A
Accumulation Phase
The period of time during which a deferred annuity’s contract value has the opportunity to grow.
Annuitant
The person whose life is used to determine the benefits payable under an annuity contract. Frequently, this person is also the annuity owner.
Annuity
A contract where an individual makes one or more purchase payments to a life insurance company in exchange for the company's commitment to pay a stream of income for a specific period of time or for the annuitant’s lifetime. There are a variety of annuities. Some annuities pay income immediately and others allow the payment of income to be deferred. Within each of these categories, there are also fixed annuities and variable annuities. A fixed annuity contract offers a fixed interest rate guaranteed for a set period of time on each purchase payment. Any interest rate applied to a purchase payment will never be less than the minimum allowed by law in the state where the contract was issued. A variable annuity offers investment choices to which the contract owner can allocate purchase payments.
Annuity Owner
The person who has the right to make decisions about an annuity contract. Frequently, this person is also the annuitant.
Asset Allocation
The spreading of investments among different asset classes, such as stocks, bonds, and cash reserves. The goal of asset allocation is to optimize the risk/reward tradeoff based on specific situations and goals of the investor and/or the mutual fund. Many financial professionals believe that the mix of asset classes has a greater impact on long-term portfolio results than does the performance of any individual investment.
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B
Bank Owned Life Insurance (BOLI)
Generally permanent life insurance purchased by a bank on the lives of its employees or directors to fund the liabilities arising from its employee benefit programs, such as deferred compensation, supplemental retirement income, and post retirement medical benefits. The bank is the owner and beneficiary of a BOLI policy.
Beneficiary
The person or entity named in a life insurance policy, a qualified retirement plan, or an annuity who, by the terms of such a policy, contract or plan, is entitled to receive proceeds payable upon the death of the insured, annuitant or the plan participant.
Board of Directors
An elected group of individuals who govern a corporation, setting company policy and procedures, as well as appointing senior officers. The board of directors must abide by and execute the company's charter. A board member may be unaffiliated with the corporation, representing community interests, professional organizations, or industry establishments.
Bond
A debt security issued by a corporation, government, or governmental agency that obligates the issuer to pay interest at pre-determined rates and intervals and repay the principal at maturity. Every bond has a set face value, also known as a par value, which specifies the amount of money the bondholder will receive when the bond reaches maturity. The face value will never change, but the market value of a bond may fluctuate. If a bondholder sells a bond before its date of maturity, he or she may receive more or less than the face value.
Business Succession
The prearranged process that addresses the orderly transfer of control of a business entity in the event of retirement, termination or death of key persons who manage or own the business. Business succession broadly involves legal, financial, tax, and family concerns.
Buy-Sell Agreement
A written, legal contract that provides for the purchase of a business from an owner who wishes to sell, wants to terminate involvement, is permanently disabled, or has died. A buy-sell agreement generally allows for a different, future ownership structure. The agreement may be funded with life and disability income insurance, and it may contain specific purchase arrangements.
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C
Cash Value
The accumulated cash buildup in a permanent life insurance policy or a deferred annuity contract that the policy or contract owner receives if the policy/contract is surrendered. Cash values paid to the owner are reduced by any outstanding debt and, if applicable, surrender charges.
Cash Value Life Insurance
Also known as permanent or ordinary life insurance. Life insurance that offers a cash value, such as whole life, universal or variable universal life. Cash value life insurance generally refers to most forms of life insurance other than term.
Certified Financial Planner (CFP)
One who has successfully passed the exams of the Certified Financial Planner Board of Standards Inc., earning certification as a financial advisor. Areas of expertise generally include banking, investments, retirement, estate planning, insurance, and taxes.
Claim
A request for payment under the terms of an insurance policy or contract.
Claims-Paying Ability Rating
Provides an assessment of an insurance company's ability to pay claims, relative to other insurance companies.
Contingent Beneficiary
On most insurance applications, owners have the option to name a primary beneficiary and a contingent, or secondary, beneficiary. At the death of the insured, a death benefit of an in force contract is payable to a beneficiary. The primary beneficiary is the beneficiary who will receive the proceeds upon death of the insured. If, at the death of the insured, the primary beneficiary is ineligible or is deceased, the named contingent beneficiary will then receive the proceeds.
Convertible Term Insurance
Life insurance that provides the policyholder with a right (as described in the policy) to convert the face amount of term insurance to a guaranteed issue identical face amount of permanent life insurance depending on the product.
Corporate Owned Life Insurance (COLI)
Generally permanent life insurance purchased by an employer on the lives of its employees or directors to fund the liabilities arising from its employee benefit programs, like deferred compensation, supplemental retirement income, and post retirement medical benefits. The employer is the owner and beneficiary of a COLI policy.
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D
Death Benefits
Payments from an insurance policy, annuity contract or an Individual Retirement Account (IRA) to a beneficiary upon the death of the insured, annuitant or plan participant.
Decreasing Term Insurance
This term insurance policy has a death benefit that decreases over time. Decreasing term insurance is often used in conjunction with a mortgage or other amortized debt. For example, a holder of a 30-year mortgage may also hold a 30-year decreasing term insurance policy to cover the mortgage if he or she dies before it is paid off.
Deferred Annuity
A long-term contract designed to accumulate assets for retirement and turn those assets into a predictable stream of income at some point in the future.
Deferred Compensation
The deferral of receipt of current earned income or compensation to a later date, usually retirement. The intent is to defer receipt to a date when the recipient might be subject to a lower marginal tax rate.
Defined Benefit Plan
This employer-funded retirement plan is designed to pay a predetermined benefit to an employee based on years of service and salary or wages. Employer contributions adjust annually on an actuarial basis, and the employer is responsible for all investment selections and decisions. Generally, defined benefit plans provide eligible participants with a fixed monthly benefit for life. These benefits are the obligations of the company providing the plan and insured by a government agency - the Pension Benefit Guaranty Corporation (PBGC).
Defined Contribution Plan
Defined Contribution Plans, such as 401(k) plans, offer tax deferred retirement savings that depend on the amount contributed by the employee/employer and any earnings. Up to certain limits, these contributions are not currently taxed and the earnings on them are also tax deferred until received.
Direct Rollover
A tax-free transfer of money or property from the trustee or custodian of one qualified retirement plan or account to another.
Disability Benefit
Benefits received from a disability income insurance policy that are payable if the insured becomes totally (and, in some cases, partially) disabled.
Disability Income Insurance
A policy that pays the insured a portion of his or her income in the event that a temporary or permanent disability prevents the insured from working in his or her occupation or, in some cases, in any occupation.
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E
Early Withdrawal
The removal of funds from a fixed-term investment before the maturity date or from a tax-deferred investment or retirement savings account before a fixed time. One example would be a distribution from an Individual Retirement Account (IRA) taken before age 59½, other than for death or disability. Early withdrawals may be subject to a penalty.
Early Withdrawal Penalty
A 10% federal income tax penalty levied against withdrawals from a qualified retirement plan (e.g., IRA, 401(k) plan, or profit-sharing plan) that are taken prior to age 59½. Certain situations may qualify as exceptions depending on the type of plan and the situation. Exceptions to the tax penalty include: if an individual is disabled, has higher education expenses, has first-time homebuyer expenses, has unreimbursed medical expenses that exceed 7.5% of adjusted gross income (AGI), is responsible for medical insurance premiums as a result of unemployment, is receiving payments in the form of substantially equal periodic payments, or is a beneficiary of death proceeds.
Employee Benefit Plan
The package of employee benefits offered by an employer beyond the salary or wage scale, such as death benefits, health benefits, disability benefits, dental, vision, retirement, and similar programs.
Estate Planning
This process plans for the orderly administration and disposition of assets after the owner dies.
Estate Tax
Federal and/or state taxes that are levied on the transfer of the assets of a decedent (person who dies). Commonly, estate taxes are paid by the decedent's estate rather than by his or her heirs.
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F
Fiduciary
A person who owes a duty of loyalty to another person with respect to his/her property. A fiduciary can refer to an individual, company, or association responsible for holding and managing assets for any other party. One of the most common examples of a fiduciary is a trustee.
First-to-Die Life Insurance
A type of life insurance policy that covers two or more insureds and pays a death benefit when the first death occurs.
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G
Grace Period
The period of time after the due date for a payment during which the overdue payment may be made without penalty or lapse in contractual obligations.
Grantor
Also known as a settlor. The creator of a trust, who transfers assets or property to a trustee for the benefit of a beneficiary or beneficiaries.
Group Life Insurance
A type of life insurance policy that insures a group of people who are affiliated in some way, such as through employment or membership. Group life insurance is often provided by an employer as an employee benefit.
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H
Household Income
The combined income of all household members from all sources, including wages, commissions, bonuses, Social Security and other retirement benefits, as well as unemployment compensation, disability, interest, and dividends.
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I
Income Phase
In an annuity contract, this refers to the period of time during which annuity payments are made to the payee(s).
Individual Retirement Account (IRA)
IRA is an acronym for "Individual Retirement Account." The traditional IRA allows an individual to set aside income up to a specified amount each year (based upon current IRS limits), and have the earnings tax-deferred until withdrawal. Depending on adjusted gross income and eligibility for other pension participation, the contributions may be tax-deductible. There are several other types of IRA. The Roth IRA does not permit deduction of any contributions but exempts savings growth and withdrawals from taxation (subject to certain exceptions). The SEP (simplified employment pension) IRA is for self employed individuals and defers tax on contributions.
Individual Retirement Account (IRA) Rollover
Individual Retirement Accounts may receive eligible IRA fund transfers from a qualified plan or another IRA. An IRA Rollover permits continued tax-deferred accumulations on transferred funds and avoids the early withdrawal penalty.
Insured
An individual who is covered by an insurance policy.
Investment Objective
A financial goal. Different investment vehicles have different objectives. For example, a fixed-income fund may have outlined in its prospectus an objective of providing current income by investing in fixed-income securities, whereas, a capital growth fund looks to provide long-term capital gains and high potential future income. Individual investors also have personal investment objectives, based on their own time horizon and tolerance for risk.
Irrevocable Trust
A trust that cannot be altered, stopped, or canceled after creation without the permission of the probate court. The grantor, who has transferred assets to the trust, gives up all ownership rights to the assets and to the trust (although the grantor can retain certain benefits from the assets, such as income).
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J
Joint Annuitant
The second person named on a joint and survivor annuity contract who will receive annuity payments in the same or reduced amount, upon the annuitant’s death.
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K
Key Employee
An employee who possesses valued skills, craft, knowledge, intellectual or organizational abilities. He or she is considered crucial to the ongoing operation of the business or company and difficult to replace.
Key Person Insurance
Insurance purchased by a business on a key employee who possesses craft or scientific knowledge, leadership, and valued skills. Hiring a replacement might alter business planning, profit, stability, and management. To address the financial aspects of replacing a key employee, the corporation becomes owner and beneficiary of an insurance policy that reimburses the company for the untimely loss of a key employee, due to death or disability.
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L
Lapsed Policy
A policy that is terminated for nonpayment of premiums.
Level Premium Term Insurance
A term life insurance policy for which premiums remain the same from year to year for a specified period.
Life Insurance
A contract wherein a premium is paid to an insurance company in return for the insurance company's commitment to pay the beneficiary a defined amount upon the death of the insured. There are various types of life insurance available, including term life, whole life, universal and variable life.
Living Trust
Also called an
inter vivos trust, a living trust is established by a living person and allows that person to control the assets he or she contributes to the trust during life. At death, the trust becomes irrevocable. This type of trust is intended to avoid probate.
Long-Term Care Insurance (LTC)
Long term care refers to the many services beyond medical care and nursing care used by people who have disabilities or chronic (long-lasting) illnesses. Long term care insurance is purchased to help pay for these services upon the occurrence of a covered event.
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M
Mutual Fund
A mutual fund is formed when an investment company pools money from shareholders and invests it. Investments can include stocks, bonds, gold or government securities.
Mutual Insurance Company
An insurance company that has no shareholders. A mutual insurance company is often described as being owned by its policyholders. This generally means that an insured under a participating whole life insurance policy issued by a mutual company, for example, is a member entitled to vote for the company's board of directors. Moreover, if the insured also owns the policy, he or she may be entitled to share in any dividends the company may declare. Insurance companies that are not mutual companies are most often structured as publicly traded stock companies, where the company is owned by its shareholders.
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N
Nonqualified Plan
A retirement plan that does not meet the requirements of Section 401(a) of the Internal Revenue Code and, therefore, is not eligible for all of the favorable tax treatment afforded to qualified plans.
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O
Ordinary Life Insurance
Life insurance with a cash value, such as whole life, universal or variable universal life. Ordinary life insurance generally refers to most forms of life insurance other than term. This type of insurance may also be referred to as cash value or permanent life insurance.
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P
Paid-Up Additions
Additional whole life insurance coverage that is typically purchased with policy dividends. The insurance is “paid-up” because the coverage requires no further premiums. Paid-up additions have a cash value component in addition to a death benefit. When declared, dividends are paid on paid-up additions.
Payee(s)
The person or persons designated on an annuity application to receive annuity payments from the contract.
Payout Period
A period of time during which income payments are made to the annuitant or another person identified by the annuity contract owner.
Pension
An employer-provided qualified retirement plan. Examples of pension plans include defined benefit plans, profit-sharing plans, bonus plans, employee stock ownership plans (ESOPs), thrift plans, target benefit plans and money purchase plans.
Permanent Life Insurance
Life insurance that does not expire and combines a death benefit with cash value accumulation that remains for the life of the insured, provided premiums are paid when due. Whole life, universal life and variable life are types of permanent life insurance.
Plan Administrator
As designated in insurance or retirement documents, plan administrators of employee benefit programs are responsible for compliance with government regulations and procedures, including disclosure and reporting to participating employees.
Plan Sponsor
Refers to an employer who establishes and maintains a qualified employee benefit pension or welfare benefit plan. Although ultimately responsible for plan administration, plan sponsors often use outside consultants, corporations, government agencies, or labor organizations to administer the plan in compliance with applicable federal and state laws (such as ERISA or tax).
Policy
A legal written document that states the terms of an insurance contract.
Policy Dividend
A payment under a participating individual policy that reflects the policyowner’s annual share of divisible surplus. Divisible surplus is the amount of earnings and surplus paid out after a company sets aside funds to cover contractual obligations (reserves), operating expenses, contingencies (such as worsening mortality or economic conditions), and general business purposes. Each year, the board of directors votes on the amount of divisible surplus and how it will be allocated. Policy dividends are subject to change and are not guaranteed.
Policy Loan
A loan made by an insurance company, secured by the cash surrender value of a life insurance policy.
Policy Rider
A provision that may be added to an insurance policy, usually at an additional cost, to increase or limit the benefits the policy otherwise provides.
Policyholder
The person or entity owning an insurance policy. The policyholder is usually the insured but may also be a spouse, business partner, partnership, trust or corporation, as long as that party has insurable interest in the life of the insured.
Portability
Refers to the ability of an employee to keep insurance or benefits originally provided or sponsored by an employer after employment ceases. With a mobile workforce in which employees move from one employer to another, portability of employee benefits, especially insurance and retirement plans, is important.
Portfolio
The combined security holdings of an individual investor or mutual fund. A portfolio can consist of any combination of stocks, bonds, derivatives, and such. A typical objective of holding investments in a portfolio is to reduce risk through diversification.
Premium
In terms of insurance, a premium is a specified amount of payment required periodically by the insurer to provide coverage under a specific policy. The amount and frequency of the premium payment will depend on the type of policy owned.
Premium Loan
A loan made against the cash value of an insurance policy to pay the premium due. Interest is charged on this loan and if the insured dies while the loan and/or interest are unpaid, the death benefit will be reduced.
Primary Beneficiary
The named beneficiary who receives the proceeds of an insurance policy or annuity contract when the insured or annuitant dies. There can be multiple primary beneficiaries.
Prospectus
A disclosure document that must be provided (according to Securities and Exchange Commission (SEC) regulations) by the issuer to potential purchasers of a securities issue. The prospectus provides information such as fees, expenses, risks and other details designed to help a potential purchaser make an informed decision.
Purchase Payment
The amount of money applied to an annuity contract.
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Q
Qualified Retirement Plan
A retirement plan that complies with the requirements of Internal Revenue Code section 401(a) and, as a result, receives favorable tax treatment of contributions and earnings.
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R
Required Minimum Distribution (RMD)
The legally required minimum annual distribution that must be taken from a qualified retirement account or from an IRA. RMDs are calculated by dividing the year-end account balance by the applicable distribution period or life expectancy, and generally must begin by April 1 of the year following that when an individual reaches age 70½. Failure to take the RMD results in an excise tax equal to 50% of the distribution that should have been taken.
Rollover
A tax-free transfer of funds from one qualified retirement plan to another.
Roth IRA
A type of Individual Retirement Account (IRA) in which contributions are nondeductible. However, account funds grow tax free, and withdrawals are tax free, provided certain conditions are met.
Roth IRA Conversion
This refers to the process of converting a traditional IRA into a Roth IRA. Roth conversions have specific income eligibility requirements and income tax consequences.
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S
Section 529 Plans
State-sponsored higher education savings plans that offer tax benefits while allowing for higher contributions than with other savings alternatives such as Coverdell ESAs (formerly known as Education IRAs) and custodial accounts. Although details of these plans vary by state, they generally come in two forms: 1) Prepaid tuition programs that allow participants to "lock in" tuition rates at eligible state colleges or universities with a lump sum investment or monthly installment payments; and 2) Savings programs that allow for investment in the stock and bond markets. You may not need to reside in a state to participate in its plan.
SIMPLE (Savings Incentive Match Plans for Employees) Plan
A SIMPLE Plan is a retirement plan, which can be set up as a 401(k) or IRA, that allows employee pre-tax contributions and mandatory employer matching contributions. All contributions are immediately vested in a SIMPLE plan.
Simplified Employee Pension Plan (SEP)
A tax-deferred retirement plan allowing both an employer and an employee to contribute to the employee's Individual Retirement Arrangement (IRA) on a discretionary basis, subject to special rules on eligibility and contributions.
Split-Dollar Arrangement
A contractual arrangement between two parties, commonly an employer and employee, in which they share the obligations and benefits of a life insurance policy. The shared arrangement may govern the payment of premiums, death proceeds, cash values, dividends, or ownership. Special tax treatment applies to split-dollar plans depending on their form and when they were established.
Stock Dividend
For a stock company, a dividend is a payment to shareholders out of the company's current or retained earnings. This dividend is usually paid quarterly and generally given as cash (cash dividend); however, it can also take the form of stock (stock dividend) or other property. The board of directors of a company votes to distribute dividends to shareholders.
Subsidiary
A corporation owned by another corporation. A subsidiary corporation possesses all the legal elements of a corporation, but typically has only one shareholder, which is the “upper-tier” corporation.
Survivorship Life Insurance
Also called second-to-die or last-to-die insurance. Survivorship life insurance covers the lives of two or more individuals, and pays a death benefit after the last death of the insureds. It is often used by married couples to help fund estate tax liability that occurs upon the last death.
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T
Tax Deferred
The postponement of taxes on accumulated earnings until receipt. For example, an Individual Retirement Account (IRA) holder may postpone paying taxes if he or she waits until the Required Minimum Distributions (RMD’s) to make withdrawals.
Tax-Sheltered Annuity
Also called a 403(b), a tax-sheltered annuity is a retirement plan under Section 403(b) of the Internal Revenue Code that allows employees of government and nonprofit organizations to make pre-tax contributions up to a pre-defined annual limit and have the benefit of tax-deferral until amounts are withdrawn.
Term Insurance
Life insurance that has no cash value and that expires at the end of a specific period. Premiums can rise each year, or can be level through a guaranteed period.
Traditional Individual Retirement Account (IRA)
A tax-deferred retirement savings vehicle that allows individuals to contribute a limited amount per year. Depending on their income and participation in employer-sponsored retirement plans, individuals may be able to deduct part or all of their contributions. Withdrawals are subject to ordinary income tax. Mandatory withdrawals, generally referred to as required minimum distributions (RMDs), must begin shortly after age 70½. Withdrawals made before the age of 59½ may be subject to a 10% federal income tax penalty.
Trust
A fiduciary relationship, wherein a grantor transfers assets or property to a trustee for the benefit of a beneficiary or beneficiaries. The trustee, who may or may not be the grantor, manages the trust property. Duties often include holding title to property, distributing assets, and overseeing investments and payments. A living trust is a trust created during the grantor's lifetime; whereas, a testamentary trust is a trust created by a will.
Trustee
An individual or party responsible for managing a trust on behalf of a beneficiary or beneficiaries. Duties often include holding title to property, distributing assets, and overseeing investments and payments.
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U
Underwriting
For insurance, underwriting is the process by which an insurance company determines whether, and on what basis, it can assume the risk of a specific life, disability or long term care insurance policy.
Universal Life Insurance
Life insurance that allows the holder to vary the amount and timing of premiums and to change the death benefit, based on the policyholder's changing needs and circumstances. It is generally considered more flexible than traditional whole life insurance and includes a "cash value" feature. In some cases, it is subject to additional underwriting.
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V
Variable Life Insurance
Life insurance with a face amount and cash value that fluctuate according to the performance of the underlying separate account investment options.
Variable Product Investment Choices
Professionally managed underlying investments available under a variable insurance policy or variable annuity contract to which premiums, purchase payments, and account values can be allocated.
Variable Universal Life Insurance
Life insurance that combines features of both variable life insurance and universal life insurance. A policyholder may invest premiums, after certain deductions, modify the death benefit, as well as vary the coverage amount (in some cases, subject to additional underwriting), and/or the premium payments. Because investment options include securities, the Securities and Exchange Commission (SEC) requires a variable universal life insurance policy to be sold by prospectus, which discloses policy operations, risks, expenses, and fees.
Voluntary Employee Contribution
An employee may be permitted to make voluntary contributions to a retirement plan, usually unmatched by the employer, in excess of mandatory contributions to his or her plan account. Voluntary employee contributions may be deposited on a pre-tax or post-tax basis.
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W
Whole Life Insurance
Life insurance that provides guaranteed coverage for the insured's entire life, provided the policyholder pays the premiums when due. Premiums generally remain level for the life of the policy. In addition, there is also a guaranteed cash value component. When declared, dividends are paid on whole life insurance policies.
Wholly Owned Subsidiary
A company whose stock is completely owned by another company.
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X
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Y
Yield
The yield of an investment is its annual gain or loss earned, generally expressed as a percentage. To determine the yield on a bond, divide the amount of interest received from the bond by the amount paid for the bond. For example, suppose an individual paid $5,000 for a bond. At 5% interest, he/she would earn $250 annually in interest income. The yield, $5,000 divided by $250, would be 5%. Similarly, to determine the yield on stocks, divide the dividend received per share by the amount paid per share.
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Z
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