Chapter 5 - Other Pooled Investments

Variable payout

1. principle balance of the contract. 2. Annuitants age 3. Payout option selected 4. Assumed interest Rate (AIR)

Section 529 Plans

Also referred to as Qualified Tuition Programs (QTPs). Contributions are considered gifts under the federal tax code. $17,000/yearly without incurring gift tax. IRS does allow individual to give lump sum that is equal to 5 years worth of contributions or $85,000. ($170,000 for filing jointly) Two types: 529 prepaid tuition plans and 529 savings plans State sponsored.

Assumed Interest Rate (AIR)

Arbitrary interest rate used by insurance company to project rate of growth in separate account during contracts payout period. Benchmark percentage used in determining amount of initial payment and remains unchanged throughout the life of contract.

Deferred Annuity

Begin to make payments starting at a specified time in the future longer than 1 year from issue date. Can purchased with single premiums or periodic premiums.

Annuitization

Begins when investor starts to receive income stream usually as a lifetime benefit.

Subaccounts

Considered investment company product and must be registered with SEC under Investment company act of 1940. Securities held in account must be registered with SEC and each offering is new issue requiring sale by prospectus. Dollars invested are labeled as accumulation units which convert once payout phase begins. Accumulation units are converted into fixed annuity units.

Annuity

Contract issued by life insurance companies in which the purchaser (contract owner) makes payments that are invested in a tax-deferred account. Funds (in addition to earnings) are designed to pay out a future steam of income over the lifetime of the annuitant. Owner can elect to cash out in lump sum. can be fixed or variable.

ABLE (Achieving a Better Life Experience) Act

Established 529A plans, intended to help individuals and their families living with disabilities. Can hold up to $100,000 in an ABLE account without losing their eligibility for Social Security, Medicaid, and Medicare Benefits. Nondeductible contributions can be made by anyone on an after-tax basis Qualified withdrawals are federally income tax free. Must relate to the expenses of living with a disability, including education, housing, transportation, health care expenses and any services needed to improve quality of life. Only one ABLE account for each eligible person. Plan does not need to be in the person's state of residence.

Immediate Annuity

Generate income immediately after first deposit is made into account. to be considered, income must begin within one year of the issue date and there is no accumulation period. Can only be funded with single premium

Mortgage REIT

Highly leveraged. Invest in mortgages and construction loans. investors are paid out of the spread between borrowing rates and income rates. May also purchase CMO's

Qualified Expenses

Include regular tuition, room and board, and other costs associated with attending accredited colleges and universities, up to $10,000 per year per beneficiary to cover tuition for private/religious k-12 education.

Local Government Investment Pools (LGIPs)

Investment pools that are established by state or local government entities to allow for the investment of public funds modeled after mutual funds or UIT's but NOT subject to Investment Company Act of 1940. Objective includes safety of principal and daily liquidity. Not available to general public.

529 Savings plans

Maximum contributions are determined by individual plan or state. Contributions are nondeductible. Investor chooses mutual fund type investment that dollars are invested in. Can be aggressive or conservative. Account value fluctuates based on the performance of the investments chosen. Can be direct sold or advisor sold. investment income is free from federal taxation if used for qualified education expenses. many states offer state income tax deductions or credits for contributions. Withdrawals not used for qualified education expenses are subject to ordinary income tax on the earnings, as well as 10% penalty on those earnings. Plan assets may be transferred from one relative to another without tax consequences. Owners can also roll plan assets over to another every 12 months without tax consequences.

Funds of hedge funds

Must be registered under the Investment Company act of 1940. minimum investment of $25,000. two set of fees: one for the hedge fund managers and one for investment managers of fund. Cannot be redeemed at any time.

Fixed annuities

Not securities, conservative and do NOT traditionally keep pace with inflation. not SEC registered.

Advisor sold plans

Offered through broker-dealers in the state and often have different investment options.

Accumulation period

Pay in phase of annuity. Earnings grow tax deferred during this time period.

mortality and expense charge

Percentage charge against contract value Compensates insurance company for the life expectancy risks it assumes.

Variable life insurance

Permanent life insurance that protects insured for life. Designed to offer more competitive returns to potentially keep pace with or act as a hedge against inflation. MARKET RISK Requires owner to pay a fixed and level premium. Portion is paid into general account (guaranteed minimum death benefit) which is the face amount of the policy. Balance of premium is invested into separate account with no guarantees to the rate of return. Policy owners are given a choice of investment options and will select an investment mix based on the risk tolerance and objectives. Actual death benefit will fluctuate based on performance of separate account but can never drop below guaranteed minimum death benefit. Considered a security.

Variable universal life

Premiums are deposited in separate account with no guarantees as to death benefits payable or cash value growth. Policy premiums are flexible based on performance and values held in separate account. considered a security

Exchange Traded Funds

Registered as either UIT's or Open-end investment companies. Track a benchmark index. Passively managed and have lower ongoing expenses. Issuer creates a finite number of shares that are sold to the underwriter (authorized participant). Investors pay a brokerage commission on each transaction. Investors may buy on margin and sell them short.

Variable Annuities

Security, aggressive. Attract investors looking for a potential hedge against inflation. Market risk. Regulated by SEC under Securities act of 1933 and Investment company act of 1940 regulated at the state level as both insurance products and securities.

REITs

Sells shares of beneficial interest to investors. If 75%-75%-90% is done, only taxed on retained amount. This eliminates the double taxation Distributions are taxed as ordinary income, however, investors are allowed to deduct 20% from REIT from their taxable income.

Hedge Fund

Structured as limited partnership and mainly available to accredited investors. Not offered to general public and do not have to register with SEC. Subject to antifraud provisions of SEC rule 10b-5 Information is provided to investors in a private offering memorandum NOT registered investment companies and NOT regulated by Investment company act of 1940. Private placement offerings under Regulation D. Lockup provisions for first 6 months making them illiquid. Max investors is 99, with 35 max being non-accredited. Structured like mutual funds, investors subject to higher fees. Investment minimum is $1 million or more. Charges 2% annually on account value and additional 20% on capital gains.

Class L-share annuities

Variable annuity with shorter CDSC period of 3-4 years. Higher mortality and expense charges

10b-5

catch-all-fraud

Municipal Fund Securities

funds or trusts offered by individual states or local governments. Fall under regulation by MSRB. Program disclosure document is used with the sale of municipal fund securities. Includes section 529 plans, ABLE Programs, and LGIPs.

blind pool hedge fund

has a stated investment objective but does not specify the investments

qualified purchasers

individuals with more than $5 million or institutions more than $25 million.

Direct sold plans

investor purchases the plan directly through their states 529 plan website or through the mail. Offered as no-load but may have annual fees.

Blank Check Hedge Fund

look for acquisitions and potential investments without identifying an investment objective

Equity REITs

own specific pieces of real estate such as apartments, shopping malls, and office buildings and are not leveraged. Real estate equity. Dividend payouts.

Direct Participation Program (DPP)

passes through all gains and losses to investors, therefore avoiding double taxation of earnings. Passive losses can be used to offset passive gains. Highly illiquid and generally suitable for sophisticated investors. partnership agreement is written so that the general partner can demand additional funds from the limited partners.

529 Prepaid tuition plans

promise to keep pace with the tuition of in-state public colleges. No risk to principal amount invested. plan returns are based on in-state public tuition averages. Only 11 states that offer prepaid tuition plans.

gift tax

tax accessed to donor if contributions exceed $17,000

Exchange traded note

unsecured debt obligation of financial institution. Principal is backed by issuer and subject to DEFAULT on payments and bankruptcy of the issuer. Return is linked to the performance of an index, with a promise to match the return of that index, minus any costs. Some fees will not appear until maturity, important to disclose. Have a set maturity date and trade on exchanges. No liquidity risk but does have CREDIT risk.