lf you’ve been selling life insurance for any time at all, you know that it’s an industry filled with jargon and acronyms. To be part of the insider’s club, you have to speak the language. Harder still, you have to be able to translate that language for clients who barely know what an annuity is, let alone the ins and outs of a fifth dividend option.
Now, it’s time to test your industry knowledge. We’ve rounded up thirteen terms that separate the novice from the true insurance scholar. How many of them do you know?
adhesion: There is no true bargaining or “meeting of the minds” in a life insurance contract. Bluntly, a policyowner can “take it or leave it” but may not bargain for specific terms or conditions. In other words, the party who buys life insurance must adhere to an established, preexisting standard contract and its terms. The law provides special protection to one forced to accept a contract of adhesion and, other things being equal, will interpret the terms of such a document in favor of the policyowner rather than the insurer.
aleatory contract: Where a contract between two parties depends upon an uncertain event and where one party may pay a very small amount and receive a very large amount upon the occurrence or nonoccurrence of the specified event, it is called an aleatory contract. Life insurance is such a contract.
banding: Banding refers to the recovery of ongoing administrative and handling costs. Insurers generally “band” premiums by policy size. This is a “cheaper by the dozen” concept in which larger policies are charged a more favorable rate than smaller policies. In other words, a $1,000,000 policy will be charged significantly less per year than ten $100,000 policies for ongoing administrative and handling costs. Fewer policies are less expensive than more policies of the same aggregate amount. This is one reason why buy-sell policies may be purchased on a stock redemption rather than cross-purchase basis.
capital conservation method (*capital needs analysis): When an individual’s needs for insurance are ascertained, there are two choices for determining how much income a given amount of capital will produce. One method assumes only income will be used so as to protect (conserve) capital. The capital conservation method, therefore, assumes only the earnings on principal (not the principal itself) will be used to satisfy those needs. The other approach is to annuitize capital (i.e., break down capital and pay out both income and capital to meet needs). This will generally result in a lower amount of capital needed (but at the expense of less future security and inheritance for others).
*capital needs analysis: A related term, capital needs analysis (CNA) is an appraisal of needs system popularized by supersalesman Tom Wolf. A client’s financial needs are met through the economic value and income-producing capabilities of current and future assets.
current-assumption policy: Current-assumption policies reflect the insurer’s current interest, mortality, and expense experience directly in cash value credits and charges rather than indirectly through dividends. As a result, actual cash values accumulations are uncertain, although there is a minimum cash value guarantee. The most prevalent type of current-assumption policy is universal life, although it is also sold in fixed-premium modes. Although inaccurate, the term “interest-sensitive” is sometimes used synonymously with “current-assumption.” Current-assumption is actually a broader concept implying direct sensitivity not only to current interest rates but also to mortality and expense experience. Although traditional participating whole life policies may reflect the company’s current performance with respect to investment, mortality and expenses through its declared dividends, these policies are not classified as current-assumption policies.
deposit term life insurance: Deposit term is a form of temporary coverage, normally sold for ten-year terms, with the first-year premium more than twice the amount of the annual premiums paid for the remaining years. This higher first-year premium is called a deposit. If the insured dies, double the deposit is added to the death benefit; if the insured lives, double the deposit is returned at the end of the term. The insured forfeits the deposit and receives no refund if the policy lapses. A form of tontine, most states now severely restrict or totally prohibit this type of policy.