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?

s

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.

s

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.

d

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.  

s

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.

s

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.

a

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.

See also: 7 things you need to know about term life insurance

d

fifth dividend option: Because this option is usually listed after four other possibilities, it is often called the “fifth dividend” option. If selected, each year the insurer will use the prior year’s dividend to purchase (at no commission or expense charge) one-year term insurance up to specified limits (usually no more than the policy’s cash value) with the balance applied toward one or more of the other options. The fifth dividend option is useful to maintain level or increasing protection, to keep coverage high even if a policy loan has been taken out, or where the parties are involved in a split dollar arrangement.

s

intentionally defective grantor trust: a trust drafted with an intentional flaw that runs “afoul” of the rules contained in sections 671 through 679 of the internal revenue code with the result that the grantor of the trust is taxed on all trust income, as income tax laws will not recognize that assets have been transferred away from the trust grantor.

d

interest-sensitive whole life: A traditional whole life policy with fixed premiums and traditional nonforfeiture values where interest is credited directly to the cash value at current rates. Often used somewhat erroneously to refer to current-assumption policies. Generally loads, mortality costs, and interest credits are separately stated. The cash value of the policy is the greater of this fund less surrender charges, and the guaranteed cash values.

s

joint and X-percent survivor annuity: An annuity that pays an income to two individuals. The specified percentage of the joint income continues to the survivor for life if the principal annuitant dies first. If the secondary annuitant dies first, the unreduced joint benefit continues to the principal annuitant for life. In its second-death form, X percent of the joint income is paid to the survivor regardless of which individual dies first. Common percentages are 100% (full), 75% (three-fourths), 66% (two-thirds), or 50% (one-half).

s

persistency: Perhaps the most important objective test of a good insurance agent, persistency is a measure of the number of policies sold that “stay on the books.” This “staying quality” is an indication that the policyowners were satisfied with their contracts, were not oversold, and have found the means and the desire to keep the policies in force over a long period of time. A low persistency (i.e. a high percentage of policies that have lapsed) is an indication that products were not matched with clients’ problems or abilities to pay or that clients did not understand (or were allowed to forget) the importance of the coverage.

s

secondary guarantee universal life: Insurers include secondary guarantees in some universal life policies to produce a policy with a guaranteed death benefit for a specified period of time, or even for life, with the lowest possible premiums. These policies are designed for people whose principal objective is to assure a given level of death benefit for a specified period of time, or for life, without the risk that they later may have to pay higher, and unaffordable, premiums to maintain the desired death benefit level. Thus, they are typically most suitable for policyowners who need an assured level of death benefit for estate liquidity purposes and who are unlikely to need lifetime benefits, because the cost of the guarantee comes in the form of much lower cash surrender values over the life of the policy or guarantee period as compared to universal life policies without the guarantee.

See also: How to sell universal life to the middle market

s

Uniform Simultaneous Death Act:  This law states that, when an insured and beneficiary die at the same time, or when they die together and it cannot be determined who died first, it is presumed that the insured survived the beneficiary. The insurance company then pays the proceeds to the next beneficiary, or to the insured’s estate if the policyowner has not named a secondary beneficiary. 

See also: How to review a will: a 12-point checklist

 

These definitions were taken from Tools & Techniques of Life Insurance Planning, which delivers detailed information about the entire range of life insurance products that can be used by estate and financial planners in a wide variety of circumstances. It includes planning techniques for retirement income needs, estate and gift tax avoidance, estate liquidity needs, and long-term care planning.