Life Settlement Glossary

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capitalization rate

A measurement often used in financial projections that represents the ratio between the net operating income produced by an asset and its original cost or current market value.

capacity

The finite total amount of life insurance coverage an individual may have inforce based on insurance company guidelines such as age, income, and net worth. Because a life settlement policy still remains in force after it is sold, it must be included in that limit and permanently reduces the amount of additional coverage available for that insured.

carrier

Another name for an insurance company and refers to the fact they "carry" the policy and the risk assumed.

cash back life insurance

Most commonly a type of term life insurance that returns the premiums paid if the insured is still living at a specified point in time. These policies carry an increased cost which can negate any potential benefit.

cash call insurance

This happens when an insurance company has a shortfall of cash required to maintain their required reserves, often due to a large unanticipated loss. The money can come from a variety of sources including reinsurance companies or the government.

cash payment dividend option

A participating whole life insurance policy dividend option that allows dividends to paid to the policy owner in cash on the anniversary date of the policy.

cash refund settlement option

A provision of the life income death benefit settlement option of a life insurance policy whereby any proceeds remaining when the primary beneficiary dies will be paid in a single sum to a contingent payee.

cash settlement

Pertaining to life settlements, a lump sum amount tendered to the policyowner in exchange for the absolute assignment of an existing life insurance policy.

cash surrender value

A non-forfeiture value within a life insurance policy that allows the policy owner to terminate it by obtaining a cash settlement from the issuing company.

cash value

The net cash amount available in exchange for the full surrender of an in force life insurance policy.

cash value loan

A made by a life insurance company to the policyowner secured by the cash value of the policy.

ceding company

The insurance company who writes a policy and then "cedes" a portion of the risk to a reinsurance company.

certificate of assumption

Most often, a certificate sent to a policyowner when their insurance company has been sold to or otherwise assumed by another insurance company or reinsurer. It provides written notice of the assumption as well as information about the assuming company.

certificate of indebtedness

In connection with the interest only death benefit settlement option of a life insurance policy, a certificate provided by the insurance company to a beneficiary evidencing its indebtedness, the frequency of interest payments to be made, and the guaranteed minimum interest rate.

certificated trust

A trust that is often established in conjunction with a life settlement that includes transferrable certificates of beneficial interest in the trust.

certificates of coverage

Proof of coverage provided by a group insurance contract to each individual insured member to serve as evidence of coverage and a brief summary of benefits and provisions.

chain of origination

For life settlements, the route a life insurance policy follows from the initial policyholder to the final investor.

chartered life underwriter (CLU)

A professional designation granted to life insurance professional by The American College evidencing life insurance planning experience and the successful completion of courses related to insurance, investments and taxation.

choice of law

Legal language that deals with the legal jurisdictions that govern a contract or the stage of a case that involves possible legal differences or conflicts between different jurisdictions.

chronically ill

This typically means meeting any one of three conditions pertaining to 1) the inability to perform daily activities, or 2) health and safety related threats due to mental impairment, or 3) disability caused by conditions like those that limit the performance of daily activities.

claim

A formal request for the expected benefits promised by an insurance policy.

claim investigation

The process of collecting and verifying the information needed to determine the validity of a claim against an insurance policy.

claimant

The individual or entity that files a claim for expected benefits from an insurance policy.

closing documents

For life settlements, the legal documents required to finalize a transactions.

collateral

Usually an asset pledged for the repayment of a loan if the borrower is unable to satisfy the obligation according to the stipulated repayment schedule.

collateral assignment

Pertaining to life insurance, certain policy rights pledged to a third party and registered with insurer as collateral for a loan or other transaction.

collateral source rule

A rule of law that prohibits admitting evidence that compensation for a victim's damages have or could also be compensated for by another source in addition to court awarded damages. For example, evidence that damages related to medical expenses also reimbursed by insurance would normally not be admissible.

combined ratio

A profitability measure used by insurance companies to determine how well they are doing based on its risk underwriting practices as measured by the amount of premiums it is taking in versus the amount it is paying out in claims. A ratio below 100%�indicates profitability from underwriting alone, excluding additional profits resulting from investment earnings. A ratio below 100% represents an underwriting loss, even though the addition of investment earnings could still make the company profitable overall.

commission

Pertaining to life insurance and life settlements, the amount of compensation paid in conjunction with either the purchase or sale of a policy, most often calculated as a percentage of the premiums paid (life insurance) or the proceeds received (life settlement).

commissioners standard ordinary mortality (CSO)

An approved actuarial table of the National Association of Insurance Commissioners that is used to calculate nonforfeiture values and policy reserves for life insurance policies.

company owned life insurance (COLI)

Life insurance owned by a corporate employer and insuring the lives of employees for a number of business reasons.

compensation

Pertaining to life settlements, the fee or commission that is usually paid to the life settlement broker who negotiates the sale of a life insurance policy on behalf of the policyowner. In exchange for compensation, the broker is believed to owe a fiduciary responsibility to the policy owner.

competent to sell

Pertaining to life settlements, verification that a policy owner and/or insured is of sound mind and therefore capable of entering into a life settlement contract. This is generally evidenced by a signed written statement from the insured or policy owners physician.

complaint ratio

A ratio sometimes used by state insurance departments to measure consumer complaints upheld against insurance companies compared to premiums written.

conditional premium receipt

A premium receipt that provides temporary insurance to an applicant based on specified conditions that must be met before coverage will be effective.

conflict of law

The potential that the laws of different venues might govern the same transaction. For life settlements, this can effect a policy owners ability to sell their policy.

conservation

The action of an agent or insurer toward a policy owner to help prevent a policy from lapsing, typically initiated in order to thwart a replacement effort of an agent and/or a competing insurer.

consumer (policy holder)

Pertaining to life settlements, the policy owner in the form of an individual or entity that has bought a policy and wants to sell it.

contestable life settlement

A life settlement that takes place during the two year contestable period of a policy (otherwise know as a "wet paper" transaction. Many reputable life settlement brokers avoid representing policy owners who attempt to engage in these transactions.

contestable or contestability period

Generally the two year time period from the issue date of a life insurance policy when an insurance company has a contractual right to cancel a policy or refuse a claim under it. During this period the insurance company may investigate the representations made within the application for the policy as well as any representations made during recorded interviews. After two years policies can still be cancelled, but only for fraud or failure to pay premiums.

contingent beneficiary

Pertaining to life insurance, the individual/individuals, and/or entity/entities named by the policy owner to collect the death benefit if the primary beneficiary or beneficiaries is/are no longer living when the insured dies.

contingent liability

A liability that could materialize alter date depending on the outcome of a future event.

contingent payee

Pertaining to life insurance, a party designated to receive any remaining proceeds that are still payable after the primary payee's death.

contract of adhesion

Lawfully binding agreements (such as insurance policies) that are prepared by one party and are accepted or rejected as a whole by the other party without any bargaining.

contributory group insurance

A group insurance plan that requires the insured member to pay a portion of the cost of coverage.

conversion or conversion privilege

Pertaining to life insurance, a provision common to term policies that allows the policy owner to exchange the policy (without proof of insurability) for a more permanent form of insurance such as whole life or universal life. Conversion must occur before a specific age or date specified in the term policy. With regard to life settlements, terms policies that allow for conversion are much more marketable.

convertible or convertible term

A term life insurance policy that contains a conversion privilege that can still be exercised.

corridor

Typically the required difference between a universal life insurance policy's face amount and cash value for purposes of determining whether the policy will be taxed as insurance or as an investment.

cost of insurance (COI) rates

Pertaining to life insurance and life settlements, the pure cost of the mortality element of a life insurance policy that reflects the statistical probability of death at specified points in time.

coverage

Simply another word for insurance.

covered life

The individual whose life is covered by a life insurance policy, otherwise known as the insured.

credit

The promise to either pay later for something you received now or in the past.

credit enhancement

A method of receiving more favorable borrowing terms either through insurance such as a financial guarantee or through letters of credit issued by a financial institution such as a bank.

credit insurance

Coverage for losses stemming from the failure of business debtors to cover their obligation to an insured, typically due to insolvency.

credit life insurance

Life insurance that covers a borrower and is designed to pay off a loan if the borrower dies with an outstanding balance. Generally a debtor is required to provide little or no evidence of good health in order to qualify, often making credit life an excellent value for someone with a short life expectancy.

credit rating

An opinion of financial strength, provided by a ratings agency such as Standard & Poor's or Moody's Investors Service.

current assumption

A type of life insurance policy where the face amount and/or the cash value fluctuate according to the insurer's investment earnings.

current charges

Pertaining to cash value life insurance policies, the non-guaranteed earnings, expenses, and mortality costs that are subject to fluctuation based on the carrier's current experience.