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401(K) Plans
Employer-sponsored qualified plans that let employees contribute pre-tax dollars out of their paychecks toward a retirement investment that grows tax-deferred. Employers may sometimes match employee contributions. It meets a series of federal government requirements and is therefore eligible for certain tax advantages.
Accumulation Period
The period during which assets grow.
Alternate Funding Plan
A plan which offers self and partially funded cases with the protection and administrative advantages of conventionally insured plans. The planholder assumes some or all of the insurance risk.
Annuity
A contract, generally issued by insurance companies, that pays an income benefit at designated periods for the life of a person, for the lives of two or more persons, or for a specified period of time. A deferred annuity generally defers the income payment (the "annuity") until some point in the future. Often the income earned during the deferral period is income-tax deferred as well. There are two basic types of annuities:
 | Fixed Annuity
A type of annuity that provides payment of a specific sum of money at a fixed rate of return for a fixed period of time. |
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| Variable Annuity
A type of annuity that allows for the investment of assets in various portfolios. The return on assets will fluctuate in value over time, reflecting the performance of the underlying investment portfolios chosen. |
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Asset Allocation
A strategy of spreading investment dollars among different classes of assets. Investors often choose this strategy in an attempt to minimize the impact of any single investment class on the total performance of their investment portfolio. Some examples of asset classes are stocks, bonds, cash equivalents, and real estate.
Asset Class
A broad group of securities or investments that have similar characteristics.
Back-End Load
A deferred sales charge that exists in some mutual funds which the investor pays when withdrawing money from the fund. It diminishes with length of ownership.
Balanced Fund
A type of fund that diversifies its portfolio holdings among asset classes, such as common stocks and bonds, in fixed percentages.
Beneficiary
The individual(s) or entity, (eg. relative, charity, business, trustee), designated by the owner of a life insurance or annuity policy, to whom the policy's proceeds are to be paid upon the insured's death or when an endowment matures.
Beneficiary of a Trust
Person(s) for whom a trust is created and to whom the benefits are payable. Trusts can be used to prevent the exhaustion of an estate by regulating the beneficiary's receipt of trust benefits.
Bond
A debt security, or IOU, typically issued by a government or corporation, which obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity. Bonds that pay a fixed rate of interest are also called fixed-income securities. There are several kinds of bonds, with varying periods of maturity, including tax-free, taxable, and zero- coupon bonds.
Bond Fund
A pool of money that is managed by a professional fund manager and that invests in different kinds of investment grade debt obligations such as corporate bonds, mortgage bonds, mortgage backed bonds and municipal bonds.
Broker-Dealer
A firm that buys and sells securities, including mutual funds.
Business Continuation Insurance
Life insurance designed to provide funds so the remaining owners or the business can buy the business interest of a deceased owner. Disability buyout insurance is often used to fund the purchase of the business interest of a disabled owner.
Business Reducing Term
Disability Income Insurance coverage that can help pay business loans, employment contracts and similar business obligations lasting 5-30 years.
Cafeteria Plan (Section 125)
A benefit plan that lets employees select among the medical, life insurance, disability income insurance and other types of coverage that best meet their specific needs. Also called a flexible benefit plan, it offers tax advantages to employers and employees.
Capital Gain
The increase in value of an asset (such as stock or real estate) between the time it is purchased and the time it is sold.
Certificates of Deposit (CD)
Debt instruments typically issued by banks; deposits may be insured by a U.S. government agency up to $100,000 per depositor per bank. The issuing banks usually pay a guaranteed fixed rate of interest. Maturity dates for CDs can range from a few weeks to a few years.
Charitable Gift Annuity
An outright gift to a charity in return for a current tax deduction and income stream while you live, or while you and your spouse live.
Charitable Lead Trust
A trust that distributes investment income, or a percentage thereof, to a designated charity for the term of the trust. When the term ends, the donor, or the donor's heirs receive the remainder of the trust.
Charitable Remainder Trust
A trust that distributes either a fixed amount or a percentage of the value of the trust to the donor, or a named beneficiary, either for life or for a term of years (max. 20 yrs). After the trust expires, any remaining assets are donated to the qualified charity that was designated as the remainder beneficiary.
Common Stock
An ownership interest in a corporation represented by shares that constitute a claim on the corporation's assets.
Compound Interest
Interest that is calculated by applying the stated percentage rate both to the original capital amount and to the accumulated interest over time.
Death Benefit
An amount payable to a beneficiary of a life insurance policy, qualified plan and/or a variable annuity. Payment is generally made upon the death of the insured under an insurance policy, or in the case of a qualified plan, upon the death of the plan participant. In the case of a variable annuity, payment is made upon the death of the annuitant. Methods of payment can vary, depending upon the terms of the plan/contract, and applicable state laws.
Deferred Compensation Plan
A non-qualified plan established by an employer to provide benefits to an employee at a later date, such as after the employee's retirement. The employee may elect to defer a portion of his/her current salary or the employer may provide the plan as a supplemental benefit.
Defined Benefit Plan
A defined benefit plan promises a stated benefit at retirement. Benefits are often calculated as a specified percentage of some final year's average income.
Defined Contribution Plan
A defined contribution plan provides that the employer make a stated annual contribution to the plan. The amount of each employee's retirement benefit ultimately depends on the amount of contributions and the investment performance of that particular employee's account. Some defined contribution plans also allow for employee contributions.
Disability Buyout Insurance
Insurance policies that can help provide the balance of cash flow necessary to allow you to buy your disabled associate's business interests.
Disability Income Insurance
Insurance that pays benefits to help replace the insured's income for a specified term or for life if a disability occurs which is covered by the agreement.
Disability Overhead Expense Insurance
Insurance that provides a source of income to pay certain eligible business expenses while an owner is sick or injured and can't work.
Diversification
Spreading your risk by putting your assets into several different categories of investments.
Dollar-Cost Averaging
The practice of investing equal amounts of money at regular intervals, regardless of whether the security markets are rising or falling. Dollar-cost averaging does not ensure a profit or protect against a loss in a declining market.
Equity
An ownership interest in a corporation. Equity indicates ownership of stock.
Estate Plan
A plan developed with the help of qualified professionals (attorneys, CPAs, trust officer) to provide for the orderly handling, disposition and administration of an estate when the owner dies. The plan determines matters such as who will inherit assets and in what amounts, who will care for children, and who will manage the distribution of assets, taking into consideration federal estate taxes.
Executive Bonus Plan
A plan under which the employer gives an executive a bonus which is used to pay the premium on a life insurance policy in which the executive is both the insured and the owner. The executive receives the bonus as taxable income. The bonus is tax deductible by the employer assuming it qualifies as reasonable compensation to the executive.
Fixed Income Securities
Investments that constitute an IOU to the investor from the issuer, often a government or corporation, offering specific payments at predetermined times. The market value of these securities changes depending on the direction of market interest rates. Bonds and government securities are examples of fixed income securities.
Front-End Load
Sales charge applied to an investment at the time of initial purchase and taken directly from the purchase price.
Fund Performance
A measurement of a fund's returns, whether the returns are consistent, and how they compare to the returns of comparable funds.
Group Life Insurance
A type of life insurance that offers coverage to employees, and possibly their dependents, with low premiums through group rating and simplified underwriting. The employer generally pays a portion of the cost.
Health Benefits
Employer-provided benefits that can include major medical, disability, and life insurance, and may also include dental and vision plans. Premiums may be paid either entirely by the employer, entirely by the employee, or through a contribution by both.
Index Fund
A mutual fund in which its portfolio seeks to follow a specific index such as the S&P 500.
Interest Rate
The cost of borrowing money. Usually expressed annually, it is quoted on treasury bills and notes, bonds, credit cards, and loans.
Individual Retirement Accounts (IRAs)
Tax-advantaged personal savings and investment accounts. Assets in these accounts can be used for retirement and, subject to specific conditions, for other financial goals.
There are three basic types of IRAs:
| Traditional IRA
Traditional IRAs are personal accounts of up to $2,000 per year that working people and their spouses can establish on a tax-deferred basis, for the purpose of saving and investing for retirement. |
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| Roth IRA
Like the traditional IRA, Roth IRAs allow up to $2,000 in contributions per year. Unlike the traditional IRA, however, Roth IRA contributions are not tax deductible, but earnings and distributions can be tax-free for specified purposes and subject to restrictions at the time of withdrawal. |
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| Rollover IRA
Rollover IRAs are Traditional IRAs that hold money transferred from another qualified plan. Assets held in a rollover account classified as a conduit IRA may be subsequently transferred into another 401(K) or similar plan. |
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"Junk" Bond
A bond with a speculative credit rating of BB (S&P) or Ba (Moody's) or lower is sometimes called a junk or high yield bond. Such bonds offer investors higher yields, but also greater risks, than bonds of more established or financially sound companies.
Key Employee Insurance
Life or disability insurance purchased by a business on the life of an employee whose continued participation in the business is necessary to the firm's success and whose death or disability would cause financial loss to the company.
Life Insurance
A contract (policy) under which one pays premiums to an insurance company, which pays a death benefit to the insured's beneficiaries upon the insured's death. Term insurance provides a death benefit only for a specified period; permanent life insurance accumulates a tax-deferred cash values which may, in certain policies, be paid in addition to the face amount.
Load
Sales charge paid in connection with the purchase of shares in a mutual fund or variable life insurance policy. A front-end load is charged when the fund or policy is purchased, and a back-end load is charged when the fund or policy is redeemed, or money is withdrawn.
Long-Term Care Insurance
Coverage available to provide medical and other services to patients who need on-going care in their own home or in a nursing home.
Long-Term Disability Income Insurance
Disability income insurance that typically provides benefits at the end of a specified waiting period and continues until a date specified in the policy.
Margin Account
A special brokerage account that allows investors, within specified limits, to leverage their investment portfolio by buying securities with money borrowed from the brokerage firm. Margin trading can increase the risks associated with investing.
Money Market Fund
An open-end mutual fund that invests in highly liquid securities such as CDs and government securities, and which pays money market rates of interest. Investments in shares of money market funds are neither insured nor guaranteed by the U.S. government.
Money Purchase Plan
A plan that provides employers with less flexibility than other qualified plans but allows for higher contributions (up to 25%) by an employer to an employee's retirement account.
Municipal Bond
Bonds issued by states, counties, cities, and other political subdivisions. Interest income on municipal bonds is generally exempt from federal taxation.
Mutual Fund
A pool of securities owned collectively by a large number of investors and managed by a professional investment advisor. This pooling of securities provides individual investors with diversification and professional management of their assets. Money earned on investments is distributed to shareholders as dividends and/or capital gains.
No-Load Mutual Fund
A mutual fund that does not have a sales charge or load assessed in connection with the purchase or redemption of shares of the fund.
Non-Qualified Executive Benefit Plans
Plans which allow an employer to decide which employees receive retirement benefits and how much. They are much more flexible than Qualified Plans, since rules for contributions and nondiscrimination are not as strict but they provide less immediate tax advantages. They may provide for retirement or deferred compensation benefits or supplemental benefits beyond those from the company's qualified plans.
Option
The right to buy or sell a security, granted in exchange for an agreed-upon price. If the right is not exercised (i.e., the security is not purchased or sold) within a specific period of time, the option expires and the option holder forfeits the money paid for the option.
Optional Life Insurance
A policy that offers employees large non-medical amounts, simplified enrollment, and underwriting. The employee pays the full premium cost through payroll deduction. Owners and managers may also participate in the plan.
Pension
A sum of money paid regularly as a retirement benefit, generally from an employer-sponsored qualified plan.
Pension Plan
A fund that is established for the payment of retirement benefits.
Performance
A measurement of a fund's returns, such as whether the returns are consistent, and how they compare to the returns of comparable funds.
Portfolio
A list of investments, securities, and commercial paper owned, as by a bank or individual investor.
Premium
The amount paid or payable for insurance protection; alternatively, payments to fund a deferred annuity.
Profit Sharing Plan
These plans are a type of defined contribution plan that allows discretional contributions by the employer. This is the distinguishing feature about this program because the employer is not obligated to make contributions each year. However, there must be recurring substantial contributions. Employers' contributions to a profit sharing plan are deductible but limited to no more than 15% of the total compensation of the participating employee.
Prospectus
A disclosure document required by the Securities and Exchange Commission that describes a registered variable product (for example, a variable annuity, mutual fund, or variable life insurance policy). A contract prospectus describes such subjects as fees, expenses, risks, investment options and contract benefits, including transfer rights and withdrawal rights. Death benefits and the income phase, if applicable, would be disclosed as well.
Qualified Plan
A pension plan or employee benefit plan that meets a series of federal government requirements and is therefore eligible for certain tax advantages.
Qualified Sick Pay Plans
A disability or sick-leave plan that provides for employees to continue to receive a salary if they become ill or disabled. Wages paid are considered tax deductible.
Rate of Return
In performance measurement, the percentage change in the value of an investment over a specified time period.
Risk
The measurable possibility of losing or not gaining value. Generally, investment risk is classified by three categories: conservative, moderate and aggressive.
Security
Evidence of an ownership interest, as in a stock; or a creditor relationship, as in a bond.
Simplified Employee Pensions (SEPs)
An IRA funded by an employer or a self-employed person. Contributions are immediately vested and employees have control of the investment. Like a pension, SEPs require that employers contribute up to a certain percentage of an employee's salary.
Savings Incentive Match Plan for Employees (SIMPLEs)
A salary-reduction contribution plan that has none of the administrative costs related to a 401(k) plan. SIMPLEs require that employees contribute up to a certain percentage of their salary, but employers must also contribute.
Short-Term Disability Income Insurance
Disability income insurance that provides a benefit for a disability for a limited period as specified in an insurance policy. A short-term disability period may be a specified period or the first part of a long-term disability.
Split Dollar Plan
A method of purchasing life insurance in which the premium payments and policy benefits are divided in some predetermined way, usually between a business and an employee, but sometimes between two individuals. In a business setting, split dollar is an executive benefit, with the employee as the insured. The premium payments and proceeds are split between the employer and employee.
Stock
An ownership interest in a corporation through shares that are a claim on the corporation's assets.
Survivorship Life Insurance
A type of life insurance that insures two people and pays a death benefit only after the second person dies. It is generally designed to provide funds to create liquidity for the payment of estate taxes. It is also called second-to-die life insurance.
Tax-Deferred Investing
A method of investing in which earnings accumulate tax free until they are withdrawn. At withdrawal, taxes on earnings are due. Examples include traditional IRAs, annuities, and permanent life insurance.
Term Life Insurance
Life insurance, limited to a death benefit, which is payable only if the insured dies during the time the policy is in force.
Total Return
In performance measurement, the actual rate of return realized over a specified period.
Trust
Fiduciary relationship under which an Owner transfers legal title of certain property to another party, the Trustee, who in turn holds it for the benefit of the grantor and/or beneficiaries. The terms and conditions under which the Trustee holds the property are set forth in the trust agreement.
Universal Life Insurance (EP)
Permanent life insurance product in which the mortality, investment, and expense factors used to calculate premium rates and cash values are expressed separately in the policy. One can specify the premium amount desired to be paid provided this amount falls within the minimum and maximum specified by the company.
Unit Investment Trust
An investment vehicle that offers the benefits of a large, professionally managed, and diversified portfolio. Unit investment trusts buy a fixed portfolio of securities, e.g., stocks, bonds, or mortgage-backed securities. Investors (unit holders) receive an interest in both the principal and income portion of the portfolio based on the amount of capital they have invested.
Variable Life Insurance (EP)
A form of permanent insurance under which the cash value, and possibly the death benefit, of the policy fluctuates according to the investment performance of multiple funds offered as investment separate accounts. Most variable life insurance policies guarantee the death benefit will not fall below a specified minimum. A minimum cash value is not usually guaranteed.
Variable Universal Life Insurance (EP)
A form of life insurance that combines the premium and death benefit flexibility of universal life insurance with the investment flexibility and risk of variable life insurance.
Voluntary Deductible Plans (EP)
Plans comprised of deductions from participating employee's paychecks, which provide a source of income if the employee becomes disabled. The employer endorses and sponsors plan enrollment and can also participate in the plan.
Vesting
The point at which an employer is guaranteed benefits, regardless whether he/she continues employment. This can apply to qualified and non-qualified plans.
Whole Life Insurance (EP)
Life insurance that remains in force during the insured's entire lifetime provided premiums are paid as specified in the policy. Whole life insurance also builds cash value (as a result of the level premium approach to funding the death benefit). Whole life insurance from a mutual insurance company may be eligible for dividends, which are not guaranteed.
Withdrawal Charges
Penalty assessed upon the surrender of more than the permitted charge-free amount, if any, from certain investments during the first several years. Certain investments may have annually declining withdrawal or "surrender" charges.
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