CLU key terms

A financial or love-and-affection stake in a person or property such that the policyholder benefits from its continued existence and suffers a measurable loss if it is destroyed. It must exist when the policy is purchased.

A situation in which the only possible outcomes are loss or no loss, with no chance of gain. Insurers generally insure pure risks, such as fire or premature death, because they are measurable and accidental.

The tendency of people facing greater-than-average risk to seek insurance more eagerly than low-risk people. Insurers control it through underwriting, waiting periods, exclusions, and risk-based pricing.

A statistical principle holding that as the number of similar, independent exposure units increases, actual losses come closer to the expected level. It lets insurers predict aggregate claims and set stable rates.

The idea that an insured should be restored to roughly the same financial position as before a loss, no better and no worse. It limits recovery to the actual loss and underlies subrogation and replacement-cost rules.

The amount of a covered loss the insured must absorb before the insurer pays anything. Raising the deductible lowers the premium because it removes small, frequent claims from the insurer's costs.

A property policy provision requiring the insured to carry coverage equal to a stated percentage of the property's value, often 80 percent. If the property is underinsured at the time of loss, the insured shares in the loss.

A condition created by insurance itself, in which a person may behave less carefully or file dishonest claims because someone else bears the financial consequences of loss. Insurers counter it with deductibles, exclusions, and investigation.

The insurer's right, after paying a claim, to pursue the party that caused the loss and recover what it paid. It prevents the insured from collecting twice and helps hold careless parties accountable.

Insurance purchased by an insurance company to transfer part of the risk it has assumed to another insurer. It protects the primary insurer from catastrophic losses and lets it write larger policies.

The process of evaluating an applicant's risk characteristics and deciding whether to accept, decline, or modify the coverage, and at what price. It is the insurer's main defense against adverse selection.

The present value of the income an individual would have earned and contributed to a family over the remaining working years, net of personal consumption. It is used to size life insurance coverage.

A method of setting a life insurance amount by totaling the funds survivors need, such as debts, income replacement, education, and final expenses, then subtracting existing resources including savings, benefits, and current coverage.

Term coverage whose death benefit and premium stay fixed for a specified period, such as 10, 20, or 30 years. It provides pure protection with no cash accumulation.

Permanent coverage with flexible premiums and an adjustable death benefit, backed by a cash value credited with current interest. Its unbundled structure shows expense charges and cost-of-insurance deductions separately.

The accumulating account inside a permanent life policy that belongs to the owner if the policy is surrendered or borrowed against. It grows tax-deferred and distinguishes permanent from term coverage.

A borrowing of a life policy's available cash value, secured by the policy itself. Interest accrues on the amount borrowed, and an unpaid loan plus interest reduces the death benefit or can cause the policy to lapse.

A rider that keeps a policy in force without further premium payments if the insured becomes totally disabled for a specified period, commonly six months.

A tax-free replacement of one life insurance policy or annuity contract for another under Section 1035. Cash values and basis carry over, so no gain is recognized when the exchange occurs.

A life policy that fails the seven-pay test because premiums were funded too quickly. Loans and withdrawals are taxed like annuity distributions, and a penalty may apply before age 59½.

An irrevocable trust that owns a life policy so the death benefit escapes the insured's taxable estate. The insured gives up all rights, and gifts to fund premiums need withdrawal powers to qualify for the annual exclusion.

The total value, at death, of all property in which the decedent held an interest, including life insurance proceeds, retirement accounts, jointly held assets, and certain lifetime transfers. The taxable estate is computed from this figure.

The court-supervised process of validating a will, paying debts and taxes, and distributing assets that pass under the will or by intestacy. Assets with beneficiary designations or held in trust usually avoid it.

The statutory scheme that determines who receives a deceased person's probate property when no valid will exists. State law sets the shares for a surviving spouse, children, and other relatives.

An estate and gift tax deduction for property passing to a surviving spouse in a qualifying form. It defers estate tax until the survivor's death rather than eliminating the tax.

The amount of a person's estate that can pass free of federal estate tax at death, adjusted annually for inflation. It can be increased by a deceased spouse's unused exclusion through portability.

The amount one person can give each recipient in a year without using any lifetime exemption or filing a gift tax return, indexed for inflation. Splitting gifts with a spouse can double the amount.

The rule that inherited property takes a new income tax basis equal to its fair market value at the decedent's death. Appreciation during the owner's life escapes income tax, reducing the heirs' tax.

A marital deduction trust that pays income to the surviving spouse for life while letting the deceased spouse control who receives the remainder. It qualifies for the marital deduction despite restricting the survivor's control.

A trust funded at death up to the available exclusion, paying income to the survivor with the remainder to children. Because the assets stay out of the survivor's estate, they escape tax a second time.

A surviving spouse's ability to use the unused estate and gift tax exclusion of a deceased spouse, provided a timely estate tax return is filed. It lets a couple shelter effectively twice the single exclusion.

A contract among business owners, and often the business itself, setting terms for buying out an owner's interest at death, disability, or withdrawal. It fixes price and terms and prevents interests passing to unwanted owners.

An arrangement in which each co-owner personally buys the interest of a departing owner, often funded with life insurance owned by the other owners. Ownership simply shifts among the survivors.

A buy-sell structure in which the business entity itself buys back a departing owner's interest and typically owns the funding policies. Administration is simpler, but surviving owners receive no increase in basis.

Life or disability coverage on an employee whose loss would damage the business. The business owns the policy, pays the premiums, and receives proceeds as a tax-free recovery of the economic loss.

A compensation arrangement in which the employer pays premiums on a life policy owned by the executive and deducts the payment as compensation. The executive reports the premium as taxable income.

An unfunded agreement to pay an executive later, often at retirement or after a change of control. The employee is taxed when benefits are paid, and the employer's deduction is delayed to match.

Disability coverage that reimburses a business for fixed operating costs, such as rent, utilities, and staff salaries, while an owner is disabled. Premiums are deductible and benefits are taxable to the business.

Coverage that supplies funds for a business or its owners to purchase the interest of a partner who becomes permanently disabled. It triggers after a waiting period and supports a buy-sell agreement.