Select & Ultimate Rates: Many insurers file two (2) different sets of rates with the State Departments of Insurance for each and every risk class. Select rates are filed for use in newly-issued policies where health examinations and medical records provide underwriters with the information needed to "select" the rates most appropriate for a given applicant (e.g., preferred plus, preferred, standard, sub-standard rates). Ultimate rates are filed for use in the renewal of existing policies where this underwriting information is aged or not available. Ultimate rates are, therefore, higher than select rates to compensate the insurer for the risk that a health condition (e.g., heart attack, cancer, etc.) can develop after policy issuance. Select rates apply in the initial policy year(s) with ultimate rates phased in as underwriting information ages (typically over the first 10 - 15 policy years). Policies that have reached the ultimate rate period (e.g., policies 10 years old and older) may be re-rated by supplying a new health examination and updated medical records thereby refreshing the underwriting information needed to select the appropriate rate class.
7-Pay Premium: The Technical and Miscellaneous Revenue Act (TAMRA) of 1988 classifies certain policies where premium payments exceed a certain threshold as Modified Endowment Contracts (MECs). Distributions from these policies (excluding death benefits but including policy loans and withdrawals) are taxed differently (i.e., both withdrawals and loans are generally taxed under Last in First Out (LIFO) accounting rules where loans are treated as withdrawals and gains are taxed first and basis withdrawn last) and may be subject to an IRS 10% penalty tax. A policy is generally considered a MEC when cumulative premiums paid exceed the cumulative annual 7-pay premium. To the extent that cumulative premium payments are less than the cumulative annual 7-pay premium, then loans would generally not be taxable, withdrawals would be taxed under First in First Out (FIFO) accounting rules (i.e., cost basis is distributed first and not taxable until gains are distributed which are then taxable), and neither are subject to an IRS 10% penalty tax.
Smoker: A health profile designation for policy buyers who have used tobacco products within the last two years. This time frame varies by insurer and product. (Also see Tobacco Use.)
Standard: A risk class designation for policy buyers whose health profiles are likely to result in average mortality risks. (Also see Risk Class and Health Profile.)
Sub-Standard: A risk class designation for policy buyers whose impaired health profiles are likely to result in higher than average mortality risks. (Also see Risk Class and Health Profile.)
Surrender Charge: An amount deducted from the accumulation value of a life insurance policy to yield its cash surrender value. These charges, typically found in the first 10 to 20 policy years, enable the insurer to cover a portion of unrecouped issue costs on policies that surrender early.
Survivorship: Survivorship (or second-to-die) life insurance is written on two lives and the death benefit is payable upon the death of the last insured person. These policies are commonly used as a means of funding anticipated federal estate taxes.