LOMA Glossary

The LOMA Glossary of Insurance and Financial Services Terms

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face amount. (1) For a life insurance policy, the amount of the policy benefit that is payable if the insured dies while the policy is in force. Contrast with cash surrender value. (2) For a bond or other debt security, the amount stated on the security. Also known as face value, par value.

face value. For a life insurance policy, see face amount. For a bond, see par value.

facility of payment provision. A life insurance policy provision which states that, under specified conditions, the insurer may pay policy benefits to the executor or administrator of the insured’s estate, relatives of the insured, or any other person who is equitably entitled to the benefits or has incurred expenses for the care or burial of the insured.

fac-ob reinsurance. See facultative-obligatory reinsurance.

factor table. A chart used by insurance underwriters that shows the maximum amount of insurance—expressed in multiples of a person’s salary or current gross earned income—that an insurer typically will approve in each of several age ranges.

facultative application. See request for coverage.

facultative reinsurance. A reinsurance arrangement in which a direct writer chooses whether to cede a risk and a reinsurer chooses whether to accept that risk. A reinsurer has no obligation to submit a quote for a case submitted on a facultative basis. Contrast with automatic reinsurance and facultative-obligatory reinsurance.

facultative-obligatory (fac-ob) reinsurance. A reinsurance arrangement in which (1) the direct writer may choose to submit specific cases to the reinsurer and (2) the reinsurer must accept the cases based on the direct writer’s underwriting, up to a stated maximum amount, if the reinsurer has available financial capacity. Contrast with automatic reinsurance, facultative reinsurance.

Fair Credit Reporting Act (FCRA). A United States federal law that regulates the reporting and use of consumer information and seeks to ensure that consumer reports contain only accurate, relevant, and recent information.

fair market value. See current market value.

Family and Medical Leave Act (FMLA). Federal legislation in the United States that requires companies with 50 or more employees within a 75-mile radius to grant eligible employees an unpaid leave of up to 12 weeks for family and medical emergencies, including childbirth, adoption, and illness of a child, spouse, parent, or the employee.

family benefit. A supplemental term life insurance benefit that can be added to an individual cash value life insurance policy to insure the lives of the insured’s spouse and children.

family income coverage. A plan of decreasing term life insurance that provides to the beneficiary a stated monthly income benefit amount if the insured dies during the term of coverage.

family income policy. A cash value life insurance policy with a decreasing term insurance benefit. The proceeds of the cash value policy are usually paid as a lump sum when the insured dies. Then the policy provides a stated monthly income benefit amount for a predetermined period to the insured’s beneficiary—typically the surviving spouse.

family insurance rider. See spouse and children’s insurance rider.

family policy. A cash value life insurance policy that includes term life insurance coverage on the primary insured’s spouse and children.

FASB. See Financial Accounting Standards Board.

FAST system. See Financial Analysis and Solvency Tracking System.

favorable deviation. In insurance operations, a difference between actual and assumed values that produces an increase in actual profitability relative to assumed profitability; such a deviation requires no corrective action. Contrast with adverse deviation.

favorable variance. In budgeting, an accounting result in which actual revenues are greater than expected revenues and/or actual expenses are less than expected expenses. Contrast with unfavorable variance.

FCRA. See Fair Credit Reporting Act.

FDIC. See Federal Deposit Insurance Corporation.

FDQS arrangement. See first-dollar quota share arrangement.

Fed, the. See Federal Reserve System.

Federal Deposit Insurance Corporation (FDIC). In the United States, a federal agency that protects customer deposits up to a maximum limit in the event the financial institution defaults on its deposit products, such as savings accounts, checking accounts, money market accounts, and Certificates of Deposit (CDs).

Federal Reserve System. In the United States, the federal banking system that is made up of 12 regional banks and member state and national banks and is designed, among other things, to supervise and regulate member banks and protect the credit rights of consumers. Often referred to as the Fed.

Federal Trade Commission (FTC). A U.S. federal regulatory agency that enforces antitrust and trade practices laws. The FTC is empowered to, among other things, (1) prevent unfair methods of competition, and unfair or deceptive acts or practices in or affecting commerce; (2) seek monetary redress and other relief for conduct that injures consumers; (3) adopt trade regulation rules to define specific acts or practices that are unfair or deceptive and establish requirements designed to prevent such acts or practices; (4) conduct investigations relating to the organization, business, practices, and management of entities engaged in commerce; and (5) make reports and legislative recommendations to Congress.

feedback control. An organizational control applied to a business process at the end of the process cycle to compare actual performance or output with established standards. Contrast with concurrent control and steering control.

feedforward control. See steering control.

FHC. See financial holding company.

FICO® Score. The most widely known credit score created by Fair Isaac Corporation, it is a numerical grade predicting the risk that a borrower poses to a financial institution.

fidelity bond. An indemnity insurance agreement guaranteeing to the purchaser the coverage of a financial loss caused by (1) the act or default of a third party, such as an employee, or (2) some contingency, such as fire, over which the third party may have no control.

fiduciary. An individual or entity who holds a special position of trust or confidence when handling the affairs of another and who must put the other's interest above the fiduciary's own interests.

field advisory council. A group of producers designated to represent and provide feedback from the sales force on such topics as product design and customer service.

field force. The collective term for an insurer’s affiliated agents.

field issue. See instant issue.

field office. An office in which an insurer’s affiliated agents work. Also known as an insurance agency. Contrast with home office.

field underwriting. The first step in the risk selection process for insurance. During this step, producers gather initial information about applicants and proposed insureds to determine if they are likely to be approved for a specific type of insurance coverage.

field underwriting manual. A manual that guides a producer in (1) assessing the risks a proposed insured represents and in (2) assembling and submitting the application and any required evidence of insurability.

field underwriting standards. Criteria for sales producers to use for pre-screening life insurance applicants.

FIFO rule. first-in-first-out rule. See cost recovery rule.

file and use requirement. A policy enacted by some states in the United States that allows an insurer to use an insurance policy form, without prior approval from regulatory authorities, after the form has been filed with the state insurance department.

finance charge. The total cost of credit paid by a borrower for a loan, expressed as a dollar amount.

finance company. A financial institution that specializes in making short- and medium-term loans to businesses and to people. See also commercial finance company, consumer finance company.

financed purchase. In insurance, the purchase of a new insurance contract for which the owner pays premiums or intends to pay premiums with funds taken from another contract.

financial (capital) market. A market in which money is transferred from savers to borrowers.

financial accounting. A field of accounting that focuses primarily on reporting a company’s financial information to meet the needs of the company’s external stakeholders, such as regulators and investors. Contrast with management accounting.

Financial Accounting Standards Board (FASB). A private organization, funded by the accounting profession and companies with an interest in accounting practices, that establishes and promotes the use of generally accepted accounting principles (GAAP) in the United States.

financial analysis. The study of financial statement values for the purpose of assessing a company’s financial condition or performance.

Financial Analysis and Solvency Tracking (FAST) System. In the United States, a system used to evaluate the solvency of insurers; based on (1) ratio analysis of an insurer’s most recent financial statements and (2) analysis of a five-year history of specific aspects of the insurer’s financial statements.

financial audit. An evaluation of whether a company’s financial information, financial statements, and source documents comply with accounting standards and are a fair and consistent depiction of the company’s financial condition and performance.

financial capacity. The total monetary amount of risk an insurance company can accept based on the capital it has available to write new business. Contrast with underwriting capacity.

financial condition examination. In the United States, the part of an onsite regulatory examination that investigates two broad aspects of an insurer’s operations: (1) whether the insurer’s accounting records are accurate and the insurer is being operated on a sound and lawful basis and (2) whether the insurer’s financial and business profiles contain any apparent hazards to the insurer’s solvency. Contrast with market conduct examination.

financial consultant. In a bank-distributed system of insurance sales, a person whose primary function is to sell investment products to bank customers, but who is also licensed to sell insurance.

financial design. See technical product design.

financial factor. See financial risk factor.

financial hazard. In the underwriting of insurance, the likelihood that a person who purchases more insurance than he can afford may have an ulterior motive in doing so; or that he may ultimately not be able to afford the premiums for the policy, resulting in the policy lapsing.

financial holding company (FHC). A holding company that conducts activities that are financial in nature or incidental to financial activities, such as insurance activities, securities activities, banking, and investment and advisory services.

Financial Industry Regulatory Authority (FINRA). In the United States, a nongovernmental self-regulatory organization empowered by the Securities and Exchange Commission (SEC) to license, investigate, and regulate securities dealers and their representatives.

financial institution. A business that owns primarily financial assets, such as stocks and bonds, rather than fixed assets, such as equipment and raw materials. Also known as a financial services company.

financial institution distribution system. A type of distribution channel for insurance products in which financial institutions—such as broker-dealers, banks, and even competing insurance companies—sell an insurer’s products to their own customers.

financial intermediary. An organization that collects funds from one group of people, businesses, and governments, known as suppliers, and channels them to another group, known as users. Insurance companies are financial intermediaries.

financial leverage. The effect whereby incurring fixed financing costs, usually borrowed funds, automatically magnifies a company’s risks and potential returns.

financial model. A computer-based mathematical model that approximates the operation of real-world financial processes.

financial planner. A professional who analyzes a customer’s personal financial circumstances and goals and prepares a program designed to help the customer achieve those goals.

financial ratio. A percentage amount that expresses a relationship between two pieces of financial information.

financial ratio analysis. The process of calculating the relationships between various pairs of financial statement values for the purpose of assessing a company’s financial condition or performance.

Financial Regulation Standards and Accreditation Program. In the United States, a National Association of Insurance Commissioners program which states can use to demonstrate to other states that their solvency regulation systems meet specified minimum standards and that their systems are adequate and effective.

financial reinsurance. See finite reinsurance.

financial reporting. The process of presenting financial data about a company’s financial position, operating performance, and flow of funds into and out of the company.

financial risk characteristic. See financial risk factor.

financial risk factor. Financial information that an underwriter considers to determine whether a person is applying for more insurance than he reasonably needs or can afford. Also known as a financial factor and a financial risk characteristic.

financial services company. See financial institution.

financial services industry. An industry that offers financial products and services to help individuals, businesses, and governments meet their financial goals of protecting against financial losses, accumulating and investing money and other assets, and managing debt and payments.

Financial Services Modernization Act (FSMA). See Gramm-Leach-Bliley Act.

Financial Stability Oversight Council (FSOC).. A U.S. independent agency created by the Dodd-Frank Act that is responsible for monitoring the safety and stability of the nation’s financial system, identifying systemic risks to the system, and coordinating regulatory responses to any threats to the system.

financial statement. A summary report of a company’s financial condition on a specified date or of its performance during a specified period. See also balance sheet, income statement.

financial underwriting. During the underwriting of insurance, an assessment of a proposed insured’s financial condition to determine whether (1) the proposed insured needs the coverage applied for, (2) a reasonable relationship exists between the need for the coverage and the amount of coverage applied for, and whether (3) the applicant can afford the coverage.

finite reinsurance. A form of indemnity reinsurance that allows the direct writer to improve its financial position by the timing of and method by which it transfers risk to a reinsurer. Usually, finite reinsurance is intended to be a temporary arrangement, and its primary purpose is to enable the direct writer to transfer expenses and profits to the reinsurer. Also known as financial reinsurance. Contrast with indemnity reinsurance.

FINRA. See Financial Industry Regulatory Authority.

FINRA Conduct Rule 2210. See Advertisement Rule.

FINRA Conduct Rule 2310. See Suitability Rule.

FINRA Conduct Rule 2821. See Conduct Rule 2821.

FINRA Conduct Rule 3010. See Supervisory Rule.

FINRA Conduct Rules. A set of rules developed by the Financial Industry Regulatory Authority in the United States to ensure that companies and people engaged in securities transactions treat customers fairly and equitably. See also Financial Industry Regulatory Authority.

first beneficiary. See primary beneficiary.

first mortgage. A mortgage obtained for the initial purchase of a house. See also second mortgage.

first-dollar coverage. Medical expense coverage under which the insurer begins to reimburse the insured for eligible medical expenses without first requiring an out-of-pocket contribution from the insured.

first-dollar quota share (FDQS) arrangement. In reinsurance, a method for assigning risk in which the direct writer retains a stated percentage of the risk for each policy in a given block of business, up to its retention limit, and cedes the remaining risk to one or more reinsurers.

first-in-first-out (FIFO) rule. See cost recovery rule.

first-to-die life insurance. See joint whole life insurance.

first-year commission. For a life insurance policy, a commission equal to a stated percentage of the amount of the premium an insurer receives during the first policy year. See also commission. Contrast with renewal commission.

fixed amount option. (1) A life insurance policy settlement option under which the insurance company uses the policy proceeds plus interest to pay the beneficiary a preselected amount in a series of installments for as long as the funds last. (2) An annuity contract payout option under which the insurer provides periodic income payments of at least a specified minimum amount for as long a period as the annuity's accumulated value will provide, regardless of whether the annuitant is living

fixed annuity. An annuity contract under which the insurer guarantees the minimum interest rate that will be applied to the annuity’s accumulated value during the accumulation period and the minimum amount of the periodic income payments that will be paid during the payout period. Contrast with variable annuity.

fixed assumptions. In product modeling, variables for which actuaries assign a specific value or proportional relationship and for which the value or proportion remains unchanged throughout multiple iterations of a model. Also known as constants. Contrast with dynamic assumptions.

fixed budget. See static budget.

fixed cost. A business cost that remains relatively constant regardless of the level of operating activity or production. Contrast with variable cost.

fixed dividend. A dividend on preferred stock that is fixed in both the dividend payment amount and the dividend payment schedule.

fixed fund option. For variable insurance and annuity products, an option that guarantees a fixed rate of interest for a specified period of time. Premiums allocated to a fixed fund option are administered and invested with the insurer’s general account.

fixed indexed annuity. See equity indexed annuity.

fixed period option. (1) A life insurance policy settlement option under which the insurance company agrees to pay a policy's proceeds plus interest in equal installments to the beneficiary for a specified period of time. (2) An annuity contract payout option under which the insurer makes annuity payments for a specified period of time regardless of whether the annuitant is living.

fixed premium universal life insurance policy. A universal life insurance policy that requires a series of scheduled premium payments of a specified amount for a specified length of time (typically 8 to 10 years) or until the insured’s death, whichever comes first. Contrast with flexible premium universal life insurance policy.

fixed-amount budget. See static budget.

fixed-income investment. An investment that provides a predictable stream of income, such as a bond or a mortgage.

flat extra premium method. A method for adjusting individual life insurance premium rates to compensate for extra mortality in which the insurer adds to the standard premium rate a specified extra dollar amount for every $1,000 of life insurance. The flat extra premium method is typically used when the proposed insured's extra risk is expected to remain constant or decrease with age. See also temporary flat extra premium and permanent flat extra premium. Contrast with table rating method.

flexible budget. A type of budget that provides alternative sets of budget estimates to use under different circumstances that may arise during an accounting period. Also known as flexible-amount budget, dynamic budget, or variable budget. Contrast with static budget.

flexible premium deferred annuity (FPDA). A type of annuity contract that will begin making periodic income payments more than one year after the contract’s issue and is purchased with a series of premium payments that may be irregular in timing and amount.

flexible premium universal life insurance policy. A universal life insurance policy that allows the policyowner to alter the amount and frequency of premium payments, within specified limits. Contrast with fixed premium universal life insurance policy.

flexible premium variable life insurance. See variable universal life insurance.

flexible premiums. (1) For life insurance products, a form of premium payment in which a customer can make payments to the company at various times to increase the savings element in a contract that was established with a single initial premium; such premiums are used with universal life insurance. (2) For annuity contracts, when the contract owner is allowed to alter the amount and frequency of premium payments, within specified limits.

flexible-amount budget. See flexible budget.

floor provision. For fixed indexed annuities, a provision which specifies that the contract’s values are not reduced if the linked index decreases in value during a measurement period.

FMLA. See Family and Medical Leave Act.

foreclosure. A legal proceeding by which a lender can take possession of and sell a mortgaged property to recover the unpaid loan balance if the borrower fails to make timely contractual principal and interest payments on the loan.

foreign corporation. From the point of view of a given state in the United States, a corporation that was incorporated under the laws of another state. Contrast with domestic corporation. In most other countries, a corporation incorporated under the laws of another country. Contrast with alien corporation.

foreign exchange market. A market that converts currencies used by buyers into currencies acceptable to the sellers.

formal contract. A contract that is enforceable because the parties met certain formalities concerning the form of the agreement. Sometimes referred to as a contract under seal. Contrast with informal contract.

FPDA. See flexible premium deferred annuity.

fraternal benefit society. A nonprofit organization that is operated solely for the benefit of its members and that provides social, as well as insurance, benefits to its members. Contrast with stock insurance company, mutual insurance company.

fraud. The intentional use of false information to mislead another party into parting with something of value or giving up a legal right.

fraudulent misrepresentation. In the formation of a contract, a misrepresentation that was made with the intent to induce another party to enter into a contract and that did induce the innocent party to enter into the contract.

free withdrawal provision. A deferred annuity contract provision that gives the contract owner the right to withdraw a specified portion of the accumulated value without paying a surrender charge or back-end load.

free-examination provision. See free-look provision.

free-look provision. An insurance or annuity policy provision that gives the policyowner a stated period of time—usually at least 10 days—after the policy is delivered in which to examine the policy. Sometimes referred to as a free-examination provision or a cooling-off provision.

front load. See front-end load.

front-end load. A commission or a sales charge applied at the time of purchase. (1) For annuities, a fee insurers charge—at the time a contract owner purchases or makes additional contributions to an annuity—to help cover the insurer’s expenses of selling the annuity. (2) For mutual funds, a charge assessed for the purchase of shares in specified mutual fund accounts. Also called front-end sales load or front load. Contrast with back-end load.

front-end sales load. See front-end load.

fronting. An arrangement in which one insurer acts as a primary insurer and issues policies; but then immediately transfers most of the risk to another insurance or reinsurance company. Often the primary insurer is licensed to sell insurance in a particular jurisdiction but the other company is not.

FSMA. See Gramm-Leach-Bliley Act.

FSOC. See Financial Stability Oversight Council.

FTC. See Federal Trade Commission.

fulfillment kit. In the direct response marketing of insurance products, a package of materials designed to address or fulfill a customer’s request for more information or to enter into an insurance contract.

full costing. A method for estimating product-related expenses in which both direct and indirect expenses are counted. Also known as absorption costing. Contrast with marginal costing.

full-service broker. Any person or entity engaged in the business of buying or selling investments for the account of another and who also offers investment advice and executes trades.

fully insured plan. A group insurance plan under which the group policyholder makes periodic premium payments to the insurance company and the insurance company bears the responsibility for all claim payments. Contrast with fully self-insured plan.

fully self-insured plan. A group insurance plan under which the group policyholder—usually an employer—takes complete responsibility for all claim payments and related expenses. Contrast with fully insured plan.

fund operating expense charge. For variable (unit-linked) life insurance and annuity products, an annual charge assessed by a fund manager to cover the advisory and administrative services provided by the manager.

fund option. See subaccount.

funding agency. The financial institution in which a group retirement plan’s assets are held.

funding instrument. See funding vehicle.

funding vehicle. The means chosen for investing a retirement plan's assets as they are accumulated. Also known as a funding instrument or investment vehicle.

funds withheld. In reinsurance, amounts of money that the direct writer would otherwise pay to the reinsurer, but by agreement, the direct writer continues to hold as security for the reinsurance transaction.

funds withheld coinsurance. A type of reinsurance under which the direct writer and reinsurer proportionately share responsibility for almost all aspects of a reinsured policy, but the direct writer retains the gross reinsurance premium and the reinsurer retains the initial coinsurance allowance.

future purchase disability option benefit. A disability income benefit that grants the insured the right to increase the benefit amount in accordance with increases in the insured’s earnings.

future value (FV). The amount that an original sum is expected to be worth at a specified future date, given a specified interest rate. Contrast with present value.

future value interest factor (FVIF). The future value of $1.00 at a given rate of interest for a stated number of periods. A future value interest factors table shows the future value of $1.00 for various interest rates and a number of compounding periods. Contrast with present value interest factor.

future value interest factor for an annuity (FVIFA). The compound value interest factor that represents the future value of a $1.00 annuity at a given rate of interest for a stated number of periods.

future value of an annuity. The amount that a series of equal payments earning compound interest will be worth at a given future date.

futures contract. A limited-time agreement that gives the owner of the agreement the right to buy or sell a specified investment in the future for a price that is set through trading on an organized exchange.

FV. See future value.

FVIF. See future value interest factor.

FVIFA. See future value interest factor for an annuity.

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