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Glossary of Insurance Terms

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face amount
In a life insurance policy whose benefit is not variable, the amount stated as payable at the death of the insured or (in the case of an annuity) at the maturity of the contract. It is generally shown on the first page of the policy. Also called the face value. See also basic death benefit, death benefit, and policy proceeds.

face page
The first page of an insurance policy. The face page normally includes the insured's name and age, the name of the policyowner (if different from the insured's name), the amount of premiums, the policy number, the date on which the policy was issued, and the signatures of the insurance company's president and secretary.

facility-of-payment clause
A life insurance policy provision that permits an insurer to pay all or part of the policy proceeds either to a blood relative of the insured or to anyone who has a valid claim to those proceeds. The facility-of-payment clause enables the insurer to pay benefits in a timely manner when such benefits cannot be made to the beneficiary identified in the insurance contract.

factor table
A table used by insurance underwriters to determine an applicant's net worth by specifying what an applicant's annual income should be multiplied by to arrive at the maximum allowable amount of insurance.

Fair Credit Reporting Act (FCRA)
A United States federal law designed to help ensure that consumer reporting agencies act fairly, impartially, and with respect for the consumer's right to privacy when preparing consumer reports on individuals. See also consumer reporting agency.

family benefit
A life insurance policy rider that provides term insurance coverage on the insured's spouse and children.

family deductible
A single deductible which, when satisfied, relieves a family of the burden of satisfying a deductible for each individual family member.

family income insurance
A specialized individual policy that commonly combines whole life insurance with decreasing term insurance. The whole life insurance portion of the policy is usually paid as a lump sum when the insured dies. The decreasing term insurance portion of the policy provides an income for a predetermined period to help support the insured's family.

family insurance policy
A life insurance policy that covers all the members of a family under one contract.

FASB Statement No. 35
Issued in the United States by the Financial Accounting Standards Board (FASB) in 1985, Statement 35 contains rules by which to measure and report a defined benefit pension plan's assets and liabilities in accounting reports that are issued by the pension plan itself. The Statement is titled "Accounting and Reporting by Defined Benefit Plans."

FASB Statement No. 87
Issued in the United States by the Financial Accounting Standards Board (FASB) in 1985, Statement 87 governs the ways in which an employer accounts for and reports the costs of pension benefits offered to its employees. The Statement, titled "Employers' Accounting for Pensions," requires that, for accounting purposes, employers use a cost method known as the projected unit credit method to determine the net periodic cost of the pension benefits offered to employees. Statement 87 also requires that an employer recognize a liability if the net periodic cost is greater than employer contributions to the plan, and an asset if net periodic cost is less than employer contributions to the plan. An employer must also recognize a liability known as the unfunded accumulated benefit obligation if the accumulated obligations of the plan sponsored by the employer exceed the fair market value of the plan's assets.

FASB Statement No. 88
Issued in the United States by the Financial Accounting Standards Board (FASB) in 1985, Statement 88 establishes accounting requirements for employers whose defined benefit pension plans are curtailed or terminated, or experience other special events, such as a settlement of a pension obligation through a lump-sum cash payment of benefits to a plan participant. The Statement is titled "Employers' Accounting For Settlements and Curtailments of Defined Benefit Pension Plans and Termination Benefits."

federally qualified HMO
In the United States, a Health Maintenance Organization which satisfies specific requirements set forth in the Health Maintenance Organization Act of 1973. Federally qualified HMOs are entitled to certain grants and loans from the federal government and are eligible to be used by employers to satisfy the dual choice provision.

fee-for-service
A payment system for health care where the health-care provider is paid for each procedure or service rendered.

fee schedule
A schedule or list of maximum benefits that will be paid under a group medical contract for certain listed procedures. See also relative value schedule. May simply be called a schedule.

fee schedule basis
A compensation plan used in health maintenance organizations (HMOs) and preferred provider organizations (PPOs) in which a physician is paid a predetermined amount for each service that the physician provides. See also capitation basis.

fiduciary
A person or organization who holds, manages and has discretionary authority and control over money belonging to another person or organization, or who renders investment advice in exchange for compensation. When an insurance company manages pension funds, the insurance company is acting as a fiduciary.

field force
Those insurance agents who work out of an insurer's field offices.

field offices
An insurance company's local sales offices.

field underwriter
See insurance agent.

field underwriting
The first step in the risk selection process. Field underwriting occurs when an agent gathers pertinent information about the proposed insured and reports that information on the application blank so the home office underwriter can make an underwriting decision.

fifth dividend option
See additional term insurance option.

final average (final earnings) benefit formula
A type of defined-benefit formula in which the retirement benefit amount is derived on the basis of a participant's average compensation during a specified period (usually the three to five years preceding retirement) during which the participant was most highly compensated. Contrast with career average benefit formula.

financial institution
An organization that helps to channel funds through an economy by accepting the surplus money of savers and supplying that money to borrowers, who pay to use the money. Insurance companies are financial institutions.

financial intermediary
A financial institution that borrows money on its own account and loans money to other borrowers. Insurance companies are financial intermediaries.

financial settlement
A lump sum payment by an insurer to a disabled insured that extinguishes the insurer's responsibility under the disability contract. Also known as a buy-out or commutation.

first-dollar coverage
Medical expense insurance under which no deductible or coinsurance is applicable to covered expenses.

first-year commission
An amount paid to an insurance agent based on a policy's first annual premium amount.

501(c)(9) trust
In the United States, a type of trust that many self-insured groups establish to fund their group insurance plans. All contributions to a 501(c)(9) trust are deductible for federal income tax purposes, as are all investment gains made on funds in the trust. The trust must meet certain federal government requirements. Also called a voluntary employees' beneficiary association (VEBA). See also self-insured group insurance.

fixed amount option
A life insurance settlement option under which the insurer uses the policy proceeds plus interest to pay the beneficiary a sum of money in a series of annual or more frequent installments for as long as the proceeds plus interest last. Also called the fixed payment option.

fixed period option
A life insurance settlement option under which the insurer pays the beneficiary the policy proceeds plus interest in a series of annual or more frequent installments for a specified length of time.

flat amount formula
A method of determining the retirement benefit for participants in a defined benefit pension plan. A flat amount formula provides the same periodic (e.g., monthly, annual) benefit amount, for example $500 per month, to each retiree. See also flat percentage of earnings formula and unit-benefit formula.

flat extra premium method
A method for rating substandard risks used when the extra risk is considered to be constant. The underwriter assesses a specific extra premium for each $l,000 of insurance. Contrast with extra-percentage tables method.

flat percentage of earnings formula
A method of determining the retirement benefit for participants in a defined benefit pension plan. This method provides for each participant to receive a certain percentage of preretirement compensation, for example 60%. The actual payment amount under this formula depends on how compensation is defined. See also career average benefit formula, final average benefit formula, flat amount formula, and unit-benefit formula.

flexible benefit plan
See cafeteria plan.

flexible premium annuity
A deferred annuity that gives the purchaser the right to vary the amount of each premium paid to the insurer during the accumulation period.

foreign corporation
From the point of view of a particular state in the United States, a company that is incorporated under the laws of another state. Compare to domestic corporation and alien corporation.

foreign insurer
In Canada, a non-Canadian insurance company that is incorporated under the laws of a country which is not a member of the British Commonwealth.

foreseeability
The ability of an insured to have had a reasonable anticipation that harm or injury would be a likely result of a certain act or an omitted act.

forfeiture
The unvested amount that remains in a pension or profit sharing plan when a participant leaves the plan and withdraws the amounts which are vested. Forfeitures may occur when an employee is terminated, for example. Forfeitures must either be used to reduce the plan sponsor's future contributions to the plan or be reallocated to other participants.

fractional premiums
Premiums that are paid in installments during a year, such as semiannually, quarterly, or monthly. Fractional premiums are so called because they are fractions of the annual premium.

fraternal benefit society
An organization that exists to provide social and insurance benefits to its members. In such a society, members often share a common religious, ethnic, or vocational background, although some fraternals are open to the general public.

fraternal insurance
Insurance coverage issued by a fraternal benefit society. See also open contract.

fraudulent claim
A type of claim that occurs when a claimant intentionally uses false information in an attempt to collect policy proceeds.

fraudulent misrepresentation
According to common law, a false statement which meets the following three criteria: (1) the party that makes the statement is aware that it is not true or disregards whether it is true; (2) the party that makes the statement does so in order to induce another party to enter into a contract; (3) the other party does enter into a contract as a result of the statement and suffers a loss because of the contract.

free examination period
The period of time after delivery of an insurance policy during which the policyowner may review the policy and return it to the company for a full refund of the initial premium. Full coverage is in force during this period. Also called a ten-day free look.

front-loaded policy
A life insurance policy (usually a universal life insurance policy) in which most of the expense charges take the form of deductions from each premium payment. Such deductions continue throughout the premium payment period. See also back-loaded policy and universal life insurance.

full-service plan
A health insurance plan which pays in full the actual cost, if reasonable and customary, of services received, rather than a specified maximum for each service.

fully contributory
An arrangement in which the insureds under a group policy pay the entire cost of their insurance. Contrast with contributory group insurance and noncontributory group insurance.

funding agency
The party who holds the assets of a pension plan. Often an insurance company.

funding standard account
For qualified pension plans in the United States, a bookkeeping account which is maintained in order to determine whether a defined benefit pension plan is meeting minimum funding standards set by law. Many of the entries to the account are derived actuarially. If at any time the plan's funding is inadequate, then an accumulated funding deficiency is said to exist. Also known as a minimum funding standard account. See also minimum funding standards.

funding vehicle
The legal document which governs the management of pension funds by a funding agency. When the funding agency is an insurance company, the funding instrument is usually an insurance contract. Also called the funding instrument.

future service
The prospective service that an employee will provide to an employer from the date of entry into a pension, or from the current date, to the employee's normal retirement date. Pension benefits provided for this service are known as future service benefits. See also past service.

Written by the Insurance Center

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