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Regulation and Safety terms
The regulators, the safety of insurers, fraud and the courts.
Best interest standardA conduct rule requiring agents and advisers to recommend products that serve the customer's needs without putting their own pay first.Community propertyA marital property system in which most assets and income acquired during marriage belong equally to both spouses, which can affect a policy and its payout.Corridor (death benefit corridor)The minimum gap the tax code requires between a universal life policy's death benefit and its cash value to keep the policy's tax advantages.Cost basisFor life insurance and annuities, the after-tax money put in (premiums minus tax-free amounts taken out), which sets how much of a payout is taxed.Crummey letterA written notice telling a trust beneficiary of a temporary right to withdraw a new contribution, so the gift qualifies for the annual gift tax exclusion.CSO mortality tableThe table of death rates state regulators adopt as the minimum standard for life insurance reserves, guaranteed values and tax-law tests.ERISAThe 1974 federal law governing most private employer benefit plans, including group life insurance, which sets claim procedures and overrides many state laws.EscheatmentThe legal process by which money owed but unclaimed, including unpaid life insurance proceeds, is turned over to a state after a dormancy period.EstateEverything a person owns at death, from property and accounts to some life insurance, which is settled and distributed to heirs and creditors.Estate taxA federal tax on the transfer of a deceased person's assets above an exemption amount, with a top rate of 40%; some states levy their own.Federal estate tax exemptionThe amount a person can pass at death or give during life before federal estate and gift tax applies: $15 million per person for 2026, per the IRS.FiduciaryA person or firm legally bound to act in someone else's best interest with loyalty and care, such as a trustee, executor or registered investment adviser.Gift tax annual exclusionThe amount you can give any one person each year without filing a gift tax return or using lifetime exemption: $19,000 per recipient in 2026, per the IRS.Guaranty associationA state safety net, funded by assessments on insurers, that continues coverage or pays claims up to set limits when a life or annuity insurer fails.Imputed incomeThe taxable value the IRS assigns to employer-paid group-term life insurance above $50,000, added to your W-2 wages though you receive no cash.Insurance commissionerThe official who heads a state's insurance department, licensing insurers and agents, reviewing policy forms, monitoring solvency and handling complaints.Insurer liquidationA court-ordered process that closes a failed insurer, sells its assets and pays claims, with guaranty associations protecting policyholders up to limits.Irrevocable life insurance trust (ILIT)A trust that owns life insurance and can't be changed or revoked by its creator, keeping the death benefit out of the insured's taxable estate.NAIC (National Association of Insurance Commissioners)The standard-setting body of the chief insurance regulators of all 50 states, D.C. and five territories, which writes model laws and coordinates oversight.Policy replacementBuying a new life policy or annuity while dropping, surrendering or borrowing heavily against an existing one, a sale states regulate closely.ReservesLiabilities a life insurer must hold on its balance sheet, as required by state law, to cover future claims and benefits owed on policies in force.Revocable living trustA trust you create and control during your life that can hold assets or receive life insurance, then distribute them after death without probate.Revocation-on-divorce statuteA state law that automatically cancels an ex-spouse's designation as beneficiary when a marriage ends, unless the owner names them again.Section 101(j) notice and consentFederal tax rules requiring employers to notify employees and get written consent before insuring them, or lose most of the tax-free death benefit.Section 7702The federal tax code section that defines which contracts count as life insurance, limiting how much cash value a policy can hold for its death benefit.Seven-pay testThe IRS test that flags a policy as a modified endowment contract if premiums in its first seven years exceed what would pay it up in seven level payments.Split-dollar arrangementAn agreement in which two parties, often an employer and an executive, share the premiums, cash value and death benefit of a permanent life policy.Statutory accountingThe conservative accounting rules state regulators require insurers to use in filings, built to show whether a company can pay its policyholders.SuitabilityThe requirement that an agent recommend an annuity or other product only after gathering enough information to judge that it fits the buyer.Testamentary trustA trust written into a will that comes into existence only after death and probate, often to manage money for minor children.TrusteeThe person or institution that holds legal title to trust assets and manages them for the beneficiaries under the trust's terms and fiduciary duties.Viatical and life settlement providersLicensed companies that buy life insurance policies from their owners for a lump sum, then pay the premiums and collect the death benefit later.Bank-owned life insurance (BOLI)Permanent life insurance a bank buys on its employees, owns and names itself beneficiary of, mainly to offset the cost of employee benefits.Corporate-owned life insurance (COLI)Life insurance a business buys on its employees or executives, owns and is the beneficiary of, often to fund benefits or offset the loss of key people.Insurer rehabilitationA court-supervised receivership in which a state regulator takes control of a troubled insurer to restore it to health rather than shut it down.Lapse-supported pricingPricing that counts on many owners dropping coverage before it pays out, letting the insurer charge less than if everyone kept the policy.Mutual holding companyA structure in which a policyholder-owned mutual parent controls a stock insurer, letting it raise outside capital without fully demutualizing.ReceivershipA court-ordered process in which a state insurance regulator takes control of a financially troubled insurer to rehabilitate or liquidate it.ReinsuranceInsurance that insurance companies buy, passing part of the risk on policies they've sold to another company called a reinsurer.ChurningReplacing a client's policy or annuity with a new one, often from the same insurer, mainly to earn fresh commissions rather than to help the client.STOLIA scheme in which investors with no insurable interest induce someone to buy life insurance so they can acquire the policy and profit from the death.TwistingPersuading someone to drop or replace an existing policy by misrepresenting or leaving out key facts, an unfair trade practice under state law.RebatingGiving a customer part of an agent's commission or anything of value as an inducement to buy insurance, a practice most states prohibit.