Financial Terms Variable life insurance policy

# Definition of Variable life insurance policy

## Variable life insurance policy

A whole life insurance policy that provides a death benefit dependent on the
insured's portfolio market value at the time of death. Typically the company invests premiums in common
stocks, and hence variable life policies are referred to as equity-linked policies.

# Related Terms:

## Average life

Also referred to as the weighted-average life (WAL). The average number of years that each
dollar of unpaid principal due on the mortgage remains outstanding. Average life is computed as the weighted average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal
paydowns.

## Coinsurance effect

Refers to the fact that the merger of two firms decreases the probability of default on
either firm's debt.

## Collection policy

Procedures followed by a firm in attempting to collect accounts receivables.

## Continuous random variable

A random value that can take any fractional value within specified ranges, as
contrasted with a discrete variable.

## Deferred nominal life annuity

A monthly fixed-dollar payment beginning at retirement age. It is nominal
because the payment is fixed in dollar amount at any particular time, up to and including retirement.

## Discrete random variable

A random variable that can take only a certain specified set of discrete possible
values - for example, the positive integers 1, 2, 3, . . .

## Dividend policy

An established guide for the firm to determine the amount of money it will pay as dividends.

## Endogenous variable

A value determined within the context of a model.

## Exogenous variable

A variable whose value is determined outside the model in which it is used. Also called
a parameter.

## Federal Deposit Insurance Corporation (FDIC)

A federal institution that insures bank deposits.

## Fiscal policy

The use of government spending and taxing for the specific purpose of stabilizing the economy.

## Guaranteed insurance contract

A contract promising a stated nominal interest rate over some specific time
period, usually several years.

## Insurance principle

The law of averages. The average outcome for many independent trials of an experiment
will approach the expected value of the experiment.

## Monetary policy

Actions taken by the Board of Governors of the Federal Reserve System to influence the
money supply or interest rates.

## Normal random variable

A random variable that has a normal probability distribution.

## Perfect market view (of dividend policy)

Analysis of a decision on dividend policy, in a perfect capital
market environment, that shows the irrelevance of dividend policy in a perfect capital market.

## Policy asset allocation

A long-term asset allocation method, in which the investor seeks to assess an
appropriate long-term "normal" asset mix that represents an ideal blend of controlled risk and enhanced
return.

## Portfolio insurance

A strategy using a leveraged portfolio in the underlying stock to create a synthetic put
option. The strategy's goal is to ensure that the value of the portfolio does not fall below a certain level.

## Random variable

A function that assigns a real number to each and every possible outcome of a random experiment.

## Signaling view (on dividend policy)

The argument that dividend changes are important signals to investors

## Tax differential view ( of dividend policy)

The view that shareholders prefer capital gains over dividends,
and hence low payout ratios, because capital gains are effectively taxed at lower rates than dividends.

## Term life insurance

A contract that provides a death benefit but no cash build-up or investment component.
The premium remains constant only for a specified term of years, and the policy is usually renewable at the
end of each term.

## Term insurance

Provides a death benefit only, no build-up of cash value.

## Traditional view (of dividend policy)

An argument that "within reason," investors prefer large dividends to
smaller dividends because the dividend is sure but future capital gains are uncertain.

## Universal life

A whole life insurance product whose investment component pays a competitive interest rate
rather than the below-market crediting rate.

## Variable

A value determined within the context of a model. Also called endogenous variable.

## Variable annuities

Annuity contracts in which the issuer pays a periodic amount linked to the investment
performance of an underlying portfolio.

## Variable cost

A cost that is directly proportional to the volume of output produced. When production is zero,
the variable cost is equal to zero.

## Variable price security

A security, such as stocks or bonds, that sells at a fluctuating, market-determined price.

## Variable rate CDs

Short-term certificate of deposits that pay interest periodically on roll dates. On each roll
date, the coupon on the CD is adjusted to reflect current market rates.

## Variable rated demand bond (VRDB)

Floating rate bond that can be sold back periodically to the issuer.

## Variable rate loan

Loan made at an interest rate that fluctuates based on a base interest rate such as the
Prime Rate or LIBOR.

## Weighted average life

See:Average life.

## Whole life insurance

A contract with both insurance and investment components: (1) It pays off a stated
amount upon the death of the insured, and (2) it accumulates a cash value that the policyholder can redeem or
borrow against.

## VARIABLE EXPENSES

Those that vary with the amount of goods you produce or sell. These may include utility bills, labor, etc.

## Lifecycle costing

An approach to costing that estimates and accumulates the costs of a product/service over
its entire lifecycle, i.e. from inception to abandonment.

## Semi-variable costs

Costs that have both fixed and variable components.

## Variable cost

A cost that increases or decreases in proportion with increases or decreases in the volume of production of goods or services.

## Variable costing

A method of costing in which only variable production costs are treated as product costs and in which all fixed (production and non-production) costs are treated as period costs.

## variable expenses

Expenses that change with changes in either sales volume
or sales revenue, in contrast to fixed expenses that remain the same
over the short run and do not fluctuate in response to changes in sales
expenses.

## decision variable

an unknown item for which a linear programming
problem is being solved

## dependent variable

an unknown variable that is to be predicted
using one or more independent variables

## independent variable

a variable that, when changed, will
cause consistent, observable changes in another variable;
a variable used as the basis of predicting the value of a
dependent variable

## key variable

a critical factor that management believes will
be a direct cause of the achievement or nonachievement
of the organizational goals and objectives

## life cycle costing

the accumulation of costs for activities that
occur over the entire life cycle of a product from inception
to abandonment by the manufacturer and consumer

## product life cycle

a model depicting the stages through
which a product class (not necessarily each product) passes

## slack variable

a variable used in a linear programming problem
that represents the unused amount of a resource at
any level of operation; it is associated with less-than-orequal-
to constraints

## surplus variable

a variable used in a linear programming problem that represents overachievement of a minimum requirement; it is associated with greater-than-or-equal-to constraints

## variable cost

a cost that varies in total in direct proportion
to changes in activity; it is constant on a per unit basis

## variable costing

a cost accumulation and reporting method
that includes only variable production costs (direct material,
direct labor, and variable overhead) as inventoriable
or product costs; it treats fixed overhead as a period cost;
is not acceptable for external reporting and tax returns

## variable cost ratio

the proportion of each revenue dollar
represented by variable costs; computed as variable costs
divided by sales or as (1 - contribution margin ratio)

the difference between budgeted variable overhead based on actual input activity and variable overhead applied to production

the difference between total actual variable overhead and the budgeted amount of variable overhead based on actual input activity

## Economic life

The period over which a company expects to be able to use an asset.

## Useful life

The estimated life span of a fixed asset, during which it can be expected to
contribute to company operations.

## Variable cost

A cost that changes in amount in relation to changes in a related activity.
Variance
The difference between an actual measured result and a basis, such as a budgeted amount.

## collection policy

Procedures to collect and monitor receivables.

## credit policy

Standards set to determine the amount and nature of credit to extend to customers.

## variable costs

Costs that change as the level of output changes.

## Accomodating Policy

A monetary policy of matching wage and price increases with money supply increases so that the real money supply does not fall and push the economy into recession.

## Beggar-My-Neighbor Policy

A policy designed to increase an economy's prosperity at the expense of another country's prosperity.

## Cold-Turkey Policy

Decreasing inflation by immediately decreasing the money growth rate to a new, low rate. Contrast with gradualism.

## Demand Management Policy

Fiscal or monetary policy designed to influence aggregate demand for goods and services.

## Discretionary Policy

A policy that is a conscious, considered response to each situation as it arises. Contrast with policy rule.

## Fiscal Policy

A change in government spending or taxing, designed to influence economic activity.

## Incomes Policy

A policy designed to lower inflation without reducing aggregate demand. Wage/price controls are an example.

## Monetary Policy

Actions taken by the central bank to change the supply of money and the interest rate and thereby affect economic activity.

## Policy-Ineffectiveness Proposition

Theory that anticipated policy has no effect on output.

## Policy Rule

A formula for determining policy. Contrast with discretionary policy.

## Tax-Related Incomes Policy (TIP)

Tax incentives for labor and business to induce them to conform to wage/price guidelines.

## Unemployment Insurance

A program in which workers and firms pay contributions and workers collect benefits if they become unemployed.

## Federal Insurance Contributions Act of 1935 (FICA)

A federal Act authorizing the government to collect Social Security and Medicare payroll taxes.

## Health Insurance Portability and Accountability Act of 1996 (HIPAA)

A federal Act expanding upon many of the insurance reforms created by
health insurance, despite the special health status of any employees.

## Policy Acquisition Costs

Costs incurred by insurance companies in signing new policies, including expenditures on commissions and other selling expenses, promotion expenses, premium
taxes, and certain underwriting expenses. Refer also to customer, member, or subscriber
acquisition costs.

## Delivery policy

A companyâ€™s stated goal for how soon a customer order will be
shipped following receipt of that order.

## Shelf life

The time period during which inventory can be retained in stock and beyond
which it becomes unusable.

## Shelf life control

Deliberate usage of the oldest items first, in order to avoid exceeding
a component or productâ€™s shelf life.

Better known as CDIC, this is an organization which insures qualifying deposits and GICs at savings institutions, mainly banks and trust companys, which belong to the CDIC for amounts up to \$60,000 and for terms of up to five years. Many types of deposits are not insured, such as mortgage-backed deposits, annuities of duration of more than five years, and mutual funds.

## Co-insurance

In medical insurance, the insured person and the insurer sometimes share the cost of services under a policy in a specified ratio, for example 80% by the insurer and 20% by the insured. By this means, the cost of coverage to the insured is reduced.

Also known as "Dead Janitors insurance", this is the practice, where allowed, in several U.S. states, of numerous well known large American Corporations taking out corporate owned life insurance policies on millions of their regular employees, often without the knowledge or consent of those employees. Corporations profiting from the deaths of their employees [and sometimes ex-employees] have attracted adverse publicity because ultimate death benefits are seldom, even partially passed down to surviving families.

## Disability Insurance

insurance that pays you an ongoing income if you become disabled and are unable to pursue employment or business activities. There are limits to how much you can receive based on your pre-disability earnings. Rates will vary based on occupational duties and length of time in a particular industry. This kind of coverage has a waiting period before you can begin collecting benefits, usually 30, 60 or 90 days. The benefit paying period also varies from 2 years to age 65. A short waiting period will cost more that a longer waiting period. As well, a long benefit paying period will cost more than a short benefit paying period.

## Errors and Omissions Insurance

insurance coverage purchased by the agent/broker which provides protection against loss incurred by a client because of some negligent act, error, oversight, or omission by the agent/broker.

## Group Life Insurance

This is a very common form of life insurance which is found in employee benefit plans and bank mortgage insurance. In employee benefit plans the form of this insurance is usually one year renewable term insurance. The cost of this coverage is based on the average age of everyone in the group. Therefore a group of young people would have inexpensive rates and an older group would have more expensive rates.
Some people rely on this kind of insurance as their primary coverage forgetting that group life insurance is a condition of employment with their employer. The coverage is not portable and cannot be taken with you if you change jobs. If you have a change in health, you may not qualify for new coverage at your new place of employment.
Bank mortgage insurance is also usually group insurance and you can tell this by virtue of the fact that you only receive a certificate of insurance, and not a complete policy. The only form in which bank mortgage insurance is sold is reducing term insurance, matching the declining mortgage balance. The only beneficiary that can be chosen for this kind of insurance is the bank. In both cases, employee benefit plan group insurance and bank mortgage insurance, the coverage is not guaranteed. This means that coverage can be cancelled by the insurance company underwriting that particular plan, if they are experiencing excessive claims.

This is a type of insurance for which the cost is distributed evenly over the premium payment period. The premium remains the same from year to year and is more than actual cost of protection in the earlier years of the policy and less than the actual cost of protection in the later years. The excess paid in the early years builds up a reserve to cover the higher cost in the later years.

## Life Expectancy

The average number of years of life remaining for a group of people of a given age and gender according to a particular mortality table.

## Life Income Fund

Commonly known as a LIF, this is one of the options available to locked in Registered Pension Plan (RPP) holders for income payout as opposed to Registered Retirement Savings Plan (RRSP) holders choice of payout through Registered Retirement Income Funds (RRIF). A LIF must be converted to a unisex annuity by the time the holder reaches age 80.

## Mortgage Insurance

Commonly sold in the form of reducing term life insurance by lending institutions, this is life insurance with a death benefit reducing to zero over a specific period of time, usually 20 to 25 years. In most instances, the cost of coverage remains level, while the death benefit continues to decline. Re-stated, the cost of this kind of insurance is actually increasing since less death benefit is paid as the outstanding mortgage balance decreases while the cost remains the same. Lending institutions are the most popular sources for this kind of coverage because it is usually sold during the purchase of a new mortgage. The untrained institution mortgage sales person often gives the impression that this is the only place mortgage insurance can be purchased but it is more efficiently purchased at a lower cost and with more flexibility, directly from traditional life insurance companies. No matter where it is purchased, the reducing term insurance death benefit reduces over a set period of years. Most consumers are up-sizing their residences, not down-sizing, so it is likely that more coverage is required as years pass, rather than less coverage.
The cost of mortgage lender's insurance group coverage is based on a blended non-smoker/smoker rate, not having any advantage to either male or female. Mortgage lender's group insurance certificate specifies that it [the lender] is the sole beneficiary entitled to receive the death benefit. Mortgage lender's group insurance is not portable and is not guaranteed. Generally speaking, your coverage is void if you do not occupy the house for a period of time, rent the home, fall into arrears on the mortgage, and there are a few others which vary by institution. If, for example, you sell your home and buy another, your current mortgage insurance coverage ends and you will have to qualify for new coverage when you purchase your next home. Maybe you won't be able to qualify. Not being guaranteed means that it is possible for the lending institution's group insurance carrier to cancel all policy holder's coverages if they are experiencing too many death benefit claims.
Mortgage insurance purchased from a life insurance company, is priced, based on gender, smoking status, health and lifestyle of the purchaser. Once obtained, it is a unilateral contract in your favour, which cannot be cancelled by the insurance company unless you say so or unless you stop paying for it. It pays upon the death of the life insured to any "named beneficiary" you choose, tax free. If, instead of reducing term life insurance, you have purchased enough level or increasing life insurance coverage based on your projection of future need, you can buy as many new homes in the future as you want and you won't have to worry about coverage you might loose by renewing or increasing your mortgage.
It is worth mentioning mortgage creditor protection insurance since it is many times mistakenly referred to simply as mortgage insurance. If a home buyer has a limited amount of down payment towards a substantial home purchase price, he/she may qualify for a high ratio mortgage on a home purchase if a lump sum fee is paid for mortgage creditor protection insurance. The only Canadian mortgage lenders currently known to offer this option through the distribution system of banks and trust companies, are General Electric Capital [GE Capital] and Central Mortgage and Housing Corporation [CMHC]. The lump sum fee is mandatory when the mortgage is more than 75% of the value of the property being purchased. The lump sum fee is usually added onto the mortgage. It's important to realize that the only beneficiary of this type of coverage is the morgage lender, which is the bank or trust company through which the buyer arranged their mortgage. If the buyer for some reason defaults on this kind of high ratio mortgage and the value of the property has dropped since being purchased, the mortgage creditor protection insurance makes certain that the bank or trust company gets paid. However, this is not the end of the story, because whatever the difference is, between the disposition value of the property and whatever sum of unpaid mortgage money is outstanding to either GE Capital or CMHC will be the subject of collection procedures against the defaulting home buyer. Therefore, one should conclude that this kind of insurance offers protection only to the bank or trust company and absolutely no protection to the home buyer.

## Policy Fee

This is an administrative fee which is part of most life insurance policies. It ranges from about \$40 to as much as \$100 per year per policy. It is not a separate fee. It is incorporated in the regular monthly, quarterly, semi-annual or annual payment that you make for your policy. Knowing about this hidden fee is important because some insurance companies offer a policy fee discount on additional policies purchased under certain conditions. Sometimes they reduce the policy fee or waive it altogether on one or more additional policies purchased at the same time and billed to the same address. The rules are slightly different depending on the insurance company. There could be enormous savings if several people in the same family or business were intending to purchase coverage at the same time.

## Policyholder

This is the person who owns a life insurance policy. This is usually the insured person, but it may also be a relative of the insured, a partnership or a corporation. There are instances in marriage breakup (or relationship breakup with dependent children) where appropriate life insurance on the support provider, owned and paid for by the ex-spouse receiving the support is an acceptable method of ensuring future security.

## Split Dollar Life Insurance

The split dollar concept is usually associated with cash value life insurance where there is a death benefit and an accumulation of cash value. The basic premise is the sharing of the costs and benefits of a life insurance policy by two or more parties. Usually one party owns and pays for the insurance protection and the other owns and pays for the cash accumulation. There is no single way to structure a split dollar arrangement. The possible structures are limited only by the imagination of the parties involved.

## Temporary Life Insurance

Temporary insurance coverage is available at time of application for a life insurance policy if certain conditions are met. Normally, temporary coverage relates to free coverage while the insurance company which is underwriting the risk, goes through the process of deciding whether or not they will grant a contract of coverage. The qualifications for temporary coverage vary from insurance company to insurance company but generally applicants will qualify if they are between the ages of 18 and 65, have no knowledge or suspicions of ill health, have not been absent from work for more than 7 days within the prior 6 months because of sickness or injury and total coverage applied for from all sources does not exceed \$500,000. Normally a cheque covering a minimum of one months premium is required to complete the conditions for this kind of coverage. The insurance company applies this deposit towards the cost of a policy at its issue date, which may be several weeks in the future.

## Term Life Insurance

A plan of insurance which covers the insured for only a certain period of time and not necessarily for his or her entire life. The policy pays a death benefit only if the insured dies during the term.

## Yearly Renewable Term Insurance

Sometimes, simply called YRT, this is a form of term life insurance that may be renewed annually without evidence of insurability to a stated age.

## Export Credit Insurance

The granting of insurance to cover the commercial and political risks of selling in foreign markets.

## Insurance Company

A firm licensed to sell insurance to the public.

## Lending Policy

A course of action adopted by a financial institution to guide and usually determine present and future decisions in the light of given conditions.

## Accidental Dismemberment: (Credit Insurance)

Provides additional financial security should an insured person be dismembered or lose the use of a limb as the result of an accident.

## Amortization (Credit Insurance)

Refers to the reduction of debt by regular payments of interest and principal in order to pay off a loan by maturity.

## Beneficiary (Credit Insurance)

The person or party designated to receive proceeds entitled by a benefit. Payment of a benefit is triggered by an event. In the case of credit insurance, the beneficiary will always be the creditor.