Insurance Glossary

A tax-free exchange of one insurance contract for another under IRC §1035. Allowed directions: life→life, life→annuity, annuity→annuity. NOT allowed: annuity→life. The exam loves testing which direction fails.

Allows an insured who is terminally ill (or in some versions chronically ill) to receive part of the death benefit while still alive. Amounts received reduce what beneficiaries later receive; qualified accelerated benefits are generally received income-tax-free.

The replacement cost of damaged property minus depreciation. ACV = Replacement Cost - Depreciation. This is the default loss settlement method unless replacement cost coverage is purchased.

An insurance contract drafted entirely by the insurer and offered on a take-it-or-leave-it basis. Because the insured has no bargaining power, any ambiguity is interpreted in favor of the insured.

A contract in which the values exchanged are unequal and depend on an uncertain event. The insured may pay premiums for years without a claim, or receive a large payout after a single premium.

The irreversible conversion of an annuity's accumulated value into a guaranteed income stream. Payout options parallel life settlement options: life only (highest payment, most risk), life with period certain, joint and survivor, and refund options. A top-tested annuity concept.

A contract that liquidates an estate — the mirror image of life insurance. Money accumulates tax-deferred (accumulation phase), then converts to an income stream (annuitization phase). Classified by funding (single vs. flexible premium), start date (immediate vs. deferred), and investment type (fixed, variable, indexed).

The transfer of policy rights from one party to another. After a loss, the insured may assign the right to collect payment. Assignment of a property policy before a loss typically requires insurer consent.

The person or entity receiving the death benefit. The primary beneficiary is first in line; the contingent (secondary) beneficiary collects only if no primary survives. A revocable designation can be changed by the policyowner at any time; an irrevocable one requires the beneficiary's consent.

A temporary agreement providing immediate insurance coverage until the formal policy is issued. Can be oral or written and typically lasts 30 to 90 days.

Coverage that pays for physical injury, sickness, or death of another person caused by the insured's negligence. Includes medical expenses, lost wages, and pain and suffering.

A package policy designed for small to mid-sized businesses that combines commercial property and general liability coverage in a single policy at a reduced premium.

The savings element inside permanent life insurance, growing tax-deferred. The policyowner can access it via policy loans, withdrawals, or full surrender. On surrender, gain above premiums paid (the cost basis) is taxed as ordinary income — a heavily tested tax point.

A broad insurance category that covers legal liability for harm you cause to others — bodily injury, property damage, or financial loss to a third party. The main casualty lines tested on the Texas P&C exam are Auto Liability, General Liability (CGL), Workers' Compensation, and Professional Liability. Casualty is distinct from Property insurance, which covers loss to your own assets. Together they form the Property & Casualty (P&C) license category.

A standard commercial policy providing broad liability coverage for businesses, including bodily injury, property damage, personal injury, and advertising injury to third parties.

The unethical practice of an agent inducing a policyholder to replace an existing policy with a new one primarily to generate additional commissions, without benefit to the insured.

Federal law letting employees of employers with 20+ workers continue group health coverage after qualifying events: generally 18 months after termination or reduced hours, up to 36 months for dependents after events like divorce or the employee's death. The ex-employee pays the full premium plus up to 2% administration.

A property insurance clause requiring the insured to maintain coverage equal to a specified percentage (usually 80%) of the property's value. Failure to meet the requirement results in a penalty at the time of a partial loss.

The percentage split of covered expenses between insurer and insured AFTER the deductible — classically 80/20 — continuing until the stop-loss limit is reached. Distinguish from a copay (flat dollar amount per service) and the deductible (paid before the plan pays anything). Not the same as property-insurance coinsurance.

Auto insurance that pays for damage to the insured's vehicle caused by collision with another object or vehicle, regardless of fault. Subject to a deductible.

The head of the Texas Department of Insurance (TDI), appointed by the Governor. Responsible for regulating the insurance industry, enforcing insurance laws, and protecting consumers in Texas.

Auto insurance covering damage to the insured's vehicle from non-collision events such as theft, vandalism, hail, fire, flood, or hitting an animal. Also called Other Than Collision (OTC).

The intentional failure to disclose material information on an insurance application. If proven, it can void the policy from inception.

Texas requires licensed insurance agents to complete 24 hours of continuing education every two years, including 3 hours of ethics or consumer protection, to maintain their license.

The right to convert group coverage to an individual policy without evidence of insurability when leaving the group — typically within 31 days. In Texas, conversion and continuation rights coexist with federal COBRA; smaller-employer state continuation fills part of the under-20-employee gap.

A type of insurance company unique to Texas that is owned by its policyholders and operates on a mutual basis within the state. County mutuals are exempt from rate regulation but must file rates with TDI.

The first page of an insurance policy summarizing key information: named insured, policy period, coverages, limits, deductibles, premium, and property or vehicle descriptions.

The amount the insured must pay out of pocket before insurance coverage begins. Higher deductibles result in lower premiums. Common types include flat dollar and percentage deductibles.

Replaces a portion of earned income (typically 60–70%) when the insured cannot work. Key exam distinctions: own-occupation (can't do YOUR job — broader, costlier) vs. any-occupation (can't do ANY suitable job), plus total, partial, and residual disability definitions.

A property policy designed for residences that do not qualify for a standard homeowners policy, such as rental properties, vacant homes, or homes under construction. Offered in three forms: DP-1, DP-2, and DP-3.

The waiting period in disability income (and LTC) insurance between the onset of disability and the start of benefit payments — essentially a deductible measured in time. Longer elimination period = lower premium. Commonly tested alongside the benefit period and the probationary period.

A written amendment attached to an insurance policy that adds, removes, or modifies coverage. Also called a rider in life and health insurance.

A legal doctrine that prevents a party from asserting a right that contradicts their previous actions or statements. If an insurer's conduct led the insured to believe coverage existed, the insurer may be estopped from denying the claim.

A policy provision that eliminates coverage for specific perils, losses, or property. Common exclusions include war, nuclear hazard, intentional acts, and wear and tear.

Fair Access to Insurance Requirements plan providing basic property insurance to property owners in urban areas who cannot obtain coverage in the voluntary market due to environmental hazards or location.

Texas rating law that allows insurers to file their rates with TDI and begin using them immediately, without waiting for prior approval. TDI can disapprove rates after the fact if they are excessive, inadequate, or unfairly discriminatory.

The window after policy delivery during which the owner can return the policy for a full refund. In Texas: at least 10 days for a new life policy — and 30 days when the policy replaces an existing one (§1114.053(e)). Day-counts like these are near-guaranteed Texas statute questions.

Liability coverage for businesses (auto repair shops, parking garages) that have care, custody, or control of customers' vehicles. Covers damage to customers' autos while in the insured's possession.

Time after a missed premium during which the life policy stays in force. If the insured dies during the grace period, the claim is paid minus the overdue premium. Texas requires at least one month for individual life policies (TIC §1101.105).

Lets the policyowner buy additional coverage at specified ages or life events (marriage, birth) WITHOUT new evidence of insurability. The exam tests that no new underwriting/medical exam is required at each option date.

The insurer must renew the policy (typically to age 65) but MAY raise premiums — only on a class basis, never for one individual. Most individual health and LTC policies are guaranteed renewable. One notch below noncancelable.

The Texas Property and Casualty Insurance Guaranty Association pays covered claims of insolvent insurers. Funded by assessments on admitted insurers. Maximum claim payment is $300,000.

A condition that increases the likelihood or severity of a loss. Types include physical hazards (icy sidewalk), moral hazards (dishonesty), and morale hazards (carelessness).

Federal law tested for two things: portability (limits pre-existing-condition exclusions and guarantees group-to-group creditable coverage) and privacy (protected health information rules). Also guarantees renewability of group plans regardless of claims experience.

The most common homeowners policy. Covers the dwelling on an open perils basis (everything except what is excluded) and personal property on a named perils basis.

A homeowners policy for tenants that covers personal property on a named perils basis and includes personal liability coverage. Does not cover the dwelling structure.

A homeowners policy for condominium unit owners covering personal property, improvements to the unit, and personal liability. The condo association's master policy covers the building structure.

Provision preventing the insurer from voiding a life policy due to misstatements in the application after the policy has been in force for two years. On the Texas exam, know the fraud nuance: §705.104 of the Insurance Code preserves the insurer's ability to contest genuinely fraudulent claims through its carve-out.

The principle that insurance should restore the insured to the same financial position they were in before the loss — no better, no worse. Prevents profiting from insurance.

Coverage for property in transit, mobile equipment, and items that are movable by nature. Covers goods not adequately protected by standard property policies — examples include contractors' equipment, fine arts, and scheduled jewelry.

A financial stake in the subject of insurance such that the insured would suffer a financial loss if the insured event occurs. Required at the time of loss for property insurance.

Covers custodial and skilled care (home care, assisted living, nursing home) that health insurance and Medicare largely exclude. Benefit triggers are typically the inability to perform a set number of Activities of Daily Living (ADLs) or cognitive impairment. Texas mandates specific minimum standards and an outline of coverage.

The method used to determine how much the insurer will pay for a covered loss. The two primary methods are Actual Cash Value (ACV) and Replacement Cost Value (RCV).

Comprehensive health coverage with high maximum benefits, structured around a deductible, coinsurance, and a stop-loss (out-of-pocket maximum) that caps the insured's annual share. Contrast with basic/limited plans and with supplemental indemnity policies that pay fixed cash amounts.

The joint federal-state program paying medical and long-term care costs for people with low income and limited assets — the payer of last resort for nursing home care after assets are spent down. Contrast with Medicare, which is age/disability-based, not needs-based.

Federal health program for people 65+ and certain disabled individuals. Part A: hospital insurance (premium-free with sufficient work credits). Part B: medical/outpatient (premium). Part C (Medicare Advantage): private-plan alternative bundling A+B. Part D: prescription drugs. Part distinctions are near-guaranteed exam questions.

Standardized private policies (Plans A–N) that fill Medicare's gaps — deductibles, coinsurance, copays. Guaranteed-issue during the 6-month open enrollment after Part B enrollment at 65+. Medigap does NOT cover long-term custodial care.

A false or misleading statement made to induce someone to buy, continue, or surrender an insurance policy. A prohibited trade practice under Texas Insurance Code that can result in license revocation.

A life insurance policy funded faster than the 7-pay test allows. Consequence: lifetime distributions (loans AND withdrawals) are taxed gain-first (LIFO) and may incur a 10% penalty before age 59½. Once a MEC, always a MEC — but the death benefit remains income-tax-free.

The tendency of an insured to be dishonest or to intentionally cause a loss for financial gain. Example: committing arson to collect on a fire insurance policy.

Carelessness or indifference to loss because insurance exists. Unlike moral hazard, there is no dishonest intent — the insured simply takes fewer precautions.

A coverage approach where only the specific perils listed in the policy are covered. If the cause of loss is not named, there is no coverage. The insured must prove the loss was caused by a named peril.

A federal program administered by FEMA providing flood insurance to property owners in participating communities. Standard homeowners policies exclude flood damage, making NFIP coverage essential in flood zones.

The strongest renewability class: the insurer can neither cancel nor raise premiums — rates are locked to age 65 (or a stated age). Common in disability income insurance. If the exam contrasts it with guaranteed renewable, premium guarantee is the difference.

A coverage approach (also called all-risk or special form) covering all causes of loss except those specifically excluded. The burden of proof is on the insurer to show an exclusion applies.

The direct cause of a loss. Examples include fire, windstorm, theft, and lightning. Policies either cover named perils (listed) or open perils (all except excluded).

The standard auto insurance policy for individuals. Includes liability, medical payments, uninsured motorist, and physical damage coverages. The ISO form is widely used.

Movable property owned by the insured, such as furniture, clothing, electronics, and appliances. Covered under Coverage C of a homeowners policy, typically at 50-70% of the dwelling coverage limit.

No-fault auto insurance coverage that pays medical expenses, lost income, and funeral costs for the insured and passengers regardless of who caused the accident. Required in some states; optional in Texas.

The amount paid by the insured to the insurer for coverage. Determined by risk factors including type of coverage, limits, deductible, and the insured's loss history.

Errors and Omissions insurance that protects professionals (agents, consultants, etc.) against claims of negligence, mistakes, or failure to perform professional duties.

The combined regulatory category covering both Property insurance (protection against loss to your own physical assets) and Casualty insurance (protection against your legal liability to others). In Texas, the General Lines Property & Casualty license authorizes producers to sell both. The Pearson VUE Texas P&C exam (#124401) tests 8 content areas including types of property policies, types of casualty policies, contract law, Texas statutes, and policy provisions. Distinct from Life & Health (L&H), which requires a separate license.

Coverage that pays for damage to another person's property caused by the insured's negligence. Covers repair or replacement costs up to policy limits.

Insurance that protects against financial loss to physical assets — your home, business building, contents, or specific objects — caused by covered perils such as fire, wind, theft, or vandalism. The two main forms tested on the Texas P&C exam are Homeowners (HO) policies for residential property and Commercial Property policies for businesses. Property insurance is typically written on an indemnity basis (you're restored to your pre-loss financial position, not enriched).

The illegal practice of offering any inducement (money, gifts, or services not specified in the policy) to a prospect as an incentive to purchase insurance. Prohibited in Texas with limited exceptions.

Insurance purchased by an insurance company to transfer portions of its risk to another insurer (the reinsurer). Helps insurers manage large or catastrophic exposures.

The cost to repair or replace damaged property with materials of like kind and quality, without deduction for depreciation. Provides a higher payout than actual cash value.

Statements made by the applicant on an insurance application that are believed to be true to the best of their knowledge. Unlike warranties, they need only be substantially true.

An attachment to a policy that modifies its terms or coverage. In property and casualty, the equivalent term is endorsement. Common in life and health insurance.

The ways a life insurance death benefit can be paid out: lump sum, interest only, fixed period, fixed amount, and life income (with variants like life income with period certain). Interest earned on proceeds held by the insurer is taxable to the beneficiary; the death benefit itself is not.

The right of an insurer, after paying a claim, to step into the insured's shoes and pursue recovery from the third party responsible for the loss.

A three-party agreement (principal, obligee, surety) guaranteeing the principal will fulfill an obligation. Unlike insurance, the principal is expected to repay the surety for any losses.

Insurance placed with non-admitted (unlicensed) insurers when coverage is unavailable from admitted carriers in the state. In Texas, surplus lines must be placed through a licensed surplus lines agent.

A residual market mechanism ensuring auto insurance is available to Texas drivers who cannot obtain coverage in the voluntary market. Assigns applicants to participating insurers.

The state agency responsible for regulating the insurance industry in Texas. TDI licenses agents, approves policy forms, monitors insurer solvency, and handles consumer complaints.

A limited license issued by TDI for up to 90 days to allow a person to handle insurance business in specific circumstances, such as the death or disability of a licensed agent. Not renewable.

Life insurance that provides pure death protection for a specified period (10, 20, 30 years) with no cash value. Variants tested on the exam: level term (constant death benefit), decreasing term (often paired with a mortgage), and increasing term. Premiums are lowest of all life policy types — the classic answer for 'maximum coverage, minimum premium.'

The minimum auto liability insurance required in Texas: $30,000 per person for bodily injury, $60,000 per accident for bodily injury, and $25,000 per accident for property damage.

A residual market insurer providing wind and hail coverage to property owners in designated catastrophe areas along the Texas Gulf Coast who cannot obtain coverage in the voluntary market.

The act of using misrepresentation to convince an insured to cancel or lapse an existing policy and replace it with another. An illegal and unethical trade practice in Texas.

A personal or commercial liability policy that provides additional limits above underlying policies (auto, homeowners, CGL). Also may cover claims excluded by underlying policies, subject to a self-insured retention.

Coverage that pays the difference when the at-fault driver's liability limits are insufficient to cover the insured's damages. Often paired with uninsured motorist coverage.

Treating insureds differently in rates, coverage, or claims handling based on factors not related to risk, such as race, religion, or national origin. Prohibited by Texas Insurance Code. Discrimination based on actuarial risk factors is permitted.

Coverage that protects the insured when injured by a driver who has no liability insurance or in a hit-and-run accident. Covers bodily injury (and property damage in some states).

Flexible-premium permanent life insurance that unbundles the policy into protection, savings, and expense components. The policyowner can adjust premium amounts and the death benefit (Option A level vs. Option B increasing). Cash value grows at a current interest rate with a guaranteed minimum.

The principle requiring both insurer and insured to act honestly and disclose all material facts. Insurance contracts are contracts of utmost good faith (uberrimae fidei).

Permanent life insurance whose cash value is invested in separate-account subaccounts chosen by the policyowner — investment risk falls on the policyowner, not the insurer. Because it is a security, selling it requires BOTH a life insurance license and FINRA securities registration. Regulated by the SEC, FINRA, and the state.

The voluntary giving up of a known right. If an insurer knowingly waives a policy condition (e.g., accepts late premium), it cannot later enforce that condition to deny a claim.

Rider that waives life insurance premiums if the insured becomes totally disabled, after a waiting period (commonly six months). The policy — including cash value growth — continues as if premiums were being paid.

Statements in an insurance contract that are guaranteed to be true. Unlike representations, even a minor breach of warranty can void the policy.

Permanent life insurance with level premiums, a guaranteed death benefit, and cash value that grows on a tax-deferred basis. Coverage endows at a stated age (traditionally 100 or 121). Limited-pay and single-premium variants compress the payment period without shortening coverage.

Statutory insurance providing medical benefits and wage replacement to employees injured on the job, regardless of fault. In Texas, it is optional for most private employers.