Click on a term to see its definition: S

Lost in the terminology insurance companies use? Our quick-reference insurance glossary provides easy-to-understand definitions and examples of the terms insurance professionals use.


Salvage refers to the act of an insurance company to make use of whatever remaining value an insured property has after claims are paid against it.

When the insurance company has paid for a claim for a property that was damaged, it can take hold of that property and sell it to recover some of the claims it paid. For instance, if the insurance company that insured marine cargo paid for those cargos that were lost at sea, it can try to recover the lost cargo and sell it. If the insurance company paid for the replacement of a car that was totaled, it can sell the totaled car and obtain the proceeds of the sale.


A Schedule, in insurance terms, refer to the list of what benefits the policy will provide, what risks are covered and what premiums are to be paid and when. Essentially, it is a list of the policyholder's and the insurance company's responsibilities by way of benefits, assets, coverage and other defined items.

This is particularly applicable in health insurance policies. It provides an itemized list of what the insured person can reimburse for, up to how much the reimbursements will pay, how many days a benefit is provided (like income benefits, room and board in a hospital, the number of allowable consultations with the doctor, etc).

The schedule is provided when the policy is issued and provides the basis of what benefits the insured person can make use of.

Secondary Market

A Secondary Market refers to a market that trades securities and other products that have been previously issued and remain outstanding.

A secondary market can also refer to the place where life insurance policyowners can sell existing policies for amounts that are higher than its cash surrender value.

For instance, John is considering terminating his life insurance policy. He can surrender the policy to the insurance company and get the surrender value, he can stop paying premiums and wait for the policy to lapse, or he can sell it to a secondary market. A life settlement company may be willing to buy the life insurance policy (sales prices may go for up to three times the cash surrender value). The life settlement becomes John beneficiary and will receive the death benefits when John dies.

Section 1035 Exchange

A Section 1035 Exchange refers to the exchange of an existing insurance policy or annuity into a new one. This is a tax-free transaction and should involve the same insured person. The "new" contract should also be equivalent to the "old" contract being terminated.

This is based on Section 1035 of the Internal Revenue Service Code. This means immediately reinvesting the proceeds of an annuity or insurance policy into another one that has the same value and the same terms. Section 1035 requires that for this to be tax-free, it should be facilitated and managed by the seller of the new annuity or life insurance policy.

Section 415

Section 415 refers to the portion in the Internal Revenue Code that sets limits on how much can be contributed to qualified retirement plans. It also involves limits on the benefits to be received under the plans.

For a retirement plan to be considered qualified under Section 415, it should meet the requirements of the Employee Retirement Income Security Act (ERISA), as well as IRS Section 401(a). As a result, qualified retirement plans enjoy some tax benefits such as the fact that all contributions to the fund, as well as earnings on these contributions are tax-deferred until such a time that the fund owner decides to withdraw his funds.

Plans that may qualify include pension plans, profit sharing plans and 401(k) plans.

The IRS annually adjusts the limits prescribed to allow for inflation and cost-of-living increases.

Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is a government-established organization that is responsible for overseeing the operations of publicly-held insurance companies. It is an independent agency that regulates the stock exchange, the securities industry and other electronic securities markets. Basically, the SEC is in charge of protecting the nation's investors.

The SEC was established due to 1934 Securities Exchange Act. Companies that fall under the purview of the SEC are required to provide annual and quarterly reports such as the 10K (annual financial statement) and 10-Q (quarterly financial statements). By law, all companies are required to disclose to the SEC important information and events regarding company stock. For example, if an individual or entity buys over 5% of the company's stocks, this must be reported to the SEC to help it monitor takeover threats.

Securities Outstanding

Securities Outstanding refers to shareholders' stocks. These are common shares of stocks that investors purchase, and that have been authorized by the company and the Securities and Exchange Commission and issued accordingly.

Securities outstanding provide the shareholders with the right to have some form of control over the company. These enable holders to vote for the members of the board and represent ownership to the company for the proportion of shares held by the individuals or entities.

Securities outstanding are different from common stock (treasury shares). Securities outstanding can be fully diluted, when it includes diluting securities. These include convertibles, options and warrants.

The Securities and Exchange Commission maintains filings of securities outstanding.

Securitization of Insurance Risk

Securitization of Insurance Risk refers to the process of using capital markets to spread insurance risk. This is one way insurance companies can diversify and expand their risk exposure.

Insurance risk can be traded using the capital markets through issuing note or bonds to third-party investors. This can be done by the insurance company, the reinsurer or an insurance pool. This may be done directly or indirectly and can be used as a way to obtain more capital to cover more risks.

The securitization of insurance risk is particularly useful, especially for spreading the exposure in high-risk or high-ticket risk such as what is involved in catastrophe insurance. Securitization also has the added advantage of adding liquidity.

Segregated Account

A Segregated Account refers to a separate account that insurance companies maintain in order to keep the company's assets (general account) from the customers'. This helps the insurance company to manage the funds generated from variable annuities and other variable insurance products.

Segregated accounts serve to ensure that there is no misuse of customers' funds - since the two funds are clearly separated, neither the general fund nor the customers' funds are used in the wrong way. With segregated accounts, it's also easier to identify which amount belongs to which group. This is particularly helpful in instances where something substantial happens to the company (such as its becoming insolvent).


Self-Insurance refers to the act of assuming the financial risks involved by setting aside the entity's own money. This fund takes the place of an insurance policy so that the money that was supposed to be used to pay premiums is the one used to fund expenses associated with risks (such as medical expenses for injury due to an accident).

Self-insurance usually happens to medium to large-sized companies who pay for small yet frequent losses. For instance, a construction company can pay for minor injuries to their construction employees. (This is, of course, done in accordance to legal requirements for workers' compensation.) A taxi company can also pay for minor damages to their taxi fleet.

Separate Account

A Separate Account refers to an investment account that the insurance company maintains as separate from its general account. The separate account is used for the insurance company's investment activities. These include funds from variable annuities or variable insurance products that have to be invested in order to get a return.

These funds are kept separate in order to distinguish it from the insurance company's own money (the general account). Keeping the distinction helps prevents misuse of funds from both sides - the insurance company does not use the general funds for investments and it does not use the separate account to fund the company's day-to-day operations.

Settlement Options

Settlement Options refer to the choices an insurance policyowner can have regarding how he will receive the proceeds of his policy once it matures. This means that there are many ways by which the insurance company can pay for the benefits due to the policyowner, not just the option to get the settlement as a lump sum payment.

The policyowner can choose: one, to receive the proceeds on an installment basis; two, to receive the proceeds in pre-selected installment amounts that are regularly paid until the funds are all used up and three, to let the insurance company continue holding the funds so that it can get interest earnings. The policyowner can also create a life annuity with the proceeds and tie the payments so that he will receive a specified amount regularly for as long as he lives.


Severity refers to the extent of the loss incurred.

When computing for premium rates, the insurance company also considers the possible amount of damage an insured risk will cause. For example, if the insurance company will cover a house against a fire, it will also look into how much possible damage the fire may cause.

The insurance company often uses a severity rate, something that is used to compute for the premiums. The severity rate is the ratio that pertains to the extent of loss with respect to the property or assets exposed to the loss during a specific time period.

Sewer Back-Up Coverage

Sewer Back-Up Coverage provides homeowners with protection against losses caused by the sewers backing up. This is something that a policyowner can add as an endorsement to the policy.

Sewers can back up and seep through the drains in the house or business establishment, causing flooding and damage inside the house. This happens when there are abnormally heavy rains and flooding.

Sewer back-up also involves not just the back-up of sewers, but downspouts, eaves troughs and septic tanks as well. Sewer back-up is usually not part of a standard policy for homeowners or commercial establishments. This includes payments for cleanup when the water backs up through the sewers or drains, as well as the damage to property that it can cause.

Shared Market

A Shared Market refers to a system developed by the state, the government and by insurance companies that enable people to buy insurance for risks that are not covered in the regular market.

These usually involve state-sponsored pools - the state requires insurance companies licensed to be part of the pool of insurers that cover unique, undesirable or large risks. These include Fair Access to Insurance Requirements (FAIR) plans and assigned risk plans.

When an application comes up, the state can pick from the pool and assign the selected insurance company to cover the risk. The amount of risk the insurance company is required to assume depends on the size of market share it has (with respect to its premiums in the voluntary market).

Short-Term Disability Income Insurance

Short-Term Disability Income Insurance refers to disability income benefits given by the insurance company to an insured person in the event of his disability. As the name suggests, this is just a short-term benefit and the benefits will usually be provided for a limited time period (say one to five years).

The advantage with short-term disability income insurance versus long-term disability income is that there is usually a shorter waiting periods before the income benefit payments start to kick in. Premiums for this type of cover are also lower.

However, since it pays only for a shorter time period, long-term disability income insurance is a more attractive option, since even when it has a longer waiting period, it will pay for as long as the insured person is disable - until the insured person reaches retirement age (65 years). There are even some policies that pay for the insured person's lifetime.

Single Premium Annuity

A Single Premium Annuity is an annuity that requires one lump sum payment and then the annuity is considered paid in full. Single premium annuities are different from other kinds of annuities that have a savings period over an extended period of time (a time when the annuitant makes regular deposits to the annuities).

One can buy a single premium annuity at almost any age, with the single premiums based on the amount of income payments desired, as well as the life of the contract.

Insurance companies and other financial firms sell single premium annuities, as well as other kinds of annuities.

Single Premium Policies

Single Premium Policies, as the name suggests, are life insurance policies or annuity contracts that can be bought by a single payment or lump sum. For this kind of policy or contract, the insurance or annuity is considered paid up at the time of its purchase.

This is a particularly attractive package for someone who has just inherited money, or for someone who can afford it and don't want the hassle of having to make periodical premium payments or are afraid of the negative effects/losses that are incurred when periodic premium payments are missed.

A Single Premium policy is no different from the other policies - the benefits depend on the age and health condition of the insured person. Also, the more money invested (the larger the single premium paid), the higher the benefit payments.

Soft Market

A Soft Market refers to a time in the insurance market where insurance coverage is readily available and easy to find. Thus, premiums are low since there are more sellers than there are buyers. This is what is considered as a buyer's market.

As insurance companies compete for clients, premiums rates drop rapidly and insurance companies tend to become more lenient with respect to their underwriting requirements and standards.

The property and casualty insurance market regularly experience a rotation between hard markets and soft markets. The cycle can occur for a line of insurance, or for a specific geographic location. The shift from a soft market to a hard market is usually caused by a major insurance event - like a catastrophe. When a natural disaster hits, the industry is turned into a hard market, when insurance coverage is less readily available.


Solvency refers to the ability of insurance companies to make good the claims of its policyholders.

Regulatory departments check to insurance an insurance company's solvency. State insurance commissions require regular reports from insurance companies as part of their early warning system. When a company's ratios fall below the prescribed standards, the state insurance commission can intervene to ensure that the company does not become insolvent.

To ensure solvency, states have regulations regarding the insurance company's surplus requirements, minimum capital requirements, investment requirements and limits as well as statutory accounting conventions. The state insurance commission also looks into cash flow and corporate activities (sales, operations, investments and marketing) as well financial ratio tests.

Specified Disease Coverage

Specified Disease Coverage provides protection against loss caused by a specified disease. The coverage will pay for medical expenses and living allowances once the insured person is diagnosed with an illness or disease that are part of the covered list of diseases.

The coverage may require certain medical reports and tests, as well as the diagnosis of a physician.

Specified disease coverage works as an amendment to an existing health insurance policy. It is not designed to act as a substitute to a comprehensive health insurance. Thus, it is not sold as a stand-alone policy.

This is also called the dread disease coverage.

Spendthrift Trust Clause

Spendthrift Trust Clause is a provision in a life insurance policy that pays directly to the beneficiary and does not allow the creditors of the beneficiaries to receive the payouts. Thus, if a beneficiary pledges the proceeds expected from an insurance policy to his creditors, claims for benefit payments from the creditors will not be honored.

This prevents a beneficiary that is unable to control spending or who is talked into a speculative investment to use expected proceeds as collateral or to use a potential gift as security for credit.

The spendthrift trust clause may also be attached to annuities and trusts.

Split-Dollar Life Insurance Plan

A Split-Dollar Life Insurance Plan is an agreement where premium payments are shared by the employer and the employee. This is not an insurance policy, but an arrangement as to what portion of the premiums are paid by the employer and the employee, as well as how aspects of the policy will be split. This includes the ownership of the policy (and related rights), cash values, as well as the death benefits.

The employer uses a split-dollar life insurance plan to ensure that the employer contributes to the plan. In the event of the employee's (who is the insured person) death, the employer gets back what it paid for the premiums, and the balance is paid to the beneficiaries.

An insurance policy with a split-dollar agreement may also be used by an employer to help fund retirement income.

Spread of Risk

Spread of Risk refers to the sale of act of the insurance company to pool risks from more than one source, that is, to sell insurance policies covering the same risk to as many customers as possible, or selling insurance policies to as many geographic areas as possible.

The insurance company is counting on the fact that with a large number of people buying coverage for the same risk, the likelihood of that risk happening to a majority of the policyholders is small.

Insurance companies look for an attractive spread of risk when choosing the risks to insure. That is why insurance companies are hesitant to offer flood insurance as there is a tendency only for those who have high risk to buy the policies. This means that when the risk happens, there will be a lot of claims filed all at the same time, making flood insurance a poor spread of risk.


Stacking refers to the practice that insurance companies and policyholders use to ensure that there is more money available to pay for claims made due to auto accidents. These allow the limit of liability to add up for each vehicle when a single policy is bought to cover multiple cars, or when different policies insure multiple cars.

When there are multiple vehicles carried on one policy, the amount of coverage provided will increase. When a driver meets with an accident with someone who is insured, the driver's insurance company will pay additional benefits over and above what the other driver's insurance company pays.

Stacking also protects the insured against meeting with accidents with a driver who has no or little auto insurance.

Standard Risk Class

A Standard Risk Class refers to the group of insurance applicants that carry an average risks in relation to the underwriting practices of the insurance company.

Those belonging to the standard risk class will be charged the standard or average premium rates. This is in contrast with the rates charged to people belonging to the substandard or rated risk class, who will be charged higher premium rates because of the higher risk they carry.

People in the standard risk class usually have jobs that are considered safe, are in great physical condition and do not present a large moral hazard to the insurance company, as per the company's underwriting guidelines.

Statutory Accounting Principles (SAP)

Statutory Accounting Principles (SAP) are accounting rules that are more conservative. These are a set of rules that were laid down by the National Association of Insurance Commissioners. The state requires insurance companies to follow these accounting principles when they prepare for their accounting reports.

SAP is part of the state insurance commission's way of ensuring that the insurance companies under their jurisdiction remain financially strong and solvent. With the use of SAP, assets that are not that liquid are not included in the ratios that represent the company's solvency. SAP also requires that assets and liabilities are valued accordingly and that expenses related to sales are recorded immediate and not amortized throughout the policy's duration.

Stock Insurance Company

A Stock Insurance Company is an insurance company that is comprised by stockholders who own shares in the company and those take part in its profits through increases in the value of the stocks and through earnings distributions such as dividends.

The stock is the mechanism by which the insurance company raises funds for their operations. The stockholders are the providers of the capital and in return they have ownership rights to the company. They have the right to vote for its board of directors. These directors in turn appoint the officers who are tasked to run and manage the company.

The stockholders don't need to have insurance policies with the company.

Straight Life Annuity

A Straight Life Annuity is a life annuity that pays the annuitant a regular income while the annuitant is alive. However, it will not pay any benefits (such as a death benefit) after the death of the annuitant.

With a straight love annuity, there are no designated beneficiaries. And since there is no insurance component, a straight life annuity is cheaper than other kinds of insurance products. These may be bought by making regular deposits to the annuity during the savings phase, or by paying one lump sum premium. Straight life annuities are also ideal for people who do not have beneficiaries to support.

Structured Settlement

A Structured Settlement is a plan that outlines how an insured person, beneficiary or claimant is to be paid when these opt not to get a single lump sum payment. It is a legal agreement that defines how much is to be given in periodic benefit payments. This is usually programmed to be received throughout the lifetime of the insured person, the beneficiary or claimant. Thus, the structured settlement really becomes a lifetime annuity, which is designed to fit the needs of the one set to receive the payments.

A structured settlement is useful in serving as a steady income stream, especially if the person is past the retirement age. A third-party is assigned to administer the structured settlement.


Subrogation refers to the process where the insurance party seeks to recover the claims it already paid. This is a legal process and the insurance company asks the party that is liable for the payment of damages to reimburse the amount of loss it has paid to its policyholder.

For instance, a policyholder claims for medical expenses because of injury due to an accident. Upon investigation, it was clear to the insurance company that the accident was caused by a driver of another car. The insurance company pays for the claims of its clients while going after the guilty party (or his insurance company) so that it will recover the amount it paid for in claims.

This is based on the principle that whoever caused the accident would be liable for the resulting damages.

Substandard Premium Rates

Substandard Premium Rates refer to higher rates charged to insurance applicants who fall under the substandard risk group. Those who belong to the substandard risk exhibit a greater-than-average likelihood of loss. The classification is based on several factors, such as height/weight ratio, lifestyle, health history, gender and occupation. Thus, the factors may either be medical or non-medical.

Those under the substandard risk class are charged a higher premium, since they show a greater risk of loss. There are levels of substandard premium rates, depending on the extent upon which the individual shows a risk of loss.

This is also called special class rates.

Substandard Risk Class

Substandard Risk Class refers to a group of insurance applicants that are characterized by a considerably greater-than-average possibility of loss.

The insurance company's underwriter upon receiving the application for insurance will evaluate what kind of risks the applicant represents. The underwriter will check for permanent medical conditions that have existed prior to the application, whether the applicant has been injured in an accident or suffered from a serious illness, or is involved in what is considered as a dangerous occupation. These, as well as the applicant's health history, moral hazards and other factors, contributed to the applicant's being, are included in the substandard risk class. Those under this class are charged a higher premium because of the greater risk they represent.

This class is also called an impaired risk class and a special class.

Suicide Exclusion Provision

The Suicide Exclusion Provision included in a life insurance policy declares that the insurance company will not pay for death benefits in the event that the insured commits suicide and dies as a result of that act.

This prevents people who intend to commit suicide (and who want beneficiaries to benefit from it), to buy insurance policies. Life insurance is designed in such a way that the insured person has a vested interest in prolonging his life, and not in ending it.

Thus the suicide exclusion provision is applicable only within a stated period (usually one or two years). This waiting period will start from the day the policy is issued. After that, the insurance company will have to pay for death benefits even when the cause of death is suicide.


The Superfund refers to the fund raised to pay for cleanup of abandoned dump and hazardous waste sites, as well as the remedial activities and long-term removal efforts involved.

The Superfund resulted from the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), as well as the Superfund Amendments and Reauthorization Act of 1986. This law was developed and enacted in response to the need to clean up abandoned waste sites.

The Environmental Protection Agency (EPA) is tasked to manage the activities which involve investigating the sites in question, the priority of the sites on the list, the enlistment of community involvement and putting on long-term measures to prevent the same thing from happening again.

The EPA is also responsible for investigating and finding out who are the parties that are to be held responsible for the waste sites and make them clean up the sites.

Supplemental Coverage

Supplemental Coverage refers to additional face amounts that can add to the basic insurance policy. These riders serve to alter (in most cases to add to) the coverage of the policy, or to alter its terms so as to offer the policyholder more benefits or an increased coverage with respect to risks.

Examples of supplemental coverage include a Cost of living rider (where the face amounts are regularly increased to make up for inflation) or an Accidental death benefit rider (where the insurance company pays an amount equal to the death benefit for a death caused by accident).

Since supplemental coverage provides more benefit, these usually a charged with additional premium.

Surety Bond

A Surety Bond is an agreement among the principal, the obligee and the surety, where the obligee is protected in case there is a default in the payments. The surety will be the one to pay the obligee when the principal fails to perform his part of the deal.

For instance, in the case of a customer hiring a contractor to build a house, a surety bond is established. The contractor, under the contract, agrees to complete the house based on the specifications and building plan approved by the customer. In the event that the contractor fails to perform and to complete the house according to specifications, the surety will ensure that the work is carried out, or will pay for the loss.


Surplus refers to the remaining amount or the difference between the assets and the liabilities of the insurance company. In essence, it's how much the insurance company has immediately available for it to meet their claims obligations to their policyholders.

The surplus serves as a cushion in case the insurance company is faced with an unpredictably high number of claims.

The surplus also provides a very useful indication of the insurance company's financial strength and stability. It also indicates the company's solvency or its ability to pay for claims.

The surplus represents the true profit the insurance company gains from premiums. The company can distribute the surplus by way of policyholders' bonus and shareholders' dividends.

Surplus Lines

Surplus Lines refer to the insurance products (usually for property and casualty insurance) that the admitted insurance companies do not sell. When a would-be customer is looking for a company to insure a unique or extremely large risk, it must turn to a non-admitted carrier to buy insurance. Admitted companies are companies that are licensed to operate in a certain state, while non-admitted companies do not hold a license to operate in that state.

These surplus lines can be covered by an insurance company outside of the state (with another state or in another country). An example would be Lloyd's of London taking on a unique risk that typical insurance companies have rejected.

Surrender Charge

The Surrender Charge is the fee tacked on if the life insurance policy owner or annuitant decides to surrender or cancel the policy or annuity contract. This is particularly true if the surrender or cancellation occurs within a specified period (like five to seven years).

The surrender charge or surrender fee covers the costs of maintaining the contract in the books of the insurance company.

If you want to save on the surrender charge, you can have it waived if you inform the insurance company well in advance regarding the cancellation of the policy or annuity. Then, the payments are continued for a certain time before the contract is actually canceled.

Surrender Cost Comparison Index

The Surrender Cost Comparison Index is an index used to evaluate two or more insurance policies or annuities. It computes for the present value of premiums paid or deposits made. As such, one can compare the policies or annuities by looking at how much these cost over a 10- or 20- year period, with the assumption that the owner decides to surrender the contract for the cash value at the end of the said time.

The surrender cost comparison index takes into account the timing of the dividends to be paid, the amount of dividends expected, as well as the amount and regularity of paid premiums.


Swaps refer to the trading (exchange, selling and buying) of various securities from among investors. These investors agree to exchange, sell or buy a security that is posed to mature at a certain time, for another similar bond that will mature at a different time.

Swaps may be made to account for a change in investment goals or to change the maturities in the bond portfolio. The goal is to leverage the changes in risk, interest rate, marketability, maturity and even for its tax implications.

Swaps enable an investor to generate capital, while at the same time enjoy a tax write-off. There are also bonds that perform poorly that can be unloaded via swaps.

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