Facts About Life Insurance

Why to use a Fee-Only Life Insurance Advisor--and not an agent--to help you find the right life insurance products for your needs.

Glossary

Actuarial Present Value (APV)
The lump sum value of a stream of future cash flows discounted both for interest and life expectancy.  The APV is always less than the present value of the same cash flows.  APV is useful in comparing different life insurance illustrations.

Assets under management (AUM)
A fee determined by the amount of assets managed by a financial advisor.  For example, an asset manager who charges 1% annually for assets totaling $1-2M, would be paid $10,000 a year to manage total asses of $1 million. Fee percentages are generally graduated downward as assets increase.  And while AUM fees are unrelated to investment performance, it’s obviously in the manager’s best interests to increase the value of the client’s assets.

Cash Surrender Value
The amount payable to the policyholder by a life insurance company in the event that the policy is voluntarily terminated before its maturity date.   Not all types of life insurance policies accumulate cash value. “Cash value” is the savings component of most permanent life insurance policies, particularly whole life.


CSO Table
CSO stands for “Commissioners' Standard Ordinary.”  The table is based on past mortality experience and is used as the basis for valuation assumptions in determining the price of life insurance and annuities. The current table in use is the 2001 CSO table adopted by the American Society of Actuaries.   


Financial advisor
A meaningless term anyone may use to attract business.  They may be insurance agents, securities brokers or dealers, or fiduciaries.  They may also call themselves financial consultants or planners, but only a fiduciary (see below) has a legal obligation to act in his client’s—and only his client’s—best interests.
 
Financial planner
See financial consultant

Fee-based advisor

An advisor who attracts business by charging fees for legal, financial, investment or insurance knowledge.  Unlike Fee-Only Advisors, these advisors may also receive commissions from the sale of insurance or investments and cannot, therefore, claim to be true fiduciaries.

 
Fee-only advisor
A fiduciary advisor who is only compensated by fees charged to the client. A fee-only advisor receives no commissions or other financial compensation from the sale of any insurance or financial products he may recommend and is a true fiduciary.

Fiduciary
An advisor whose legal duty is to represent their client's best interests.  They are paid solely by fees such as a retainer, flat fee, hourly or other similarly negotiated arrangement.  A fiduciary's fee is paid solely for advice and is not contingent on the purchase of any product. Strictly, they should not be paid based on assets under management, since a reduction in assets that would serve the client would reduce the advisors fees.  For example, lawyers, accountants, and other fiduciaries are not paid more by richer clients.
 
No Lapse Life Insurance
A life insurance policy guaranteed by the insurer to remain in force so long as conditions stated in the policy are met by the policyholder.  Those conditions include payment of premiums when due, no loans or withdrawals, and no changes to the policy.

Permanent Life Insurance
Any life insurance policy that provides a surrender value in the event premiums are discontinued. Unlike Term Life Insurance, Permanent Life Insurance products and premiums—such as Whole or Universal--include a savings component that accumulates cash value.

 

Portfolio-Based Life Insurance
Any permanent life insurance policy that determines cash surrender value according to a formula crediting earnings of the insurer to the policy owner after deductions for mortality and expense charges.  The assets supporting the cash surrender value are part of the general account of the insurance company and subject to the claims of the company's creditors.

Split Dollar Life Insurance
A method of financing the purchase of any life insurance policy where the premiums, death benefits, and surrender values are split between two or more parties.  While the vast majority of split dollar agreements apply to the financing of permanent life insurance with surrender values, split dollar agreements can be applied to term life insurance.


Term Life Insurance
Any life insurance policy that lapses without cash value if the next premium is not paid.

Universal Life Insurance (UL)
A permanent form of life insurance that allows the policyholder flexibility in premium payments.  Policies remain in force so long as cash surrender values are greater than zero.
Think of this as the primary guarantee of a UL policy.  Some UL policies offer secondary guarantees that guarantee the payment of a death benefit at the death of the insured during the guarantee period so long as conditions of the policy are fulfilled by the policyholder.  
See no lapse life insurance

Variable Life Insurance
Any permanent life insurance policy which allows the policy owner to allocate cash surrender values among various investment options offered by the life insurer.  The assets are maintained in a separate investment account and not subject to the claims of the insurance company's creditors.