Disability Insurance Glossary

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A

ACCIDENTAL DEATH AND DISMEMBERMENT BENEFIT:

A life insurance policy provision that provides an additional amount- usually equal to the policy face value- if the insured is killed in an accident. Also known as double indemnity. The dismemberment benefit pays a set percentage for the loss of certain body party.

ACCUMULATION PERIOD:

This is the period of time the insured must accumulate during a period of time before benefits are paid. (similar to a standard Elimination Period) Example: insured must be disabled any 90 days during a seven-month period before benefit payments begin.

ADJUSTABLE LIFE INSURANCE:

A variety of whole life insurance allowing the policyowner to change the type of insurance, raise or lower the face amount of the policy, increase or decrease the premium, and lengthen or shorten the protection period of the policy at specified intervals.

ADVERSE SELECTION:

A tendency of poorer risks to continue insurance to a greater extent than normal risks, producing an abnormal increase in mortality rates for lose less-healthy members still in the plan. It also includes the tendency for poorer risks to seek out insurance to a greater extent than normal risks.

AGENT:

A sales and service representative of an insurance company. An agent represents the insurance company and is given powers by the company to act in its behalf.

ANNUITY:

A contract that provides a periodic income at regular intervals for a specific period of time, such as for a number of years, or for life.

APPLICANT:

The person who applies for insurance by signing a written application.

APPLICATION:

A statement of information made by a persona applying for insurance. The application is used by the life insurer to asses the acceptability of risk and issue the life insurance policy. A copy of the application is made a part of the policy when it is issued.

ATTAINED AGE:

The age the insured has reached on a certain date, based on the nearest birthday or last birthday, depending on the company. Sometimes referred to as insurance age.

ATTENDING PHYSICIAN STATEMENT (APS):

A report, completed by the proposed insured’s (or, in a claim situation, the insured’s) physician, which documents current and prior health history. Used in the evaluation process of approving an application (or claim).

AUTOMATIC INCREASE BENEFIT:

A policy provision that increases, annually, the policy monthly benefit by either a stated percentage or the latest Consumer Price Index measure, without the evidence of either medical or financial insurability.

AUTOMATIC PREMIUM LOAN:

An elective policy feature wherein any premium not paid by the end of the grace period is paid by the insurance company by making a loan equal to the premium from policy cash values.

AVIATION CLAUSE:

A clause limiting the liability of the insurer if death is related to aviation, to a specified degree. This may be used if the insured is a crewmember or pilot.


B

BENEFICIARY:

Any person, class of people, institution, or trust specifically named in a life or annuity contract to receive the policy benefits at the death of the insured.

BENEFICIARY CHANGE:

The named beneficiary may be changed only if the policy gives such right to the policyholder and law permits the change. Most policies allow such change with the formal request and signature of the owner.

BENEFICIARY, CONTINGENT:

The person(s) designated in the policy to receive the benefit if the primary beneficiary dies while the insured is living.

BENEFICIARY, PRIMARY:

The person(s) designated in the policy to receive the benefit at the death of the insured.

BENEFIT AMOUNT:

Amount paid to insured at the time of claim.

BENEFIT PERIOD:

The length of time for which disability income benefits will be payable to the claimant under a policy. Examples: two years, to age 65, and in some cases, lifetime.

BROKER:

A sales and service representative who handles insurance for clients and represents the client, not the insurance company.

BUSINESS LIFE INSURANCE:

Life insurance purchased by a business enterprise on the life of a member of the firm. It is often bought by partnerships to protect the surviving partners against loss caused by the death of a key employee or owner employee.

BUSINESS OVERHEAD EXPENSE:

A policy that reimburses the insured business owner, during a disability, for covered business expenses that are incurred in the day-to-day operation of the business. (See Business Owners for a more detailed explanation.)

BUY-SELL (OR BUY-OUT):

A policy that pays to a corporation or co-owner either a lump-sum or installment payments on the disability or death of an insured owner to provide the necessary funds to buy-out the business interest of the disabled owner or the deceased owner’s heirs. (See Business Owners for a more detailed explanation)


C

CARRY-OVER ACCOUNT:

In a Business Overhead Expense policy, this is the fund that accumulates unused benefits to be paid out to the insured at a later date.

CASH SURRENDER VALUE:

the amount available in cash upon voluntary termination of a policy by its owner before it becomes payable by death or maturity.

CASH VALUE:

The cash fund within a permanent life insurance policy that is part of the death benefit and is owned by the policy owner for purposes of cash surrender or policy loans.

COMMISSIONERS STANDARD ORDINARY MORTALITY TABLE (CSO TABLE):

Mortality tables based on inter-company experience during a particular period of time.

CONDITIONALLY RENEWABLE:

Under this policy provision, an insurance company agrees to renew a disability income policy, providing the insured meets certain qualifications, such as full-time employment.

CONTESTABLE PERIOD:

A period (normally 2 years) after a policy is issued during which the company has the right to cancel the policy because of the insured’s material misrepresentation or fraud. Normally after 2 years from the policy date the policy becomes incontestable.

CONVERTIBLE TERM INSURANCE:

Term insurance that can be exchanged, at the option of the policy owner and without evidence of insurability, for another plan of insurance.

COST OF LIVING RIDER:

An optional benefit that increases the disability benefit by a percentage (3 or 6 percent) or the latest Consumer Price Index measure after the insured has been on claim for one year. Some policies increase the percentage by simple measures and some by compound.

COVERED EXPENSES:

In a Business Overhead Expense policy, this is a listing of typical business expenses that are eligible to be reimbursed during an insured’s disability. Examples: rent or mortgage payments, electricity, employee salaries.

CROSS-PURCHASE AGREEMENT:

In a disability buy-sell situation, this arrangement has the owners themselves as owner and beneficiary of the policy proceeds. Generally used only where two owners are involved.


D

DATE OF ISSUE:

The date (day, month, year) on which the policy was issued. Normally controls contestability and suicide provision dates.

DEATH BENEFIT:

The amount payable to a beneficiary according to the policy terms upon the death of the insured.

DEATH CLAIM:

When the insured dies, the person(s) entitled to the proceeds must complete certain insurance company death claim forms giving proof of death and establishing the claimant’s right to policy proceeds.

DECREASING TERM INSURANCE:

Term life insurance with a face value that will decrease each year over a stated period of time.

DISABILITY BUYOUT:

Policy that “buys out” the business partner in the event
that a disability occurs.

DISABILITY INCOME:

A monthly benefit paid to an individual in the event of an accident or sickness to help replace earnings lost.

DISABILITY WAIVER OF PREMIUM:

A policy rider providing for the automatic payment of premium by the company should the insured become totally physically incapacitated.

DIVIDEND:

The return to the policy owner of part of the premium paid for a policy issued on a participating basis by the insurer. It represents an excess of collected premiums over expenses, actual mortality and investment experience during a period of time. Dividends may be used by the policyowner (1) as cash refunds, (2) to reduce the next premium, (3) to be kept at interest by the insurer, (4) to purchase paid-up life insurance, and (5) to purchase one year term up to the amount of the cash value in the policy.

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E

ELIMINATION PERIOD:

The policy deductible, usually the number of days from the onset of disability, for which no benefits are payable. Choices are usually 30 days, 60 days, 90 days, or 180 days.

EMPLOYER-PAID LIMITS:

A table used by an underwriter and agent to determine the maximum amount of monthly benefit the insured can purchase when the employer is paying the premium. This limit is higher than the ordinary issue limit because of the taxation on benefits when received due to the employer’s deducting the premium paid as an ordinary business expense.

ENDOWMENT:

Cash from a life insurance policy payable to the policyowner, if living, at the policy maturity date, normally equal to the face amount. If death occurs prior to the maturity date, the face amount is paid.

ENTITY PURCHASE AGREEMENT:

In a disability buy-sell situation, this arrangement has the corporation as owner and beneficiary of the policy proceeds. Generally used in situations where there are more than two owners.

EXCLUSIONS:

Specified conditions or circumstances for which the policy does not provide benefits. Example: complications of pregnancy

EXCLUSION RIDER:

Attached to and made a part of the policy, this document, which the insured generally must sign, indicates a condition(s) which is specifically not going to be covered under this insured’s policy. Example: any disease or disorder of the lungs. Riders like these are placed as a result of the individual evaluation of the insured’s history.

EXECUTIVE BONUS:

A premium paying arrangement for which a deduction is allowable under Section 162 of the Internal Revenue Code for a salary bonus to the insured and used to pay the disability policy premium.


F

FACE AMOUNT:

The sum of money as stated on the face of the policy that will be paid in case of death of the insured or at the maturity of the policy. It does not include additional amounts payable under accidental death or other special provisions, or acquired through the application of policy dividends. It will be reduced by an outstanding policy loan, if any.

FINANCIAL UNDERWRITING:

A method of evaluating data relevant to earned income, unearned income, net worth, fringe benefits and other components of compensation to determine the proper amount of monthly disability insurance benefit or life insurance benefit for which the insured qualifies. Typical requirements are a pay stub, tax return or a copy of employment contract.

FUTURE INCREASE OPTION:

An optional benefit in a disability income policy that allows the insured future increases to the policy monthly benefit at specified dates (typically on insured’s policy anniversary), with a requirement of only financial (and not medical) insurability.


G

GRACE PERIOD:

The period of time, usually 31 days following the premium due date, during which the insurance policy remains at full benefit and payment of the premium may be made without penalty.

GRADED PREMIUM:

Premiums start out less expensive than level premiums but increase each year. If the insured starts with a graded premium, they may change to a level premium on a policy anniversary. Premiums will then be based on attained age.

GROUP DISABILITY POLICY:

Policy through an employer.

GROUP DISABILITY REPLACEMENT RIDER:

Rider that allows policyholder to purchase additional benefit when they leave their employer or lose their group benefits. No medical underwriting required to exercise the benefit.

GUARANTEE ISSUE:

Policy issued without any medical underwriting. Group disability policies are often “guaranteed issue.”

GUARANTEED INSURABILITY OPTION:

A provision or rider to a policy allowing the purchase of additional insurance at specified future dates at attained age without evidence of insurability.

GUARANTEED RENEWABLE:

Under this policy provision, the insurance company agrees to renew the policy (can’t cancel the policy) for as long as premiums are paid on a timely basis by the insured. Premiums may be increased with prior notification, but policy provisions can never be changed.


I

INCONTESABLE CLAUSE:

A policy provision preventing the insurance company from declaring the contract invalid after a certain date, usually 2 years, as established by the individual states.

INCREASING TERM INSURANCE:

A type of term life insurance in which the face amount increases during the term of coverage.

INSPECTION REPORT:

Information, ordered by the underwriter that provides a summary description of the insured’s employment, health history, and habits as a result of a direct interview and interviews with business and personal associates.

INSTALLMENT OPTION:

In a disability Buy-Sell policy, this policy provision offers an alternative payout to a Lump-Sum settlement by having the insurance company pay out a level benefit in monthly installments for a specified period of time.

INSURABILITY:

Qualifications of age, health, occupation, and other factors that enable the proposed insured to meet the requirements of a company for the issuance of insurance.

INSURABLE INTEREST:

The condition that must exist at the issue of a life insurance policy calling for the person applying for the insurance and the beneficiary to have an insurable interest in the potential loss. This means that these are perons who would suffer an emotional or financial loss in the event of the death of the insured.

INSURANCE:

Insurance is a contractual arrangement in which a customer pays a specified sum (the insurance premium) in return for which the insurer will pay compensation if specific conditions or events affect the customer.

INSURANCE POLICY:

A written legal document issued by an insurer setting forth the terms of the coverage and the rights and obligations of each party under the contract.

INSURANCE TRUST:

A trust composed partly or wholly of insurance policies.

INSURED:

The person whose life is protected by the insurance policy and upon whose life the death benefit is predicated.

INSURER:

The party of the insurance contract promising to pay the losses and benefits. It is a term used to refer to the company providing insurance to the public.

IRREVOCABLE BENEFICIARY:

The beneficiary designation in a policy that cannot be changed without beneficiary permission or at the death of the beneficiary.


J

JOINT LIFE INSURANCE:

Insurance on two or more persons, the benefits of which are payable on the first death. Also called first-to-die life insurance.

JOINT AND SURVIVOR LIFE INSURANCE:

Insurance on two or more persons, the benefits of which are payable on the second death. Also called second-to-die life insurance.


K

KEY PERSON INSURANCE:

Insurance designed to protect a firm against the loss of business income resulting from the death or disability of an employee who is important to the company’s operation.

KEY PERSON POLICY:

A product designed to reimburse the business for financial loss during the key person’s disability until recovery or a suitable replacement can be found.


L

LEVEL PREMIUMS:

Premiums in the policy are locked in and will never increase (until age 65, for disability insurance).

LEVEL TERM INSURANCE:

Term insurance with a constant face value from the date of issue to the date of expiration.

LIFE INSURANCE:

The scientifically calculated pooling, growth, and distribution of money to pay benefits by lump sum or with guaranteed lifetime payments to survivors of someone who dies while covered.

LIFETIME EXTENSION RIDER:

A rider that extends the benefit period after age 65. The amount of benefit the claimant receives is based on the age when the claim started.

LOAN INTEREST:

The rate of interest that the borrower must pay on the loan as specified in the policy. If the interest is not paid, it will be added to the policy loan.

LUMP SUM:

The method for payment of insurance proceeds of a policy wherein the whole amount due or still owing is payable to the beneficiary in one sum.

LUMP-SUM PAYMENT:

In a disability Buy-Sell policy, benefits are usually payable in a Lump Sum at the trigger (or effective) date of the buy-sell. The trigger date is the day following expiration of the Elimination Period


M

MEDICAL UNDERWRITING:

The process of evaluating a disability income application for approval by reviewing the potential insured’s individual health history.

MODIFIED OWN-OCCUPATION:

Definition of disability that will pay benefits if the insured cannot work in their occupation. Any earnings in another occupation will offset the benefits.


N

NET WORTH:

The total non-business related assets of an insured used in the financial evaluation of the disability insurance application. For disability Buy-Sell policies, net worth is that of the business and is used in the calculation of the value of the owner’s interest.

NON CANCELABLE:

The renewal provision of the policy which states that the insurance company cannot change any policy provisions or increase premiums after the policy has been issued as long as the insured makes timely payments of premium.

NONFORFEITURE PROVISONS:

Contractual policy provisions that allow the policyowner to receive the policy’s cash value in the event that the policy is terminated for any reason other than the death of the insured.


O

OCCUPATION CLASS:

A category of insured based on specific job duties that dictate the premium and contractual grouping under which the insured would be placed.

ORDINARY LIFE INSURANCE:

The most common form of basic permanent life insurance in which coverage and premiums are paid to age 100. The policy is designed to build cash values equaling the face amount at age 100.

OUTLINE OF COVERAGE:

A simplified benefit summary of a disability policy provided by the insurance company and required by law in many states to be delivered to the individual insured either at the time of the sales presentation or policy delivery.

OVERHEAD MAXIMUM:

The total possible benefit payout under the Business Overhead Expense policy, this amount is calculated by multiplying the monthly benefit by the number of months in the selected benefit period. Example: a $3,000 monthly benefit and 18-month benefit period would provide an Overhead Maximum of $54,000 ($3,000 x 18).

OWN-OCCUPATION:

A term that defines the most liberal wording of the total disability contractual provision. If the insured, due to sickness or injury can’t perform the duties of one’s own occupation, benefit will be paid even if income is earned in another occupation. If insured is a physician or dentist, their occupation will be deemed their medical specialty.


P

PAID-UP ADDITIONS:

Units of single premium insurance purchased with dividends of participating policies; one of the customary dividend options.

PAID-UP INSURANCE:

Insurance on which all required premiums have been paid.

PERMANENT LIFE INSURANCE:

Life insurance designed to be in force for the whole of a person’s life. This refers to all insurance except term.

PHYSICIAN CARE REQUIREMENT:

This policy provision states one of the eligibility requirements for disability benefits, requiring that the insured be under the regular care and attendance of a physician. Many companies waive this requirement if it can be shown that future treatment would be of no benefit to the insured.

POLICY:

The printed legal document stating the terms of the insurance contract issued to the policy owner by the company.

POLICY ANNIVERSARY:

Date policy is initially issued and is yearly renewed.

POLICY DIVIDEND:

A refund of part of the premium on a participating life insurance policy reflecting the difference between the premium charged and actual experience.

POLICY LOAN:

A loan made by a life insurance company from its general fund to a policy owner on the security of the cash value of a policy.

POLICY OWNER:

One who owns an insurance policy and possesses the contractual rights with the insurer. The policy owner need not be the same as the insured.

POLICY RESERVES:

The measure of the funds that a life insurance company holds specifically for fulfillment of its policy obligations. Reserves are required by law to be so calculated that, together with future premium payments and anticipated interest earnings, they will enable the company to pay all future claims.

POLICY SCHEDULE PAGE:

Found in the early pages of a disability income policy, this sheet details all the specific individual policy data such as name, policy number, monthly benefit, and premium.

POLICY SUMMARY:

This document defines the main features of the issued policy.

PREFERRED RISK:

A prospect whose physical condition, occupation, mode of living, or other characteristics suggest above average longevity.

PREMIUM MODE:

The particular method of premium payment selected by the insured. The policy can be paid for annually, semi-annually, quarterly or monthly.

PRESUMPTIVE TOTAL DISABILITY:

A policy provision that waives the normal total disability eligibility requirements in the event of a catastrophic-type disability such as the loss of sight, hearing, speech or use of two limbs. Elimination period is also waived.

PROFESSIONAL OVERHEAD EXPENSE:

Disability policy designed to pay business expenses.


R

RATING:

An underwriting decision to approve coverage but at a higher than normal premium due to an increased risk which is usually associated with adverse medical history. An extra premium of anywhere from 15 to 100 percent or more can be applied.

RECURRENT DISABILITY:

A policy provision that defines when an injury or illness will be considered continuous if there has been a recovery for a short period (usually six months) and then a recurrence of the same or related cause. A condition considered recurrent will not necessitate new satisfaction of the Elimination Period.

REDUCED TERM DISABILITY INSURANCE:

Policy designed to pay back a loan.

REGULAR OCCUPATION:

Not to be confused with “own occupation,” regular occupation will pay benefits if the insured cannot work in their occupation, but benefits will be offset if insured earns money in another occupation or job.

REHABILITATION:

A policy provision under which the insurance company agrees to assist in the expenses associated with a rehabilitation program that the insured enters following disability.

REINSTATEMENT:

The process whereby the insured must go through the underwriting process to place the policy back in force after the policy has lapsed.

RENEWABLE TERM INSURANCE:

Term insurance providing the right to renew at the end of the term for another term without evidence of insurability.

RENEWABILITY:

The policy provision that details the conditions upon which the insurance company agrees to continue to insure the disability income policy. Examples: Non-cancelable, Guaranteed Renewable, Conditionally Renewable.

RESIDUAL DISABILITY BENEFIT:

A policy provision or an optional benefit that promises to pay the insured a portion of the total disability benefit based on a loss of earnings. Usually requires at least 20 percent or more loss of earnings and the policyholder will receive a proportionate benefit. Typically if the insured has at least 75 percent or more loss of earnings they will receive the entire benefit amount.

RESIDUAL RIDER:

Rider that pays a proportional benefit to the loss of
earnings.

RIDER:

An added benefit to the policy.

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S

SALARY CONTINUATION PLAN:

A program, also called a Section 105 plan, under which the employer makes deductible wage payments, in part or in full, to an individual who is unable to work due to illness or injury.

SETTLEMENT OPTIONS:

The several ways outlined in a policy, other than by a lump sum payment in cash, by which a policy owner or beneficiary may choose to have the contract’s benefits paid.

SHORT-TERM DISABILITY:

Usually associated with group insurance, this program pays a monthly benefit for total disability after a minimum Elimination Period for up to 13, 26, 39, or 52 weeks.

SICKNESS:

A policy provision defined as illness or disease, which first makes itself known to the insured following the policy effective date. Sickness covers both physical and mental illness unless otherwise specified.

SIGNIFICANT EARNINGS LOSS:

A provision under the Residual Disability Benefit that promises the full total disability benefit if the insured is back to work and suffers a substantial loss of income, usually 75 percent.

SOCIAL SECURITY:

A federal program, which provides benefits to all working Americans in the form of disability, retirement or survivor benefits. Disability is strictly and narrowly defined and benefits begin in the sixth month of a disability that has an expectation of lasting at least 12 months or will result in the individual’s death.

SOCIAL SECURITY OFFSET RIDER:

An optional benefit that coordinates benefits with any benefits received through Social Security disability (and, often, other public programs) to avoid either under insurance or over insurance.

STANDARD RISK:

A person who qualifies through a company’s underwriting standards and practices for insurance protection without any extra rating or any special restrictions.

SUBSTANDARD RISK:

The person who because of health history or physical impairments does not meet the underwriting qualifications for the issue of a company’s standard life insurance policy. The policy may be issued at extra risk, requiring an additional premium.

SUICIDE CLAUSE:

A standard disclaimer of life insurance policies providing that the death benefit of a policy will not be paid if the insured dies because of suicide, governed by the rules of the state. Most states restrict this to, at most, 2 years from the date of issue.

SUPPLEMENTAL HEALTH STATEMENT:

A form that is a direct communication from the underwriter to the proposed insured that asks for more details about a specified medical condition(s).

SURRENDER CHARGE:

The difference between cash surrender value of a policy and the reserve held by the company.


T

TERM LIFE INSURANCE:

Life insurance providing a death benefit for a limited period of time on the life of the insured and expiring without value after the stated period.

TOTAL DISABILITY:

Often the key policy provision in the disability income policy, this feature defines the eligibility requirements necessary for an individual to qualify for full monthly benefits.

TRANSPLANT DONOR/ COSMETIC SURGERY BENEFIT:

A policy provision that considers an insured to be disabled under the sickness provision if donating a body organ or as a result from plastic surgery.


U

UNDERWRITING:

The process by which insurance companies analyze risks to decide if they want to insure them, and at what rates.

UNEARNED INCOME:

Money that will be available to an individual whether or not he is disabled. It affects the amount of disability coverage that may be purchased based on earned income. Example: real estate property income.

UNIVERSAL LIFE INSURANCE:

A type of permanent life insurancde under which the policyowner is allowed to vary the timing and amount of premiums as well as the death benefit. Premiums (less expenses) are credited to the policy account (cash value) from which mortality charges are deucted and to which interest is credited at a varying future rate.


V

VARIABLE LEFE INSURANCE:

A type of permanent life insurance in which the death benefit and the policy’s cash value may vary in relation to the investment experience of the selected fund in which the cash value is invested.

VARIABLE UNIVERSAL LIFE:

A type of life insurance policy that combines the premium flexibility and design features of universal life insurance and the policyowner-directed investment choices of variable life insurance.


W

WAIVER OF PREMIUM:

A policy provision that specifies the exemption of the insured from making premium payments following a specified number of days of disability, until the insured recovers. In many cases, any premium paid during the initial days following disability is refunded.

WAR CLAUSE:

A clause in an insurance contract relieving the insurer of liability, or reducing its liability, for loss caused by war.

WHOLE LIFE INSURANCE:

Premium payment for the whole of a person’s life. Also known as ordinary life insurance.

WORKERS COMPENSATION:

A system administered by each individual state that provides benefits if a worker is hurt or contracts an illness on the job.