regular MORTALITY TABLES without additions for

abnormalities.
STANDARD ANNUITY TABLE, 1937 historical MORTALITY TABLE used
for individual ANNUITY contracts subsequently replaced by the ANNUITY
TABLE, 1949.

STANDARD AVERAGE CLAUSE see COINSURANCE.

STANDARD DEVIATION OR VARIATION statistic indicating
the degree of dispersion in a set of outcomes, computed as the
arithmetic mean of the differences between each outcome and the
average of all outcomes in the set.
STANDARD FIRE POLICY see FIRE INSURANCESTANDARD FIRE POLICY.
STANDARD FIRE POLICY ANALYSIS method of rating that
compares property to be insured to a standard and adjusts the rate
for deviations from the standard. A standard building is situated in
a standard city of specific construction with specified fire
protection. Other risks are compared to the standard and given
credits or debits if they are a better or worse risk.
STANDARD FORM approved or accepted policy for a particular
type of risk. The only type of risk covered by a standard form
mandated by
 Page 480
law is the fire policy. In 1886, New York adopted a standard fire
form that has since been revised and adopted by every other state.
In other types of coverage, states may prescribe mandatory or
optional minimums or may forbid certain provisions. Therefore,
while life and health benefits may vary widely, for example,
policyholders are given certain uniform rights like grace periods
for paying premiums. In other areas, insurers have voluntarily
adopted standard forms. One example is the standard automobile
policy. Other types of coverage are offered on standard forms
developed by rating bureaus such as the INSURANCE SERVICES OFFICE (ISO).
Although insurers may use these forms, they are not obligated to do
so, and many develop their own forms.
STANDARD GROUP see STANDARD RISK.
STANDARD INSURANCE CONTRACT PROVISION see
STANDARD PROVISIONS, LIFE INSURANCE; STANDARD PROVISIONS, PROPERTY AND CASUALTY INSURANCE.

STANDARD LIMIT see BASIC LIMITS OF LIABILITY.

STANDARD MORTGAGE CLAUSE see MORTGAGEE CLAUSE.
STANDARD NONFORFEITURE LAWS see NONFORFEITURE BENEFIT
(OPTION); NONFORFEITURE CASH SURRENDER BENEFIT; NONFORFEITURE EXTENDED TERM BENEFIT;

NONFORFEITURE PROVISION; NONFORFEITURE REDUCED PAID-UP BENEFIT.

STANDARD POLICY see STANDARD FORM; STANDARD PROVISIONS, LIFE INSURANCE;

STANDARD PROVISIONS, PROPERTY AND CASUALTY INSURANCE.

STANDARD PREMIUM see BASIC PREMIUM.

STANDARD PROVISIONS, LIFE INSURANCE elements
common to all life insurance policies. While state insurance laws
do not prescribe the exact words that must be in a life insurance
policy, certain standard provisions must be included to provide
specified basic benefits for an insured, who cannot be charged extra
for them. Additional benefits can be provided, if the insurance
company desires. Standard provisions include the BENEFICIARY; GRACE
PERIOD; INCONTESTABLE CLAUSE; NONFORFEITURE (CASH SURRENDER BENEFIT, REDUCED PAID-UP

BENEFIT, EXTENDED TERM BENEFIT); POLICY LOAN; REINSTATEMENT; SUICIDE CLAUSE; WAR EXCLUSION

CLAUSE.

STANDARD PROVISIONS, PROPERTY AND CASUALTY

INSURANCE sections with standard wording common to all
property and casualty insurance contracts: CONDITIONS, DECLARATIONS,
EXCLUSIONS, INSURING AGREEMENT. See also PROPERTY AND CASUALTY INSURANCE PROVISIONS.

STANDARD RISK one that is regarded by underwriters as normal

and insurable at standard rates. Other classifications of risks are
given credits or debits based on their deviation from the standard.
 Page 481
STANDARD WORKERS COMPENSATION INSURANCE see
WORKERS COMPENSATION INSURANCE.

STANDBY TRUSTS trusts in which individuals manage their own

assets and only if a predetermined event occurs, such as incapacity,
will another party take over the management of these assets. Upon
recovering from the incapacity, the individual may resume the
management of the assets.
STANDING TIMBER INSURANCE coverage against only two
perils, fire and lightning. The amount of coverage is per acre of
standing timber for either merchantable trees (living trees with no
decay, and minimum diameter), or for trees used in reforestation.
This coverage is commonly purchased by tree farmers and
investors. Historically, because of tax write-offs, investing in tree
farms has been particularly popular among certain investors. With
the passage of the TAX REFORM ACT OF 1986 such a tax shelter is no longer
possible, but the reason for purchasing timber insurance for
protection remains unchanged.
STARE DECISIS Latin phrase meaning ''to stand by the
decisions." This legal doctrine under common law requires courts
to rely on precedents, or previous decisions, when deciding
disputes unless there is a compelling reason to reject those
precedents. In most instances, this doctrine means that courts will
decide disputes over insurance contracts the same way they have
decided cases with similar facts and legal issues in the past.
STATE AGENT insurance salesperson who markets and services
policies in one or more states and holds a supervisory position. See
also SPECIAL AGENT.
STATE ASSOCIATIONS OF INSURANCE AGENTS see
INDEPENDENT INSURANCE AGENTS OF AMERICA (IIAA); NATIONAL ASSOCIATION OF LIFE UNDERWRITERS

(NALU); PROFESSIONAL INSURANCE AGENTS (PIA).

STATED AMOUNT ENDORSEMENT addition to a property

policy providing coverage for a specified amount. This
endorsement is typically used for an unusual or valuable piece of
property that does not fit standard descriptions and, instead of
declining, retains its value. For example, a classic Austin Healey
3000 Mark IV might be covered by this type of endorsement to a
PERSONAL AUTOMOBILE POLICY (PAP).

STATE DISABILITY PLAN account established and administered

by a state agency to finance a mandatory state insurance program
for job-related injuries or to finance a non-job-related injuries
insurance program on a statewide basis. See also WORKERS COMPENSATION
INSURANCE.

STATE EXEMPTION STATUTE laws in most cases protecting life

insurance policies from an insured's creditors. These laws typically
exempt death benefit proceeds and policy cash values from
attachment by creditors, particularly if the beneficiary is a spouse
or child of the insured. Many exemption laws have limits, with all
insurance proceeds over a certain amount, say $20,000, available to
the insured's creditors.
 Page 482
In some states, endowment and ANNUITY policies are granted less
protection from creditors than ORDINARY LIFE INSURANCE because such
policies are often used as investment vehicles. See also LIFE INSURANCE,
CREDITOR RIGHTS.

STATE FUND account established and administered by a state

agency to finance a mandatory insurance program, for example,
WORKERS COMPENSATION INSURANCE.

STATE GOVERNMENT INSURANCE health insurance coverage

offered by some states for medical expenses and loss of income
from nonoccupational disability. The merits of federal health
insurance have been debated for some time. In the meantime,
several states have passed plans that may be used as a testing
ground for a more comprehensive plan. For example, Rhode Island
pays for out-of-pocket expenses that total more than $5000 or a
certain percentage of income. Other states have passed similar
laws, including Georgia, Maine, Minnesota, and Connecticut.
STATE HIGH RISK POOLS FOR THE MEDICALLY
UNINSURABLE state plans that provide health insurance
coverage for those who are unable to purchase medical insurance.
Coverage is provided by a specially formed nonprofit-making pool
comprised of all the health insurance companies doing business in
that particular state. The pool offers the insurance coverage to those
residents of the state who: (1) have been rejected for health
insurance coverage by at least one insurance company; and/or (2)
have higher premium payments for a currently insured plan than
that required by the pool; and/or (3) have insurance under a rated
health insurance policy or have a restrictive rider attached to that
policy. The typical lifetime maximum benefits in most states is
$500,000 with a $500 DEDUCTIBLE. The waiting period in most states is
usually six months if the applicant has been treated for a medical
problem within six months of the application. Generally, in most
states the premium paid by the insured ranges from 125% to 150%
of the standard premium rate for that of an individual health
insurance policy purchased through a standard carrier.
STATE INSURANCE DEPARTMENT see INSURANCE DEPARTMENT.
STATE LIFE FUND see WISCONSIN STATE LIFE FUND.
STATEMENT BLANK see ANNUAL STATEMENT.
STATEMENT (INSURANCE COMPANY TO INSURED) annual
report to policyholders of certain CASH VALUE LIFE INSURANCE products and
annuities to inform them of the value of the investment portion of
their contracts. Buyers of whole life insurance can be said to
purchase both an insurance product and a tax-deferred savings
vehicle. If the insurance is terminated, the policyholder is entitled
to the cash value buildup. In addition, newer forms of these
policies, such as UNIVERSAL LIFE INSURANCE, variable annuities, and VARIABLE
LIFE INSURANCE,
 Page 483
offer policyholders a choice of investments rather than a
guaranteed return. A statement informs the insured of the annual
cash buildup and the performance of the investment portion.
STATEMENT OF OPINION (ACCOUNTANTS REPORT,
AUDITORS REPORT) statement by an auditor or certified public
accountant indicating if a company's financial statements fairly
present its true financial condition. A statement of opinion may be
unqualified, qualified, or adverse. An unqualified, or "clean,"
opinion indicates no exceptions or qualifications were found by the
auditor. A qualified report means the statement makes a fair
presentation of a firm's financial condition except for some
important uncertainties with effects that cannot be determined by
the auditor. In the case of an insurance company, an example of an
important uncertainty that might lead to a qualified opinion would
be the outcome of litigation over a major disputed claim. An
adverse opinion means the auditor is unwilling to vouch for the
financial statements presented by the company.
STATE MUTUAL assessment mutual company that operates on a
statewide basis or in more than one state. See also ASSESSABLE MUTUAL.
STATE-OF-THE-ART DEFENSE provision established either by
state statute or court order that permits the defendant to establish
that at the time of the injury incurred by the plaintiff, the defendant
provided goods and services in accordance with the state of
technological and scientific knowledge as of the date and/or was in
compliance with industry or government standards at that time.
STATE RATE standard property/casualty insurance premium set by
a state rating bureau. States have responsibility for regulating
insurers and making certain that rates are reasonable. To this end,
experience information is gathered by rating bureaus, and standard
(or advisory) rates are set for various lines of insurance in that
state. The rates are simply for guidance and individual companies
may charge more or less as long as their rates are approved by the
state commissioner. The bureau may represent the companies that
write a particular line of insurance in that state, such as workers
compensation, and may request rate increases from the state
commissioner on behalf of its members.
STATE RATE SHEET see STATE RATE.
STATE SAVINGS GUARANTEE CORPORATION state-
sponsored insurance fund that was intended to guarantee deposits
at state-chartered savings institutions. A handful of these funds
existed in the early 1980s, but after a string of savings and loan
failures in Maryland and Ohio in 1985, these funds were phased
out and the member savings institutions converted to Federal
Deposit Insurance.
STATE SUPERVISION AND REGULATION primary
responsibility for overseeing the insurance industry that has rested
with individual
 Page 484
states since 1945, after Congress passed the MCCARRAN-FERGUSON ACT (PUBLIC
LAW 15). In addition to supervision and regulation, states receive taxes

and fees paid by the industry that amount to several billion dollars
a year. State insurance laws are administered by state insurance
departments that are responsible for making certain that (1) rates
are adequate, not unfairly discriminatory, and not unreasonably
high, and (2) insurance companies in the state are financially sound
and able to pay future claims.
To this end, states set requirements for company reserves, require
annual financial statements, and examine company books. Each
state has an insurance commissioner or superintendent who is
either elected or appointed by the governor, with responsibility for
investigating company practices, approving rates and policy forms,
and ordering liquidation of insolvent insurers. The NATIONAL ASSOCIATION
OF INSURANCE COMMISSIONERS (NAIC) has drafted model legislation and worked

for policy uniformity, but regulations vary widely from state to

state.
Whether insurers should be regulated by the states or the federal
government remains at issue, but so far insurers and the NAIC
lobbying have been effective in resisting federal regulation.
Nevertheless, the federal government has a profound effect on the
insurance industry through its taxes and a variety of regulations.
See also STATE TAXATION OF INSURANCE.
STATE TAXATION OF INSURANCE authority of states to tax the
insurance companies they regulate. States levy income taxes, real
and personal property taxes, and special levies, the most important
of which is a premium taxin effect, a sales tax on premiums.
Although it is generally 2% of premiums, some states tax as much
as 4%. Insurers also pay franchise taxes, licensing fees, and SPECIAL
CHARGES. Insurance taxes are an important source of revenue for the

states, amounting to several billion dollars a year. See also FEDERAL

TAXATION.

STATE UNEMPLOYMENT INSURANCE see UNEMPLOYMENT

COMPENSATION.

STATIC TABLE MORTALITY TABLE, MORBIDITY TABLE that does not include
current statistical experience.
STATIC RISK damage or destruction of property and/or property
that is illegally transferred as the result of misconduct of
individuals. The risk is insurable.
STATISTICS collection of numbers to record and analyze data
such as occurrences of events and particular characteristics.
Statistics are absolutely vital to all elements of insurance. In life
and health insurance, they are used to tabulate age, sex, disability,
cause of death, occupation, and other data needed to construct a
MORBIDITY TABLE and MORTALITY TABLE, which in turn figure importantly in

calculating premiums. Similarly, in property and casualty insurance

statistics are
 Page 485
used to record losses and injuries to help predict their future
occurrence in order to calculate premiums.
STATUTE OF LIMITATIONS period, set by law, after which a
damage claim cannot be made. Limits are set by individual states
and usually range from one to seven years.
STATUTORY ACCOUNTING rules that insurance companies
must follow in filing an annual financial statement known as the
convention blank, with state insurance departments. The reported
financial condition of an insurance company can differ markedly
depending on whether statutory accounting rules or GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) are used in preparing financial statements. In

general, statutory accounting is more conservative than GAAP

because it tends to overstate expenses and liabilities while
understating income and assets.
STATUTORY BONDS any of a number of types of SURETY BONDS that
the law requires of government contractors, licensed businesses,
litigants, fiduciaries, government officials, and others whose
performance of some duty or obligation must be assured in the
public interest. See also APPEAL BOND; BAIL BOND; BID BOND; COMPLETION BOND;
CONTRACT BOND; FEDERAL OFFICIALS BOND; JUDICIAL BOND; LICENSE BOND; LOST INSTRUMENT BOND;

PENSION PLANS PERFORMANCE BOND; PERMIT BOND; SECURITIES BOND; TRUSTEE ROLE.

STATUTORY EARNINGS revenue based on conservative reserve

requirements of various states. Statutory earnings do not meet
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). A role of state regulation is to

make certain that insurers have enough money set aside in STATUTORY
RESERVES to pay all future claims and that the company will remain

solvent. For this reason, regulators take a conservative approach to

setting reserve requirements. But because an increase in reserves
translates into lower earnings for a stock insurer, investors, and
securities analysts argue that they are not helpful in gauging the
health of a company for investment purposes. Therefore, insurers
calculate statutory earnings for regulators and another set of
earnings, based on natural reserves, for investors.
STATUTORY LAW see STATUTORY LIABILITY.
STATUTORY LIABILITY see ANNUAL STATEMENT; FULL PRELIMINARY TERM RESERVE
PLAN; LIABILITIES: LIFE INSURANCE COMPANIES; PROSPECTIVE RESERVE; RETROSPECTIVE METHOD

RESERVE COMPUTATION; STATUTORY ACCOUNTING; STATUTORY REQUIREMENTS; STATUTORY RESERVES.

STATUTORY PROVISIONS see STANDARD PROVISIONS, PROPERTY AND CASUALTY

INSURANCE.

STATUTORY PROFIT total EARNED PREMIUMS minus total EXPENSES and

LOSSES PAID of the INSURANCE COMPANY.
 Page 486
STATUTORY REQUIREMENTS standards set by the various state
regulatory authorities that determine how financial statements must
be prepared for regulators. The states are responsible for making
certain that insurers will remain solvent and have enough set aside
in reserves to pay future claims. To this end, they have devised
STATUTORY ACCOUNTING principles that govern insurance company

reporting. These requirements differ from GENERALLY ACCEPTED ACCOUNTING

PRINCIPLES (GAAP). Among other things, statutory requirements include

the setting of STATUTORY RESERVES, and the immediate expensing of the

cost of acquiring new business, rather than allowing insurers to
spread the exposure over the life of the policy. See also STATE
SUPERVISION AND REGULATION.

STATUTORY RESERVES reserves required by state regulators.

Because regulators must assure that an insurance company remains
solvent and that it can pay future claims, they set conservative
standards for insurer reserves. Regulators have various formulas
for valuing reserves, such as the LOSS FREQUENCY METHOD and the
Commissioners Reserve Valuation Method.
STATUTORY RESTRICTION limitation imposed on insurance
companies by state law. States oversee the insurance industry,
being responsible for making certain that the rates are fair,
reasonable, and adequate, and that among other things, the
companies that write insurance in the state are financially sound
and able to pay future claims. To this end, the states restrict the
types of investments insurance companies can make with their
premium dollars, and they control insurers' relationships with
insureds by guaranteeing certain minimum rights to insureds.
STATUTORY STATEMENT OF ACCOUNTING PRINCIPLE
(SSAP) 16EDP EQUIPMENT state law that limits the admitted
value of an insurance company's EDP equipment to 3% of the
company's ADJUSTED SURPLUS.
STATUTORY STATEMENT OF ACCOUNTING PRINCIPLE
(SSAP) 52DEPOSIT-TYPE CONTRACTS state law that stipulates
accounting rules for products sold by insurance companies that
have no contingent benefits such as GUARANTEED INVESTMENT CONTRACTS.
STATUTORY STATEMENT OF ACCOUNTING PRINCIPLE
(SSAP) 65PROPERTY AND CASUALTY CONTRACTS state
law that stipulates the establishment of required reserves for CLAIMS
MADE BASIS LIABILITY COVERAGE contracts, removes the excess STATUTORY RESERVES,

and directs that all amounts that represent contractual

reimbursements to the insurance company be reflected as a
reduction in PAID LOSSES.
STATUTORY STATEMENT OF ACCOUNTING PRINCIPLE
(SSAP) 68BUSINESS COMBINATIONS AND GOODWILL state
law that stipulates that GOODWILL as an ADMITTED ASSET cannot be greater
than 10% of ADJUSTED SURPLUS.
 Page 487
STATUTORY STATEMENT OF ACCOUNTING PRINCIPLE
(SSAP) 83FEDERAL INCOME TAXES state law by which
insurance companies are permitted to establish deferred tax assets
and liabilities subject to maximum limitations.
STATUTORY STATEMENT OF ACCOUNTING PRINCIPLE
(SSAP) 89SEPARATE ACCOUNTS state law that stipulates that
the worth of separate accounts must be valued at current market
with the exception of those separate accounts established and
maintained for GUARANTEED INVESTMENT CONTRACTS (GICS).
STATUTORY SURPLUS excess funds above the amount required
to establish LEGAL RESERVES for the policies in force. These excess funds
are generated as the result of mortality savings, excess interest
earned on investments (an amount above that expected), and
expense savings.
STATUTORY UNDERWRITING PROFIT OR LOSS difference
between the EARNED PREMIUMS and the losses and expenses of an
insurance company. See also STATUTORY EARNINGS; STATUTORY REQUIREMENTS;
STATUTORY RESERVES.

STEAM BOILER INSURANCE see BOILER AND MACHINERY INSURANCE.

STEVEDORES LEGAL LIABILITY INSURANCE liability
coverage for dockworkers for damage to property in transit while
in their care.
STIPULATED PREMIUM COMPANY see STIPULATED PREMIUM INSURANCE.
STIPULATED PREMIUM INSURANCE a form of ASSESSMENT
INSURANCE for which a regular premium is charged. In addition to

paying the regular stipulated premium, an insured and other

members of a mutual ASSESSMENT COMPANY may be subject to an
additional assessment premium to make up for underwriting losses.
STOCK see STOCK INSURANCE COMPANY.
STOCK APPRECIATION RIGHTS (SARs) contractual rights to a
stipulated percentage of the increase in the value of an insurance
agency over a given future period of time. They are used to convey
a percentage of the increase in the agency's value to a key
employee without resulting in the owner(s) of the agency owning
less than 50%. The advantages of such a stock transfer for the
agency owner include the following:
1. Noncompete agreements not further reinforced since the key
employee does not receive benefits if an agreement is violated.
2. The key employee is tied to the agency because that employee
can become an equity owner without actually committing his or her
own funds.
These SARs are really long-term deferred compensation plans for
the employee(s) whose ultimate value is tied to the increase in the
value of the agency's book of business over the value at the time
 Page 488
the right was granted to the employee(s). This circumstance should
increase the commitment of the employee(s) to increase the
economic value of the agency.
STOCK COMPANY INSURANCE insurance sold by a stock
insurance company that is usually in the form of NONPARTICIPATING
INSURANCE.

STOCKING A MUTUAL see DEMUTUALIZATION (STOCKING A MUTUAL).

STOCK INSURANCE COMPANY business owned by
stockholders, as contrasted to a MUTUAL INSURANCE COMPANY, which is
owned by its policyholders. Many major life insurers are mutual
companies whereas some leading property/casualty and multiline
insurers are stock insurance companies. See also DEMUTUALIZATION
(STOCKING A MUTUAL).

STOCK INSURER see STOCK INSURANCE COMPANY.

STOCK PROCESSING INSURANCE coverage in the event that
stock sent to others for processing is damaged or destroyed en
route or at their premises except those perils specifically excluded.
For example, this coverage can be used when processing milk into
cheese since the farmer would lose everything if the milk were
damaged or destroyed en route or at the processor's premises.
STOCK REDEMPTION PLAN see CLOSE CORPORATION PLAN.
STOCK SWAP trading of stock to enhance portfolio performance
and reduce taxes. This practice is followed when the investor has
accumulated losses on stocks and sells these stocks in order to use
the losses to offset capital gains on other investments, thereby
reducing taxable income. Losses incurred in this manner can be
used to offset capital gains dollar-for-dollar. For any additional
losses, they can be used to offset ordinary income of up to $3000.
All excess losses can be carried forward to future years.
STOCK TRANSFER reregistration of existing shares when there is
any change in the name of the owner(s). Such a circumstance may
occur when the owner(s) of the shares gives these shares to another
person, establishes a trust, marries and changes the name, or adds
or removes a name as owner. The transfer is executed through a
letter of instruction with the signature of all owners guaranteed by
a bank or a broker and sent to the transfer agent.
STOP LOSS see STOP LOSS REINSURANCE.
STOP LOSS AGGREGATE CONTRACT see STOP LOSS REINSURANCE.
STOP LOSS INSURANCE coverage purchased by employers in
order to limit their exposure under SELF INSURANCE medical plans. This
coverage is available in two types:
1. Specific stop lossCoverage is initiated when a claim reaches the
threshold selected by the employer. After the threshold is reached,
the stop-loss policy would pay claims up to the lifetime limit per
employee for the self insurance medical plan.
 Page 489
2. Aggregate stop lossCoverage is initiated when the employer's
self insurance total group health claims reach a stipulated threshold
selected by the employer. Typically, this threshold is 125% of the
self insurer's annual estimated group health claims cost.
STOP LOSS PROVISION see STOP LOSS REINSURANCE.
STOP LOSS REINSURANCE protects a cedent against an
aggregate amount of claims over a period, in excess of a specified
percentage of the earned premium income. Stop loss reinsurance
does not cover individual claims. The reinsurer's liability is limited
to a stipulated percentage of the loss and/or a maximum dollar
amount. The stop loss method protects the cedent against the
possibility that the aggregate value of an accumulation of small
losses will exceed a specified percentage of earned premium
income of a particular class. Stop loss reinsurance is the exact
opposite of the QUOTA SHARE REINSURANCE and SURPLUS REINSURANCE, and differs
considerably from other forms of EXCESS OF LOSS REINSURANCE. For
example, a reinsurer can provide a cedent with 50% of the amount
by which aggregate incurred losses of the cedent in any year
exceed 70% of the cedent's earned premium income during that
year.
STOREKEEPERS BURGLARY AND ROBBERY INSURANCE
coverage for small mercantile establishments on a package basis.
Combines six layers of protection: burglary of a safe; damage
caused by robbery and burglary, whether actual or attempted;
robbery of a guard and burglary of the business's merchandise;
robbery inside or outside the premises of the business; kidnapping
to physically force a businessowner and/or his or her
representative(s) to open the premises of the business from the
outside; and theft of securities and monies either from the home of
a messenger of the business and/or from a night depository of a
bank.
STOREKEEPERS LIABILITY INSURANCE coverage for bodily
injury and property damage liability resulting from ownership, use,
and/or maintenance of the insured business's premises, completed
operations, and products. Covers medical payment expenses
associated with bodily injury to another party when an accident
causes hazardous conditions on the business's premises or within
the business's operation. Also covers costs in defending the insured
against liability suits, even if the suits are without foundation.
STORM INSURANCE (WINDSTORM INSURANCE) additional
coverage to a property policy. Windstorms are not one of the
standard covered perils. If an insured desires coverage for
windstorms and hail, an endorsement is required.
STRAIGHT DEDUCTIBLE CLAUSE section of a policy that
specifies the dollar amount or percentage of any loss that the
insurance does not pay. Most property and medical policies specify
that the first portion of any loss is absorbed by the insured. A
straight deductible
 Page 490
clause, which is common in auto and homeowners insurance, might
provide for a deductible stated in a dollar amount, such as $500.
For example, the Smiths have a homeowners policy with a $500
straight deductible clause. Fire damage to the home amounts to
$1500. Under the terms of the policy, the Smiths would pay the
first $500 and the insurance company would reimburse them for
$1000. Some straight deductibles are expressed as a specific
percentage of value rather than a dollar amount. For example, the
insured might absorb the loss for 5% of the value of property that is
totally destroyed. See also DISAPPEARING DEDUCTIBLE.
STRAIGHT LIFE ANNUITY see ANNUITY; ANNUITY DUE; LIFE ANNUITY CERTAIN;
PURE ANNUITY; REFUND ANNUITY.

STRAIGHT LIFE INSURANCE see ORDINARY LIFE INSURANCE.

STRAIGHT LINE RULE method of depreciating an asset in which
its useful life is divided into an appropriate number of years (or
other periods), the final salvage value is deducted, and the asset is
written off in an equal portion for each period. Depreciation is a
business expense for tax purposes. Straight line depreciation is the
simplest method, but is not as advantageous to an owner as
ACCELERATED DEPRECIATION, which allows a company to recover its costs

more quickly.
STRATEGIC RISK FINANCING elimination of unnecessary
financing costs and the redirection of those sums to activities that
are more profitable. The concept is for the company to have a long-
term view of its risk exposure as opposed to concentrating on the
availability of insurance at any time. For example, in a soft market,
companies tend to buy more insurance than they need because
premiums are low. In a hard market, companies tend to retain their
insurance coverage regardless of price. The methodology involves
a cost/benefit analysis of the numerous risk retention options to
discern the difference in the cost of a retention option and that of
full/partial insurance for that option. In the analysis of each option,
the company's past loss experience is examined and maximum
possible loss scenarios in the future are projected. After the
statistical studies are completed, a program is designed to provide
an effective plan of risk coverage at an efficient price.
STRATIFICATION OF LOSSES technique of breaking down the
various losses as a whole into useful components called subsets
(strata) so that no subset is overrepresented. The result is the
classification of losses according to dollar amount in order to
predict the probabilities of various degrees of loss severity so that
the organization can adopt the proper RISK MANAGEMENT techniques. See
also RATE MAKING.
STRATIFIED RANDOM SAMPLING selection of restricted
random samples in order to obtain a more accurate estimate of the
EXPECTED LOSS (mean) than could be obtained by the selection of

completely
 Page 491
For example, assume it is the desire to obtain an
RANDOM SAMPLES.

accurate estimate of the average number of automobile accidents

experienced by juniors in the Louisiana State University System.
By selecting the proper size of random samples among the various
colleges within the system, a more accurate estimate of the number
of automobile accidents experienced by juniors system-wide can be
obtained than by selecting the same total random sample from the
system as a whole.
STREET CLOCK FLOATER endorsement to a scheduled property
floater that provides ALL RISKS protection for street clocks. Clocks and
signs attached to business property can be covered under the
Standard Fire Policy. But a street clock floater provides broader
coverage and protects the owner of the clock both in transit and
wherever it is located. Each clock and its value must be listed on
the schedule.
STRICT LIABILITY tort liability, which is defined by law,
requiring an injured party to prove only that he or she was harmed
in a specified way in order to collect damages. For example, the
law provides that an employer is responsible if a worker is injured
on the job. All the worker must do to collect WORKERS COMPENSATION
BENEFITS is to prove that the injury took place at work. See also

ABSOLUTE LIABILITY.

STRIKE INSURANCE coverage to protect employers from losses

due to labor disruptions. The ocean marine policy exempts losses
caused by strikes, riots, and civil commotion. Special coverage is
necessary.
STRIKES, RIOTS, AND CIVIL COMMOTION CLAUSE
exemption in ocean marine policy for losses caused by strikes,
riots, and civil commotion. See also RIOT AND CIVIL COMMOTION INSURANCE, RIOT
EXCLUSION; STRIKE INSURANCE.

STRIKE-THROUGH CLAUSE (CUT-THROUGH CLAUSE)

provision that holds a reinsurer liable for its share of losses even if
the CEDING COMPANY becomes insolvent before paying these losses. For
example, XYZ Insurance Co. writes a fire policy for Acme
Manufacturing and then reinsures 80% of the risk with ABC
Reinsurance. XYZ is declared insolvent. Then Acme
Manufacturing burns to the ground. ABC Reinsurance would be
responsible for the 80% of the risk it reinsured and would pay the
claim directly to Acme.
STRUCTURED SETTLEMENT periodic payments to an injured
person or survivor for a determinable number of years or for life
typically in settlement of a claim under a liability policy. Terms
may include immediate reimbursement for medical and legal
expenses and rehabilitation, and long-term payments for loss of
income or as compensation for other injuries. A structured
settlement can be expected to be less costly to the insurance carrier
than a LUMP SUM settlement, especially if it enables costly litigation to
be avoided.
 Page 492
STRUCTURED SETTLEMENT ANNUITY SINGLE PREMIUM IMMEDIATE
ANNUITY purchased to fund a STRUCTURED SETTLEMENT. This product is

purchased when the injured party (the plaintiff) wishes to have a

monthly income payment for life and the insurance company (the
liability insurance company providing coverage for the defendant)
wishes to minimize the sum required to be paid to the plaintiff.
SUBJECTIVE PROBABILITY projections of losses based on
qualitative (emotional) rather than quantitative reasoning.
SUBJECTIVE RISK see SUBJECTIVE PROBABILITY.
SUBJECT PREMIUM see BASE PREMIUM.
SUBLIMITS see BROAD FORM PERSONAL THEFT INSURANCE; HOMEOWNERS INSURANCE
POLICYSECTION I (PROPERTY COVERAGE).

SUBMITTED BUSINESS applications for insurance coverage that

have been forwarded to an insurer but not yet processed.
SUBROGATION see SUBROGATION CLAUSE.
SUBROGATION CLAUSE section of PROPERTY INSURANCE and LIABILITY
INSURANCE policies giving an insurer the right to take legal action

against a third party responsible for a loss to an insured for which a

claim has been paid. For example, an insurance company pays a
claim for $40,000 in damages to an insured storekeeper for losses
caused by a negligent contractor working next door. The policy's
subrogation clause gives the insurer the right to be subrogated to,
or take on as its own, the storekeeper's claim and to sue the
contractor for damages.
SUBROGATION PRINCIPLE surrender of rights by an insured
against the third party to an insurance company that has paid a
claim.
SUBROGATION, PROPERTY AND CASUALTY INSURANCE
circumstance where an insurance company takes the place of an
insured in bringing a liability suit against a third party who caused
injury to the insured. For example, if a third party, through
negligence, damages an insured's car and the insured's insurance
company pays to restore the car, the insurance company has
recourse against the third party for the costs involved. The insured
cannot sue the third party for damage, since if successful, the
insured could collect twice for the same damage.
SUBROGATION RELEASE see SUBROGATION CLAUSE.
SUBROGATION, WAIVER OF see WAIVER OF SUBROGATION RIGHTS CLAUSE.
SUBROSEE insurance company that becomes subrogated to the
rights of another party. See also SUBROGATION CLAUSE; SUBROGATION PRINCIPLE;
SUBROGATION, PROPERTY AND CASUALTY INSURANCE.
 Page 493
SUBROSOR insured whose rights against a third party are
transferred to an insurance company (the SUBROSEE) according to the
process required by the SUBROGATION CLAUSE in the policy.
SUBSCRIBER, BLUE CROSS, BLUE SHIELD person insured
under a BLUE CROSS hospitalization or BLUE SHIELD medical health
insurance plan.
SUBSCRIPTION DATE OF THE POLICY see DATE OF SUBSCRIPTION OF
THE POLICY.

SUBSEQUENT NEGLIGENCE see LAST CLEAR CHANCE.

SUBSIDIZATION difference between the ACTUARIAL EQUIVALENT (rate)
and the often lower rate actually charged to insure a risk.
SUBSTANDARD see SUBSTANDARD HEALTH INSURANCE (QUALIFIED IMPAIRMENT
INSURANCE); SUBSTANDARD LIFE INSURANCE.

SUBSTANDARD GROUP see SUBSTANDARD HEALTH INSURANCE (QUALIFIED

IMPAIRMENT INSURANCE); SUBSTANDARD LIFE INSURANCE.

SUBSTANDARD HEALTH INSURANCE (QUALIFIED

IMPAIRMENT INSURANCE) coverage for persons whose
medical history includes serious illness such as heart disease or
whose physical condition is such that they are rated below
standard. A policy may specifically deny coverage for recurrence
of a particular illness or medical condition through an impairment
exemption rider, or may provide only partial benefits. See also RATED
POLICY.

SUBSTANDARD LIFE INSURANCE coverage for risks deemed

uninsurable at standard rates by normal standards (persons whose
medical histories include serious illness such as heart disease or
whose physical conditions are such that they are rated below
standard.) A policy may specifically deny benefits for death caused
by a specific illness or medical condition or may provide only
partial benefits. Many risks that would have been rejected as
uninsurable under earlier underwriting standards, either because of
their hazardous occupations or physical impairment, now can be
insured under an extra-risk policy at an extra premium; even
applicants who have survived cancer may be acceptable. The
premium may include an extra flat fee per thousand dollars of
coverage, or is one that would normally be charged to an older
person. See also RATED POLICY.
SUBSTANDARD RISK see IMPAIRED RISK (SUBSTANDARD RISK); SUB-STANDARD
HEALTH INSURANCE (QUALIFIED IMPAIRMENT INSURANCE); SUBSTANDARD LIFE INSURANCE.

SUBSTANTIAL EMPLOYER see SUBSTANTIAL OWNER BENEFIT LIMITATION.

 Page 494
SUBSTANTIAL OWNER effective proprietor of a business. Under
the TAX REFORM ACT OF 1986, a uniform accrual rule prevents a qualified
PENSION PLAN from being weighted in favor of the substantial owner of

the business. The owner can select the accrual method to be applied
provided the same method is used for all qualified employees of
the business.
SUBSTANTIAL OWNER BENEFIT LIMITATION restriction on
the benefit that owners and other highly compensated individuals
may receive from a qualified pension or other employee benefits.
The U.S. Tax Code requires that benefits under a qualified plan,
and some other benefits, do not unduly favor a business firm's top
hierarchy. The TAX REFORM ACT OF 1986 provides a uniform definition of
''highly compensated" as an employee who either owned more than
5% interest in the business, received more than $75,000 in
compensation, received more than $50,000 in compensation and
was in the top 20% of employees as ranked by salary, or was an
officer and received compensation greater than 150% of Section
415 defined contribution dollar amount. See also SUBSTANTIAL OWNER.
SUCCESSION BENEFICIARY CLAUSE section of a LIFE INSURANCE
policy setting the procedure for revoking a current beneficiary and
designating a successor beneficiary. Insurers require written notice
of a beneficiary change, usually on a form designated for that
purpose. Some may require return of the policy for the beneficiary
change to be added. See also BENEFICIARY; BENEFICIARY CLAUSE.
SUCCESSOR BENEFICIARY see SUCCESSION BENEFICIARY CLAUSE.
SUCCESSOR PAYEE see SUCCESSION BENEFICIARY CLAUSE.
SUE AND LABOR CLAUSE section of ocean marine policy
making it an obligation of the insured to take specific measures to
limit losses to ship or cargo when a mishap occurs. Expenses
incurred to limit physical damages, or to take legal action to protect
the ship and its cargo, are reimbursed by the insurer to the extent
they reduce the loss otherwise payable by the insurer, according to
policy terms.
SUE, LABOR, AND TRAVEL CLAUSE see SUE AND LABOR CLAUSE.
SUICIDE CLAUSE limitation in all life insurance policies to the
effect that no death payment will be made if an insured commits
suicide within the first two years that the policy is in force. This
clause protects the company against ADVERSE SELECTIONthat is, purchase
of a policy in contemplation of planned death in order for a
beneficiary to collect the proceeds.
SUMMARY ANNUAL REPORT synopsis of the key financial
figures concerning the PENSION PLAN that is contained in the FORM 5500 that
must be filed annually with the Internal Revenue Service. This
report must be given to the plan participants but does not have to
be filed with any government agency.
 Page 495
SUMMARY PLAN DESCRIPTION layman description of the key
features and benefits of a PENSION PLAN that must be filed with the
Department of Labor. Periodic updates of this summary must also
be provided to the Department of Labor as well as the employees to
reflect any substantial changes in the plan or regulatory laws.
SUPERFUND AMENDMENTS AND REAUTHORIZATION
ACT OF 1986 (SARA) act that provides retroactive LIABILITY for
environ-mental claims by mandating that those who polluted the
environment must pay to clean up the pollution, regardless of how
long ago their actions harmed the environment.
SUPERGRIT type of GRANTOR-RETAINED INCOME TRUST (GRIT) in which the
grantor retains the right to the assets of the trust should he or she
die before the term of the trust expires.
SUPERINTENDENT OF INSURANCE see COMMISSIONER OF INSURANCE
(INSURANCE COMMISSIONER, SUPERINTENDENT OF INSURANCE).

SUPERIOR GOOD condition in which life insurance sales increase

at a rate greater than the general rate of growth of the economy. As
a society moves from an agriculture-based economy to an industry-
based economy, the transferring of the PURE RISK from the family to
the insurance company becomes more expedient.
SUPERSEDED SURETYSHIP RIDER endorsement to a FIDELITY
BOND or SURETY BOND to cover losses that occurred after lapse of the

DISCOVERY PERIOD of the previous bond. Coverage is limited to the

amount provided by the previous bond.

SUPPLEMENTAL ACCIDENT EXPENSE see GROUP HEALTH INSURANCE.
SUPPLEMENTAL BENEFIT FORMULA procedure in Social
Security that sets the benefit level for a dependent of a retired or
disabled person who is receiving Social Security benefits. For
example, if a retired or disabled worker has a spouse over age 65,
the spouse is entitled to a benefit that is 50% of that paid to the
primary recipient. This benefit is also available to dependent
children. Further, the spouse can elect to take a reduced benefit if
he or she is between ages 62 and 65.
SUPPLEMENTAL CONTRACT see SUPPLEMENTARY CONTRACT.
SUPPLEMENTAL EXTENDED REPORTING PERIOD period of
time after the expiration of a CLAIMS MADE BASIS LIABILITY COVERAGE policy
during which claims may be made. See also MAXI TAIL (FULL TAIL); MIDI TAIL;
MINI TAIL.

SUPPLEMENTAL LIABILITY INSURANCE broad excess

protection for liability over the level of primary coverage or self
insurance. Umbrella policies are written for both business and
personal liability. For example, a personal umbrella policy might
add $1 million in
 Page 496
liability coverage for an insured's negligent use of a car, boat, and
all other property, over and above regular coverage. For a business,
its applications would be even broader, including workers
compensation, general liability, and all other coverage.
Policyholders must have a certain minimum level of primary
insurance before they can buy this supplemental coverage. For a
personal policy the minimum might be $100,000 in homeowners
liability insurance and $500,000 per accident for bodily injury in an
auto policy. See also UMBRELLA LIABILITY INSURANCE.
SUPPLEMENTAL MAJOR MEDICAL INSURANCE see
SUPPLEMENTARY MEDICAL INSURANCE.

SUPPLEMENTAL MEDICAL INSURANCE see SUPPLEMENTARY MEDICAL

INSURANCE.

SUPPLEMENTAL SECURITY INCOME (SSI) income

supplement program under Social Security to provide a minimum
monthly income to aged, blind, and disabled persons. The SSI
payments, which were introduced in January 1974, make up the
difference between family income and a guaranteed minimum
amount for families who have only a specified amount of other
resources such as savings accounts.
SUPPLEMENTAL TERM LIFE INSURANCE extra life insurance
benefit found in the FAMILY INCOME POLICY, FAMILY INCOME RIDER, FAMILY MAINTENANCE
POLICY, and FAMILY POLICY payable to the BENEFICIARY should the INSURED die

within a stipulated time period.

SUPPLEMENTARY CONTRACT terms of a settlement of a life
insurance or annuity contract under which monies are currently
payable or used at least in part by the beneficiary to fund a new
insurance policy. Supplementary contracts are a balance sheet
liability for a life company. They represent money held for
policyholders that will eventually be paid out. But because the
contract no longer involves insurance on a life, it is not included in
the company's policy reserves.
SUPPLEMENTARY COVERAGE in property insurance,
percentages of basic coverages which may be applied to provide
coverage for other real and personal property. For example, under
the HOMEOWNERS INSURANCE POLICYSECTION I (PROPERTY COVERAGE) Coverage B,
structures not attached to or part of the home (garage or
appurtenant private structures) can be covered up to 10% of the
basic home structure as found under Coverage A.
SUPPLEMENTARY MEDICAL INSURANCE part of the federal
Medicare program for additional coverage on a voluntary basis.
The Medicare program is divided into two parts: (1) Hospital
Insurance provides hospital benefits to persons over 65 who
qualify for Social Security, and to disabled persons who have been
receiving Social Security benefits for at least two years; and (2)
SUPPLEMENTARY MEDICAL INSURANCE provides physician services to those over

65, and their

 Page 497
dependents, who have enrolled in the program. Those enrolled in
the program pay half the cost, and the U.S. government pays the
other half.
SUPPLEMENTARY PAYMENTS in a LIABILITY INSURANCE policy,
provision for the payment of the insured's expenses as stated in the
policy in three areas above the policy limit of liability: legal fees
resulting from defending the insured, expenses incurred by the
insured as the result of legal actions taken against him or her as the
result of requests by the insurance company, and premium
payments for bonds required by the insured.
SUPPLIES AND TRANSPORTERS FORMS see INLAND MARINE
INSURANCE (TRANSPORTATION INSURANCE): BUSINESS RISKS.

SURETY see FIDELITY BOND; LIABILITY, BUSINESS EXPOSURES; OBLIGOR; SURETY BOND.
SURETY ASSOCIATION OF AMERICA (SAA) association
whose membership is composed of surety bonding companies. The
association's primary purpose is to act as a rating bureau for
member companies by collecting statistics and developing rating
tables.
SURETY BOND contract by which one party agrees to make good
the default or debt of another. Actually, three parties are involved:
the principal, who has primary responsibility to perform the
obligation (after which the bond becomes void); the surety, the
individual with the secondary responsibility of performing the
obligation if the principal fails to perform. (After the surety
performs, recourse is against the principal for reimbursement of
expenses incurred by the surety in the performance of the
obligation, known as surety's right of exoneration); and the obligee,
to whom the right of performance (obligation) is owed.
SURETY BOND GUARANTEE PROGRAM program instituted
by the Small Business Administration (SBA) that guarantees a
construction contract bond in the event the issuing surety company
suffers a loss. This is an effort by the SBA to encourage the
awarding of more construction bids to minority contractors. See
also SURETY BOND.
SURETYSHIP see FIDELITY BOND; SURETY BOND.
SURETY'S RIGHT OF EXONERATION see SURETY BOND.
SURGICAL EXPENSE INSURANCE policy providing benefits to
pay for surgery.
SURGICAL INSURANCE BENEFITS see SURGICAL EXPENSE INSURANCE.
SURGICAL SCHEDULE list of cash allowances for various types
of surgeries. See also SURGICAL EXPENSE INSURANCE.
SURPLUS see SURPLUS ACCOUNT; SURPLUS LINES.
 Page 498
SURPLUS ACCOUNT assets minus liabilities of the insurance
company. See also STATUTORY LIABILITY.
SURPLUS ADEQUACY RATIO insurance company's ADJUSTED
SURPLUS divided by its ADJUSTED LIABILITIES. The greater this ratio, the

greater the financial strength of the company that can be used for
writing new business and covering benefit payments.
SURPLUS LINES
Reinsurance: SURPLUS REINSURANCE contracts under which the agreement
between an insurer and a reinsurer is based on the ceding
company's line guide, such that the amount reinsured is expressed
in terms of the multiples of the retention and is referred to as a
number of lines. See also SURPLUS REINSURANCE.
Regular market: insurance coverage not available from an ADMITTED
COMPANY in the regular market; thus a surplus lines broker agent

representing an applicant seeks coverage in the surplus lines

market from a NONADMITTED INSURER according to the insurance
regulations of a particular state.
SURPLUS LINES BROKER see EXCESS LINE BROKER (SURPLUS LINE BROKER).
SURPLUS LINES (EXCESS-SURPLUS LINES) specialized
property or liability coverage provided by a NONADMITTED INSURER in
instances where it is unavailable from insurers licensed by the
state. Examples of surplus lines are coverage for some
environmental impairment liability risks, or liability coverage for
directors and officers of certain companies. See also EXCESS LINE BROKER
(SURPLUS LINE BROKER).

SURPLUS RATIO percentage of total assets set aside by an

insurance company to provide for unexpected losses. In general, a
minimum of a 5% surplus ratio (5 cents in reserve for each $1 of
assets) is advocated for determining whether the company has an
adequate reserve against unexpected losses.
SURPLUS REINSURANCE automatic REINSURANCE that requires an
insurer to transfer (CEDE) and the reinsurer to accept the part of every
risk that exceeds the insurer's predetermined retention limit. The
rein-surer shares in premiums and losses in the same proportion as
it shares in the total policy limits of the risk. The surplus method
permits the insurer to keep for its own account small policies, and
to transfer the amount of risk on large policies above its retention
limit. For example, assume an insurer issues a policy for $20,000.
The insurer keeps $5000 (1/4) and transfers the remaining $15,000
(1/4) to its reinsurer. This is called a three line surplus because the
amount transferred equals three times the retained line of the
insurer. The insurer keeps 1/4 of the premium and transfers 3/4 of
the premium to the reinsurer. In the event of total loss, the
settlements between the insurer and the reinsurer would be effected
on the identical 1/4 - 3/4 basis. The same principal applies if there
 Page 499
is a partial loss, in that the reinsurer must reimburse the insurer in
the same proportion as the reinsurance premium received.
SURPLUS RELIEF insurance company's REINSURANCE COMMISSIONS AND
EXPENSE ALLOWANCES divided by its ADJUSTED SURPLUS account. The smaller

this ratio, the more financially sound the insurance company, since
this ratio shows the extent to which the insurance company relies
on reinsurance to maintain its surplus strength.
SURPLUS RELEASE method of using REINSURANCE to counteract the
unexpected impact of business on the POLICYHOLDER SURPLUS. See also
PORTFOLIO REINSURANCE; REINSURANCE.

SURPLUS SHARE see SURPLUS REINSURANCE.

SURPLUS TO POLICYHOLDERS see POLICYHOLDER SURPLUS.
SURPLUS TREATY REINSURANCE see SURPLUS REINSURANCE.
SURRENDER CHARGE fee charged to a policyowner when a life
insurance policy or annuity is surrendered for its cash value. This
fee reflects insurance company expenses incurred by placing the
policy on its books, and subsequent administrative expenses. See
also BACK LOAD.
SURRENDER COST INDEX method of comparing the costs of a
set of CASH VALUE LIFE INSURANCE policies that takes into account the TIME
VALUE OF MONEY. The true costs of alternative cash value policies with

the same death benefit depend on a number of factorsamount and

timing of premiums paid, amount and timing of dividends (in the
case of participating policies), time period involved, and the CASH
SURRENDER VALUE. In evaluating a particular group of policies, a

surrender cost index can be calculated using INTEREST ADJUSTED COST

comparison. The index ranks the policies for the same period of
time, say the first 20 years of the policy life, by cost per $1000 of
FACE AMOUNT, showing the cheapest through the most expensive. In

effect, the index illustrates the relative cost of acquiring a dollar's

worth of each policy's cash surrender value after 20 years. Contrast
with the NET PAYMENTS INDEX, a ranking of policy costs using the
traditional net cost method of comparison that ignores the time
value of money and thus gives a less accurate picture of relative
policy costs.
SURRENDER COST METHOD see SURRENDER COST INDEX.
SURRENDER, LIFE INSURANCE action by the owner of a cash
value policy to relinquish it for its CASH SURRENDER VALUE. Since the
depression of the 1930s, companies have reserved the right to delay
payment of a cash surrender value up to six months; however,
payments have been prompt.
SURRENDER VALUE see SURRENDER, LIFE POLICY.
SURVEY see SURVEY APPROACH.
 Page 500
SURVEY APPROACH study of buying habits of consumers to
determine their insurance needs.
SURVIVAL STATUTE see UNIFORM SIMULTANEOUS DEATH ACT.
SURVIVOR PURCHASE OPTION provision applied as a RIDER
attached to an ORDINARY LIFE INSURANCE POLICY for the purpose of meeting
ESTATE PLANNING requirements. When the INSURED dies, the BENEFICIARY is

entitled to receive the DEATH BENEFIT in cash or to use the death benefit
to purchase a new ordinary life insurance policy. This new policy is
not subject to additional underwriting requirements and has, as the
date of issue, the same time as the original policy. The initial
premium due is automatically subtracted from the original policy's
death benefit.
SURVIVORSHIP ANNUITY agreement under which an annuitant
receives a predetermined monthly income benefit for life upon the
death of the insured. Should the annuitant predecease the insured,
the contract is terminated and no benefits are ever paid. The life
expectancy of both the insured and annuitant must be taken into
consideration in determining the premium, and such, the annuitant
cannot be changed once selected. This is also called a revisionary
annuity (a life insurance policy combined with an annuity
agreement).
SURVIVORSHIP BENEFIT retirement income benefit of a
survivor (or survivors) of an insured individual, according to a
particular formula. For example, if a retired male worker dies, all
or a portion of his monthly pension (perhaps one half or two-thirds)
may continue to go to his wife if he has elected the JOINT AND SURVIVOR
OPTION. Survivors of a person entitled to Social Security benefits may
also be entitled to receive a survivorship benefit. For example, a
widower may get as much as 100% of his wife's benefits, if
claimed at age 65 or over.
SURVIVORSHIP CLAUSE see COMMON DISASTER CLAUSE (SURVIVOR-SHIP CLAUSE).
SURVIVORSHIP INCOME PAYMENTS see SURVIVORSHIP BENEFIT.
SURVIVORSHIP LIFE INSURANCE coverage on more than one
person that pays a benefit after all of the insureds die. This type of
joint life policy is significantly cheaper than a regular policy.
Survivorship life insurance might be used to help fund estate taxes
after the deaths of a husband and wife or as a form of business
continuation insurance. See also TONTINE.
SURVIVORSHIP SPLIT DOLLAR INSURANCE modification of
SPLIT DOLLAR LIFE INSURANCE policy in that the death benefit becomes

payable upon the second death. This type of policy is ideal in those
circumstances when ESTATE TAXES must be paid, which is usually the
case upon the death of the second spouse. Since this is a second-to-
die policy, the premiums are substantially lower than those for a
single life insurance policy. The procedure is for two individuals
(usually spouses)
 Page 501
to form a LIFE INSURANCE TRUST and then to enter into a SPLIT DOLLAR LIFE
INSURANCE agreement with the trust. The individual(s) pay(s) that

portion of the premium equal to the CASH VALUE of the policy and the
trust pays the term cost of the premium. The individual is
reimbursed for the premiums paid when the death benefit is paid or
when the policy is surrendered for its CASH SURRENDER VALUE. The
remainder of the death proceeds is paid to the LIFE INSURANCE TRUST.
SURVIVOR'S RIGHT TO SUE legal recourse available to
survivors of a person who suffers a wrongful death. Under COMMON
LAW, only an injured person had the right to sue for damages. If a

wrongfully injured person died of those injuries, there was no one

with a legal right to sue to recover damages for the death. State
laws now provide for the right of the survivor to sue, not just for
the wrongful death but for loss of income and other losses.
SUSPENSION OF COVERAGE interruption of insurance
provided for in most property insurance policies under
circumstances where a substantial increase in hazard has arisen
with the knowledge or control of the insured. The policy's WORK AND
MATERIALS CLAUSE gives the insured the right to use materials and

processes needed in his or her business without facing suspension

from increased hazard. But major changes in the characteristics of
the risk will trigger suspension of coverage. For example, a
building used to warehouse dry goods when fire insurance first is
written on it may be converted by the insured to store paint. The
substantial increase in hazard results in suspension of coverage.
Vacancy for more than 60 days and riot or explosion also result in
suspension. Coverage is reinstated automatically for the remainder
of the policy term when the condition that triggered suspension is
corrected.
SUSPENSION PROVISION see SUSPENSION OF COVERAGE.
SYMMETRIC RISK EXPOSURE gain that occurs when the move
in the underlying asset in one direction is similar to the loss when
the underlying asset moves in the opposite direction. For example,
if a stock goes up by X dollars, there is an X dollar gain. On the
other hand, if a stock goes down by X dollars, there is an X dollar
loss.
SYNDICATE group of insurers or reinsurers involved in joint
underwriting. Members typically take predetermined shares of
premiums, losses, expenses, and profits. Syndicates, more common
in REINSURANCE than in PRIMARY INSURANCE, are formed to cover major risks
that are beyond the CAPACITY of a single underwriter. See also POOL;
POOLING.

SYNDICATE POLICY INSURANCE POLICY underwritten and issued by a

SYNDICATE listing each RISK insured by each syndicate member.

SYNTHETIC GUARANTEED INVESTMENT CONTRACT

modified GUARANTEED INVESTMENT CONTRACT (GIC) in which the underlying
assets of the synthetic contract are owned by the plan itself rather
than
 Page 502
the insurance company as is the case with the GIC. This ownership
right is of particular importance if there is a concern about the
long-term financial soundness of an insurance company. The
synthetic plan segregates the plan's assets from the assets of the
insurance company.
SYNTHETIC PRODUCTS type of GUARANTEED INVESTMENTS CONTRACT that
enables the sponsor of the plan to own the title of the under-writing
assets. In addition, benefit payments at BOOK VALUE are made for
qualified plan withdrawals.
SYSTEM SAFETY method of accident prevention whose
objective is to detect system-component deficiencies that have the
potential for causing accidents.
SYSTEMS SAFETY ENGINEERING risk management technique
for identifying risks and taking steps to minimize losses.
 Page 503

T
TABLE OF MORBIDITY see MORBIDITY TABLE.
TABLE OF MORTALITY see MORTALITY TABLE.
TABULAR COST OF INSURANCE see TABULAR PLANS.
TABULAR INTEREST RATE see TABULAR PLANS.
TABULAR MORTALITY rate exhibited in a MORTALITY TABLE; EXPECTED
MORTALITY. See also TABULAR PLANS.

TABULAR PLANS RETROSPECTIVE RATING system with basic, minimum,

and maximum premium rates listed in manual tables. Calculation
of an individual premium involves adjusting the basic premium for
appropriate discounts, losses, and a tax multiplier. The rate is then
set between the minimum and the maximum, based on the loss
experience, the size of the risk, and the underwriter's judgment.
TABULAR-VALUE RESERVE METHOD means of setting life
insurance reserves based on expected mortality rates as reflected in
a MORTALITY TABLE. See also RETROSPECTIVE METHOD RESERVE COMPUTATION.
TAFT-HARTLEY ACT provision of federal legislation that
prohibits an employer from making contributions (premium
payments) directly to a union for the purchase of employee
benefits; instead the contributions can be paid into a trust fund
established for these purposes.
TAFT-HARTLEY PENSION PLAN PENSION PLAN under which both
the contribution (employer and employee if a contributory plan)
and the benefit structure are fixed. In order to properly maintain the
 , the benefit structure and the contribution schedule
ACTUARIAL EQUIVALENT

are modified.
TAIL COVERAGE liability insurance that extends beyond the end
of the policy period of a liability insurance policy written on a
claims-made basis. Liability claims are often made long after the
accident or event that caused the injury. Many liability policies are
written on a claims-made basis, which means the insurer pays only
claims that are received during the policy period. In that case, an
insured needs tail coverage to protect against claims not known
about at the end of the policy period. For example, a doctor retires,
allows her insurance policy to lapse, and a claim comes in six
months later. In order to protect herself, the doctor purchases tail
coverage.
TAPES INSURANCE see DATA PROCESSING INSURANCE.
TARGET BENEFIT PLAN type of pension in which benefits may
vary depending on the investment performance of the pension plan
assets. Contributions are made to fund a target benefit, such as 35%
of compensation, using acceptable mortality and interest rate
assumptions.
 Page 504
Funds are invested wholly or partially in such vehicles as variable
annuities or mutual funds, and benefits may exceed or fall below
target levels depending on investment performance. Target plans
are subject to the same annual contribution limits for individual
participants as a See also VARIABLE DOLLAR ANNUITY.
TARGET RISK
1. prospective buyers of insurance classified according to various
demographics such as age, sex, and insurance.
2. risk so hazardous that it is difficult to obtain insurance coverage.
TARIFF see TARIFF RATE.
TARIFF RATE standard property-liability insurance premium set
by a rating bureau for a particular class of risk.
TAXABLE-EQUIVALENT YIELD tax-free yield ÷ (1 individual's
combined federal and state income tax bracket). The calculation is
made according to the following steps:
1. Determine individual's effective state tax rate (percentage that
individual pays in state taxes after deduction of these state taxes
from his or her federal tax).
where: effective state tax rate = (state tax rate + local tax rate) x (1
federal income tax rate).
Assume that the individual's taxable income is $60,000. The
individual is in the 33% federal marginal income tax bracket, and
his or her state tax rate on dividend income is 7.9%. Then the
effective state tax rate = 0.079(1 0.33) = 0.05293.
2. Determine individual's combined federal and state income tax
bracket (federal marginal tax rate + effective state tax rate). For the
above example, this relationship equals 0.33 + 0.05293 = 0.38293.
3. Determine taxable-equivalent yield. Assume, for the above
example, that an individual is considering an investment that has a
tax-free yield of 8%. Then

TAXABLE INCOME earned and unearned income on which

current taxes must be paid. Tax avoidance is one of the goals of
investment, and various tax-free or tax-deferred investments have
been devised for this purpose. In the past, real estate and oil and
gas limited partner-ships have been a method of avoiding tax on
current income, but changing tax legislation frequently alters the
nature of taxable income and the taxes that must be paid on it. For
example, the TAX REFORM ACT
 Page 505
OF 1986 eliminated contributions to INDIVIDUAL RETIREMENT ACCOUNTS as a
deduction for many taxpayers.
Insurance products have long enjoyed special tax benefits because
of the belief in the importance of protecting one's family. For
example, the interest buildup in annuities is allowed to accumulate,
tax deferred. Taxes are paid on the earnings only when the money
is withdrawn. Because the 1986 federal tax law eliminated so many
other forms of tax shelters, insurance products became even more
attractive for these properties.
TAX ADVANTAGES OF QUALIFIED PLAN see PENSION PLAN.
TAX-APPRAISED VALUE estimate of an asset that is used to
determine tax obligations. It is usually in the interest of the owner
to have a low value put on a piece of property for tax purposes.
However, the owner sometimes wants the same property to carry a
higher appraisal value for insurance purposes so that losses can be
easily recovered if the property is lost or damaged.
TAXATION, INSURANCE COMPANIES see TAX EQUITY AND FINANCIAL
RESPONSIBILITY ACTS OF 1982 AND 1983 (TEFRA); TAX REFORM ACT OF 1984.

TAXATION, INTEREST ON DIVIDENDS interest earned on

dividends from a participating life insurance policy left on deposit
with the insurance company and subject to taxation.
TAXATION, LIFE INSURANCE COMPANIES see TAX EQUITY AND
FINANCIAL RESPONSIBILITY ACTS OF 1982 AND 1983 (TEFRA); TAX REFORM ACT OF 1984.

TAXATION, PARTICIPATING DIVIDENDS dividends of a

participating life insurance policy deemed by the Internal Revenue
Service to be a return of a portion of premiums and thus not subject
to taxation.
TAXATION, PROCEEDS see AUTHORITY TO TERMINATE PLAN; GIFT TAX; TAXABLE
INCOME; TAXATION, INTEREST ON DIVIDENDS; TAXATION, PARTICIPATING DIVIDENDS; TAX DEFERRAL; TAX

DEFERRED ANNUITY (TDA); TAX EQUITY AND FINANCIAL RESPONSIBILITY ACTS OF 1982 AND 1983 (TEFRA);

TAX FREE ROLLOVER; TAX PLANNING; TAX REFORMACT OF1984; TAX REFORM ACT OF 1986.

TAX BENEFITS OF ANNUITY see ANNUITY.

TAX BENEFITS OF LIFE INSURANCE tax advantages of
investing in life insurance fall into two main areas: (1) TAX DEFERRAL on
untaxed buildup of earnings in such cash value policies as whole
life insurance and annuities, and (2) exclusion from federal income
tax of the proceeds of a death benefit of an insurance policy. See
also TAX REFORM ACT OF 1986.
TAX BRACKET SHIFTING arrangement of financial affairs such
that a family member who is in a lower income tax bracket receives
 Page 506
income that another family member would otherwise have received
(thereby reducing the taxes paid by the family unit).
TAX DEFERRAL postponement of taxes on investment or other
earnings until the investor begins to consume them and anticipates
being in a lower tax bracket. One example of a tax-deferred
investment is an INDIVIDUAL RETIREMENT ACCOUNT (IRA). Earnings accumulate
tax free until the account holder retires after age 59 1/2. At that
time, taxes must be paid on the earnings as money is withdrawn
from the account. Other examples of tax deferred investments are
insurance products such as annuities and various types of whole life
insurance such as VARIABLE LIFE and UNIVERSAL LIFE. The TAX REFORMACT OF 1986
limited the use of IRAs, making insurance products one of the few
tax-deferred investments still available.
TAX DEFERRED ANNUITY (TDA) retirement vehicle permitted
under SECTION 403 (B) PLAN of the U.S. Internal Revenue Code for
employees of a public school system or a qualified charitable
organization. Under such an agreement, the maximum annual
contribution is $4500. Cash values and dividends accrue but are not
taxed until the annuitant actually receives benefits. At that time, the
annuitant is taxed only on the amount that exceeds the investment
in the annuity. Should the annuitant receive a monthly benefit
under one of the various annuities, the percentage of each payment
that would not be subject to taxation is determined by the exclusion
ratio:

where the expected return under the annuity equals the life
expectancy of the annuitant x the annual income payment.
For example, if an annuitant invested $40,000 in an annuity, and at
age 60 has a 14-year life expectancy, and receives an annual
income of $5000, then 57.14% of each income payment would not
be subject to taxation.
TAX EQUITY AND FINANCIAL RESPONSIBILITY ACTS OF
1982 AND 1983 (TEFRA) legislation that redefined life insurance
and raised taxes on life insurance companies. Among the
provisions were new rules for some life insurance products,
including a definition of FLEXIBLE PREMIUM LIFE INSURANCE, and an increase in
life insurance company taxes. Congress was concerned that a
policyholder could take a substantial amount, say $1 million, and,
after putting a few dollars toward a life insurance premium, put the
remainder into a tax-free investment vehicle. One of two tests had
to be satisfied for a policy to qualify as life insurance: (1) the cash
surrender value policy could not exceed a net single premium, and
(2) the death benefit had to represent a certain percentage of the
cash value, which declined as the policy-holder got older. For
example, at age 40, the death benefit must be
 Page 507
140% of cash value. The second rule closed a loophole on tax-free
withdrawals from annuities. Prior to 1982 annuity holders could
withdraw their initial premium tax free at any time. The 1982 code
decreed that any money withdrawn from an annuity would be
considered income first and would therefore be taxable.
The older 1959 tax code devised a shorthand formula for
determining taxes paid by insurers. The formula worked when
interest rates were low, but as they soared, insurers found ways to
reduce the increased tax bite. The 1982 code introduced a stopgap
measure designed to raise taxes on life insurers by $3 billion.
TAX-EQUIVALENT INCOME tax-exempt income that, for
comparative purposes, has been increased by an amount equal to
the taxes that would be paid if this income were fully taxable at
statutory rates. See also TAXABLE-EQUIVALENT YIELD.
TAX (FEDERAL), INCOME OF PENSION PLAN see PENSION PLAN.
TAX-FREE EXCHANGE OF INSURANCE PRODUCTS under
Section 1035 of the Internal Revenue Code, stipulation that the
exchange of one life insurance policy for another life insurance
policy will generally not result in a recognized gain for the purpose
of federal income tax purposes to the policyowner who exchanges
the policy. The insured must be the same person under both
policies. If the policy owner should surrender the second policy in
a taxable transaction, the untaxed gain is then recognized. The
types of policy exchanges that can be made on a tax-free basis are
as follows: (1) a life insurance policy for another life insurance
policy; (2) a life insurance policy for an annuity contract; and (3)
an annuity contract for another annuity contract. An annuity
contract cannot be exchanged on a tax-free basis for a life
insurance policy. The ANNUITANT must be the same person under both
annuity contracts in order to maintain the tax-free basis. See also
MINIMUM DEPOSIT RESCUE.

TAX-FREE INCOME see TAXATION, PARTICIPATING DIVIDENDS; TAX BENEFITS OF LIFE

INSURANCE; TAX DEFERRAL; TAX DEFERRED ANNUITY (TDA); TAX FREE ROLLOVER; TAX PLANNING.

TAX-FREE MONEY MUTUAL FUNDS investments restricted to

short-term financial instruments issued by state, city, and county
governments and agencies. Interest paid by those instruments are
not subject to federal income tax, thus their attraction for high
income tax bracket investors.
TAX-FREE ROLLOVER
1. transfer of money from or an employer-sponsored pension or
other qualified plan into an INDIVIDUAL RETIREMENT ACCOUNT (IRA) without
paying tax on the distribution.
2. transfer of money from one individual retirement account to
another without paying tax.
 Page 508
In both cases, the law allows the account holder 60 days to place
the money in a new IRA account. Transfer from one account to
another can be accomplished either by withholding the money from
one account and depositing it in another within 60 days, or by
instructing one institution to transfer it to a second. As long as the
new deposit is made within 60 days, there is no current tax liability.
TAX LIEN claim against property for payment of taxes. Life
insurance proceeds and annuity benefits are protected against
certain creditors of the insured, but the federal government is not
one of them. Thus life insurance and annuity benefits can be held
liable if the federal government has a tax lien against the insured.
TAX MULTIPLIER factor applied in RETROSPECTIVE RATING in order to
increase the BASIC PREMIUM to cover state premium taxes for liability
and workers compensation insurance. For example, if a state
premium tax is 2%, the tax multiplier used in the formula to
determine the retrospective premium would be 1.02.
TAX PLANNING arrangement of discretionary income, expenses,
and investments in a way that enhances after-tax wealth. Insurance
policies can be used to increase after-tax income through the tax-
deferral features of CASH VALUE LIFE INSURANCE and to reduce estate taxes
through the preferential tax treatment of the life insurance DEATH
BENEFIT. See also ESTATE PLANNING.

TAX REDUCTION FLEXIBLE BENEFITS PLAN (SECTION

125 OF THE INTERNAL REVENUE SERVICE CODE) plan in
which participant (employee) utilizes SPENDING ACCOUNTS to pay for
health care costs not subject to reimbursement from a health
insurance policy or health care provider. The reimbursement is for
the participant as well as the participant's dependent(s). Before the
plan year (usually July 1 through June 30) begins, the participant
decides the amount he or she desires to contribute to the HEALTH CARE
ACCOUNT and/or the DEPENDENT CARE ACCOUNT. The maximum amount that

can be contributed to the Health Care account is $2000 per year

and $5000 to the Dependent Care account. The minimum
contribution each year to each account is $300. Any amount,
subject to the maximum and minimum, may be chosen by the
participant to be deducted in equal installments from the
participant's employment income during the plan year. The amount
chosen is deducted before taxes are subtracted, thus making the
contribution tax-free. As health care expenses are paid by the
participant, the participant files a claim with the employer and is
reimbursed from the Health Care or Dependent Day Care account.
At the conclusion of the plan year, under IRS regulations any funds
remaining in either the Health Care or the Dependent Care account
are forfeited by the employee; the employer receives the forfeited
funds.
The particulars of the Health Care account are as follows:
1. Participant and dependent health care expenses that are not
covered under an insurance policy or health care provider
agreement are
 Page 509
paid for by the participant. The participant in turn submits a claim
to the employer for that amount and is reimbursed by the employer
from the Health Care or Dependent Care account.
2. Any funds remaining in the Health Care or Dependent Care
account at the end of the plan year are forfeited by the participant
to the employer.
3. Employees who work at least 30 hours per week are eligible to
participate in the plan.
4. An open enrollment period is held during the plan year. During
this time, the employee can elect whether or not to participate in
the plan, to open the Health Care and/or Dependent Care accounts,
and the amount to be contributed from each check to each account,
subject to a minimum contribution of $300 per year for both
accounts and a maximum amount per year of $2000 and $5000 for
the Health Care account and the Dependent Care account,
respectively.
5. The Health Care Account and the Dependent Care accounts are
separate entities. As such, monies from one account cannot be
transferred to the other account.
6. Changes in the elections may be made only during the open
enrollment period each year or when a qualifying change in the
participant's family status occurs. A qualifying change occurs when
a child is born or adopted; marriage, divorce, or legal separation
occurs; dependent dies or becomes disabled; and the employment
status of the participant and/or the participant's spouse changes.
7. The participant will receive on a quarterly basis a listing of the
activities in the account(s). Notification is sent to the participant in
advance of a possible forfeiture of funds in the account(s) at the
end of the plan year.
8. Health care claims are paid up to a maximum amount equal to
the contribution into that account each year less any
reimbursements paid out of the respective account during the plan
year.
9. The participant is reimbursed for those health care expenses not
covered under a health insurance policy or by a health care
provider to include: (a) nonreimbursed medical expenses resulting
from charges due to hospital, physician, dental, orthodontia, vision,
and prescription drug expenses incurred; (b) deductibles and
copayments resulting from charges due to hospital, physician,
dental, orthodontia, vision, and prescription drug expenses
incurred; (c) routine physicals; (d) rehabilitation services over a
long-term period to include drug and alcohol addiction; (e) health
care expenses that meet medical expense requirements for federal
income tax purposes.
10. Deductible expenses for the Health Care Spending account
include: (a) medical deductible (amount under COMPREHENSIVE HEALTH
INSURANCE); (b) copayment (medical, dental, orthodontia); (c)

prescription drugs unless otherwise covered; (d) routine physical

examinations unless otherwise covered; (e) vision examinations.
 Page 510
The particulars of the Dependent Care account include those
dependent care expenses that are associated with the participant's
work requirements:
1. Day care costs for children age 12 and less.
2. Education-related expenses for children who have not yet
attended the first grade.
3. Day care costs in the home to include housekeeping expenses.
4. Licensed day care expenses to include those associated with
babysitting.
5. Day care costs associated with individuals who reside with the
participant and obtain at least half of their monetary support from
the participant.
6. Day care costs associated with the participant's dependents who
are physically or mentally incapable of caring for themselves, such
as mentally retarded individuals or elderly parents.
TAX REFORM ACT OF 1976 legislation that provided temporary
rules for implementing the EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
(ERISA).

TAX REFORM ACT OF 1984 legislation that raised taxes on life

insurers and further defined life insurance. Because the TAX EQUITY AND
FINANCIAL RESPONSIBILITY ACT OF 1982 AND 1983 (TEFRA) failed to raise the amount of

revenue the U.S. Treasury wanted, the 1984 Act again raised the
corporate tax on life insurance companies. It also expanded the
definition of life insurance to all life insurance contracts, rather
than just those with flexible premiums that had been addressed in
the Tax Reform Act of 1982. For FLEXIBLE PREMIUM contracts, the 1982
Act established the death benefits had to represent a certain
percentage of the cash value, which declined as the policyholder
got older. The 1984 Act raised that ratio. For example, at age 40,
the death benefit must be at least 250% of cash value for the
product to qualify as life insurance. This act also attempted to
redistribute the tax burden between mutual and stock life insurance
companies. It also replaced a three-tier structure for taxing life
insurance companies with a single-phase structure.
TAX REFORM ACT OF 1986 legislation to eliminate most tax
shelters and write-offs in exchange for lower rates for both
corporation and individuals. It was intended to be revenue neutral;
that is, to bring in the same amount of revenue as the previous law.
1. For individuals, it eliminated deductions for most tax shelters
such as tax-advantaged limited partnerships; it eliminated special
treatment for capital gains by taxing them at the same rate as
ordinary income.
2. Deductions for an INDIVIDUAL RETIREMENT ACCOUNT (IRA) no longer applied
to those with incomes above $35,000 and couples above $50,000
unless they had no company pension plan. Individuals with
incomes between $25,000 and $35,000 and couples between
$40,000 and $50,000 got a partial deduction.
 Page 511
3. For company-sponsored 401 (k) salary reduction plans, the
maximum annual limit was reduced from $30,000 to $7000;
antidiscrimination rules were tightened; and a 10% penalty was
imposed for withdrawals before age 59 1/2.
4. Other administrative changes made it more expensive for
companies to start or maintain a company pension plan.
5. CASH VALUE LIFE INSURANCE was one of the few retirement vehicles to
retain its tax-deferred status.
6. Top individual tax rates were reduced from a series of rates
going up to 50% to two rates: 15% and 28%, although the top
marginal rate was 33%.
7. The top corporate rate down from 46% to 34%.
8. The investment tax credit was eliminated and depreciation
schedules were lengthened.
9. Many industries lost special advantages they held under the old
code.
10. The alternative minimum tax was stiffened for individuals and
one was added for corporations.
TAX-SHELTERED ANNUITY (TSA) see TAX-DEFERRED ANNUITY (TDA).
TEACHERS INSURANCE AND ANNUITY
ASSOCIATIONCOLLEGE RETIREMENT EQUITIES FUND
(TIAA-CREF) life insurance company that sells life insurance and
annuities to the faculty and staff of colleges and universities. Its
TIAA-CREF Tax-Sheltered Annuity (TSA) uses a traditional FIXED
DOLLAR ANNUITY, the TIAA portion, and a VARIABLE DOLLAR ANNUITY, the CREF
portion. Most participants have a SPLIT FUNDED PLAN with 50% of the
premium going to each, but this proportion can be changed as often
as a participant desires. See also TAX DEFERRED ANNUITY (TDA).
TECHNICAL AND MISCELLANEOUS REVENUE ACT OF
1988 (TAMRA): CHILDREN'S EDUCATION determination that
investments by parents in their children's education through the
purchase of Series EE Savings Bonds, which generate interest
income, are tax-exempt if the proceeds are applied to qualified
education expenses. To qualify for this tax exemption, the
following criteria must be met:
1. In order for education expenses to qualify, they must be incurred
in the year of redemption of the bonds. Such expenses include
tuition and required fees. In a year in which the proceeds from the
redeemed bonds are greater than the qualifying expenses, a
prorated percentage of the redeemed bonds' earnings becomes
taxable income for that year.
2. In order for the education expenses to qualify, they must be the
expenses of the bond's purchaser or those of the purchaser's
dependent in the year of redemption of the bonds.
3. In order for the education expenses to qualify, the purchaser of
the bonds must be at least 24 years of age and the bonds must be in
the name of the purchaser or in the joint names of the purchaser
and his
 Page 512
or her spouse. Also, married individuals must file joint tax returns.
4. Bonds purchased must have been issued after December 31,
1987.
TECHNICAL AND MISCELLANEOUS REVENUE ACT OF
1988 (TAMRA): EMPLOYEE BENEFITS determination that
group plans offering legal services are limited to an annual tax-free
benefit of $70 per employee; group plans may offer employer-
provided educational assistance plans on a tax-exclusion basis to
employees, with the exception of graduate school expenses; if an
employer elects to treat highly compensated employees as those
earning in excess of $50,000, then the employer must have
significant business operations in at least two geographically
separate locations; and each plan must be tested for discrimination
on a date to be chosen by the employer in 1990, and the same date
must be used each year in the future unless a date change is
approved in advance by the Secretary of the Treasury.
TECHNICAL AND MISCELLANEOUS REVENUE ACT OF
1988 (TAMRA): INCOME TAXATION OF CASH VALUE LIFE
INSURANCE determination that policies entered into on or after
June 21, 1988, that fail the 7-pay test (aggregate premiums paid at
any time during the first 7 years of the contract exceed the annual
net level premium of a 7-pay policy multiplied by the number of
years the policy has been in force) are considered by the Internal
Revenue Service (IRS) to be modified endowment contracts
(MECs). If the policy is determined to be a MEC, it may be subject
to income taxes as well as penalty taxes. Any policy loans,
dividends, or partial withdrawals of funds are treated by the IRS for
income tax purposes on a last-in, first-out basis.
TELEGRAM PROPOSAL OF INSURANCE binding contract for
insurance completed by telegraph. The law has recognized the date
an insurance agreement is made as the date that coverage
commences, rather than the date stated on the insurance policy.
Acceptance of a proposal by telegram, like a letter or an oral
agreement, represents a binding contract.
TELE-UNDERWRITING procedure in which a home office
interviewer (who may or may not have UNDERWRITING experience)
interviews APPLICANTS on the telephone. The questions asked the
applicant are automated and scripted. The applicant's response to a
particular question triggers the interviewer to either ask more
details about the response or to ask another question. This
procedure lists among its benefits: reduction in the time required to
process applications; delivery of policies in a shorter period of
time; nonduplication of the same question asked by agents, medical
examiners, and underwriters; reduction in the number of omitted
answers to questions on the application; and the reduction of
paperwork required by an agent.
TEMPERATURE EXTREMES EXCLUSION provision in an ALL
RISKS INLAND MARINE policy that denies coverage for exposure to
 Page 513
dampness and extremes of temperature. Some property, like living
plants, might be particularly vulnerable to extremes of temperature
and is not considered as insurable risk.
TEMPORARY DISABILITY BENEFITS income paid to a worker
who is temporarily disabled by an injury or sickness that is not
work related. Compare with WORKERS COMPENSATION BENEFITS, which are
available only to workers injured on the job. And unemployment
benefits are available only to those who are able to work.
Temporary disability benefits fill in for those who cannot work
because of illness and who were not injured on the job. After a
waiting period that is typically about a week, the disabled worker is
paid a weekly income. Temporary disability benefits may come
from a group benefit plan, from a union medical plan, or, in some
cases, from a state insurance fund. Five states have temporary
disability plans: California, Hawaii, New Jersey, New York, and
Rhode Island.
TEMPORARY LIFE ANNUITY ANNUITY that provides income
payments for a number of years provided the ANNUITANT is alive to
receive them. All income payments cease upon the death of the
annuitant.
TEMPORARY LIFE ANNUITY DUE limited number of
payments, the first of which is due immediately, and payments
thereafter are contingent upon the designated beneficiary (the
ANNUITANT) continuing to live. After the limit has been reached all

payments cease even if the annuitant is still alive.

TEMPORARY LIFE INSURANCE see TERM LIFE INSURANCE.
TEMPORARY MAJOR MEDICAL INSURANCE modification of
the MAJOR MEDICAL INSURANCE policy that provides coverage for the
terminating employee who otherwise would not be covered by a
health insurance policy. Usually, this coverage is for no more than
six months and cannot be renewed.
TEMPORARY NONOCCUPATIONAL DISABILITY PLAN
social insurance that provides benefits to temporarily disabled
workers in a few states. Five states require employers to pay cash
benefits if work-ers are disabled. They are Rhode Island,
California, New Jersey, New York, and Hawaii.
TEMPORARY PARTIAL, TOTAL DISABILITY see DISABILITY INCOME
INSURANCE; TEMPORARY DISABILITY BENEFITS.

TENANCY see ESTATE PLANNING DISTRIBUTION: JOINT TENANTS; TENANCY BY THE ENTIRETY.
TENANCY BY THE ENTIRETY ownership of property by a
husband and wife together; the law views the couple as one person.
This can have a bearing on insurance claims. For example, if the
wife willfully destroys property, her husband's claim may be denied
by an insurer on the grounds that he is not separate from his wife
for insurance purposes,
 Page 514
and this constitutes destruction by the insured. Contrasts with
TENANTS IN COMMON.

TENANTS IMPROVEMENTS AND BETTERMENTS

improvements or renovations to a leased business or residential
property made by a tenant to meet its particular needs. Loss of use
of these improvements as a result of damage is covered by an
endorsement to the Standard Fire Policy.
TENANTS IN COMMON ownership of property by two or more
persons who do not have rights of survivorship. The share of a
deceased tenant passes to that person's heirs and not to the other
tenants. Because insurance is a personal contract, all parties with an
interest in the property must be listed. When filing an insurance
claim, the policyholder must prove there was a loss and that the
property damaged belonged to the policy holder. For example, four
tenants in common own a resort condominium. Only one is listed
on the insurance policy. A fire destroys the condo. The insurer
probably could argue successfully that the interests of the other
three are not covered.
TENANTS INSURANCE coverage for the contents of a renter's
home or apartment and for liability. Tenant policies are similar to
homeowners insurance, except that they do not cover the structure.
They do, however, cover changes made to the inside structure, such
as carpeting, kitchen appliances, and built-in bookshelves.
TENDER OFFER DEFENSE EXPENSE INSURANCE coverage
for defense costs incurred in defending a company from an
unfriendly takeover attempt. Hostile takeovers have been one of the
hottest business topics in recent years. Vulnerable companies have
responded in a variety of ways including changing the corporate
bylaws, selling off their most attractive assets, and, in the last
resort, voting themselves huge severance packages or ''golden
parachutes." When a company or individual makes a tender offer
for the stock of its takeover target, the latter company usually hires
legal experts and mounts a costly defense. This insurance is an
example of a specialized coverage that grew to meet a specific
need.
TENDER OF UNEARNED PREMIUM return of a pro rata portion
of premium after a policy is canceled by the insurer. Under most
property and liability insurance policies, the insurer can cancel at
any time but must return to the insured the portion of the premium
that has not been used. Although some courts have held that a
policy has not been cancelled until the insurer returns the unearned
premium, others allow the insurer to cancel the policy and inform
the insured that the unearned premium will be refunded on
demand.
TEN-YEAR AVERAGING accounting method used to reduce
income taxes on distributions from qualified pension or retirement
plans. Ten-year averaging was repealed by the TAX REFORMACT OF 1986 but
is still
Page 515
 Page 516
available to persons who reached age 50 before January 1, 1986.
They are allowed at any future date to make a one-time use of 10-
year averaging at 1986 income tax and capital gains rates.
Everyone else is limited to 5-year forward averaging. For those
still eligible, 10-year averaging provides the opportunity to pay tax
on a lump sum distribution as if it were the only income received
over a 10-year period. For example, a lump sum distribution of
$50,000 would be taxed at $5874. This amount is calculated as
shown on the previous page.
TEN-YEAR VESTING (CLIFF VESTING) method of vesting
under the EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA) that requires an
employee to have 10 years of service with an employer to be
vested. An employee who leaves an employer prior to that time
does not receive retirement benefits from that job. Under the TAX
REFORM ACT OF 1986, after December 31, 1988, the 10-year vesting rule is

reduced to 5 years. See also VESTING.

TERM period of time of insurance coverage. If a loss occurs during
this time, insurance benefits are paid. If a loss occurs after this time
period has expired, no insurance benefits are paid.
TERMINAL DIVIDEND additional policy dividend paid to a life
insurance policyholder when a policy terminates. A MUTUAL INSURANCE
COMPANY is owned by its policyholders and writes participating

policies, which pay annual policy dividends to policyholders.

(Some stock insurance companies pay dividends on some policies
as well.) In addition to the annual dividend, many policies pay a
terminal dividend when the policy terminates after a minimum
period in forceusually 10 to 20 years. This represents a realm to the
policyholder of an equitable portion of the overall increase in the
insurer's surplus over this period. Some companies pay this
dividend no matter how a policy is terminated; others pay it only
under certain conditions.
TERMINAL FUNDING former method of funding a pension plan.
When employees retire, the employer sets aside a lump sum that
will pay them lifetime monthly benefits. When determining the
amount, these factors are considered life expectancy, the promised
monthly benefit, and expected earnings on the sum set aside. The
lump sum can either be placed in a trust fund or used to buy an
annuity. Terminal funding, along with the current disbursement
method, are no longer permitted for qualified pension plans under
the EMPLOYEE RETIREMENT INCOME SECURITY ACT of 1974 (ERISA). ERISA requires
current funding of future pension liabilities.
TERMINAL ILLNESS BENEFIT portion of the DEATH BENEFIT in a life
insurance policy paid upon the insured being diagnosed as having a
terminal illness that will result in death within a year.
TERMINAL RESERVE life insurance reserve at the end of any
policy year. Insurers are required by state regulatory authorities to
set up reserves to pay for future claims. The initial reserve is the
reserve at
 Page 517
the beginning of the policy year; the mean reserve is the average of
the initial reserve and the terminal reserve for that year. The
terminal reserve is used for dividend distributions and to set
nonforfeiture values for CASH VALUE LIFE INSURANCE. The terminal reserve
for one policy year is the initial reserve for the next policy year.
TERMINATION cancellation of a policy by an insurance company.
See also PENSION BENEFIT GUARANTY CORPORATION (PBGC); TERMINATION INSURANCE.
TERMINATION DATE see EXPIRATION; EXPIRATION NOTICE.
TERMINATION INSURANCE see PENSION PLAN TERMINATION INSURANCE.
TERMINATION RATE measure of the rate at which policies are
cancelled or allowed to lapse. The termination rate is a factor in
setting premiums for group life and health policies.
TERM INSURANCE see TERM LIFE INSURANCE.
TERM INSURANCE COST low-cost life insurance providing
coverage only for a limited time, such as one year, five years, or to
age 65. Term insurance costs less at younger ages than a
comparable amount of CASH VALUE LIFE INSURANCE, or permanent insurance,
which covers the remaining life of the insured. Term insurance has
become increasingly popular; it costs less because there is less
likelihood that an insured will die during the term, whereas with
cash value insurance, a policy must pay off whenever a
policyholder dies. However, the premium for term insurance
increases dramatically as an insured grows older, but the premium
for permanent insurance usually remains level throughout an
insured's lifetime.
TERM LIFE INSURANCE life insurance that stays in effect for
only a specified, limited period. If an insured dies within that
period, the BENEFICIARY receives the death payments. If the insured
survives, the policy ends and the beneficiary receives nothing. For
example, if an insured with a five year term policy dies within that
period, the beneficiary receives the face amount of the policy. If the
insured survives the five year period, the policy ends, with no
benefit payable. See also ORDINARY LIFE INSURANCE; RENEWABLE TERM LIFE INSURANCE.
TERM OF THE POLICY length of time INSURANCE POLICY is in force.
TERRITORIAL GROUPING OF RISKS method of classifying
risks to establish equitable rates. In many property and liability
insurance lines, the location of an insured has a significant impact
on the loss experience. For example, in automobile insurance the
chance of a policyholder sustaining a loss is much greater in New
York City than in rural Iowa. In lines like workers compensation,
insurers may consider the attitude of the state courts and its impact
on the cost of claims in that state. The insurer's task is to define a
territorial grouping that has
 Page 518
an exposure that is either smaller or greater than the standard, yet
the group must be large enough to provide significant loss
experience for rate making.
TERRITORIAL LIMITS condition for INLAND MARINE liability
insurance coverage that states a loss or claim must occur in the
policy territory. Policy territory for a liability policy includes the
U.S., its territories, and Canada; international water or air space
(except for when the injured person is traveling to another
country); and injuries sustained anywhere in the world if a product
is produced in the U.S. and the suit is brought in the U.S.
TERRITORIAL LIMITS LIABILITY INSURANCE see TERRITORIAL
LIMITS.

TERTIARY BENEFICIARY third-in-line BENEFICIARY to receive

benefits from an insurance policy should the primary and
secondary beneficiaries not survive.
TESTAMENTARY TRUST see ESTATE PLANNING DISTRIBUTION; TESTAMENTARY
DISPOSITION.

TESTAMENTARY DISPOSITION disposition or transfer of

property at time of death. Although the law provides that property
may be transferred at death only by means of a will that meets the
requirements of state statutes, life insurance proceeds are exempt
from this requirement. They pass to the stated beneficiary without
regard to the state requirements for wills.
TESTATE having in force a valid WILL.
TESTATOR/TESTATRIX individual who institutes a valid WILL.
TESTATE DISTRIBUTION see ESTATE PLANNING DISTRIBUTION.
THEATRICAL FLOATER endorsement to a scheduled property
floater that provides named perils coverages for props, costumes,
and other materials that might be used by a theatrical company.
Coverage is provided for these perils: fire, lightning, windstorm,
explosion, collapse of bridges, flood, theft, smoke, and
transportation perils.
THEFT act of stealing. Coverage can be purchased under most
property insurance policies such as the HOMEOWNERS INSURANCE POLICY.
THEFT, CHARACTERISTICS see BURGLARY INSURANCE; HOMEOWNERS
INSURANCE POLICY; PERSONAL AUTOMOBILE POLICY (PAP); SPECIAL MULTIPERIL INSURANCE (SMP).

THEFT, DISAPPEARANCE, AND DESTRUCTION POLICY

(FORM C) COMBINATION POLICY PLAN of fidelity insurance and crime
insurance under five standard agreements:
1. Insuring Agreement Idishonesty of employees on either a
COMMERCIAL BLANKET BOND or BLANKET POSITION BOND basis.
 Page 519
2. Insuring Agreement IIcoverage inside an insured's premises or a
bank premises if money and securities are lost due to dishonesty,
disappearance, or destruction.
3. Insuring Agreement IIIcoverage of money and securities being
transported by an insured's messenger outside an insured's premises
if they are lost due to dishonesty, disappearance, or destruction.
4. Insuring Agreement IVcoverage if an insured accepts counterfeit
U.S. or Canadian paper currency or money orders of no value.
5. Insuring Agreement Vcoverage for depositor forgery if an
insured's own commercial paper is forged or altered. Additional
coverages can be added through endorsement, including check
forgery, paymaster robbery, broad form payroll robbery coverage
both inside and outside an insured's premises, broad form payroll
robbery coverage inside premises only, burglary and theft of
merchandise, forgery of warehouse receipts, wrongful obstruction
of securities or losses from safe deposit boxes, burglary of office
equipment, theft of office equipment, paymaster robbery inside
premises only, and forgery in use of credit cards.
THEFT, EXCLUSION see BURGLARY INSURANCE; HOMEOWNERS INSURANCE POLICY;
PERSONAL AUTOMOBILE POLICY (PAP); SPECIAL MULTIPERIL INSURANCE (SMP).

THEFT, HOMEOWNERS INSURANCE POLICY see HOMEOWNERS

INSURANCE POLICY.

THEORY OF PROBABILITY see LAW OF LARGE NUMBERS; PROBABILITY;

PROBABILITY DISTRIBUTION.

THIEF see BURGLARY INSURANCE; HOMEOWNERS INSURANCE POLICY; PERSONAL AUTOMOBILE

POLICY (PAP); SPECIAL MULTIPERIL INSURANCE (SMP).
THIRD PARTY individual other than the insured or insurer who
has incurred a loss or is entitled to receive a benefit payment as the
result of the acts or omissions of the insured.
THIRD PARTY: ADMINISTRATION performance of managerial
and clerical functions related to an EMPLOYEE BENEFIT INSURANCE PLAN by an
individual or committee that is not an original party to the benefit
plan. In selecting a Third Party Administration (TPA), the
following factors should be taken into consideration: (1) Has the
TPA been operating on a profitable basis? (2) Does the TPA have a
long operating record? (3) What percentage of the TPA's total
business will your company's business comprise? (4) Does the TPA
have the technical capacity (for example, sophisticated computer
operations) to adequately service its acquired business? (5) Are
current and former clients of the TPA positive about that TPA? (6)
Are the employees of the TPA technically competent and
committed to providing effective and efficient services? See also
ADMINISTERING AGENCY; ADMINISTRATIVE CHARGE; ADVISORY COMMITTEE.
 Page 520
THIRD PARTY: BENEFICIARY individual who has a legally
enforceable right to receive all benefits allocated to him or her
under the insurance policy or employee benefit plan even though
this person was not an original party to the insurance policy
contract or employee benefit contract.
THIRD PARTY: INSURANCE liability insurance purchased by the
insured (first party) from an insurance company (second party) for
protection against possible suits brought by another (third party).
See also LIABILITY INSURANCE.
"3-D" POLICY see DISHONESTY, DISAPPEARANCE, AND DESTRUCTION POLICY (3-D POLICY).
THREE-FACTOR CONTRIBUTION METHOD principle of SURPLUS
distribution as the result of excess funds above the amount required
to establish LEGAL RESERVES. These excess funds are generated from
three sources: (1) mortality savings; (2) excess interest earned on
investments; and (3) expense savings.
THREE-FOURTHS LOSS CLAUSE provision requiring insurance
company to pay no more than three-fourths of the actual cash value
of the damaged or destroyed property. Historically, this clause was
found in property insurance policies and marine insurance policies.
Today, this clause is no longer used.
THREE-FOURTHS VALUE CLAUSE see THREE-FOURTHS LOSS CLAUSE.
THREE STEPS INVOLVED see RISK MANAGEMENT.
THRESHOLD LEVEL minimum degree of injury or loss for
which an injured party can sue, even though covered by NO FAULT
AUTOMOBILE INSURANCE. Traditionally, an accident victim had to prove the

other driver was at fault in order to collect damages from that

driver's insurance company. Today, more than 20 states have some
type of automobile no-fault law designed to eliminate long and
costly legal action, and to assure quick payment for medical and
hospital costs, loss of income, and other unavoidable costs
stemming from automobile accidents. An injured person can
collect from his or her insurance company up to the threshold level,
or specified limit, no matter who is at fault. For expenses above
these limits, the injured person is still allowed to sue. There are
three types of thresholds: a specific dollar amount, a specific
period of disability, or specified injuries such as loss of a leg.
THRIFT PLAN type of employee savings plan under which an
employee may contribute up to a specified percentage of the salary
on an after-tax basis and the employer matches the employee's
contribution up to a specified percentage. Investment earnings on
the sums contributed accrue on a tax-deferred basis until
distributed.
 Page 521
TICKET POLICY see TRANSPORTATION TICKET INSURANCE.
TIME AND DISTANCE REINSURANCE type of EXCESS OF LOSS
REINSURANCE in which the insurance company (CEDENT) receives payments

from its REINSURER in a specific pattern of payments.

TIME ELEMENT (TIME POLICY) COVERAGE insurance that
covers an INDIRECT LOSS stemming from a DIRECT LOSS by a covered peril to
income-producing property. A building destroyed by fire represents
a direct loss. Lost income resulting from the shutdown of a
manufacturing facility housed in the burned building represents an
indirect time element loss and would be covered by BUSINESS
INTERRUPTION INSURANCE, a form of time element insurance.

TIME FOR NOTIFICATION OF LOSS period allowed an insured

to notify an insurer of loss. Many policies require immediate
written notice, or notice as soon as practicable. Different types of
policies have their own time periods. For example, health insurance
policies require notice within 20 days, windstorm insurance
policies within 10 days, and hail insurance policies within 48
hours. The purpose of a time period is to allow the insurer to
investigate the loss and protect the property from further damage.
TIME LIMIT
1. part of the Model Uniform Life and Health Insurance Policy
Provisions Law giving an insurer a time limit on contesting
coverage for preexisting conditions or misrepresentation. This law,
developed in 1950 as model legislation by the NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS (NAIC), has been adopted by all states. While the

model law gave insurers three years for certain defenses, such as
misrepresentation of facts by an insured or nondisclosure of a
preexisting condition, many states have lowered it to two years.
2. period of time that proof of loss or claim must be filed with an
insurance company.
TIME LIMITS period of time during which notice of claim and
proof of loss must be submitted by the INSURED or his or her legal
representatives.
TIME POLICY see TIME ELEMENT (TIME POLICY) COVERAGE; VOYAGE POLICY.
TIME VALUE OF MONEY relationship determined by the
mathematics of COMPOUND INTEREST between the value of a sum of
money at one point in time and its value at another point in time.
Time value of money can be illustrated by the fact that a dollar
received today is worth more than a dollar received a year from
now because today's dollar can be invested and earn interest as the
year elapses. Implicit in any consideration of time value of money
are the rate of interest and the period of compounding. For
example, the present value of $1 million
 Page 522
received 10 years from now is only $386,000 today, assuming a
10% rate of interest and annual compounding. Insurance
companies make use of time value of money by earning investment
income on premiums between the time of receipt and the time of
payment of claims or benefits. See also STRUCTURED SETTLEMENT.
TITLE INSURANCE coverage for losses if a land title is not free
and clear of defects that were unknown when the title insurance
was written. Title insurance protects a purchaser if there is a defect
in the title, such as a lien against the property, that is not discovered
at the time of purchase. Although a title search is a routine part of a
property transaction, it is possible that a search may overlook some
encumbrance. Title insurance is written by title insurance
companies that generally operate in a specific geographic area
because of the need to examine local records. The TORRENS SYSTEM is a
form of title insurance used in some states.
TITLE XIX INSURANCE see MEDICAID.
TLO see TOTAL LOSS ONLY (TLO) INSURANCE.
TONTINE early life insurance that provided benefits only to
survivors who lived to the end of a certain period of time. In the
mid-17th century, Lorenzo Tonti, an Italian, devised a scheme to
raise money for the French government of Louis XIV. It involved a
state lottery in which the oldest survivor would collect the pot. One
woman, age 96, hit the jackpot shortly before her death. Tontine
policies were introduced in the U.S. in the 1860s, but condemned
in the ARMSTRONG INVESTIGATION in 1905 in New York State and
subsequently outlawed everywhere 45 years later.
TOP HAT PLAN NONQUALIFIED DEFERRED COMPENSATION PLAN for highly
compensated employees or select group of personnel. The
reporting and disclosure requirements of the EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974 (ERISA) and the INTERNAL REVENUE CODE require only the

following information: name of the employer, number of

employees in the plan, and a statement from the employer that the
plan is maintained and funded strictly to provide nonqualified
deferred compensation to select number of personnel.
TOP-HEAVY PLAN pension or other employee benefit plan that
favors highly compensated employees or top executives or owners
of a company. Prior to the TAX REFORM ACT OF 1986, there was no uniform
definition of a "highly compensated" employee, but that law
provides a specific definition that is used for qualified pension
plans, 401 (k) plans, and some other employee benefits. An
employee is considered highly compensated if he or she: (1)
directly or indirectly owns more than a 5% interest in the company,
(2) receives compensation from the company of more than
$75,000, (3) is paid more than $50,000 and was among the top
20% of employees ranked by compensation, or (4) is at any time an
officer and receives compensation that was more than 150% of the
Section 415 defined-contribution dollar amount.
 Page 523
TORRENS SYSTEM means of land title registration used in some
states that in effect, provides a government sponsored form of TITLE
INSURANCE. Under this system, a government official, such as county

recorder or county clerk, maintains Torrens System deed records

and guarantees clear title when property is transferred. Fees
charged for registration and transfer of title are used in part to
finance a Torrens insurance fund in each jurisdiction to compensate
claimants for damages resulting from errors.
TORT in general, a civil wrong, other than breach of contract, for
which a court will provide a remedy in the form of a suit for
damages. Torts include negligent acts or omissions on the part of a
defendant. Liability insurance is designed to cover an insured
(defendant) for unintentional tort acts. See also NEGLIGENCE.
TORT, DEFENSE AGAINST UNINTENTIONAL excuses raised
by a defendant in a negligent suit (unintentional tort). There are
three basic defenses to unintentional torts or negligence.
1. ASSUMPTION OF RISKan individual (plaintiff), by not objecting to the
negligent conduct of another, acknowledges awareness of the
present danger and consents to it.
2. CONTRIBUTORY NEGLIGENCEboth individuals have contributed to an injury
or property damage sustained by one or both individuals. Under
this circumstance neither should be allowed to collect from the
other.
3. COMPARATIVE NEGLIGENCEwhere both plaintiff and defendant contributed
to plaintiff's injury, the apportionment of some fault to the plaintiff
reduces the liability of the defendant.
TORT FEASOR person who commits a TORT, a type of wrongful act,
that causes injury or damage.
TORT, INTENTIONAL deliberate act or omission. These torts
include trespassan individual enters property owned or in the
possession of another without permission; conversionan individual
exerts control and subverts another's property to his or her own
benefit; assaultan individual's conduct causes another to fear for
his or her life or the damage to his or her property; batteryan
individual physically strikes another without permission; false
imprisonmentan individual confines another illegally;
libeldissemination of written injurious and false information about
another's character; and slanderoral dissemination of injurious and
false information about another's character.
TORT LAW legislation governing wrongful acts, other than
breaches of contract by one person against another or his or her
property, for which civil action can be brought. Tort law and
contract law define civil liability exposures. The four areas of torts
are negligence, intentional interference, absolute liability, and strict
liability. For example, the owner of a decrepit boat dock that
collapses while people are standing on it might be liable under
negligence. Assault and battery are an
 Page 524
example of intentional interference. The owner of a poisonous
snake that bit someone could be liable for injury under absolute
liability, even if he or she did not intend to harm anyone. The
maker of a defective product that harms the buyer might be held
liable under strict liability. See also TORT LIABILITY.
TORT LIABILITY see TORT; TORT, DEFENSE AGAINST UNINTENTIONAL; TORT, INTENTIONAL;
TORT, UNINTENTIONAL.

TORT, UNINTENTIONAL individual action or failure to act as a

reasonably prudent person would under similar circumstances,
resulting in harm to another. Also called NEGLIGENCE. A reasonably
prudent person is defined by the standards of the profession that are
followed, and the level of expertise expected of a person with like
training. An example is a CPA who fails to complete tax returns on
behalf of a client according to GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
TOTAL DISABILITY see DISABILITY.
TOTAL DISABILITY BENEFIT monthly income payment from a
DISABILITY INCOME INSURANCE policy made to the insured wage earner when

income has been interrupted or terminated because of illness,

sickness, or accident provided the following stipulations by the
wage earner have been met: (1) total disability for the duration that
the policy is in force and beyond the ELIMINATION PERIOD; and (2) while
remaining totally disabled, income payment made at the end of
each month until the limits on the maximum amount of benefit are
reached, at which time payments will cease.
TOTAL LOSS condition of real or personal property when it is
damaged or destroyed to such an extent that it cannot be rebuilt or
repaired to equal its condition prior to the loss.
TOTAL OPERATING INCOME insurance company's total
premium income plus investment income.
TOTAL LOSS ONLY (TLO) INSURANCE ocean marine policy
that pays an insured only if a ship or cargo is a total loss. Because
total loss is rare, these policies are much less expensive than
regular hull insurance. Therefore, it is used by shipowners who
cannot afford more complete coverage or who cannot get it for
some other reason.
TOTAL RETURN comprehensive gain or loss on a security over a
stipulated period of time comprised of capital appreciation plus
dividend/interest received.
TOTAL QUALITY MANAGEMENT (TQM) management
philosophy developed by W. Edwards Deming, the thesis of which
is the continuous improvement in quality through research in
customer satisfaction and the empowerment of employees. To that
end, a range of team-building and work flow-analysis techniques
are emphasized. This management technique is useful in its
application to insurance
 Page 525
company operations since these operations involve transactions
between the company and customers to include policy sales,
distribution, and claims. See also QUALITY INSURANCE CONGRESS (QIC).
TOTAL RETURN UNITRUST (TRU) modification of the CHARITABLE
REMAINDER UNITRUST through which the BENEFICIARIES receive a specified

percentage of the assets' value in the TRUST usually paid out on a

quarterly basis. If the trust's assets earn a greater return than the
amount being received by the beneficiaries, the excess amount
earned remains in the trust to further accumulate. As the assets
grow in this trust, the income to the beneficiaries will also become
larger.
TOURIST BAGGAGE INSURANCE coverage for personal
effects of a tourist, including apparel, books, toilet articles,
watches, jewelry, luggage, portable typewriters, photographs and
photography equipment and supplies. This is a SPECIFIED PERIL INSURANCE
policy that specifically includes fire, lightning, damage due to
automobile accident, theft of items in the care, custody, and control
of a common carrier, and theft of items from the hotel room in
which the insured tourist is registered. Excluded are baggage theft
from checkrooms, baggage theft from hotel lobbies unless checked,
items at the permanent premises of the insured tourist, and items
that cannot be found but have not been stolen.
TOWING INSURANCE endorsement to an automobile policy that
pays specified amount for towing and related labor costs.
TOWNHOUSE MULTIPLE LINE INSURANCE homeowners
policy to cover the owner of a townhouse. See also HOMEOWNERS
INSURANCE POLICY.
TRADITIONAL NET COST METHOD OF COMPARING
COSTS see INTEREST ADJUSTED COST; LIFE INSURANCE COST.
TRADITIONAL RISK REINSURANCE application of
conventional terms and conditions to the REINSURANCE of a RISK.
Contrast with NONTRADITIONAL REINSURANCE.
TRAILER INSURANCE liability and physical damage coverage
for trailers under business or personal auto policies. Most
automobile insurance policies offer liability coverage for common
types of trail-ers owned by an insured, including house trailers,
boat trailers, and campers. For collision insurance coverage,
personally owned trailers must be scheduled on a personal policy.
The BUSINESS AUTOMOBILE POLICY (BAP) offers only limited insurance without
scheduled coverage for both liability and collision.
TRANSACTING INSURANCE see NAIC: MODEL LIFE INSURANCE SOLICITATION
REGULATION; NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC).

TRANSFERABILITY see ASSIGNMENT; ASSIGNMENT CLAUSE, LIFE INSURANCE;

COLLATERAL ASSIGNMENT.
 Page 526
TRANSFER ABSOLUTE see LIFE INSURANCE, ASSIGNMENT CLAUSE.
TRANSFER BY ASSIGNMENT see ASSIGNMENT CLAUSE, LIFE INSURANCE.
TRANSFER BY ENDORSEMENT see ASSIGNMENT; COLLATERALASSIGNMENT;
LIFE INSURANCE, ASSIGNMENT CLAUSE.

TRANSFER FOR VALUE RULE an exception to SECTION 101 (A) (1) OF THE
INTERNAL REVENUE CODE tax-exempt status of the DEATH BENEFIT in a life

insurance policy where the transfer of the interest in the policy by

the policyowner to another party in exchange for a valuable
consideration results in the death benefit losing its tax-exempt
status. However, the death benefit will not lose its tax-exempt
status when the policy is transferred to the insured, to a partner of
the insured, to a partnership in which the insured is a full partner,
or to a company, provided the insured is a stockholder and/or an
officer in that company.
TRANSFER OF INSUREDS provision in corporate life insurance
policies that allows coverage to be transferred to a new individual
with proof of insurability, for a premium appropriate to the age of
the new individual. These policies are designed to cover key
executives of a corporation and to provide continuous insurance in
force without the necessity of obtaining a new policy. For example,
if a corporation buys insurance to cover the chief executive officer
who later retires, the policy could be transferred to the new CEO.
See also RIDERS, LIFE INSURANCE.
TRANSFER OF RISK see RISK TRANSFER.
TRANSFER ON DEATH (TOD) form of stock ownership that
permits the stockholder to select a BENEFICIARY to receive the stock
upon the death of the stockholder. The stockholder retains all rights
of stock ownership during his or her lifetime. At the death of the
stockholder, the stock is transferred to the beneficiary not subject to
PROBATE. The beneficiary can be a corporation, TRUST, or individual.

The stockholder may nullify the TOD and change the beneficiary at
will.
TRANSFER PAYMENTS redistribution of wealth by taking
money from one group of individuals and allocating that sum to
another group of individuals. SOCIAL INSURANCE is such a mechanism,
since the high-income group of individuals will pay proportionately
more in Social Security taxes and receive proportionately less in
retirement income benefits than the low-income group of
individuals.
TRANSIT INSURANCE INLAND MARINE policy that protects an insured
against loss for property that is shipped. One policy may be written
for a single shipment, as for a family moving household goods, or
it may be an open policy written for a manufacturer who
continuously ships products. The basic inland transit policy is
written on one of two policy forms, the ANNUAL POLICY or the OPEN POLICY.
TRIP TRANSIT INSURANCE is available for single shipments.
 Page 527
TRANSPLANT BENEFIT TOTAL DISABILITY BENEFIT in the form of a
monthly income payment found in a disability income insurance
policy to insured wage earners when their income has been
interrupted or terminated due to total disability resulting from an
organ transplant from the insured's body to the body of another
individual.
TRANSPORTATION INSURANCE see INLAND MARINE INSURANCE
(TRANSPORTATION INSURANCE): BUSINESS RISKS.

TRANSPORTATION INSURANCE RATING BUREAU (TIRB)

one of two bureaus that writes forms and files standard rates for
inland marine insurance. The other is the INLAND MARINE INSURANCE BUREAU.
TRANSPORTATION TICKET INSURANCE accident policy that
covers a traveler for a single trip on an airplane or other common
carrier. The name comes from its origin as part of the ticket or
ticket stub, but these policies are no longer sold with the ticket.
They are commonly sold in airports, often from vending machines.
TRAUMATIC INJURY bodily or emotional injury resulting from
physical or mental wound or shock. A traumatic injury is caused by
something outside the person's body as opposed to a sickness or a
disease. An example would be injury to a hand that is smashed in a
machine, or a nervous breakdown caused by stress on the job.
TRAVEL ACCIDENT INSURANCE special-purpose health
insurance policy that covers an insured for accidents while
traveling. The policy may cover the insured for one specific trip or
one particular type of travel, or it may cover all trips taken in a
year. This type of insurance can be purchased in airport vending
machines or from an agent.
TRAVEL INSURANCE insurance coverage for pitfalls associated
with travel. The coverage can be classified as follows:
1. Trip Cancellationthe traveler(s) must cancel the trip because of
unforeseen circumstances such as an illness;
2. Trip Interruptioncoverage in the event a trip is terminated
because of illness or hotel ceases to continue to operate;
3. Lost Luggagevaluables are lost and expenses are incurred
because of the inconvenience;
4. Default Protectiona trip is cancelled because a carrier or tour
operator is no longer in business.
TREASURY INFLATION PROTECTION BONDS (TIPs) bonds
issued by the United States Treasury that pay a semiannual interest
rate tied to the Treasury auction plus an additional interest rate tied
to the rate of inflation during this semiannual period. The rate of
inflation is measured by the increases or decreases in the Consumer
Price Index for Urban Consumers (CPI-U). The TIPs are issued in
minimum denominations of $1000 with varying maturities. The
additional rate of inflation interest adjustment is paid on the
principal of the bond at maturity. Taxes are paid annually on both
the interest earned on the TIP as well as the additional rate of
inflation interest adjustment.
 Page 528
TREATMENT OF DEATH BENEFITS see (1) ESTATE PLANNING; (2)
ESTATE PLANNING DISTRIBUTION; (3) GROUP LIFE INSURANCE; (4) PENSION PLAN; (5) TAX

BENEFITS OF LIFE INSURANCE; (6) TAX PLANNING.

TREATMENT OF EMPLOYEE WITHDRAWALS see PENSION PLANS:

WITHDRAWAL BENEFITS.

TREATMENT OF GAINS AND LOSSES see TAX REFORMACT OF1986.

TREATY FACILITY facility used to gain access to the REINSURANCE
markets by the CAPTIVE INSURANCE COMPANIES for their large property
exposures. The facility reinsures a relatively small percentage of its
captive company members' property exposure and uses a RETROCESSION
to transfer the remainder of the property exposure on a TREATY
REINSURANCE basis. The facility institutes all renewals of reinsurance

for its captive company members at the same instance and arranges
FACULTATIVE REINSURANCE for those members that cannot meet the

UNDERWRITING requirements of the facility.

TREATY REINSURANCE see AUTOMATIC NONPROPORTIONAL REINSURANCE;

AUTOMATIC PROPORTIONAL REINSURANCE; AUTOMATIC REINSURANCE.

TRENDED describing the process of developing the ultimate

losses and then adjusting them to the cost levels projected for the
period of time to be forecasted.
TRESPASS see TORT, INTENTIONAL; TRESPASSER.
TRESPASSER person who enters property without the right to do
so. For liability purposes, it has been held that property owners are
not responsible for trespassers as long as they do not intentionally
trap or injure them. On the other hand, a property owner can be
liable for injury to a person who has been invited onto his or her
property, including messengers, delivery people, and service
people, as well as guests. However, trespassers are very narrowly
defined. No one in a public place is considered a trespasser.
Likewise, owners of an ATTRACTIVE NUISANCE have been held liable for
injuries to trespassing children. Further, recent interpretations by
the courts have sometimes made owners liable for injury to
trespassers if the owner was negligent.
TRICARE Department of Defense TRIPLE OPTION managed health care
program consisting of three options: Tricare Prime (HEALTH MAINTENANCE
ORGANIZATION), Tricare Extra (PREFERRED PROVIDER ORGANIZATION), and Tricare

Standard (non-network provider system). This program is designed

to coordinate health care between the military and civilian systems
for members of the military. Included is a program for resource
sharing in order to increase the availability of health care services
and to facilitate referral to the proper health providers.
TRIP CARGO INSURANCE see CARGO INSURANCE.
TRIPLE INDEMNITY see ACCIDENTAL DEATH CLAUSE.
 Page 529
TRIPLE OPTION PLAN plan that permits the insurance company
to administer health care plans that permit the patient to choose
from three benefit options at the time of need: INDEMNITY (insurance),
HEALTH MAINTENANCE ORGANIZATION (HMO), and PREFERRED PROVIDER ORGANIZATION (PPO). The

indemnity plan, even though more costly, would provide the patient
with the greatest number of choices among physicians and
hospitals. The PPO would allow the patient to have more choices
among physicians and hospitals than the HMO and would not
require the patient to go through the primary care physician or
gatekeeper, as the HMO requires. The HMO would be the lowest
cost option (no deductible) but the most restrictive as to the
patient's choice.
TRIPLE PROTECTION combination life insurance policy
consisting of ORDINARY LIFE and double the amount of TERM LIFE. Should
the insured die within a stipulated time period, the double term
amount and ordinary life amount are paid to the beneficiary. If the
insured dies beyond the stipulated time period, only the ordinary
amount is paid to the beneficiary. This policy may be applicable in
situations where the family is young and extra amounts of
protection are required until the children reach the age of majority.
TRIP TRANSIT INSURANCE coverage on a single shipment of
property while in temporary storage or in transit. This policy is
most commonly used in moving of household goods, which are
covered from the time they are picked up, put in temporary storage,
shipped to another location and put in temporary storage, and then
delivered to the insured's new address. Protection is on an ALL RISKS
basis subject to exclusions such as war, wear and tear, and nuclear
disaster.
TRUCKERS INSURANCE limited special purposes policy that
provides liability and physical damage insurance for owners and
opera-tors of trucks while engaged in business. This insurance is
often purchased by a business that employs owner-operators.
TRUE GROUP PLAN insurance arrangement in which all
employees of a given business firm are accepted into a plan
regardless of their physical condition. The employee cannot be
required to take a physical examination in order to qualify. The
employees are covered under a Master Contract. See also GROUP
HEALTH INSURANCE; GROUP LIFE INSURANCE.

TRUE NO-FAULT AUTOMOBILE INSURANCE see NO-FAULT

AUTOMOBILE INSURANCE.

TRUST legal entity that provides for ownership of property by one

person for the benefit of another. The TRUSTEE receives title to the
property, but does not have the right to benefit personally from that
property. The trustee has a legal obligation to manage the property
and invest its assets solely for the BENEFICIARY OF TRUST. Since the trustee
is required to manage the property and its assets in a prudent
manner,
 Page 530
if the trustee fails to perform in accordance with the PRUDENT MAN RULE
the trustee becomes personally responsible for any lost funds or
profits incurred by the trust. There are basically two types of trusts:
LIVING TRUST (established during the life of the GRANTOR) and TESTAMENTARY

TRUST. For example, a trust may be established by a parent to hold

assets for the benefit of a child. See also BENEFICIARY OF TRUST; ESTATE
PLANNING DISTRIBUTION.

TRUST AGREEMENT legal document setting out the rules to be

followed by a TRUSTEE in administering assets of a TRUST. The trust
agreement may limit investment of trust assets to specified types of
securities, for example, or provide for distribution of the trust
principal or earnings to a BENEFICIARY OF TRUST only under certain
circumstances.
TRUSTEE see ESTATE PLANNING DISTRIBUTION.
TRUSTEE, BOND see TRUSTEE ROLE, PENSION PLANS.
TRUSTEE LIABILITY INSURANCE coverage provided for the
fiduciaries of a retirement plan as well as for the plan itself in the
event negligence of the fiduciaries results in losses to the plan
and/or liability suits filed against the plan and/or the fiduciaries.
TRUSTEE, NEGLIGENCE see TRUSTEE LIABILITY INSURANCE.
TRUSTEE ROLE, PENSION PLANS see PENSION PLAN; PENSION PLAN
FUNDING INSTRUMENTS; PENSION PLAN FUNDING, GROUP DEPOSIT ADMINISTRATION ANNUITY; PENSION

PLAN FUNDING, GROUP IMMEDIATE PARTICIPATION GUARANTEED (IPG) CONTRACT ANNUITY; PENSION PLAN

FUNDING, GROUP PERMANENT CONTRACT; PENSION PLAN FUNDING, INDIVIDUAL CONTRACT PENSION

PLAN.

TRUSTEE, TERMINATED PLAN one named under provisions of

the EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA) for a terminated
pension plan with an unfunded liability for its benefits.
TRUST FUND PLAN one of two basic types of funding
instruments for pensions or employee benefits, in which
responsibility for plan assets is vested in a trustee. The other type is
known as an insured plan, whose assets are held by a life insurance
company, typically under a group annuity contract that guarantees
payment of benefits. A COMBINATION PLAN makes use of both approaches,
with some contributions going to a trustee and the remainder to an
insurance company. See also SELF-ADMINISTERED PLAN.
TRUST FUND PLAN ANALYSIS see TRUST FUND PLAN.
TRUST INDENTURE document setting out the responsibilities of
a borrower, such as a corporation issuing bonds, and the powers of
a trustee who will be looking after the interests of the bondholders.
TRUSTOR see ESTATE PLANNING DISTRIBUTION.
 Page 531
TRUTH-IN-SAVINGS ACT act passed by Congress in 1991, the
purpose of which is to make it easier for consumers to compare
deposit accounts among savings institutions (SI). Some of the act's
more important provisions include: (1) SI must pay interest on the
full amount of a depositor's balance; (2) SI must use a standardized
formula for computing the annual percentage yield (APY). The
APY is based on the interest rate and the method of compounding
that interest; (3) SI must disclose all fees imposed on checking,
savings, money market, or Super NOW accounts as well as any
other terms or restrictions. These disclosures are required before
the account is opened, before automatic renewals, or upon the
request of the savings customer. The savings institution must
inform current savings account customers of the availability of the
disclosures and include these disclosures with the savings
customer's regular account statement; and (4) SI must be in
compliance with standardized rules concerning their promotional
activities for advertising. All solicitations (whether in print, TV,
radio, etc.) for savings deposits must state in a clear and
conspicuous manner: (1) annual percentage yield; (2) period of
time that the yield is in effect; (3) minimum account balance
required to earn the yield; (4) minimum time period required to
earn the yield; (5) minimum amount required to open the account;
(6) interest penalty is required for early withdrawals; (7) and the
fact that fees may result in the reduction of the Annual Percentage
Yield.
TUITION FEES INSURANCE indemnification of a school for the
loss of tuition, and room and board fees when it is forced to
suspend classes because of the occurrence of a peril. See also TUITION
FORM.
TUITION FORM coverage in the event a school, summer camp, or
similar operation suffers loss of tuition because a peril destroys a
building. The tuition form reimburses the institution for loss of
tuition and rental income from room and board. See also TUITION FEES
INSURANCE.

TUNNEL INSURANCE coverage in the event a tunnel is damaged

or destroyed. Written on an ALL RISKS basis, excluding perils of war,
wear and tear, inherent defect, and nuclear damage. For example,
this coverage would be important to businesses that have
underground tunnels connecting different locations.
TURNKEY INSURANCE Contractor's and Architect's Errors and
Omissions Insurance, which also serves as a general liability policy
for these professionals.
TURNOVER RATE frequency with which employees resign, are
fired, or retire from a company, usually computed as the percentage
of an organization's employees at the beginning of a calendar year.
The turnover rate is one of the factors affecting the cost of a
pension plan. Employees who leave a company before they have a
vested interest in the plan represent a cost saving to plan
administrators, because they will not receive benefits when they
retire. For this reason, most actuaries
 Page 532
make assumptions about the turnover rate of a particular company
when calculating how much money must be contributed to a
retirement plan to pay future benefits.
TWISTING UNFAIR TRADE PRACTICE, in insurance, whereby an agent or
broker attempts to persuade a life insurance policyholder through
misrepresentation to cancel one policy and buy a new one. Some
states have laws requiring full disclosure of relevant comparative
information about existing and proposed policies by an agent trying
to convince a customer to switch policies. These laws may provide
for notification of the insurance company that issued the existing
policy to give it an opportunity to respond to the agent's proposal.
 Page 533

U
U&O see USE AND OCCUPANCY INSURANCE.
UBERRIMAE FlDEI CONTRACT agreement ''of utmost good
faith." Under law, it is assumed that insurance contracts are entered
into by all parties in good faith, meaning that they have disclosed
all relevant facts and intend to carry out their obligations. Where
lack of good faith can be proved, such as in a fraudulent
application to obtain insurance, the contract may be nullified.
UJF see UNSATISFIED JUDGMENT FUND.
UL see UNDERWRITERS LABORATORIES, INC. (UL).
ULTIMATE MORTALITY TABLE presentation of data that
excludes the first 5 to 10 years of experience of those who purchase
life insurance. A MORTALITY TABLE shows the number of deaths per 1000
of a group of people. Experience shows that people have a lower
mortality rate in the first years after they have purchased insurance,
probably because they have recently passed a medical and other
tests. A SELECT MORTALITY TABLE includes data only on people who have
recently purchased insurance. An aggregate mortality table
includes all data.
ULTIMATE NET LOSS insurer's total payments resulting from a
claim, including all related expenses, less any recoveries from
salvage, reinsurance, and the exercise of subrogation rights or other
rights against third parties. See also LOSS DEVELOPMENT.
ULTRA VIRES Latin phrase meaning "beyond power or authority"
describing an act by a corporation that exceeds its legal powers.
For example, corporations do not have the authority to engage in
the insurance business without a charter. A corporation offering
insurance without authority would be acting ultra vires. Similarly,
an insurance company chartered to engage in a single line of
business would be operating ultra vires by offering some other line.
UMBRELLA LIABILITY INSURANCE excess liability coverage
above the limits of a basic business liability insurance policy such
as the OWNERS, LANDLORDS AND TENANTS LIABILITY POLICY. For example, if a basic
policy has a limit of $500,000, and it is exhausted by claims, the
umbrella will pay the excess above $500,000 up to the limit of the
umbrella policy, which may be as high as $10,000,000,
$25,000,000 or more. The umbrella policy also fills gaps in
coverage under basic liability policies.
UMBRELLA REINSURANCE protection for all classes of
business including automobile, fire, general liability, homeowners,
multiple peril, burglary, and glass, by combining the contracts for
these classes of business into one reinsurance contract. This
enables the cedant to
 Page 534
obtain reinsurance more cheaply, with greater capacity, and with
greater spread of risk. An umbrella reinsurance contract is offered
to one set of reinsurers who all take a fixed percentage of every
treaty in the contract. One reinsurer may take 5% across the board,
another may take 10%, and so on, until the umbrella contract is
totally placed. All the treaties that compose the umbrella contract
are written as one block of business; hence, the reinsurers are
prohibited from choosing which treaty they want to reinsure. By
combining all the reinsurance treaties into one contract, if a
catastrophe loss results, each reinsurer will assume only a
percentage of the loss instead of assuming the entire loss by itself.
UMPIRE arbitrator who settles disputes over the amount of loss
when an insurer and an insured do not agree.
UMPIRE CLAUSE see ARBITRATION CLAUSE.
UNALLOCATED BENEFIT see UNALLOCATED FUNDING INSTRUMENT.
UNALLOCATED FUNDING INSTRUMENT pension funding
agreement under which funds paid into a retirement plan are not
currently allocated to purchase retirement benefits. The funds of
one plan cannot be commingled with funds of another plan, and the
plan trustee guarantees neither principal nor interest of the funds
deposited. At retirement the trustee can either purchase an
immediate retirement annuity for the retiring employee or pay the
benefits directly from the fund as they become due. See also PENSION
PLAN FUNDING: GROUP DEPOSIT ADMINISTRATION ANNUITY; PENSION PLAN FUNDING: GROUP IMMEDIATE

PARTICIPATION GUARANTEED (IPG) CONTRACT ANNUITY; PENSION PLAN FUNDING INSTRUMENTS; TRUST

FUND PLAN.

UNAFFILIATED INVESTMENTS insurance company's

investments in assets other than in companies it controls and/or
companies with which it shares common ownership, stocks, and
bonds.
UNAUTHORIZED INSURANCE insurance policy sold by
NONADMITTED INSURER.

UNAUTHORIZED INSURER see NONADMITTED INSURER.

UNAUTHORIZED PRACTICE OF LAW act of practicing law or
providing legal advice without a license.
UNAUTHORIZED REINSURANCE REINSURANCE ceded to an
insurance company that is a NONADMITTED INSURER.
UNBUNDLED term that describes commercial insurance with no
administrative services attached, or alternatively, administrative
services from an insurer without insurance coverage. Years ago,
insureds bought a package that included coverage for exposures as
well as claims paying, loss control, and other risk management
services. With the increasing sophistication of risk management in
the past decade, and to reduce their costs, many corporations elect
to perform some of
 Page 535
these duties themselves and to purchase insurance and other
services on an unbundled basis.
UNBUNDLED LIFE INSURANCE POLICY coverage in which
the investment features, mortality element, and cost factors of a LIFE
INSURANCE policy are separated, permitting each part to be

independently analyzed. The SAVINGS ELEMENT of the policy then

becomes interest-sensitive (rate of return paid to the POLICYHOLDER is
more consistent with the rate of returns earned by the life insurance
company over a period of time than is the rate of return paid to the
holder of a traditional life insurance policy). See also UNIVERSAL LIFE
INSURANCE.

UNCONDITIONAL VESTING no limitation under a CONTRIBUTORY

pension plan of an employee's right to receive vested benefits,
regardless of whether or not the employer withdraws contributions.
See also VESTING; VESTING, CONDITIONAL.
UNDERINSURANCE
1. failure to maintain adequate coverage for a specific loss or
damage.
2. failure to meet a COINSURANCE requirement.
UNDERINSURED MOTORIST COVERAGE LIMITS TRIGGER
mechanism for providing coverage when the insured's underinsured
motorist coverage limit is more than the TORT FEASOR'S limit of liability.
UNDERINSURED MOTORIST COVERAGE MODIFIED
LIMITS TRIGGER mechanism for providing coverage when the
insured's underinsured motorist coverage limit is more than the TORT
 limit of liability that has been previously reduced by claim
FEASOR'S

payments to other CLAIMANTS.

UNDERINSURED MOTORIST ENDORSEMENT addition to a
PERSONAL AUTOMOBILE POLICY (PAP) that covers an insured who is involved in a

collision with a driver who does not have sufficient liability

insurance to pay for the damages. See also UNINSURED MOTORIST INSURANCE.
UNDERLYING MORTALITY ASSUMPTION see MORTALITY
ASSUMPTION.

UNDERLYING RETENTION see RETENTION AND LIMITS CLAUSE; RISK

MANAGEMENT; SELF INSURANCE.

UNDERWRITER, LAY individual who works in the home office

of an insurance company and performs the function of UNDERWRITING to
determine if an applicant is insurable at standard rates, substandard
rates, insurable at preferred rates, or is uninsurable.
UNDERWRITER, LIFE see AGENT.
UNDERWRITERS ASSOCIATION see POOL; PRODUCERS COOPERATIVE.
UNDERWRITERS LABORATORIES, INC. (UL) independent
agency supported by the insurance industry that tests a variety of
 Page 536
materials, products, and devices, such as appliances and electrical
equipment, to assure that they meet safety standards.
UNDERWRITER SYNDICATE see LLOYD'S OF LONDON.
UNDERWRITING process of examining, accepting, or rejecting
insurance risks, and classifying those selected, in order to charge
the proper premium for each. The purpose of underwriting is to
spread the risk among a pool of insureds in a manner that is
equitable for the insureds and profitable for the insurer. See also RISK
MANAGEMENT; RISK SELECTION.

UNDERWRITING CYCLE tendency of property and liability

insurance premiums, insurers' profits, and availability of coverage
to rise and fall with some regularity over time. A cycle can be said
to begin when insurers tighten their underwriting standards and
sharply raise premiums after a period of severe underwriting losses.
Stricter standards and higher premium rates often bring dramatic
increases in profits, attracting more capital to the insurance
industry and raising underwriting capacity. On the other hand, as
insurers strive to write more premiums at higher levels of
profitability, premium rates may be driven down and underwriting
standards relaxed in the competition for new business. Profits may
erode and then turn into losses if more tax underwriting standards
generate mounting claims. The stage would then be set for the
cycle to begin again.
UNDERWRITING EXPENSES salaries plus commissions plus
over-head expenses plus office rent plus fees charged for
memberships in industry associations and bureaus plus guaranty
association assessments plus taxes (not including federal income
taxes, foreign income taxes, and real estate taxes).
UNDERWRITING FACTORS: HEALTH INSURANCE factors on
the APPLICATION that must be evaluated in order to complete the
UNDERWRITING PROCESS: age; sex; physical condition; personal health

history; family health history; financial condition; use of alcohol,

drugs, or tobacco; occupation; avocation; and if in the military.
UNDERWRITING FACTORS: LIFE INSURANCE factors on the
APPLICATION that must be evaluated in order to complete the UNDERWRITING

process: (1) age; (2) sex; (3) physical condition; (4) personal health
history; (5) family health history; (6) financial condition; (7) use of
alcohol, drugs, or tobacco; (8) occupation; (9) avocation; (10) and
if in the military.
UNDERWRITING GAIN (LOSS) profit (deficit) that remains after
paying claims and expenses. Insurers generate profits from
underwriting and from investment income. Their chief business is
insuring against risks for a profit, and one measure of success is
whether there is money left after paying claims and expenses. This
amount, if any, is their underwriting gain. See also COMBINED RATIO.
 Page 537
UNDERWRITING INCOME EARNED PREMIUM minus INCURRED LOSSES plus
LOSS ADJUSTMENT EXPENSE plus other incurred UNDERWRITING expenses plus

policyowner DIVIDENDS. This income is generated from the insurance

businessthat of insuring people and property.
UNDERWRITING PROFIT (LOSS) see UNDERWRITING GAIN (LOSS).
UNDERWRITING RISK risk that premiums will not be sufficient
to cover future INCURRED LOSSES and that losses and loss adjustment
expenses' current reserves are not sufficient.
UNEARNED PREMIUM see UNEARNED PREMIUM INSURANCE; UNEARNED PREMIUM
RESERVE; UNEARNED REINSURANCE PREMIUM.

UNEARNED PREMIUM INSURANCE coverage for loss of

unearned premium if insured property is destroyed before the end
of a policy period. The policyholder pays in advance for insurance,
but the insurer does not earn the premium until coverage is
provided. For example, if a policy period is one year, one-twelfth
of the premium is earned each month. After six months, one-half of
the premium is still unearned and belongs to the policyholder if the
policy is canceled. If the property is destroyed in the second month
and the insurer pays the claim, the policyholder would have
nothing left to insure. Unearned premium insurance reimburses the
insured for the part of the premium paid up front that is no longer
needed for insurance coverage.
UNEARNED PREMIUM RESERVE fund that contains the portion
of the premium that has been paid in advance for insurance that has
not yet been provided. For example, if a business pays an annual
premium of $1000 on January 1, the money is not earned by the
insurer until the insurance coverage has been provided. On July 1,
$500 would have been earned and $500 would remain as unearned
premium, belonging to the policyholder. If either party cancels the
contract, the insurer must have the unearned premium ready to
refund. For this reason, insurance regulators require that insurers
maintain an unearned premium reserve so that, in the event an
insurer must be liquidated, there is enough money to pay claims
and refund the unearned premium. Because computations for
individual policies would be cumbersome, regulators have devised
formulas for figuring unearned premium reserves. See also
REINSURANCE RESERVE (UNEARNED PREMIUM RESERVE).

UNEARNED REINSURANCE PREMIUM portion of reinsurance

premium received by the reinsurer that relates to the unexpired part
of the reinsured policy. See also AUTOMATIC PROPORTIONAL REINSURANCE;
FACULTATIVE REINSURANCE; NONPROPORTIONAL REINSURANCE; PROPORTIONAL REINSURANCE;

REINSURANCE.

UNEMPLOYMENT COMPENSATION money paid through state

and federal programs to workers who are temporarily unemployed.
The program, which was created by the SOCIAL SECURITY ACT OF 1935, is
 Page 538
managed by the individual states, which decide the level of benefits
that will be paid and assess a payroll tax on employers to pay for
the program. Employers may pay more or less tax depending on the
stability of their workforces. Weekly benefits vary widely among
the states.
UNEMPLOYMENT COMPENSATION AMENDMENT OF 1992
amendment to the law that requires companies that manage
retirement plans to permit terminating participants to directly
transfer any plan distribution to the INDIVIDUAL RETIREMENT ACCOUNT (IRA) or
QUALIFIED PENSION PLAN of the participant's choice. If the participant

receives the distribution directly, the plan administrator is required

to remit a 20% withholding penalty directly to the Internal Revenue
Service. See also ROLLOVER AND WITHHOLDING RULES FOR QUALIFIED PLAN DISTRIBUTIONS;
ROLLOVER AND WITHHOLDING RULES FOR QUALIFIED PLAN DISTRIBUTIONS: PAYMENT PAID TO EMPLOYEE.

UNFAIR CLAIMS PRACTICE abuse by an insurer in an effort to

avoid paying a claim filed by an insured, or to reduce the size of
the payment. The NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) has
developed model legislation requiring that claims be handled fairly
and that there be free communication between policyholder and
insurer. Many states have adopted unfair claims practice laws.
UNFAIR TRADE PRACTICE in insurance, fraudulent or unethical
practice that is illegal under state law. States may fine or revoke the
licenses of agents and brokers for unfair trade practices, including
misrepresentation, false advertising, misappropriation of policy-
holder's money, and TWISTING. Many states have adopted the NAIC
model Unfair Trade Practices Act.
UNFRIENDLY FIRE see HOSTILE FIRE.
UNFUNDED see UNALLOCATED FUNDING INSTRUMENT.
UNIFORM COMMERCIAL CODE standardized set of business
laws that has been adopted by most states. The Uniform
Commercial Code governs a wide range of transactions including
borrowing, contracts, and many other everyday business practices.
It is useful because it standardizes practices from state to state.
UNIFORM FORMS widely accepted standard policy forms that
have been developed by various RATING BUREAUS or insurance
companies. Some forms are required by state law, and some are
used by custom. In some cases provisions are mandated, but a form
is not. Even so, many companies use the same forms, which
become widely recognized as the standard for certain types of risk.
UNIFORM GIFTS TO MINORS ACT act in which an irrevocable
gift is made by the parent to the child. For children less than age
14, the first $600 of annual investment earnings is tax free and the
next $600 is taxed at the child's 15% tax rate. If the child is at least
age 14, all
 Page 539
income is taxed at the child's rate. Once the child reaches the age of
majority, which in most states is 18 or 21, the child can use the
money in that account as desired.
UNIFORM INDIVIDUAL ACCIDENT AND SICKNESS
POLICY PROVISIONS ACT regulations of the NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS (NAIC) that dictate provisions that all individual

health insurance policies must contain. All states now require these
provisions, which include the circumstances under which changes
can be made to the policy; how the BENEFICIARY can be changed;
submission of PROOF OF LOSS; REINSTATEMENT of the policy; and GRACE PERIOD.
UNIFORM POLICY PROVISIONS, HEALTH INSURANCE
basic contract language in individual health and accident insurance
policies. These provisions are required under a model state law
known as the UNIFORM INDIVIDUAL ACCIDENT AND SICKNESS POLICY PROVISIONS ACT. The
uniform provisions, some mandatory and some optional under the
model act, deal with such questions as proof of loss, medical
examination, claims notice, claims forms, policy renewal, and
premium grace period. The act does not require companies to adopt
exact wording in their policies but to substantially follow the
provision guidelines.
UNIFORM PROVISIONS language adopted by the NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) and recommended or required by

state law. While they rarely dictate the language of policies, states
often prescribe mandatory or optional policy minimums, or may
forbid certain provisions. Therefore, while life and health benefits
may vary widely, for example, policyholders are given certain
uniform rights, like grace periods for paying premiums and loan
and surrender values.
UNIFORM RECIPROCAL LICENSING ACT law by which many
states attempt to regulate insurers who are unlicensed in those
states. With a few notable exceptions, such as reinsurers, insurance
companies must be licensed in the states where they do business. If
a U.S. insurer sells insurance in a state where it is unauthorized, the
insurer's home state may revoke its license under the Uniform
Reciprocal Licensing Act.
UNIFORM SIMULTANEOUS DEATH ACT statute in most states
under which, if no evidence exists in a common disaster (when an
insured and beneficiary die within a short time of each other in an
accident for which determination cannot be made as to who died
first), the presumption is that the insured survived the beneficiary
and the life insurance proceeds will either be paid to a secondary
beneficiary (if named in a policy) or, if not named, then to the
insured's estate.
UNIFORM TRANSFER TAX combination of the FEDERAL ESTATE TAX
and the federal GIFT TAX.
 Page 540
UNIFORM TRANSFERS TO MINORS ACT (UTMA) act in
which a life insurance company is permitted to transfer the DEATH
BENEFIT from the policy to the custodian of a minor BENEFICIARY provided

the beneficiary designation has specifically nominated the

custodian to receive the death benefit on behalf of the minor.
UNILATERAL CONTRACT legal agreement in which only one of
the two parties makes legally enforceable promises. An insurance
contract is a unilateral contract because only the insurer has made a
promise of future performance and only the insurer can be charged
with breach of contract. In contrast, in a bilateral contract, both
parties promise future performance.
UNINSURABLE PROPERTY see UNINSURABLE RISK.
UNINSURABLE RISK risk that substantially fails to meet the
REQUIREMENTS OF INSURABLE RISK.

UNINSURED MOTORIST COVERAGE endorsement to PERSONAL

AUTOMOBILE POLICY (PAP) that covers an insured involved in a collision with

a driver who does not have liability insurance. See also UNDERINSURED
MOTORIST ENDORSEMENT.

UNINTENTIONAL TORT see NEGLIGENCE; TORT, UNINTENTIONAL.

UNIQUE IMPAIRMENT physical, moral, or financial
circumstance of a life insurance applicant that sets him or her apart
from a physically, morally, and financially sound standard
applicant. The underwriting weight attached to this impairment
(such as a history of bankruptcy or a serious health condition)
could result in the applicant being classified as substandard or
uninsurable.
UNISEX LEGISLATION regulations affecting the right of
insurance companies to use sex as one of the factors in the actuarial
determination of premium rates. The precedent case for such
legislation is Arizona Governing Committee v. Norris in which the
decision was that a municipal retirement plan could not provide
retirement benefits based on sex.
UNIT BENEFIT see DEFINED BENEFIT PLAN; UNIT BENEFIT PLAN.
UNIT BENEFIT APPROACH see DEFINED BENEFIT PLAN.
UNIT BENEFIT PLAN retirement plan under which a discrete
increment of periodic retirement income is credited to an employee
for each year of service with an employer. This increment is either
a flat dollar amount or, more often, a percentage of compensation.
If percentage of compensation is credited, it generally is 1 1/42
1/2%. At retirement, years of service are multiplied by percentage
of compensation. The resulting percentage is applied to the
employee's final average or career average of earnings. For
example, if an employee has 30 years of service, a final average
earnings of $100,000, and the percentage of compensation is 1
1/2%, the employee's annual retirement benefit would be $45,000
($30 x $100,000 x .015). See also DEFINED BENEFIT PLAN.
 Page 541
UNITED STATES AIRCRAFT INSURANCE GROUP one of the
major underwriting organizations for insurance company pools
insuring commercial aircraft liability exposure.
UNITED STATES GOVERNMENT LIFE INSURANCE (USGLI)
see GOVERNMENT LIFE INSURANCE.
UNITED STATES LONGSHOREMEN AND HARBOR
WORKERS ACT OF 1927 see LONGSHOREMEN AND HARBOR WORKERS ACT LIABILITY.
UNITED STATES TREASURY MONEY MUTUAL FUNDS
investments restricted to short-term Treasury bills (T-bills) and
repurchase agreements secured by Treasury bills. These T-bills are
secured by the full faith and credit of the Unites States Treasury
and thus are considered to be the most RISK free of any financial
instrument. T-bills are said to be the "standard" for safety
worldwide since the United States has a long history of economic,
political, and social stability.
UNITED STATES V. THE SOUTH-EASTERN
UNDERWRITERS ASSOCIATION see SOUTH-EASTERN UNDERWRITERS
ASSOCIATION (SEUA) CASE.

UNIVERSAL ACCESS stipulation that every participant in health

care has the right according to law to purchase health insurance
from a private insurance entity. The participant's purchase is
voluntary and must not be eligible for a public health insurance
program.
UNIVERSAL COVERAGE provision for every citizen of the
United States to be guaranteed by law the right to purchase health
insurance and is required by law to make such a purchase.
UNIVERSAL LIFE II see UNIVERSAL VARIABLE LIFE INSURANCE.
UNIVERSAL LIFE INSURANCE ADJUSTABLE LIFE INSURANCE under which
(1) premiums are flexible, not fixed; (2) protection is adjustable,
not fixed; and (3) insurance company expenses and other charges
are specifically disclosed to a purchaser. This policy is referred to
as unbundled life insurance because its three basic elements
(investment earnings, pure cost of protection, and company
expenses) are separately identified both in the policy and in an
annual report to the policyowner. After the first premium,
additional premiums can be paid at any time. (There usually are
limits on the dollar amount of each additional payment.) A
specified percentage expense charge is deducted from each
premium before the balance is credited to the cash value, along
with interest. The pure cost of protection is subtracted from the
cash value monthly. As selected by the insured, the death benefit
can be a specified amount plus the cash value or the specified
amount that includes the cash value. After payment of the minimal
initial premium required, there are no contractually scheduled
premium payments (provided the cash value account balance is
sufficient to pay the pure cost of protection each month and any
other expenses and charges. Expenses and charges may take the
form of a
 Page 542
flat dollar amount for the first policy year, a sales charge for each
premium received, and a monthly expense charge for each policy
year). An annual report is provided the policy owner that shows the
status of the policy (death benefit option selected, specified amount
of insurance in force, cash value, surrender value, and the
transactions made each month under the policy during the
yearpremiums received, expenses charged, guaranteed and excess
interest credited to the cash value account, pure cost of insurance
deducted, and cash value balance). See also UNIVERSAL VARIABLE LIFE
INSURANCE.

UNIVERSAL VARIABLE see UNIVERSAL VARIABLE LIFE INSURANCE.

UNIVERSAL VARIABLE LIFE INSURANCE policy combining
features of UNIVERSAL LIFE INSURANCE and VARIABLE LIFE INSURANCE in that excess
interest credited to the cash value account depends on investment
results of separate accounts (equities, bonds, real estate, etc.). The
policyowner selects the accounts into which the premium payments
are to be made. However, since this is an EQUITY product, filing with
the SECURITIES AND EXCHANGE COMMISSION (SEC), an annual prospectus, an audit
of separate accounts, and agent registration with the NATIONAL
ASSOCIATION OF SECURITIES DEALERS (NASD) are required. This policy can be

considered a replacement for universal life insurance when interest

rates of U.S. Treasury issues and other money market instruments
are low. Contrast with UNIVERSAL LIFE INSURANCE.
UNLIMITED MARITAL DEDUCTION deduction allowed for
gifts and bequests to a spouse for federal estate and gift tax
purposes. Under the Economic Recovery Tax Act of 1981 (ERTA),
the deduction became unlimited. Prior to this, there was a dollar
and percentage limitation for the marital deduction.
UNOCCUPANCY absence of people for at least 60 consecutive
days from a given property. Many property insurance policies
suspend coverage after a structure has been unoccupied for 60
consecutive days because the probability of loss increases
dramatically from such perils as vandalism and malicious mischief.
Premiums for these policies were based on statements of an insured
that the structure would be occupied. Unoccupancy results in an
increase in hazards within the control of an insured, which gives
the insurance company the right to suspend the policy. See also
VACANCY.

UNREALIZED CAPITAL GAINS (LOSSES) appreciation in the

unsold assets' value. When assets are sold, their capital gain (loss)
is shown on the insurance company's income statement; any
unrealized gain or loss is not included within the income statement.
UNREPORTED CLAIMS see INCURRED BUT NOT REPORTED LOSSES (IBNR).
UNSATISFIED JUDGMENT FUND money set aside in some
states to pay otherwise uncompensated bodily injury claims to
innocent victims
 Page 543
of automobile accidents. The claimants must prove that they were
not at fault and that they cannot collect damages from the drivers
who hit them. The responsible drivers then lose their licenses until
they reimburse the fund.
UNSCHEDULED PROPERTY FLOATER insurance that offers
blanket coverage up to a certain dollar amount on all property of
the classification covered by the policy. Floater policies, which
cover property wherever it happens to be and while it is in transit,
can also be purchased as a SCHEDULED POLICY where each individual item
is listed.
UNSOLICITED APPLICATION request for life insurance
coverage by an individual, not through an agent or broker. It is
given extra scrutiny by an insurance company because of the
possibility of SELF-SELECTION, which is the likelihood that poorer risks
will seek insurance on their own initiative. See also ADVERSE SELECTION;
RISK SELECTION.

UNVALUED MARINE POLICY coverage that does not put a

dollar value on a hull or cargo that is insured. A valued marine
policy puts a specific value on the insured property. With unvalued
property, the value is determined at the time of loss.
UPSTREAM HOLDING COMPANY holding company formed by
at least one stock insurance company. This holding company is
owned by its stockholders and is usually listed on the New York
Stock Exchange or the NASDAQ. In turn, the holding company
owns 100% of the stock of the subsidiary insurance companies.
URBAN DEVELOPMENT ACT OF 1970 law that provided for
federal crime insurance. Because private insurance is not available
for business owners and residents of certain high-crime areas, the
act provides that the FEDERAL INSURANCE ADMINISTRATION write the coverage.
Private insurers service the program.
USE AND OCCUPANCY INSURANCE type of BUSINESS INTERRUPTION
INSURANCE that provides indirect loss coverage by endorsement to

BOILER AND MACHINERY INSURANCE. The latter, sometimes called POWER PLANT

INSURANCE, provides for both direct and indirect loss coverage. Direct

loss would indemnify an insured for damage to property. Use and

occupancy insurance covers an insured for loss of use of the
equipment due to damage from a named peril.
USGLI see GOVERNMENT LIFE INSURANCE.
USUAL AND CUSTOMARY CHARGE
1. fee that is the most consistently charged by the physician for a
particular procedure.
2. fee that is usual for a particular procedure charged by the
majority of physicians with similar training and experience within
the same geographic area.
 Page 544
USUAL, CUSTOMARY, AND REASONABLE CHARGES
(UCR) limits on reimbursement by an insurance company. Health
insurance plans pay a doctor's full charge for service if it does not
exceed the usual charge; that is, if it does not exceed the charge for
the same service by other physicians in the area or if it is
reasonable.
USUFRUCT right that has a limited time in duration for an
individual to receive the income generated by assets owned by
another individual.
USUFRUCTUARY individual who has the right to the use of
assets while the USUFRUCT is in force.
UTILIZATION measurement of the use of health insurance by
employees of an insured employer, stated in terms of the average
number of claims per employee.
UTILITY quality of being useful. Risk diminishes maximum utility
in society because resources gravitate to activities, businesses, and
investments that are least risky. By absorbing or protecting against
some risks, insurance increases utility. When individuals know they
will have some cushion against loss, their assets can be spread out
over a greater range of activities and enterprises.
UTILIZATION REVIEW (UTILIZATION MANAGEMENT)
integral part of MANAGED CARE health plans designed to control and
limit medical expenses. This review includes: (1) requirement of
certification for admission to a health care facility; (2) continuous
analysis of the reasons for the patient to remain in the health care
facility; (3) projected date for release of the patient; and (4) cost-
effective ways of handling patients with catastrophic illnesses. See
also HEALTH MAINTENANCE ORGANIZATION (HMO); PREFERRED PROVIDER ORGANIZATION (PPO).
UTMOST GOOD FAITH see UBERRIMAE FIDEI CONTRACT.
 Page 545

V
VACANCY circumstance where no people or contents occupy or
are kept in a building for at least 60 consecutive days. The same
stipulations apply to property coverages as found in unoccupancy.
See also UNOCCUPANCY.
VALIDATION PERIOD length of time required to amortize the
excess expenses of acquiring a given group of life insurance
policies. In acquiring a policy, a life insurance company may incur
expenses (such as the costs of sales commissions, paperwork, and
medical examinations) that are greater than the amount allocated
for LOADING in the first year's premium. In effect, this means new
policies are acquired at a loss, forcing insurers to dip into surplus
to add the new business. After the first year, because expenses are
lower, premiums and their invested earnings begin to generate a
contribution to surplus, gradually making up for the excess expense
of the first year. The length of the validation period depends on
many factors, including the levels of GROSS PREMIUMS and expenses, but
in some companies validation periods can extend for 10 years or
more.
VALID CONTRACT agreement signed by both parties that meets
the requirements of state law and is therefore in force.
VALUABLE PAPERS (RECORDS) INSURANCE coverage in the
event that papers of intrinsic value are damaged or destroyed.
Coverage is on an ALL RISKS basis. Limits of coverage can be quite
high; but the insurance company will not pay an amount in excess
of the actual cash value of the loss, or the amount necessary to
repair or replace the damaged or destroyed papers. Also, the papers
must be kept under lock and key.
VALUATION
1. method of determining the worth of property to be insured, or of
property that has been lost or damaged.
2. method of setting insurance company reserves to pay future
claims.
VALUATION CLAUSE provision in a MARINE INSURANCE policy in
which agreement has been reached between the insured and the
insurance company concerning the worth of the property that is to
be covered under the policy.
VALUATION FACTORS, PENSION PLANS see PENSION PLAN VALUATION
FACTORS.

VALUATION METHOD means of determining that a loss has

occurred and setting an economic value on it so that a claim can be
paid. When an insured suffers a loss, an adjuster must determine
that it actually occurred, that it was covered by insurance, and the
value of the lost or damaged property. The adjuster, with the help
of the insured, deter-
 Page 546
mines the cost to repair or replace the covered property. The
adjuster computes actual cash value, or replacement cost, minus
depreciation. For indirect losses, such as business interruption, the
adjuster must make rough estimates, and then must consider
COINSURANCE and adjust claims payments for it.

VALUATION MORTALITY TABLE MORTALITY TABLE used to calculate

the LEGAL RESERVE and life insurance policy CASH SURRENDER VALUES.
VALUATION OF ASSETS rules by state insurance regulators for
valuing ADMITTED ASSETS on the books of insurance companies. Part of
the STATE SUPERVISION AND REGULATION of insurers is the determination of
which assets''admitted assets"are allowed to back STATUTORY RESERVES.
Admitted assets include real estate, mortgages, securities, cash, and
bank deposits. Mortgage loans, cash, and bank deposits are
recognized at face value. Real estate is allowed at book value.
Securities are carried according to SECURITY VALUATION rules. Bonds with
acceptable credit quality are carried at amortized value, which is
the face value plus or minus the amount of any purchase discount
or premium, as amortized over the life of the bond. Preferred stock
is valued at cost and COMMON STOCK INVESTMENTS at year-end market price.
Valuations for impaired securities such as bonds in default are
determined by the Committee on Valuation of Securities of the
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC). See also MANDATORY SECURITIES

VALUATION RESERVE.

VALUATION OF LOSS method of setting a dollar value on loss

suffered by an insured. In some cases, a loss is straightforward,
such as the cost of gallbladder surgery. But with burglary of a home
or a traffic accident that damages a car, the amount of loss is open
to interpretation. In many cases, the insured needs receipts,
appraisal documents, or other evidence of value. In other cases, a
claim adjuster values the loss and determines how much the insurer
will pay.
VALUATION OF POTENTIAL PROPERTY LOSS risk
management technique that evaluates property exposures
preparatory to managing the risk. Although risk managers consider
the ORIGINAL COST, DEPRECIATION, market value, and TAX-APPRAISED VALUE of
property, replacement cost is the most helpful in determining the
value of the property, giving the truest indication of the degree of
the exposure to be insured or otherwise financed.
VALUATION PERIOD for a VARIABLE ANNUITY, the period of time from
the close of business on the first BUSINESS DAY to the close of business
on the second business day.
VALUATION PREMIUM life insurance rate determined by the
valuation of company policy reserves. State regulators set strict
standards for policy reserves to make certain that life insurers will
have enough assets to make good on their policies. Once the
reserves are valued, the
 Page 547
company works backward to set a valuation premium that will
cover all of its liabilities. However, some companies determine that
they can justify setting a GROSS PREMIUM that is lower than the valuation
premium because their experience, based on updated mortality
tables, is better than that used to determine the valuation premium.
If they do charge a premium that is lower, they are required to
deposit the difference in a DEFICIENCY RESERVE.
VALUATION RESERVE (SECURITIES VALUATION
RESERVE) amount set up as a cushion against fluctuations in
securities prices. See also MANDATORY VALUATION SECURITIES RESERVE.
VALUE see ACTUAL CASH VALUE; MARKET VALUE V. ACTUAL CASH VALUE; MARKET VALUE
CLAUSE; REPLACEMENT COST LESS PHYSICAL DEPRECIATION AND OBSOLESCENCE.

VALUED agreement by an insurance company to pay a

predetermined amount, as indicated in an insurance policy, should
a loss occur.
VALUED BASIS INDEMNIFICATION benefit found in a DISABILITY INCOME
INSURANCE policy that endeavors to replace the insured wage earner's

income with a monetary sum equal to the actual lost income

terminated because of illness, sickness, or accident.
VALUED CLAUSE provision in an insurance policy that states the
monetary value of each piece of property to be insured.
VALUED CONTRACT see VALUED POLICY.
VALUED FORM see VALUED POLICY.
VALUED MARINE POLICY see VALUED POLICY.
VALUED POLICY policy that pays a specified sum not related in
any way to the extent of the loss. The term applies to a life
insurance policy rather than to a contract of indemnity because the
former does not purport to restore an insured (or beneficiary) to the
same financial position after a loss as prior to the loss. The sum of
money that a life insurance policy pays as a death benefit is a
definite amount that may or may not have any relation to the
quantitative value of the death. Thus, the life insurance policy is
deemed to be a valued policy.
VALUED POLICY LAW legislation in a number of states
requiring insurers to pay the FACE AMOUNT of a fire insurance policy in
case of total loss to a dwelling (or sometimes another specified
type of building), rather than the ACTUAL CASH VALUE of the loss. Such
laws in effect override the principle of INDEMNITY that normally
governs property and liability insurance contracts.
VALUE REPORTING FORM form that provides coverage for a
business whose inventory has fluctuating values during the year.
The amount of insurance coverage is adjusted monthly, quarterly,
or annually to reflect the changing monetary value of the inventory.
The use
 Page 548
of this FORM should eliminate the problem of overinsurance as
well as underinsurance.
VALUES see NONFORFEITABILITY; NONFORFEITURE BENEFIT (OPTION); NONFORFEITURE
PROVISION.

VANDALISM AND MALICIOUS MISCHIEF INSURANCE

coverage usually written as an endorsement to property policies
such as the Standard Fire Policy. A loss must be by the intentional
acts of vandals. This peril is of particular importance to owners of
structures that are not occupied during particular periods during the
day, such as schools and churches. Vandals have little risk of being
caught during these periods, when they are most likely to strike.
Because of high frequency, a high deductible is usually required
when insuring churches and schools.
VANDALISM ENDORSEMENT see VANDALISM AND MALICIOUS MIS-CHIEF
INSURANCE.

VANISHING PREMIUM (PREMIUM OFFSET) life insurance

policy under which there is rapid buildup of cash values due to
high initial premiums such that after a given point in time no
further premium payments are required (future premium payments
are borrowed from the cash value).
VANISHING PREMIUM OPTION see VANISHING PREMIUM PROVISION.
VANISHING PREMIUM PROVISION CLAUSE in a life insurance
policy that states that once the CASH VALUE exceeds the NET SINGLE PREMIUM
(based on current interest and mortality rates) required for the
policy to become PAID-UP INSURANCE, the POLICYOWNER may elect not to make
further premium payments. If the CASH VALUE falls below the amount
necessary to fund the net single premium, additional premium
payments are required. See also VANISHING PREMIUM.
VARIABLE ANNUITIES see VARIABLE DOLLAR ANNUITY.
VARIABLE BENEFIT PLAN see VARIABLE DOLLAR ANNUITY; VARIABLE LIFE
INSURANCE.

VARIABLE DOLLAR ANNUITY annuity in which premium

payments are used to purchase accumulation units, their number
depending on the value of each unit. The value of a unit is
determined by the value of the portfolio of stocks in which the
insurance company invests the premiums.
At the time of the payment of benefits to the annuitant, the
accumulation units are converted to a monthly fixed number of
units. The variable element is the dollar value of each unit. For
example, assume that the annuitant pays a monthly premium of
$100. If the accumulation unit value during one month is $50, two
units are purchased. In another month, if the value of the
accumulation unit is $25, four units are purchased. In a third
month, the value of the unit is $10, resulting
 Page 549
in the purchase of 10 units. This allows the market use of the
investment strategy of dollar cost averaging. Accumulation units
are credited to the annuitant's account, a procedure that is similar to
purchasing shares in a mutual fund.
When income benefits are scheduled to begin, total accumulation
units are converted to assume 100 income benefit units per month.
The value of the income unit will vary according to the company's
stock investments; in one month the annuitant's income might be
$1000, in another month $500, in another month $1200. Changes
in the investment experience by the insurance company are passed
on to the annuitant, but the company absorbs fluctuations in
expenses and mortality experience. See also ANNUITY.
VARIABLE DOLLAR INVESTMENTS financial instruments
whose principal and income are not established in advance
according to contractual terms set forth in the financial instruments
document. Both the principal and income can fluctuate according
to the up and down swings in the value of an underlying portfolio.
Examples of such investments include stocks, mutual funds, real
estate, VARIABLE ANNUITIES, VARIABLE LIFE INSURANCE, and UNIVERSAL VARIABLE LIFE INSURANCE.
VARIABLE LIFE INSURANCE investment-oriented whole life
insurance policy that provides a return linked to an underlying
portfolio of securities. The portfolio typically is a group of mutual
funds established by the insurer as a separate account, with the
policyholder given some investment discretion in choosing the mix
of assets among, say, a common stock fund, a bond fund, and a
money market fund. Variable life insurance offers fixed premiums
and a minimum death benefit. The better the total return on the
investment portfolio, the higher the death benefit or surrender value
of the variable life policy. See also INDEXED LIFE INSURANCE.
VARIABLE LIMIT in property insurance coverages, provision
whereby the limit of the policy automatically increases at each
policy anniversary date, subject to the insured's rejection of such an
increase. The objective of the variable limit is to increase the
amount of coverage in tandem with the annual increase in the
inflation rate so as to prevent less than adequate coverage in the
event of a loss. See also UNDERINSURANCE.
VARIABLE PAY LIFE INSURANCE see VARIABLE PREMIUM LIFE INSURANCE.
VARIABLE PREMIUM LIFE INSURANCE policy that allows
premium payments to vary, within certain limits, at the option of
the policyholder. In return, the death benefit and rate of cash value
accumulation vary with the premium payments. UNIVERSAL LIFE INSURANCE
is the most common type of policy offering variable premiums. See
also FLEXIBLE PREMIUM LIFE INSURANCE.
 Page 550
VARIABLE RATE MORTGAGE see ADJUSTABLE RATE MORTGAGE (ARM).
VARIABLE SURVIVORSHIP LIFE INSURANCE policy that
combines life insurance coverage on two lives and pays policy
proceeds on the second person's death with the accumulation
potential of an underlying variable investment portfolio. This
variable portfolio will allow the policy proceeds to rise and fall just
as in the single-life VARIABLE LIFE POLICY.
VARIABLE UNIVERSAL LIFE see UNIVERSAL VARIABLE LIFE INSURANCE.
VARIANCE see STANDARD DEVIATION OR VARIATION.
VARIANCE FROM PRESCRIBED STANDARDS see STANDARD
DEVIATION OR VARIATION.

VEHICLE COVERAGE see BUSINESS AUTO COVERAGE FORM; INLAND MARINE

INSURANCE (TRANSPORTATION INSURANCE): BUSINESS RISKS; INSTRUMENTALITIES OF TRANSPORTATION

INSURANCE; OCEAN MARINE INSURANCE; PERSONAL AUTOMOBILE POLICY (PAP).

VENDING MACHINE MARKETING sale of life insurance

policies through vending machines. This method of distribution is
generally limited to TRAVEL ACCIDENT INSURANCE, supplemental health or
disability policies, or life insurance policies with a small face
amount.
VERMIN EXCLUSION section of some INLAND MARINE insurance
(transportation insurance) and many other property insurance
policies excluding coverage for damage to shipped goods by
vermin such as rats. See also INSECT EXCLUSION.
VESSEL see HULL MARINE INSURANCE.
VESTED ACCOUNT see VESTING.
VESTED BENEFIT entitlement of a PARTICIPANT in an EMPLOYEE BENEFIT
INSURANCE PLAN to receive benefits regardless of his or her employment

status. See also VESTING.

VESTED INTEREST see VESTING.
VESTING entitlement of a pension plan participant (employee) to
receive full benefits at NORMAL RETIREMENT AGE, or a reduced benefit upon
EARLY RETIREMENT, whether or not the participant still works for the same

employer. The EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA) mandates
vesting under one of these rules:
1. FORTY-FIVE YEAR RULE
2. FIVE TO FIFTEEN YEAR RULE
3. TEN YEAR RULE
On January 1, 1989, under the TAX REFORM ACT OF 1986, the above vesting
requirements were replaced with the following:
 Page 551
1. full vesting (100%) after a participant completes five years of
service with an employer; or
2. vesting of 20% after completion of three years of service with an
employer, increasing by 20% for each year of service thereafter,
until 100% vesting is achieved at the end of seven years of service.
VESTING, CONDITIONAL limitation under a contributory
pension plan of an employee's right to receive vested benefits. The
employee can withdraw contributions to the pension plan only
according to stated conditions. See also VESTING.
VESTING, DEFERRED specified requirements of minimum age
and years of service to be met by an employee before the
individual's benefits are vested. For example, under the TEN YEAR
VESTING rule, an employee must work ten years for the particular

employer before benefits vest. See also VESTING, IMMEDIATE.

VESTING, FULL see FULL VESTING.
VESTING, IMMEDIATE employee's full entitlement, with no
waiting period, to benefits under a pension or retirement plan. In
the case of a CONTRIBUTORY plan, there is immediate vesting of the
employee's own contributions, plus the earnings attributable to
those contributions. As to employer contributions in contributory
and NONCONTRIBUTORY plans, VESTING depends on the terms of the plans,
although maximum time limits for full vesting are set by law. Some
plans provide immediate vesting of employer contributions in the
case of death or disability. SIMPLIFIED EMPLOYEE PENSION (SEP) plans require
immediate vesting of employer contributions. See also TAX REFORM ACT
OF 1986; VESTING.
VETERANS ADMINISTRATION (VA) U.S. government agency
that administers life insurance, health insurance, welfare, mortgage
loans, education, pension benefits, and other programs for veterans
of the U.S. armed forces.
VETERANS GROUP LIFE INSURANCE (VGLI) five-year
nonrenewable TERM LIFE INSURANCE policy for veterans who were covered
by SERVICEMENS GROUP LIFE INSURANCE (SEGLI) while on active duty in the U.S.
uniformed forces. At the end of the five-year term, the insured may
convert the policy to individual permanent life insurance with any
company that participates in the VGLI program.
VIATICAL SETTLEMENT act by a person who is terminally ill of
cashing in a life insurance policy to pay for the necessary
associated illness, medical expenses, and final wishes. This
terminally ill person contacts a viatical agent who bids the life
insurance policy on the terminally ill person to the many VIATICAL
SETTLEMENT COMPANIES.

The package that is sent out for bids includes the terms of the life
insurance policy as well as the medical prognosis of the terminally
ill
 Page 552
person. The viatical settlement company that is awarded the bid
agrees to pay 50% to 80% of the FACE AMOUNT of the policy, varying
according to the gravity of the terminally ill person's condition and
LIFE EXPECTANCY. In turn, the viatical settlement company sells the

terminally ill person's life insurance policy to an investor who then

becomes the POLICYHOLDER as well as the BENEFICIARY and assumes
payment of the premiums of the policy. Upon the death of the
terminally ill person, the investor will receive 100% of the life
insurance policy's face amount from the insurance company. The
sooner the terminally ill patient dies, the higher the investor's
return. While returns of 15% to 20% are typical for investors, the
policies can pay off a substantially higher return if death occurs
early.
VIATICAL SETTLEMENT COMPANY company that buys life
insurance policies from policyowners on the lives of insureds who
are terminally ill. This type of company pays cash for the life
insurance policies, usually in the range of 50% to 80% of the
FACE AMOUNT. It also pays the premiums due and receives the
DEATH BENEFIT when that person dies. Policies are purchased when the

terminally ill person has 24 months or less to live.

VIATICATION process under which terminally ill people sell their
life insurance policy for value thereby excluding the policy from
being subject to the transfer for value under the three-year rule.
VICARIOUS LIABILITY see CONTINGENT LIABILITY (VICARIOUS LIABILITY).
VICTIM COMPENSATION payment under a state-sponsored
program for victims of crimes. See also FEDERAL CRIME INSURANCE.
VISION CARE INSURANCE health insurance coverage for eye
examinations, and eyeglass or contact lens prescriptions.
VIS MAJOR Latin phrase meaning "overpowering force"; an
unavoidable accident or calamity; an accident for which no one is
responsible; an ACT OF GOD.
VOIDABLE CONTRACT VALID CONTRACT that can be canceled for
cause by one or more parties to the contract. An insurance contract
can be voided by the insurer if the insured has used fraudulent
means to obtain it or has intentionally concealed information or
misrepresented the risk.
VOID CONTRACT apparent agreement that is not a valid contract.
VOLUNTARY ACCIDENTAL DEATH AND
DISMEMBERMENT (AD&D) INSURANCE additional amount
of ACCIDENTAL DEATH AND DISMEMBERMENT INSURANCE not provided by the
employee benefit plan (standard group life plan) that may be
chosen by the employee. Generally, the employee pays the entire
premium that is deducted through the employer's payroll deduction
accounting system used for other employee benefit plans.
 Page 553
VOLUNTARY COMPENSATION ENDORSEMENT addition to a
WORKERS COMPENSATION INSURANCE policy to cover payments to injured

employees who are not covered by a state's workers compensation

law. This endorsement provides employees who are not covered by
the state law a choice of receiving WORKERS COMPENSATION BENEFITS or suing
the employer. Under workers compensation laws, employers agree
to supply, according to a formula, income lost by workers
accidentally injured on the job, as well as medical and
rehabilitation benefits and death and survivor benefits. In
exchange, these benefits are to be the final obligation of the
employer to compensate workers, or the exclusive remedy.
However, there has been considerable erosion of the exclusive
remedy concept since the early 1970s. Workers have been allowed
to sue their employers for various types of on-the-job injuries. Each
state has its own workers compensation law.
VOLUNTARY DEDUCTIBLE EMPLOYEE CONTRIBUTION
PLAN pension plan that allows an employee to contribute by
electing to have money deducted from each paycheck. Some
qualified plans such as 401 (k) allow employees to contribute pre-
tax dollars, while others require employees to put in after-tax
dollars.
VOLUNTARY DEFERRAL PLAN vehicle for the deferring of
unneeded current income for a later date, such as retirement,
providing the following benefits:
1. There is no tax on earnings of the plan until distributed.
2. Employee is able to defer compensation in excess of the amount
subject to the limitations of qualified plans since the voluntary plan
is a nonqualified plan.
3. The amount the employee defers can be matched by the
employer.
4. The employer and employee have flexibility in designing BENEFITS
and VESTING requirements.
5. The employer can select employees to participate in the plan
since it is a nonqualified plan and does not have to comply with the
antidiscrimination provisions of qualified plans found under the
EMPLOYMENT RETIREMENT INCOME SECURITY ACT (ERISA).

6. Life insurance can be used as the funding instrument and, as

such, the employer can receive the death benefit, thereby
recovering its matching contribution to the plan.
VOLUNTARY EMPLOYEES BENEFICIARY ASSOCIATION
(VEBA) tax-exempt entity as qualified under Section 501 (c)(9) of
the Internal Revenue Code. The VEBA usually provides its
members and their dependents and beneficiaries with paid life
insurance, health insurance, and accident insurance. The VEBA
can be established by any employer for employees even if they
already have a retirement plan. Employers are permitted to make
tax-deductible contributions to the VEBA that is usually
established as a trust with the bank acting as a trustee. Earnings
build within the trust on a tax-deferred basis. If the VEBA should
terminate, all of the VEBA's assets are distributed to
 Page 554
the active participants in the VEBA as of the date of termination.
Distributions to a VEBA participant are not required to begin by
age 70 1/2 , nor is a penalty charged if the distributions begin prior
to age 59 1/2. Survivor benefits are received on an income and
estate tax-free basis. Assets of the VEBA are exempt from
creditors' claims. The IRS code requires that the VEBA must have
at least two participants (one of the participants can be a spouse);
benefits must be based on annual compensation as well as age; and
all full-time employees who are at least age 21 and have at least
three years of full-time service must be allowed to participate. The
employer can terminate the plan at any time.
VOLUNTARY GOVERNMENT INSURANCE see SOCIAL INSURANCE.
VOLUNTARY INSURANCE see SOCIAL INSURANCE.
VOLUNTARY LIFE INSURANCE additional amount of life
insurance above that provided by the employee benefit plan
(standard group life plan) that may be chosen by the employee. A
limit is usually placed on this maximum and is expressed as a
multiple of the employee's earnings.
VOLUNTARY PAYROLL DEDUCTION PLAN program through
which employees purchase individual LIFE INSURANCE and DISABILITY INCOME
INSURANCE by having the employer reduce their income by the

required insurance PREMIUM. Since the policies are individual policies,

paid for totally by the employees, the policies are portable and not
a function of employment.
VOLUNTARY PLAN TERMINATION ending a pension plan at
the election of an employer or sponsor. The employer has the
unilateral right to change or terminate a pension plan at any time.
However, the termination must meet requirements set out by the
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA). Assets must be

distributed to participants according to federal guidelines.

VOLUNTARY RESERVE amount established by an insurance
company, but not required by state law, for any of a number of
reasons, such as a reserve for payment of future dividends. A
voluntary reserve is likely to appear as a LIABILITY on the company's
balance sheet. Contrast with STATUTORY RESERVES. See also BALANCE SHEET
RESERVES; POLICY RESERVE.

VOLUNTEER PROTECTION ACT OF 1997 act in which

volunteers of nonprofit organizations and government entities do
not incur liability if they are acting within the scope of their
volunteer activities, their actions do not result in reckless
misconduct, gross negligence, and/or willful or criminal
misconduct, and they have the proper license, if required.
Protection is only for individual volunteers; there is no protection
for organizations or paid members of organizations.
 Page 555
VOLUNTEER PROTECTION LAWS laws enacted by all of the
50 states whose purpose it is to reduce or eliminate the volunteer's
CIVIL LIABILITY exposure. An ideal law would exclude the volunteer

from civil liability resulting from actions taken within the

volunteer's official capacity unless the damage and/or injury caused
was the result of a willful act by the volunteer.
VOYAGE POLICY OCEAN MARINE INSURANCE covering one trip. Ocean
marine insurance is written either for a specific time period or per
trip. A voyage policy is usually written for cargo, whereas a time
policy covers a ship.
 Page 556

W
WAGE INDEX table used, among other purposes, to determine
monthly Social Security benefit for a retired or disabled worker and
his or her dependents. The AVERAGE MONTHLY WAGE (AMW) of the worker is
computed, disregarding certain periods of low earnings. The AMW
is used to determine the PRIMARY INSURANCE AMOUNT (PIA). Then, benefits are
figured from the table depending on how old the worker is upon
retirement, whether there are dependents or survivors, and when
they will retire.
WAGERING V. INSURANCE common misunderstanding about
insurance. In gambling a RISK is created that did not exist prior to
placing a bet. Under insurance, a risk exists whether or not an
insurance policy is purchased. For example, the uncertainty of
one's home burning exists independent of the purchase of
insurance; the purchase of insurance should not affect the
probability of loss.
WAITING PERIOD see DISABILITY INCOME INSURANCE (ELIMINATION PERIOD).
WAIVE see WAIVER; WAIVER OF INVENTORY CLAUSE; WAIVER OF PREMIUM (WP); WAIVER OF
PREMIUM FOR PAYER BENEFIT; WAIVER OF RESTORATION PREMIUM; WAIVER OF SUBROGATION RIGHTS

CLAUSE.

WAIVER relinquishment of a legal right to act. For example, an

insured relies on statements of an agent of an insurance company
concerning coverages under an insurance policy. Agents by their
actions may have waived certain provisions the insurance company
has written in the insurance policy, with the company's authority.
Another example would be the provision in the HOMEOWNERS INSURANCE
POLICY that suspends coverage if a hazard is increased by the actions
of an insured. An insured who stores explosives near the family
home notifies the insurance company; the company grants
permission to do so, thereby waiving its defense of the increase in
hazard clause.
WAIVER OF COINSURANCE CLAUSE provision in property
insurance that stipulates that the COINSURANCE REQUIREMENT will not be in
effect.
WAIVER OF INVENTORY CLAUSE provision in property
insurance that waives, under specified circumstances, the
requirement for an inventory of undamaged property when a
damage claim is filed. A COINSURANCE clause in a fire insurance policy
typically requires such an inventory or appraisal at the time of a
claim. The waiver avoids the expense of an inventory when the
claim is small. Under one common formula, the inventory
requirement is waived when the claim is for less than $10,000 and
is also for less than 5% of the limit of all insurance coverage
applicable to the property.
 Page 557
WAIVER OF PREMIUM FOR DISABILITY see RIDERS, LIFE POLICIES.
WAIVER OF PREMIUM FOR PAYER BENEFIT clause added to
an insurance policy providing WAIVER OF PREMIUM (WP) if the premium
payer dies or becomes disabled. For example, this option is
available on insurance policies on a child's life where the premium
is paid by an adult, or on life and health policies for adults.
WAIVER OF PREMIUM RIDER see WAIVER OF PREMIUM (WP).
WAIVER OF PREMIUM (WP) in life insurance, action by an
insurance company canceling premium payments by an insured
who has been disabled for at least six months. The policy remains
in force and continues to build cash values and pay dividends (if it
is a participating policy), just as if the insured was still making
premium payments. Experts suggest that this clause should be
considered in a life insurance policy since the probability of
becoming disabled is 7 to 10 times greater than death at younger or
middle ages.
WAIVER OF RESTORATION PREMIUM clause in a SURETY BOND
contract providing for restoration of coverage after a loss without
requirement of a RESTORATION PREMIUM.
WAIVER OF SUBROGATION RIGHTS CLAUSE endorsement to
a property liability policy whereby an insurer gives up the right to
take action against a third party for a loss suffered by an insured.
Typically, under terms of the SUBROGATION CLAUSE, the insurer, having
paid an insured for a loss, takes over any rights possessed by the
insured who has suffered the loss. For example, an insured, John
Smith, is hit by another car while he is driving. His insurance
company pays his claim and then may sue or attempt to recover
damages from the other driver. In certain instances, the insured
might want to get a waiver of subrogation rights from the insurer.
For example, if a landlord assured a tenant that the tenant was not
responsible for damage to the landlord's property, the landlord
could make good on that promise only by getting the insurer to
waive its subrogation rights. Otherwise, if the land-lord's property
was damaged by the tenant, the insurer would have to pay the
claim and could then try to collect damages from the tenant.
WANTON DISREGARD legal phrase used in NEGLIGENCE cases to
describe one person's overwhelming lack of care for the rights or
wellbeing of another. Wanton disregard of another's rights is
evidence of GROSS NEGLIGENCE.
WAR DAMAGE INSURANCE CORPORATION government
reinsurance program that provided coverage for U.S. properties
during World War II. Private insurers shared the first layer of
coverage, with the government providing catastrophic loss
coverage. This is one of several government insurance programs
for exposures that private insurers cannot cover because techniques
of spreading the risk do not apply.
 Page 558
WAREHOUSE BOND type of surety bond that guarantees that
goods stored in a warehouse will be delivered upon presentation of
a receipt.
WAREHOUSERS LIABILITY FORM special insurance that
covers warehousers liability to customers whose property is
damaged by an insured peril while in the custody of an insured
warehouser. Policy deductibles may range from $50 to $10,000.
Typical exclusions are war risks, money, securities, and spoilage of
perishable goods.
WAREHOUSE-TO-WAREHOUSE CLAUSE part of an ocean
marine policy that provides coverage of goods through all of the
stages of a journey. Coverage begins when goods leave the
warehouse of a shipper, and continues until they reach the
customer's warehouse.
WAR EXCLUSION CLAUSE provision in a life insurance policy
that death benefits will not be paid in the event an insured dies
from warrelated causes; or in lieu of a death benefit there is a
return of premiums plus interest, or a refund equal to the reserve
portion (cash value) of the policy. For example, during the Vietnam
War, if a whole life policy with a war exclusion clause had a face
amount of $10,000 and an insured died as the result of war-related
injuries, the beneficiary would receive the cash value of the policy.
This clause cannot be added to a policy that had none originally. If
it is included in a policy bought in time of war, it is typically
removed by life insurance companies at the end of the war and,
once removed, can never be restored.
WARN see WORKER ADJUSTMENT AND RETRAINING NOTIFICATION ACT (WARN).
WAR PERIL see WAR RISK INSURANCE.
WARRANTY pledge by an insured in writing, and a part of the
actual contract, that a particular condition exists or does not exist.
For example, an insured warrants that a sprinkler system works. In
exchange, the insurance company charges a reduced premium for
fire coverage. Statements by an insured in an application for
property insurance are deemed to be warranties, not
representations, as is generally the case in life insurance policy
applications. See also REPRESENTATIONS.
WAR RISKS exposures usually excluded from life and health
insurance, or subject to a maximum limit if covered. For property
coverage, see WAR RISK INSURANCE.
WAR RISK INSURANCE coverage for damage due to peril of
war, usually written as part of an OCEAN MARINE INSURANCE policy.
WASHINGTON, D.C. V. GREATER WASHINGTON BOARD OF
TRADE legal decision in which the Supreme Court of the United
States ruled that states cannot require employers to provide
disabled employees the same health insurance with which they
provide active employees. Regulation by states of EMPLOYEE BENEFIT
INSURANCE PLANS is precluded when it relates in any way to employee

benefit
 Page 559
plans governed by the federal statute on pensions and benefits
(EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974ERISA). The issue in this case was

the relationship between WORKERS COMPENSATION INSURANCE (as required by

the states for job-related illness or injuries incurred by the
employee) and federally regulated health insurance provided by the
company for actively at work employees. The Greater Washington
Board of Trade challenged the Washington,
D.C. law that required employers who provide health insurance for
actively at-work employees to continue to offer equivalent health
insurance coverage to disabled employees who are eligible for
work-ers compensation insurance.
WASH SALE RULE rule concerning stock sold and then
repurchased or a similar security repurchased (warrants or options)
within 30 full days before or after the day of the sale. Losses
established from such a sale cannot be used to offset capital gains
for tax purposes; however, this disallowed loss is not lost forever,
as it can be added to the cost basis of the repurchased security for
tax purposes.
WATERCRAFT ENDORSEMENT addition to the HOMEOWNERS
INSURANCE POLICY AND COMMERCIAL PACKAGE POLICY that provides liability and

medical coverage for damages resulting from the operation of

motor boats too large to qualify for insurance under homeowners
and commercial package policies.
WATERCRAFT NONOWNED INSURANCE endorsement to
COMMERCIAL GENERAL LIABILITY INSURANCE (CGL) for a business responsible for

boats it does not own. Whether the boats are leased from another
firm or owned by employees who operate them for the benefit of
the business owner, a business has a liability exposure that is not
covered by a CGL policy; the special endorsement is needed for
this coverage.
WATER DAMAGE INSURANCE protection in the event of
accidental discharge, leakage, or overflow of water from plumbing
systems, heating, air conditioning, and refrigerating systems, and
rain or snow through broken doors, open doors, windows, and
skylights resulting in damage or destruction of the property
scheduled in the policy. This type of water damage coverage can
also be acquired through an endorsement of a standard property
insurance policy.
WATER DAMAGE LEGAL LIABILITY INSURANCE coverage
for an insured's liability for damage to another's property from
leakage or overflow of water. Some liability policies specifically
exclude water damage, including that caused by rain or snow.
Therefore, a special policy was necessary to cover this exposure.
However, most liability policies today have dropped this exclusion,
and coverage for water damage liability is part of the regular
liability policy.
WATER EXCLUSION CLAUSE provision in many property
insurance policies that excludes coverage for floods and backup
from sewers or
 Page 560
drains and underground water. Because floods and hurricanes are
generally confined to certain areas, only policyholders in those
areas need flood insurance. Therefore, it is impossible for
underwriters to spread the risk, which is the basis of underwriting.
But because homeowners in the endangered areas need insurance,
the U.S. government developed a special FEDERAL FLOOD INSURANCE
program.
WATER POLLUTION LIABILITY obligations of shipowners for
water polluted by spills from their ships. If a ship discharges oil or
other polluting or hazardous substances into the water, the
shipowner is responsible either for removing them, paying for their
removal, or, if the substances cannot be removed, paying a fine.
Following passage of the WATER QUALITY IMPROVEMENT ACT OF 1970 establishing
the liability of shipowners, marine underwriters formed the WATER
QUALITY INSURANCE SYNDICATE to provide insurance.

WATER QUALITY IMPROVEMENT ACT OF 1970 federal law

that requires shipowners to clean up or pay for the cleanup of
waters polluted by discharges from their ships. Shipowners may be
refused navigation privileges if they cannot demonstrate that they
have the financial resources to pay for cleanups.
WATER QUALITY INSURANCE SYNDICATE group of marine
underwriters formed in 1971 to provide coverage for shipowners
for WATER POLLUTION LIABILITY. The federal WATER QUALITY IMPROVEMENT ACT OF 1970
made shipowners responsible for hazardous substances discharged
by their ships into the water. This led to the Water Quality
Insurance Syndicate. Coverage extends to liabilities imposed by
states. The syndicate vouches for the financial responsibility of
those it insures.
WEAR AND TEAR EXCLUSION denial of coverage for damage,
in INLAND MARINE insurance, stemming from routine use of the property.
Property can be expected to deteriorate somewhat over time from
normal use. This is not considered an insurable loss.
WEATHER INSURANCE see RAIN INSURANCE.
WEDDING PRESENTS FLOATER personal property insurance
that provides ALL-RISKS coverage for wedding presents, wherever they
may be in the world, until they are permanently located. Because
the new owners of wedding presents may not yet have a home or a
HOMEOWNERS INSURANCE POLICY, and because their gifts may be moved from

place to place until they are settled, this policy fills a gap in
coverage, but it can be purchased only for as long as 90 days
following the wedding.
WEEKLY PREMIUM INSURANCE see DEBIT INSURANCE (HOME SERVICE
INSURANCE, INDUSTRIAL INSURANCE).

WEIGHT OF ICE, SNOW, OR SLEET INSURANCE coverage for

damage to a building or its contents due to the weight of these
elements. Outdoor property such as patios, swimming pools, and
sidewalks are usually excluded.
 Page 561
WELFARE AND PENSION PLANS DISCLOSURE ACT federal
law that requires administrators of pension plans with more than 25
participants to file a plan description with the U.S. Department of
Labor. A plan description includes schedules of benefits, type of
administration, and copies of the plan. If the plan has more than
100 participants, the administrator must also file an annual
financial report. This information must be made available to plan
participants upon request, and the person responsible for handling
the funds must be bonded.
WELLNESS PROGRAM employee benefit program that
emphasizes the pursuit of a lifestyle that minimizes the occurrence
of sickness through an organized program of preventive medicine.
Such a program includes screening for high blood pressure,
obesity, breast cancer, and stress; a smoke-free workplace; a
systematized exercise and fitness approach for general health; and
training and education programs for employees concerning proper
nutrition, stress management, weight control, cardiopulmonary
resuscitation, and prenatal care.
WHITE COLLAR CRIME see BLANKET POSITION BOND; BOND; FIDELITY BOND;
JUDICIAL BOND; SURETY BOND.

WHITE LIST STATES states that allow the placement of SURPLUS LINES
only with insurance companies that the states have approved.
WHOLE LIFE ANNUITY see ANNUITY; ANNUITY DUE; LIFE ANNUITY CERTAIN; PURE
ANNUITY; REFUND ANNUITY.

WHOLE LIFE ANNUITY DUE see ANNUITY DUE.

WHOLE LIFE INSURANCE see ORDINARY LIFE INSURANCE.
WHOLESALE INSURANCE see FRANCHISE INSURANCE (WHOLESALE INSURANCE).
WHOLESALE LIFE INSURANCE variation of GROUP LIFE INSURANCE
that covers a small group of persons who work for the same
employer. With group life insurance, the employer owns the policy;
with wholesale insurance, each employee applies for and owns his
or her own policy. However, the employer must agree to pay at
least part of wholesale life insurance premiums for the group to
qualify for wholesale insurance. Wholesale insurance was devised
for groups as small as 10 persons when group insurance was
limited by law to a minimum of 50 members. Today, group
insurance is sold to smaller groups and wholesale insurance is
written for groups as small as five persons. See also FRANCHISE INSURANCE
(WHOLESALE INSURANCE).

WHOLESALING action in which an insurance company develops

an insurance product and sells that product to a third party (usually
financial advisors such as accountants, lawyers, and/or bankers)
who add their own commissions and/or fees to that product, and
resell that product to their clients.
 Page 562
WILL usually a written document stipulating the disposition of
one's assets at death. If this document does not exist at death, the
assets are distributed according to state law. This document should
include the following central points: (1) name of individual who is
to be responsible for carrying out the wishes of the deceased; (2)
name of guardian for any minor children; (3) two notarized
signatures of two witnesses; (4) requirements for the disposition of
property; and (5) establishment of state of residence. This is of
particular importance if there is ownership of property in different
states.
WINDOW GUARANTEED INVESTMENT CONTRACT (GIC)
type of GUARANTEED INVESTMENT CONTRACT (GIC) under which a series of
payments are made into an account (usually monthly to reflect the
frequency of the employee's salary) of an insurance company
where it will remain for a stipulated number of years. Both the
principal of the account and the interest rate are guaranteed by the
insurance company. At an agreed upon future date, both principal
and interest are returned to the payor (usually a DEFINED CONTRIBUTION
PLAN).

WINDSTORM HAZARD see STORM INSURANCE (WINDSTORM INSURANCE).

WINDSTORM INSURANCE additional coverage available on
most property insurance policies through the EXTENDED COVERAGE
ENDORSEMENT. Windstorms, including hurricanes, cyclones, and high

winds, are not among the covered perils under most property
insurance policies. See also STORM INSURANCE (WINDSTORM INSURANCE).
WISCONSIN STATE LIFE FUND life insurance distribution
system under which the state underwrites and sells life insurance to
any resident of Wisconsin who makes application.
WINTER RANGE FORM type of livestock insurance that covers
for cattle and sheep on the range from October 1 to May 1 in the
Western states. Perils insured against are the weather, including
freezing; most natural disasters; riot and civil commotion; collision
with vehicles; and theft.
WITH BENEFIT OF SURVIVORSHIP phrase describing a form
of joint tenancy ownership where property passes to the survivors
when one party dies.
WITHDRAWAL BENEFITS, PENSION PLAN see PENSION PLANS:
WITHDRAWAL BENEFITS.

WITHDRAWAL CREDITS, PENSION PLAN see PENSION PLANS:

WITHDRAWAL BENEFITS.

WITHOUT EVIDENCE OF INSURABILITY see EVIDENCE OF

INSURABILITY.

WOMEN LEADERS ROUND TABLE group of women life

insurance agents who sell sufficient insurance to qualify for
membership. The
 Page 563
round table is sponsored by the NATIONAL ASSOCIATION OF LIFE UNDER-WRITERS
(NALU).

WOOL GROWERS FLOATER INLAND MARINE policy addition that

provides coverage to owners of sheep, and to warehouseowners
who store wool as well as wool in transit.
WORK AND MATERIALS CLAUSE provision in most property
insurance policies that permits a policyholder to use the insured
premises to store materials and handle them in the manner needed
to pursue his or her line of business. Without this clause, a policy
may be voided for fraud, concealment, or misrepresentation of an
undisclosed INCREASED HAZARD. The clause provides a defense for a
policyholder against a charge of increasing the hazard of a
workplace if the materials in question are necessary to the business.
WORKER ADJUSTMENT AND RETRAINING NOTIFICATION
ACT (WARN) federal law, effective February 4, 1989, that requires
company notification of employees prior to laying them off or
closing a plant or an office. Workers covered under WARN are to
include office workers, field representatives, agents, managers, and
any other employees of insurance companies. To be affected by
WARN, the company must employ at least 100 full-time
employees. Part-time employees are not included in the 100 full-
time employees count unless the total hours worked per week by
all employees is at least 4000 hours. WARN requires the company
to notify its employees of impending layoffs when one or more of
the following circumstances occur:
1. At least 500 employees are terminated or laid off during a 30-
day period.
2. At least 50 employees are terminated or laid off, comprising at
least 33% of the total employment force, during a 30-day period.
3. A plant or an office is closed, whether on a temporary or
permanent basis.
WORKERS COMPENSATION see WORKERS COMPENSATION INSURANCE.
WORKERS COMPENSATION BENEFITS income, medical,
rehabilitation, death, and survivor payments to workers injured on
the job. State workers compensation laws, which date from early in
the twentieth century, provide that employers take responsibility
for on-the-job injuries. Each state defines the benefit level for
employers in that state. Although these benefits were designed to
be the final obligation of employers to their employees, there has
been considerable erosion of this concept since the early 1970s;
workers have been allowed by the courts to sue employers for
various on-the-job injuries in addition to workers compensation
benefits. Because workers compensation benefits are a routine and
fairly predictable risk, many employers use SELF INSURANCE. Some
states mandate that employers buy workers
 Page 564
compensation insurance from a state fund, but some offer a choice
of a state fund, self insurance, or commercial insurance.
WORKERS COMPENSATION CATASTROPHE COVER excess
coverage for employers who use SELF INSURANCE for routine workers
compensation risks. Many employers consider workers
compensation exposure to be routine and predictable and set up a
fund to pay these losses themselves rather than trade premium and
claims dollars with an insurance company. To supplement a self-
insurance program, an employer may buy insurance for
catastrophic loss above a certain limit. A stop loss aggregate
contract will pay all losses in one year over a specified dollar limit.
A SPECIFIC EXCESS CONTRACT pays losses over a stated limit per accident.
WORKERS COMPENSATION, COVERAGE A agreement under
which an insurance company promises to pay all compensation and
all benefits required of an insured employer under the workers
compensation act of the state or states listed in the policy.
WORKERS COMPENSATION, COVERAGE B coverage under a
commercial workers compensation policy for situations in which an
employee not covered under workers compensation laws could sue
for injuries suffered under common law liability.
WORKERS COMPENSATION INSURANCE coverage providing
four types of benefits (medical care, death, disability,
rehabilitation) for employee job-related injuries or diseases as a
matter of right (without regard to fault). This insurance is usually
purchased by the employer from an insurance company, although
in a few states there are monopolistic state funds through which the
insurance must be purchased. The premium rate is based on a
percentage of the employer's payroll and varies according to the
employee's occupation. See also WORKERS COMPENSATION BENEFITS.
WORLD INSURANCE see WORLDWIDE COVERAGE.
WORLDWIDE COVERAGE endorsement to the COMMERCIAL GENERAL
LIABILITY INSURANCE (CGL) policy that provides liability coverage to an

insured business for damages anywhere in the world. Policies

typically have territorial limits for liability coverage, but this
endorsement extends coverage worldwide, so long as a damage suit
is brought in the U.S. or Canada.
WORLD WIDE WEB interconnection of computers that contain
pages classified into groups called web sites that can be accessed
over the INTERNET. The only requirement for visiting a web site is to
have access to the Internet through the software of a BROWSER.
WORRY state of anxiety and distress. One goal of adequate
insurance is to eliminate, or alleviate, worry on the part of a
policyholder. Many people, for example, are concerned that they
would not be able to
 Page 565
handle the financial burden if they became ill, or that their spouse
would be impoverished if they died. Insurance is designed to
eliminate these concerns by assuring that benefits will be provided.
WRAP-AROUND INSURANCE PROGRAM program designed
as protection for political risk (action taken by a foreign
government resulting in financial loss to companies trading or
investing overseas). Coverage is provided for deprivation, acts of
government, embargo, sanction, partial loss, and forced
abandonment.
WRAP-UP INSURANCE liability policy that covers all liability
exposures for a large group that has something in common. For
example, wrap-up insurance can be written for all the various
businesses working together on a special project, to provide
coverage for losses arising out of that work only.
WRIGHT, ELIZUR Massachusetts commissioner of insurance
responsible for the passage of legislation (1861) that guaranteed
policyowners of that state equity in the cash value of their life
insurance. The nonforfeiture legislation stipulated that four-fifths
of the cash value of a life insurance policy be applied to the
purchase of extended term life insurance.
WRITE to sell a specific amount of insurance.
WRITTEN BUSINESS insurance for which (1) an application has
been filed but the first premium has not yet been paid or (2) a life
insurance policy that has not yet been delivered to an insured.
WRITTEN PREMIUMS total premiums generated from all
policies written by an insurance company within a given period of
time. See also EARNED PREMIUM.
WRONGFUL ACT error, misstatement, or breach of duty by an
officer or director of a company that results in a lawsuit against the
company. DIRECTORS AND OFFICERS LIABILITY INSURANCE covers claims arising
from wrongful acts by directors or officers of a company while in
that capacity. Wrongful acts specifically exclude dishonesty, theft,
libel, and slander. During the liability insurance crisis of the 1980s,
this type of coverage became unavailable in many industries as
wrongful acts received an increasingly liberal interpretation by the
courts and many expensive lawsuits were filed against business
firms. See also TORT; TORT, DEFENSE AGAINST UNINTENTIONAL; TORT, INTENTIONAL; TORT,
UNINTENTIONAL.

WRONGFUL DEATH death caused by a person without legal

justification. Wrongful death may be the result of negligence, such
as when a drunken driver hits and kills someone; or it may be
intentional, as when someone kills another person with a gun. In
most states, suits can be filed for damages caused by wrongful
death. Much work has been done in an attempt to put a value on
human life and, therefore, to
 Page 566
determine the compensation allowable to the family of an
individual who has been killed. See also HUMAN LIFE VALUE APPROACH
(ECONOMIC VALUE OF AN INDIVIDUAL LIFEEVOIL).

WRONGFUL TERMINATION CLAIM under a general liability

policy, a claim by an employer arising when an employee
terminated by a supervisor without authority or just cause brings
suit against the employer. Such a claim is covered under most
general liability policies provided that the following elements are
in evidence:
1. the insurance policy is in force on the date of loss.
2. there has been no willful misinterpretation of any material facts.
3. the POLICYHOLDER did not have a willful (preconceived) intent to
harm or injure the employee who was terminated.
 Page 567

XYZ
XCU see EXPLOSION, COLLAPSE, AND UNDERGROUND EXCLUSION.
YACHT INSURANCE coverage for fire and explosion, against fire
and any damage caused by explosion whether or not fire ensues,
and whether or not an explosion occurs on-or off-board; sinking
from floating debris, sunken hulks, and reefs; stranding against
sand bars and filled channels resulting in salvage costs, material
and labor expenses to refloat and repair a yacht; collision causing
legal liability for damage to another vessel; assailing thieves (theft
by forcible entry); and jettison and barratry of mariners or masters.
Coverage for liability for bodily injury and loss of life is available
through OCEAN MARINE PROTECTION AND INDEMNITY INSURANCE.
YEARLY PRICE OF PROTECTION METHOD ACTUARIAL procedure
used to determine the cost of protection of a CASH VALUE LIFE INSURANCE
policy on an annual basis. This cost of protection is developed by
the following steps:
1. Cash value at the beginning of the year plus the premiums paid
in for that year are summed up, and the total is multiplied by an
assumed interest rate factor of (1+i), resulting in the theoretical end
of the year CASH SURRENDER VALUE;
2. From the theoretical end of the year cash surrender value, the
actual cash surrender value at the end of year and the dividends
during that year are subtracted. The resultant figure is the sum
allocated for MORTALITY CHARGES for that year;
3. The sum allocated for mortality charges for that year is then
divided by the AMOUNT OF RISK (face value end of the year cash
surrender value) per $1000 of FACE AMOUNT.
YEARLY PROBABILITY OF DYING figure in a MORTALITY TABLE
derived by dividing the number of people dying during a given
year by the number of people alive at the beginning of that same
year.
YEARLY PROBABILITY OF LIVING figure in a MORTALITY TABLE
derived by dividing the number of people alive at the end of a
given year by the number of people alive at the beginning of that
same year.
YEARLY RATE OF RETURN METHOD ACTUARIAL procedure used
to determine the annual rate of return at which annual benefits
would have to be gained from the CASH VALUE LIFE INSURANCE policy in
order to equal the annual investment made in the policy. The
benefits under the policy are the CASH VALUE, dividends (if PARTICIPATING
INSURANCE), and the DEATH BENEFIT for the year under discussion. The

investment made in the policy is the amount of the premiums paid

into the policy that year and the cash value at the beginning of that
year. The equation then becomes:
 Page 568

This method was developed by Dr. Joseph Belth, a professor at

Indiana University.
YEARLY RENEWABLE GROUP TERM INSURANCE see GROUP
TERM LIFE INSURANCE.

YEARLY RENEWABLE TERM (YRT) see RENEWABLE TERM LIFE INSURANCE.

YEARLY RENEWABLE TERM PLAN OF REINSURANCE type
of PROPORTIONAL REINSURANCE under which the CEDING COMPANY (PRIMARY INSURER)
cedes to a REINSURER its NET AMOUNT AT RISK for the amount above its
retention limit on a life insurance policy. In the event the insured
dies, the reinsurer is obligated to pay that part of the death benefit
which is equivalent to the net amount at risk.
YEARS CERTAIN ANNUITY see LIFE ANNUITY CERTAIN.
YEARS OF SERVICE length of employment as measured to
determine eligibility, VESTING, and benefit levels for employee
participants in tax qualified pension plans. There is often a
requirement that years of service be continuous (without unexcused
breaks).
YIELD, CURRENT rate of return computed by dividing the
current annual dividend (if a stock) or annual coupon amount (if a
bond) by the amount paid for that financial instrument.
YIELD OF ASSETS see YIELD ON ASSETS.
YIELD ON ASSETS annual or other periodic rate of return on
investments. Because life insurance companies act as custodians of
premiums for many years, until money must be paid out in death
benefits or other types of claims, they invest it to achieve a yield
adequate to meet these obligations. Yield is also important to the
policyowner of life policies that include a specific investment
element. For example, some annuities and CASH VALUE LIFE INSURANCE
policies pay a yield that approximates the market rate the
policyholder could get elsewhere. While other contracts, such as a
variable annuity and VARIABLE LIFE INSURANCE do not guarantee a specified
yield, they pay one based on the performance of the underlying
investments.
YIELD ON INVESTMENTS RATIO insurance company's net
investment income divided by its invested assets. The greater the
yield, the better the investments that are being made.
YIELD RATE see YIELD ON ASSETS.
YIELD TO MATURITY (YTM) sum total of the annual effective
rate of return earned by an owner of a bond if that bond is held
until its
 Page 569
maturity date. This effective return includes the current income
generated by the bond as well as any difference in the face value of
the bond and the bond's purchase price. The relationship of YTM
and the bond's coupon rate is as follows: (1) if the purchase price of
the bond is greater than the face value of the bond (purchase made
at a premium), the YTM is lower than the coupon rate (rate printed
on bond certificate); (2) if the purchase price of the bond is less
than the face value of the bond (purchase made at a discount), the
YTM is higher than the coupon rate; and (3) if the purchase price
of the bond is equal to the face value of the bond, the YTM is equal
to the coupon rate. The equation for the computation of the YTM is
as follows:

YORK ANTWERP RULES treaty adopted by most major

countries to determine adjustment for general average in OCEAN MARINE
INSURANCE.

YRT see YEARLY RENEWABLE TERM (YRT).

ZERO COUPON BONDS bonds that are sold at discount from
their maturity value with the interest compounding and paid at the
bond's maturity date. Even though these bonds do not pay interest
until maturity, the interest that accrues each year becomes taxable
income in that year. These bonds can be purchased to provide a
specific sum of money at a specific date.
 Page 570
ZONE SYSTEM method for triennial examination of insurance
companies as established by the NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS (NAIC). Teams are composed of representatives from

several state insurance commissioners' offices. Their findings are

acceptable by all the states in which the examined insurance
companies are licensed to conduct business.
 Page 571

Abbreviations and Acronyms

A
AAI Alliance of American Insurers
AIA American Insurance Association
AICPA American Institute of Certified Public Accountants
AIME Average Indexed Monthly Earnings
AMW Average Monthly Wage
ASO Administrative Services Only

B
BAP Business Automobile Policy. Replaced by BUSINESS AUTO COVERAGE
FORM

BOP Businessowners Policy

C
CAS Casualty Actuarial Society
CEBS Certified Employee Benefit Specialist
CERCLA Comprehensive Environmental Response,
Compensation, and Liability Act
CFP Certified Financial Planner
CGL Comprehensive General Liability Insurance. Replaced by
COMMERCIAL GENERAL LIABILITY INSURANCE
ChFC Chartered Financial Consultant
CLU Chartered Life Underwriter
COLA Cost of Living Adjustment
CPCU Chartered Property and Casualty Underwriter
CPP Commercial Package Policy
CSI Commissioners Standard Industrial Mortality Table
CSO Commissioners Standard Ordinary Mortality Table
D
DB&C Dwelling, Buildings, and Contents Insurance
DI Disability Income
DOC Drive Other Car Insurance
DWI Driving While Intoxicated
E
EEL Emergency Exposure Limit
ERISA Employee Retirement Income Security Act of 1974
ESOP Employee Stock Ownership Plan
EVOIL Economic Value of an Individual Life

F
FAIR Fair Access to Insurance Requirements Plan
FASB Financial Accounting Standards Board
FCAS Fellow, Casualty Actuarial Society
FDIC Federal Deposit Insurance Corporation
FEGLI Federal Employee Group Life Insurance
FELA Federal Employers Liability Act
FLMI Fellow, Life Management Institute
FPA Free of Particular Average
FSA Fellow, Society of Actuaries
FSLIC Federal Savings and Loan Insurance Corporation
FTC Federal Trade Commission
 Page 572

G
GA General Agent
GAAP Generally Accepted Accounting Principles
GAB General Adjustment Bureau
GAMC General Agents and Managers Conference
GIC Guaranteed Investment Contract

H
HIAA Health Insurance Association of America
HMO Health Maintenance Organization
HOLUA Home Office Life Underwriters Association

I
IBNR Incurred But Not Reported Losses
ICC Interstate Commerce Commission
IIA Insurance Institute of America
IIAA Independent Insurance Agents of America
IPG Immediate Participation Guarantee Plan
IRA Individual Retirement Account
IRIS Insurance Regulatory Information System
ISO Insurance Services Office
L
LIC Life Insurers Conference
LIMRA Life Insurance Marketing and Research Association
LOMA Life Office Management Association
LUPAC Life Underwriter Political Action Committee
LUTC Life Underwriting Training Council
M
MDO Monthly Debit Ordinary Insurance
MDRT Million Dollar Round Table
MLF Maximum Forseeable Loss
MIB Medical Information Bureau
MPL Maximum Probable Loss

N
NAIC National Association of Insurance Commissioners
NAII National Association of Independent Insurance Adjusters
NALC National Association of Life Companies
NALU National Association of Life Underwriting
NASD National Association of Securities Dealers
NATB National Automobile Theft Bureau
NFPA National Fire Protection Association
NSLI National Service Life Insurance
O
OASDHI Old Age, Survivors, Disability, and Health Insurance
OPIC Overseas Private Investment Corporation
OSHA Occupational Safety and Health Act

P
PAC Preauthorized Check System
P&I Protection and Indemnity Insurance