Even experienced agents have trouble with this language. Imagine what your clients think? Here are a few quick definitions of some common, misunderstood terminology:
Nonforfeiture– originally, this referred primarily to reduced paid up life insurance and/or the cash values and what amounts the insurance carrier could not hold back from the policyowner should they surrender a policy or allow it to lapse. Now, the use of the term is extended to virtually any policy benefit or value which is entitled to the policyowner in the event of policy lapse, unintended or otherwise. There are even nonforfeiture riders (a possible oxymoron) that allows the policyowner to increase the policy benefit or value that a carrier would have to honor in the case of policy lapse.
Paid-up – often misused to suggest that premiums may no longer be required after a certain period of time, resulting in a “paid-up” policy. The word “reduced” should be used in conjunction with this term, as in “I would like to stop paying on this policy and take a reduced paid-up policy”. This would be applicable to a life insurance policy with significant cash values. The death benefit (reduced paid up policy) would necessarily be much lower than the current death benefit being supported by continuous premium payments. The face amount and cash value of a reduced paid-up life policy can only be calculated by the carrier. Some paid-up policies continue to experience cash value accumulation, but may not be available for loans.
Simplified issue – an underwriting term explaining that there will likely be no medical exam required to process an application. Underwriters may still order medical records, and if the records suggest a significant impairment or adverse medical history, the underwriter may require a medical exam or specific medical test or lab sample associated with that impairment or history. A simplified application may also be declined. The cost-per-thousand of insurance for contracts that are issued with simplified underwriting are typically higher than those for fully underwritten applications.
Guaranteed issue – an underwriting term indicating that no medical questions are asked and no exam is necessary. Typically restricted to large group plans of insurance. Premiums for guaranteed issue group plans of insurance typically begin at a lower cost-per-thousand, but can be adjusted upward as the insureds in the group pass certain “step-up” points in the contract, usually every five years. Eventually, a guaranteed issue group life plan of insurance, for example, can become more expensive than if the insured were to go through full underwriting for the same type and amount of personally owned insurance.
Waiver of Premium– usually preceded by the word “disability”. This used to be a straight-forward, extra-cost rider that allowed the insured to stop having to make premium payments after 90 days of continuous inability to perform the primary duties of his or her occupation due to illness or accident. If there were cash values in the policy, they would continue to increase as if premiums were still being paid. That is no longer automatically true. The waiver of premium due to disability could simply be the cancellation of withdrawals by the carrier for the cost of insurance, or some variation on that theme, resulting in a slow-down or cessation of cash value increase. Agents have to read the fine print these days before they recommend this rider. Carriers may differ in what they provide as a “waiver” of premium payment.
Guaranteed renewable– this means that a policy cannot lapse as long as the minimum premium is paid in full and on time. Usually associated with health insurance policies (DI, LTCi, CI, etc.) and is included in the base plan of insurance.
Non-cancelable ( AKA “non-can”) – this means that the carrier cannot increase the premium for any reason. Also, associated primarily with health insurance policies. A policy that is non-cancelable usually costs more than one that is not. It is now often broken out of the base plan of insurance and offered as an extra-cost rider.
NOTE: An incident of material fraud on an application or an attempt to fraudulently obtain a policy benefit may modify or even nullify the carrier’s obligation to honor the benefits or conditions of the terms defined in this article.