Glossary
Insurance and Annuity Glossary
Plain-language definitions of insurance, annuity, and estate planning terms used throughout this site. Written by licensed professionals for affluent families and business owners.
Terms starting with A
- Accelerated Death Benefit
- A policy provision that allows the insured to receive a portion of the death benefit while still living if diagnosed with a terminal, chronic, or critical illness. Hybrid life/LTC policies use this mechanism to pay for long-term care expenses. Learn more: Long-Term Care with Hybrid Life Insurance→
- Annuitization
- The process of converting an annuity's accumulated value into a stream of periodic income payments. Once annuitized, the decision is generally irrevocable, and the insurance company guarantees payments for the chosen period (life, joint life, or a fixed term). Learn more: Retirement Income with Annuities→
Terms starting with B
- Beneficiary
- The person, trust, or entity designated to receive the death benefit of a life insurance policy or the remaining value of an annuity upon the owner's death. Primary beneficiaries receive proceeds first; contingent beneficiaries receive them if the primary is unavailable.
- Buy-Sell Agreement
- A legally binding contract between business co-owners that governs the transfer of ownership when an owner dies, becomes disabled, or exits the business. Often funded with life insurance to ensure the surviving owners or the business can purchase the departing owner's share at a pre-agreed valuation. Learn more: Buy-Sell Agreement Funding→
Terms starting with C
- Cap Rate
- In an indexed universal life (IUL) policy, the maximum rate of interest that will be credited to the cash value in a given period, regardless of how well the underlying index performs. If the S&P 500 returns 15% but the cap rate is 10%, the policy is credited 10%. Cap rates are set by the carrier and can change at each policy anniversary. Learn more: Indexed Universal Life Insurance→
- Cash Surrender Value
- The amount a policyholder receives if they voluntarily terminate a permanent life insurance policy or annuity contract before it matures or the insured event occurs. The surrender value equals the cash value minus any applicable surrender charges.
- Connelly v. United States (2024)
- A unanimous Supreme Court decision holding that life insurance proceeds held by a corporation to fund a stock redemption agreement increase the fair market value of the deceased shareholder's stock for estate tax purposes. This reversed decades of common practice and affects every closely held business with a life-insurance-funded entity-redemption buy-sell arrangement. Learn more: Connelly v. US Explainer→
- Cost of Insurance (COI)
- The internal charge deducted from a permanent life insurance policy's cash value to pay for the actual death benefit protection. COI increases as the insured ages and is a primary driver of long-term policy performance. Carriers set COI rates within guaranteed maximums.
- Cross-Purchase Agreement
- A type of buy-sell arrangement where the individual business owners (not the business entity) agree to purchase the deceased or departing owner's share. Each owner owns a life insurance policy on the other owners. After Connelly v. United States, cross-purchase agreements avoid the estate tax inflation caused by corporate-owned insurance. Learn more: Buy-Sell Agreement Funding→
- Crummey Notice
- A written notification sent to trust beneficiaries informing them of their right to withdraw contributions made to an irrevocable life insurance trust (ILIT). Crummey notices are required to qualify trust contributions as gifts eligible for the annual gift tax exclusion. Failure to send them can cause the gifts to be treated as taxable.
Terms starting with D
- Death Benefit
- The amount paid by a life insurance policy to the designated beneficiary upon the death of the insured person. The death benefit is generally received income-tax-free under IRC Section 101(a)(1).
- Deferred Income Annuity (DIA)
- An annuity purchased today that begins making income payments at a specified future date, typically 5-20 years later. The deferral period increases the payout rate significantly compared to an immediate annuity. Used to create guaranteed income starting at a later age (e.g., 75 or 80). Learn more: Retirement Income with Annuities→
Terms starting with E
- Entity Redemption
- A type of buy-sell arrangement where the business entity (corporation or LLC) agrees to purchase the deceased or departing owner's share. The business typically owns the life insurance policies on each owner. After Connelly v. United States (2024), entity-redemption arrangements cause life insurance proceeds to inflate the estate tax value of the deceased owner's stock. Learn more: Connelly v. US Explainer→
- Estate Tax
- A federal tax on the transfer of property at death. The One Big Beautiful Bill Act set the federal estate tax exemption at $15 million per person and $30 million per married couple (with portability) for 2026, made it permanent, and indexed it to inflation, repealing the scheduled TCJA sunset. Amounts above the exemption are taxed at a top rate of 40%. Many states also impose their own estate or inheritance tax at far lower thresholds. Learn more: Estate Planning with Life Insurance→
Terms starting with F
- Fiduciary
- A person or entity legally obligated to act in the best interest of another party. SEC-registered investment advisors, like Whitwell & Co., LLC, are held to a fiduciary standard. Insurance agents are generally subject to a best interest standard for annuity recommendations and to suitability rules for life insurance. Living Prepared applies a client-first approach; annuity recommendations are subject to the best-interest standard under state insurance law.
- Fixed Indexed Annuity (FIA)
- An annuity that credits interest based on the performance of a market index (such as the S&P 500) subject to a cap rate and a 0% floor. The principal is protected from market losses. FIAs are used for conservative accumulation and as a source of guaranteed lifetime income through optional income riders. Learn more: Fixed Indexed Annuities→
- Floor Rate
- The minimum interest rate credited to an indexed life insurance or annuity policy in any given period. Typically 0%, meaning the policy will not lose value due to index performance, though policy charges may still reduce cash value.
Terms starting with G
- Guaranteed Universal Life (GUL)
- A type of universal life insurance designed primarily for a guaranteed death benefit at a lower premium than whole life, with minimal cash value accumulation. GUL policies guarantee the death benefit to age 100, 105, 110, or 121 as long as planned premiums are paid on schedule.
Terms starting with H
- Hybrid Life/LTC Policy
- A life insurance policy that combines a death benefit with long-term care benefits. If the insured needs long-term care, the death benefit is accelerated to pay for care. If care is never needed, beneficiaries receive the full death benefit. Most hybrid policies also offer a return-of-premium option. Learn more: Long-Term Care with Hybrid Life Insurance→
Terms starting with I
- Indexed Universal Life (IUL)
- A type of permanent life insurance where cash value growth is linked to the performance of a market index, subject to cap rates, participation rates, and a 0% floor. IULs offer flexible premiums, adjustable death benefits, and tax-advantaged cash value access via policy loans. Learn more: Indexed Universal Life Insurance→
- Irrevocable Life Insurance Trust (ILIT)
- A trust that owns a life insurance policy to keep the death benefit outside the insured's taxable estate. The grantor cannot modify or revoke the trust. Properly structured, the ILIT receives the death benefit tax-free and distributes proceeds to beneficiaries according to the trust terms, free of estate tax. Learn more: Estate Planning with Life Insurance→
Terms starting with K
- Key Person Insurance
- Life insurance purchased by a business on the life of a key employee, partner, or executive whose death would cause significant financial harm to the company. The business owns the policy, pays the premiums, and is the beneficiary. Proceeds are used to cover lost revenue, recruit a replacement, or stabilize operations. Learn more: Key Person Insurance→
Terms starting with L
- Longevity Risk
- The risk of outliving one's financial resources. Longevity risk is the primary risk annuities are designed to address. A 65-year-old couple has a roughly 50% chance that at least one spouse will live past 90. Learn more: Retirement Income with Annuities→
Terms starting with P
- Participation Rate
- In an indexed life insurance or annuity product, the percentage of the index return that is credited to the policy. A participation rate of 80% on a 10% index return credits 8%. Participation rates vary by carrier and crediting strategy.
- Paid-Up Additions (PUAs)
- Small blocks of additional whole life insurance purchased with dividends or additional premium payments. PUAs increase both the death benefit and the cash value of a whole life policy, and they begin earning dividends themselves immediately.
- Policy Loan
- A loan from the insurance company using the policy's cash value as collateral. Policy loans are not taxable income as long as the policy remains in force. If the policy lapses with outstanding loans, the loan balance may become taxable. Policy loans reduce the death benefit by the outstanding loan balance.
Terms starting with R
- Return of Premium (ROP)
- A feature of some hybrid life/LTC policies and term life policies that refunds all or a portion of premiums paid if the policyholder surrenders the policy or, in the case of term life, outlives the term. ROP adds cost but provides an exit strategy if plans change.
Terms starting with S
- Single Premium Immediate Annuity (SPIA)
- An annuity purchased with a single lump-sum payment that begins making income payments immediately (within one year of purchase). The payments are guaranteed for life or a specified period. SPIAs offer the highest payout rates because there is no deferral period.
- Suitability
- For annuity recommendations, most states have adopted a best interest standard, based on the NAIC Suitability in Annuity Transactions Model Regulation (Model 275, as revised), that requires the producer to act in the consumer's best interest through care, disclosure, conflict-of-interest, and documentation obligations. Life insurance recommendations remain subject to state suitability and replacement rules. Both are different standards than the fiduciary duty that applies to SEC-registered investment advisers.
- Surrender Charge
- A fee charged by the insurance company if a policy or annuity is surrendered (terminated) within a specified period, typically 5-15 years. Surrender charges decrease over time and eventually reach zero. They compensate the carrier for upfront costs including agent commissions.
- Survivorship Life Insurance
- A permanent life insurance policy that insures two people (typically spouses) and pays the death benefit only after both insureds have died. Also called second-to-die insurance. Used primarily for estate planning because the estate tax liability typically arises after the second spouse's death. Learn more: Survivorship Life Insurance→
Terms starting with T
- Term Life Insurance
- Life insurance that provides a death benefit for a specific period (term), typically 10, 15, 20, or 30 years. If the insured dies during the term, the beneficiary receives the death benefit. If the insured outlives the term, coverage expires with no value. Term life offers the lowest cost per dollar of coverage. Learn more: Term Life for Affluent Families→
- Transfer for Value Rule
- Under IRC Section 101(a)(2), if a life insurance policy is transferred for valuable consideration, the death benefit becomes taxable income to the recipient (minus premiums paid). Exceptions apply for transfers to the insured, a partner of the insured, or a partnership in which the insured is a partner. Critical when restructuring buy-sell agreement insurance ownership.
Terms starting with U
- Underwriting
- The process by which an insurance company evaluates an applicant's risk factors (age, health, lifestyle, occupation) to determine whether to issue coverage and at what premium. Underwriting classifications typically include preferred plus, preferred, standard, and substandard (rated).
- Universal Life Insurance
- A type of permanent life insurance with flexible premiums and an adjustable death benefit. Cash value earns a minimum guaranteed interest rate set by the carrier. Universal life provides more flexibility than whole life but less certainty, as inadequate funding can cause the policy to lapse.
Terms starting with W
- Whole Life Insurance
- Permanent life insurance with fixed premiums, a guaranteed death benefit, and guaranteed cash value accumulation. Participating whole life policies also earn carrier dividends, which are not guaranteed but have been paid consistently by mutual carriers for over a century. Learn more: IUL vs. Whole Life Comparison→
This glossary is for educational purposes only and does not constitute legal, tax, or insurance advice. Definitions are simplified for clarity and may not capture every nuance of a given term. Consult a licensed professional for guidance specific to your situation. Full disclosures.