The ABCs of Life Insurance: K–O

By Corey Dahl, Brian Anderson for LifeHealthPro.com

Image: FreeDigitalPhotos.netWhat’s the difference between a mutual insurance company and a stock insurance company? What’s key person insurance? Your clients and propects might ask you questions like these all the time. Click through this slideshow and you’ll be better able to answer them, in easy, understandable language.

Key Person Insurance: A life insurance policy placed on the life of an important person within a company. The policy proceeds are used to offset the monetary loss experienced by the company due to the person’s death. The employer is usually the owner, beneficiary and payer of the policy.

A key person can be anyone directly associated with the business whose loss can cause financial strain to the company. For example, the person could be a director of the company, a partner, a top sales person, a key project manager, or someone with specific skills or knowledge that is especially valuable to the company.

Life SettlementsLife Settlement: The sale of an existing life insurance policy to a third party for more than its cash surrender value, but for less than its net death benefit. Policyholders may choose to sell a permanent life insurance policy for reasons such as changing needs or unaffordable premiums. Instead of letting the policy lapse or terminating the policy with the issuing company for the cash surrender value, policyholders who no longer want their policies should investigate this option.

Just the facts

  • Life settlements can bring, on average, three to five times more than the cash surrender value an insurance carrier is willing to give. Source: Life Insurance Settlement Association
  • Between 2006and 2009, policy owners received $5.62 billion more by obtaining a life settlement than they would have received from insurers if they had surrendered their policies for the cash value.  Source: U.S. Government Accountability Office, 2010 Life Settlements Study.

Living Benefits: The life insurance benefits paid to a policyholder prior to death, rather than to the beneficiary after death. The policyholder may elect to receive living benefits (also called accelerated benefits) due to a terminal or catastrophic illness, especially when health insurance does not cover all the bills, which is often the case with long-term care or nursing home costs.

Mutual Insurance CompanyMutual Insurance Company: An insurance company owned entirely by its policyholders, where any profits are rebated to policyholders in the form of dividends or reduced future premiums. This is in contrast to a stock insurance company, which is owned by its shareholders. New York Life and Northwestern Mutual are two examples of mutual insurance companies.

Nonforfeiture OptionsNonforfeiture Options: The various ways in which a contract owner may apply a life insurance policy’s cash surrender value if the contract lapses. Typical nonforfeiture options for life insurance are a cash payment option, an extended term insurance option and a reduced paid-up insurance option.

National Association of Insurance Commissioners (NAIC): Association of state insurance commissioners whose purpose is to promote uniformity of insurance regulation, monitor insurance solvency and develop model laws for passage by state legislatures. Life insurance in the United States is generally regulated at the state level rather than the federal level.

Orphan

Orphan: A policy owner who is not currently being serviced by the writing agent/broker. This can happen when an agent leaves a company, or the insurance business altogether, without making arrangements to transfer his or her book of business to another agent. When an orphan policyholder is identified, insurance companies or agencies will often assign another agent to service that client.

Original Age Conversion: A conversion of a term life insurance policy to a permanent policy at a premium rate, based on the insured’s age when the original term policy was purchased.

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