Financial Planning Glossary- Annuities CE Course

Investment Company

A firm that charges management fees to invest pooled funds of numerous investors according to stated investment objectives. A closed-end investment company is typically known as an investment trust and allows a finite number of investors to pool their funds, so that a finite number of shares may be issued. An open-end investment company is known as a mutual fund and allows a virtually infinite number of investors to pool their funds, so that an infinite number of shares may be issued.

Equity-Indexed Annuity

A fixed annuity that guarantees a minimum return and whose cash value growth is based on the performance of a stock market index such as the S&P 500.

Critical Illness Insurance

A form of medical insurance that provides a lump-sum benefit for specified critical illnesses.

Adjustable Life Insurance

A form of term or whole life insurance that provides, by contract, that the coverage and payment amounts may be modified at certain times throughout the life of the policy based on company performance with respect to mortality, expenses and investment return.

Capitalization of Adjusted Earnings Method

A formula for determining the value of a business based on average annual earnings over a period of time, adjusted by the owner's replacement salary among other adjustments, and the estimated earnings on book value. The result is capitalized to produce the value of goodwill. The total value is equal to book value plus goodwill.

Federal Estate Tax

A graduated tax levied on the right to transfer property at death, assessed on estates exceeding the applicable exclusion equivalent based on the value of property transferred at death.

Cafeteria Plan (Flexible Spending Account or FSA)

A group insurance plan that offers a menu of benefit options to employees, ranging from simple, basic choices to a broad array of benefits. Cafeteria plans are defined contribution plans, typically allowing employees to purchase benefits using a preset amount of employer dollars. Many plans also allow employees to select additional group benefits and to pay for them through salary reduction.

Hospice

A health care facility that provides medical care to terminally ill persons.

"Jumping Juvenile" Insurance

A plan of permanent coverage with a death-benefit increase taking place automatically upon the child attaining a specified age. The increase is usually a multiple of the original face amount. Juvenile insurance protects a child's insurability should health problems arise.

Accidental Death and Dismemberment Insurance

A policy or rider that provides for a lump-sum cash payment to be made in the event of accidental death or loss of use or dismemberment of specified limbs.

Know Your Customer

A principle embodied in NYSE and NASD Rules, which provides that a recommendation to a buyer or seller of securities must be based on reasonable grounds for believing that the recommendation is suitable for the customer as ascertained from the facts, if any, disclosed by the customer as to his/her security holdings and as to his/her financial situation and needs.

Hedge Fund

A private investment U.S. partnership in which the general partner has made a substantial investment and which is authorized to take long and short positions, use leverage and derivatives, invest in many markets (in addition to the securities markets), and often use speculative strategies.

Accelerated Benefits Provision

A provision in a life insurance policy that allows the policy owner to receive death benefits before the death of the insured if certain circumstances exist, e.g. terminal illness.

Front-End Load

A sales charge which is assessed upon the initial purchase of a life insurance policy, annuity, or security. In a mutual fund, A-class shares have front-end loads.

Listed security

A security that is listed and thus traded on a registered securities exchange.

Fixed-income Investment

A security that pays a predetermined, fixed rate of return, e.g. government, corporate or municipal bonds, or preferred stock that pays a fixed dividend.

Health Insurance Portability and Accountability Act (HIPAA)

A set of laws concerned with privacy of health information and rights to health coverage. It deals principally with pre-existing conditions, individual eligibility for coverage, the premiums charged for coverage, the guarantee of renewability of coverage, and privacy of personal health information. The Act applies to most group health insurance plans.

Investment Company Act of 1940

A set of laws that govern investment companies; specifically, they require that investment companies register with the SEC and adhere to stated standards for investment company promotion, reporting, pricing and other operations.

Investment Advisers Act

A set of laws that requires all investment advisers to register with the SEC, and is intended to protect the public and hold advisers to high ethical standards. "Investment Adviser" is specifically defined in the Act.

Accumulation Unit

A specified portion of invested funds in a deferred variable annuity that increases or decreases in value based on investment performance, similar to the net asset value of a mutual fund. Contributions to an annuity purchase accumulate units, which are then converted to annuity units if the contract is annuitized.

Letter of Intent (LOI)

A written promise by a mutual fund purchaser that he/she will purchase additional shares at, or by, a specified point in time. An LOI will typically entitle an investor to a discount on sales charges at the time of the initial

Immediate Annuity

An annuity contract in which payments begin within one period of the payment of the annuity premium.

Joint-life Annuity

An annuity contract that insures two or more lives and provides for distributions to begin upon the death of any insured; also known as a first-to-die annuity.

Joint Annuity

An annuity contract that insures two or more lives and provides that distributions terminate upon the first death of any insured.

Joint and Last Survivor Annuity

An annuity contract that insures two or more lives and provides that distributions will continue for as long as either of the insureds live.

Deferred Annuity

An annuity in which payments are deferred for more than one period (year, month, etc.) after the payment of the premium.

Life Annuity

An annuity in which payments are made at specified intervals for the duration of an insured's life; also known as a single-life annuity or whole-life annuity.

Life Annuity with a Period Certain

An annuity in which payments are made at specified intervals for the duration of an insured's life; however, if the annuitant dies before a designated time period, the remaining payments are made to the annuitant's beneficiary.

Incidents of Ownership

Any right to the economic benefit of an asset, such as a life insurance policy. A decedent's estate must include the face value of a life insurance policy if the decedent had any incidents of ownership in the policy within the three years prior to death.

Asset

Anything of value owned by an individual, business, or legal entity.

Medicare

A federal health care program that is financed, in part, by a payroll tax on employers and employees. Under Medicare, anyone age 65 who receives Social Security or Railroad Retirement checks is automatically enrolled in Part A, which covers hospital expenses and skilled nursing care. Part B, which is voluntary, covers the costs of physicians, surgeons and other related expenses, and is financed through general tax revenues and premiums paid by Medicare beneficiaries.

Charitable Deduction

A federal income tax deduction available for the value of donations to qualified charitable organizations taken against the adjusted gross estate (or adjusted gross income).

Generation-skipping Transfer Tax

A federal transfer tax imposed on the transferor who transfers property of value during his/her lifetime to another person who is more than one generation apart, e.g. a grandparent's gift to a grandchild. Tax rates are equal to the maximum estate tax rates.

12b-fee

A fee assessed by a mutual fund for promotion, sales and marketing expenses.

Management Fee

A fee charged to mutual fund or managed account investors to compensate for the management and shareholder expenses associated with the fund or account.

Carryover of Basis

The basis of gifted property that is carried over from the donor to the donee.

Insurance Dividend Options

The choices for application of dividends received. The policy owner can generally choose to put dividends automatically toward term insurance coverage or toward additional permanent insurance coverage.

Fair Market Value

The price at which a willing buyer will purchase an asset from a willing seller, when both parties have reasonable knowledge of material information.

Annuitization

The process of making distributions from an annuity contract in periodic payments pursuant to the terms of the annuity contract.

Capitalization Rate

The rate of interest an investor expects to earn on an investment.

Guaranteed Investment Contract (GIC)

An agreement which guarantees a certain rate of interest on invested funds in a given year. These are often investment options in a qualified plan.

Business Income/Interruption Insurance

Insurance that covers business losses after the occurrence of physical damage that causes business operations to cease.

Adjusted Gross Estate

An amount that serves as the basis for eligibility for certain tax benefits and equal to the gross estate reduced by debts, funeral/medical costs, and administrative expenses.

Maintenance Fee

An annual fee charged to the customer in order to maintain certain brokerage accounts, such as IRAs.

Lifetime Learning Credit

Annual tax credit against education expenses for undergraduate, graduate or job-related coursework incurred by a taxpayer, a taxpayer's spouse and dependents; 20% of $5,000 through 2002; 20% of $10,000 thereafter.

Hope Scholarship Credit

Annual tax credit against qualified higher education expenses for a taxpayer and taxpayer's spouse and dependents for the first two years of postsecondary education; 100% of first $1,000, 50% of second $1,000.

Key Person Insurance

Insurance that provides a business with protection against the loss of income that arises as a result of a key person's death or disability.

Compound Interest

Interest earned on interest that has already accrued on a principal amount, which greatly magnifies an investment return.

Appraisal Provision

In the context of a buy/sell agreement, it is a provision that binds the parties to have the business interest appraised by an outsider at the time of the sale, in order to establish a value for the business.

Conversion

In the employer-provided health plan context, it is the process of exchanging a group insurance plan for an individual plan. Medical care plans, complying with state laws, normally allow terminated employees to convert their group coverage to an individual plan.

Defensive Stock

A type of stock that is more likely to remain stable and provide a safe return during a period of business decline, and often consistently pays dividends.

Blue Chip Stock

A type of stock that provides an attractive return consistent with safety of the investment.

Dividend (Stockholder)

A distribution of the after-tax profits of a corporation paid to the stockholders of that corporation.

Living Will

A document that expresses an individual's wishes for life-sustaining measures in the event that he/she becomes terminally ill.

Continuing Care Retirement Community

A facility that provides long-term, even lifetime, care for older adults, and typically provides independent living quarters until deteriorating health requires a person to move to an assisted living or nursing home unit.

Growth Stock

A type of stock that typically pays low dividends and is expected to appreciate substantially.

Annuity Units

(1) A specified portion of invested funds in a deferred annuity that increases or decreases in value based on investment performance, similar to the net asset value of a mutual fund. Contributions to an annuity purchase accumulate units, which are then converted to annuity units when the payout phase of the annuity begins. (2) A specified portion of invested funds in an immediate annuity, similar to the net asset value of a mutual fund, which are earmarked for payout.

Federal Deposit Insurance Corporation (FDIC)

A federal agency that guarantees funds on deposit (up to $100,000) with member banks and thrift institutions, as well as makes loans or acts otherwise to prevent bank failures.

FIFO

"First in, first out", which refers to the method by which withdrawals from life insurance contracts are considered. It means that withdrawals are not taxable until they equal the amount that was invested or paid into the contract.

LIFO

"Last in - First out", which refers to the method by which withdrawals from annuity contracts and most investments in securities are considered. It means that withdrawals are taxable until they equal the amount of earnings (as opposed to contributions).

Irrevocable Beneficiary

A beneficiary that has a vested interest in the benefit to be received from an asset (such as a life insurance policy or annuity), and which cannot be changed by the owner of the asset without the consent of the beneficiary.

Bed Reservation Benefit

A benefit in a long-term care insurance policy that continues to pay a long-term care facility for a limited time if a patient must temporarily leave to be hospitalized, so that a bed in the facility will be available to the patient upon his/her release from the hospital.

High-Yield Bond

A bond that pays a high coupon rate because it is a higher risk. It is rated BB or lower and is also known as a "junk bond."

Investment Grade Bond

A bond with a rating of AAA to BBB.

Basic [Medical] Coverage

A broad term that includes the following: traditional plans covering hospital and surgical expenses, and certain other expenses; hospital expense covers either actual expenses or pays a flat daily benefit for room and board charges; miscellaneous hospital charges may be limited to reasonable and customary charges; surgical expense uses a surgical schedule, listing maximum fees for each procedure, or a reasonable and customary basis, based on average fees for the same procedure in the geographic area or a relative value schedule which assigns a unit value to each surgical procedure.

Limited Partnership

A business organization that consists of a general partner who manages the business and has unlimited liability, and one or more limited partners who do not actively manage the business and have liability limited to their contribution to the business.

Back-End Load

A charge assessed to a policy owner or investor when a policy or investment is surrendered or a certain amount is withdrawn. It is typically assessed in the first years of holding the policy or investment, and it serves as a redemption charge that decreases as holding time/policy life increases. In a mutual fund, B-class shares have back-end loads. Also known as "deferred sales charges."

Employee Stock Ownership Plan (ESOP)

A compensation plan in which employees are encouraged to purchase stock in their employer, usually under favorable terms.

Capital Asset Pricing Model

A complex model of expected risk and return which seeks to demonstrate that investors require higher returns when they assume higher risks, i.e. that the expected return is equal to the virtually risk-free Treasury rate plus a premium for the assumed level of investment risk.

Endowment Contract

A contract in which a benefit is paid if the insured dies during a specified period of time and also pays the same benefit if the insured survives the time period.

Buy-sell agreement

A contract that provides for the owner of a business interest to sell the business interest for a determinable price at his or her death or disability to a designated person or entity.

Annuity

A contract with an insurance company that allows one or more contributions of funds to accumulate in exchange for distribution of funds according to a regular, systematic schedule.

Disability Income Policy

A disability insurance policy that provides for payments when the insured is unable to work, and thus earn income, due to disability.

Human Life Value Approach

A method of determining a person's need for insurance coverage, which is based mainly on the "value" of the person, i.e. the value of the person's income over their lifetime.

Capital Needs Analysis

A method of determining life insurance needs by calculating the value of a continuous income stream produced by the insured.

Financial Needs Analysis

A method to determine life insurance needs for an individual which involves specifying a principal amount needed if the principal amount is to be liquidated in order to meet the insured's survivors' needs.

General Obligation

A municipal bond backed by the full faith and credit of the municipality, and is repaid through the general revenue of the municipality as opposed to Bond income from a facility constructed with the borrowed monies.

Income Mutual Fund

A mutual fund with the investment objective of high current income rather than capital growth and typically invests in stocks, bonds or both. Income Objective An investment that provides a substantial and regular income in the form of interest, dividends or rent.

Growth Mutual Fund

A mutual fund with the investment objective of long-term capital appreciation, rather than current income, and invests primarily in common stocks.

Extended Term Insurance

A paid-up insurance option that policy owners may purchase in order to extend the life of their insurance coverage. It pays a death benefit equal to a specified face amount of paid-up term insurance, increased by any dividends or deposits and decreased by policy loans.

Expense Ratio

A percentage figure that represents the amount that a mutual fund investor pays for fund operating and management fees in reference to the total investment in the fund.

Elimination Period

A period of time specified in a disability insurance policy which serves as a benefit qualifying period in that disability insurance benefits are not paid until it terminates. It begins at the onset of disability and is typically 7 to 90 days, depending on the type and particulars of the policy.

Graded Premium Whole Life

A permanent policy similar to a modified premium whole life contract but, rather than one increase taking place at a specific point in time, the increases take place each year during the early years. The ultimate premiums will remain level at an amount higher than the premium for a level premium whole life policy issued to the insured on the same date.

Fiduciary

A person or entity that holds assets in trust for a beneficiary and is responsible for managing those assets for the benefit of the beneficiary.

Adjusted Average Earnings

A person or entity's average earnings adjusted to reflect excess salaries, loans, extraordinary business gains or losses, rental income, etc.

Broker

A person who serves as an intermediary between a buyer and a seller, usually receiving a commission for each transaction. In the life insurance business, it is an independent producer who has no primary relationship with or mandatory production quotas for any insurance company.

Individual Retirement Account (IRA)

A personal retirement account that allows an investor to contribute tax-deferred dollars to the account so that the investments supporting the account increase in value and, thus, increase the number of dollars available for an individual's retirement. Withdrawals may not be made before the age of 59 ½ except under strict circumstances.

Inheritance Tax

A state tax levied on the right of the heirs to receive property from a deceased person.

Income Stock

A stock that pays regular, substantial dividends to shareholders so that it provides steady current income. Utilities, banks, insurance companies, and REITs (see below) are often considered income stocks.

Federal Gift Tax

A tax imposed on the donor of a gift made during the donor's lifetime.

Kiddie Tax

A tax on net unearned income, which is levied at the child's tax rate, for a child under the age of 14, who has at least one parent alive. When it reaches a specified amount it is taxable at the parents' rate. This is to avoid parents transferring unearned income to their children to take advantage of the child's lower tax rate.

Keogh Plan

A tax-deferred retirement account similar to an IRA, but available to unincorporated businesses or self-employed individuals.

Convertible Term Life Insurance

A term policy with the option to convert to a form of permanent insurance at or before a specified time.

Bypass Trust

A testamentary (see below) trust that provides for a transfer from a decedent spouse to the surviving spouse such that the value of the property transferred is not included in the decedent's estate.

Major Medical Plan

A traditional health insurance plan that provides substantial protection against catastrophic medical expenses. It has a higher coverage limit that is sufficient to handle major health claims, and uses deductibles and coinsurance, out-of-pocket maximum, and annual or lifetime maximum limits on expenses.

Charitable Trust

A trust qualified under Internal Revenue Code Section 501(c)(3) that exists for charitable purposes and allows for charitable deductions. Many people use charitable remainder trusts (CRTs), charitable remainder annuity trusts (CRATs), charitable remainder unitrusts (CRUTs), as planning vehicles to maximize value and minimize taxes.

403(b) Plan

A type of Individual Retirement Account (IRA) sponsored by qualified non-profit employers that allows employees to contribute to various funds in the plan on a pre-tax basis, and to direct the allocation of money to the various funds.

Cash Refund Annuity

A type of annuity contract which guarantees that the annuitant or his or her beneficiary will receive annuity payments at least equal to the total premiums paid for the annuity, even if the annuitant dies before such amount is paid.

401(k) Plan

A type of employer-sponsored, defined-contribution retirement plan that allows employees to defer a portion of their compensation in order to contribute to various funds in the plan on a pre-tax basis, and also allows employees to direct the allocation of their money to the various funds.

Index Fund

A type of mutual fund in which the underlying investment portfolio is tied to a particular stock index, such as the Dow Jones Industrial Average or S&P 500.

Cost of Living Adjustment (COLA)

An adjustment to the total [typically disability or long-term care] insurance benefit that is based on an increased cost of living as reflected in a cost of living index published by the federal government. In a disability contract the adjustment begins on the 13th month of disability and subsequent adjustments are made annually through the remainder of the disability or until a maximum adjustment (2x or 3x the basic benefit) is reached.

Indenture

An agreement between a bond issuer and a bondholder that provides for the detailed terms and conditions of the bond.

Medical Savings Account (MSA)

Also known as an Archer MSA, it is a tax-deferred account to which an employer, employee, or both may contribute, principally for the benefit of the employees who use the account funds to pay for qualified medical expenses. MSAs are only available to those covered by high-deductible health insurance policies. It also provides a method of paying for expenses until the deductible is reached.

Futures Contract

An agreement to purchase or sell a set amount of a commodity or financial instrument at a predetermined price on a predetermined date.

Fixed Annuity

An annuity under which the insurance company invests the annuity premium in its general portfolio and guarantees to pay a fixed, minimum interest rate during the accumulation period and a fixed income payment upon annuitization.

Capital Appreciation

An increase in the value of an investment from the time it is purchased until the time it is sold.

Appreciation

An increase in the value of an investment.

Key Person

An individual at a business who has unique skills and experiences and is thus essential to the continuity of the business.

Coverdell Education Savings Account

An individual retirement account that accepts a $2,000 per student (currently) annual after-tax contribution in which earnings are accumulated tax deferred and allows distributions that may be excluded from income if used to pay qualified education expenses.

Highly Compensated Employee

An individual who owns more than 5% of the capital or profit of the business, or received more than $90,000 in compensation during the preceding year. Qualified employer retirement plans must be designed so as not to discriminate in favor of highly compensated employees.

Adjusted Gross Income

An individual's gross income which has been adjusted by certain additions and subtractions. It is used primarily as a base amount to determine: (a) how the taxpayer must treat certain other items for tax purposes; and (b) eligibility for deductions, etc. For example, the individual's level of AGI is used with IRAs to determine the deductibility of traditional IRA contributions for qualified plan participants to determine eligibility for Roth IRAs, etc.

Individual Retirement Annuity

An insurance company contract that offers a guaranteed lifetime income at retirement. It is specifically designed to fund a traditional IRA.

Long-term Care Insurance

An insurance policy that provides benefits to pay for nursing home care, custodial care, and intermediate care. It may also provide benefits for home health care, assisted living, and adult day care. A LTC policy is eligible for tax advantages if it is "qualified", i.e. it meets certain IRS requirements.

"Any Occupation" Definition of Disability

An insured is only considered to be disabled (and thus eligible for benefits) if he/she is unable to work at any occupation for which he or she is reasonably suited by reason of education, training or experience. [See "Own Occupation" Definition of Disability.]

Current Assumption Whole Life

An interest-sensitive life insurance policy that provides for a re-determination of premium (and possibly the death benefit) at certain intervals, based on the insurance company's investment performance for the most current interval, subject to a maximum premium and minimum guaranteed rate of return on cash value.

Aggressive Growth

An investment objective geared toward capital appreciation, and often involves investing in growing companies, large or small, that have above average profit growth and do not declare many dividends.

Defined Contribution Retirement Plan

An investment plan for retirement that provides a benefit during retirement based on the specified dollar amount of contributions made to the plan.

Dollar Cost Averaging

An investment program in which a predetermined amount of money is invested in securities on a regular, periodic basis. This is intended to minimize risk because securities are purchased at different prices. Also called a "Constant Dollar Plan."

Dividend Reinvestment Plan (DRIP)

An investment program in which dividends are automatically reinvested into additional shares of company stock or additional mutual fund shares, instead of being distributed in cash to the shareholder.

Hedge/Hedging

An investment strategy used to minimize risk. A perfect hedge is one that totally eliminates the possibility of gain or loss in the future. Options, futures, and short sales are often used as hedging tools.

Growth Objective

An investment that provides growth of the principal sum invested through capital appreciation.

Long-term Capital Gain/Loss

An investor's gain or loss resulting from the disposition of a capital asset that was held by the investor for 12 months or longer.

Marital Deduction

An unlimited deduction from the federal adjusted gross estate equal to all qualified property passing to a surviving spouse.

Dividends (Policy owner)

In the life insurance context, it is the distribution of company divisible surplus, i.e. a return of premium paid. Dividends are declared by the board of directors, but are not guaranteed. They are normally paid annually.

Chronically Ill

In the long-term care insurance context, a person who cannot perform at least two activities of daily living (ADLs) for at least 90 days or who needs substantial services to protect his/her health and safety due to substantial cognitive impairment.

Activities of Daily Living (ADLs)

In the long-term care insurance context, tasks such as eating, bathing, dressing, toileting. Inability to perform a certain number of these tasks is a typical threshold for long-term care benefits.

Income in Respect of a Decedent (IRD)

Income that was earned by a decedent during his/her lifetime but is due to his/her estate because it was not paid prior to death.

Convertibles

Corporate securities that are eligible to be converted to securities of a different form at a predetermined price.

Adult Day Care

Day care at facilities specially designed for elderly persons who live at home but spend part or all of their daytime hours at such facilities so that they may get necessary assistance.

Bonds

Debt securities that represent loans to a corporation, the U.S. government or its agencies or a municipality (the issuer) in return for which the issuer promises to pay a stated rate of interest and promises to repay the loan on a predetermined maturity date.

Medicare HMO

HMO programs paid for by the federal government and set up to insure Medicare beneficiaries. Medicare HMO programs require members to use their panels of doctors and hospitals. In return, members get expanded benefits, such as outpatient pharmacy benefits and no deductibles.

Disability

In general, a physical impairment that may prevent an individual from working on a temporary or permanent basis. The impairments may be a result of accidents or illnesses. Each policy contract includes its own definition of disability, so it is essential to read the applicable definition.

Basis

In general, it is the original cost plus all monies expended in connection with an investment. It is used in calculating capital gains and also relevant to the LIFO and FIFO methods of taxation, as basis is not taxable when an asset is sold or withdrawals are made.

Investment in the Contract

In the annuity context, the amount of funds contributed to the contract, minus any amount received and not included in income.

Limited Pay

Life A permanent life insurance policy that requires the insured to pay premiums for a specified number of years or until a specific age. The policy is paid for at an accelerated rate so that premiums are no longer necessary after that time. Periodic premiums are higher than the premiums for an equivalent amount of traditional whole life.

Corporate Bonds

Loans to corporations governed by terms set forth in a bond document, or indenture. Corporate bonds usually provide for a higher interest rate than government bonds since they are not considered as safe as government or municipal bonds, and do not receive favorable tax treatment.

Assisted Living Care

Long-term care benefits for facilities that provide care for the elderly who need some assistance in caring for themselves, but not to the extent that they require nursing home care.

Home Health Care

Medical care received at home, including but not limited to part-time skilled nursing care, physical or occupational therapy, and services from home health aides.

Illiquid

Not easily converted to cash, e.g. a stock or bond that is not actively traded, or real estate or collectibles, for which there is not a ready market.

Liquid

Readily convertible to cash, e.g. T-bills, bank deposits, money market shares.

Crummey Powers

Rights granted to beneficiaries of a qualified irrevocable trust to request that all or a portion of grantor's contribution to the trust, such that the beneficiary has a present interest in the grantor's gift and the grantor can utilize the annual exclusion.

Junk Bond

See "High Yield Bond."

Common Stock

Shares of ownership of a corporation in a class for which dividends are declared at the discretion of the company's board of directors, and voting rights are granted. Liability is limited to the amount that an individual has invested in the stock. Common stockholders have a more lower, residual claim to corporate assets held, in the event of liquidation, than do preferred stockholders.

Cash Value

The amount of funds in a permanent life insurance policy that has accrued as a result of the savings element of the policy. It may be used by the policy owner as a source of policy loans or withdrawals. In a whole life policy, the cash value increases while the amount at risk decreases.

Economic Benefit of Term Insurance Costs

The amount of taxable benefit deemed received by an employee by the purchase of term insurance in a pension plan. The amount is calculated annually (from IRS table, P.S. 58 or Table 2001) on plan-provided pure death protection only, whether from a term policy or as part of a permanent policy.

Increasing Term Insurance

Term insurance that provides for regular increases in coverage on an annual basis.

ERISA

The Employee Retirement Income Security Act, which is a set of laws enacted in 1974 to regulate private pensions and retirement plans.

Continuation of Coverage

The ability of a person and his or her dependents to maintain coverageunder a plan for a limited period of time after they no longer belong to an eligible group. Under the provisions of the federal Consolidated Omnibus

Adjusted Book Value

The adjusted net worth of an asset, e.g. a company or a security. The book value is adjusted to reflect the fair market value.

Load/Loading

The amount added to the net premium to cover expenses of operation, to provide for contingencies, and to allow a reasonable profit to the insurer. Alternatively, it is the sales charge(s) assessed on the value of certain mutual funds.

Adjustable Taxable Estate

The amount calculated by reducing the taxable estate by $60,000 (currently).

Exclusion Ratio

The amount invested in an annuity contract divided by the total amount expected to be received under the contract. The exclusion ratio is multiplied by each annuity payment in order to determine the amount of each payment that is excludable from taxable income.

Convertability

The contractual right to exchange a term life insurance policy for a whole life insurance policy without the insured providing evidence of insurability.

Grantor

The creator of a trust, also known as a "settlor" or "trustor."

Discount

The difference between a bond's market price and its face value; or, the manner of selling certain U.S. Securities, which are sold at less than face value but redeemed at face value.

Amount at Risk

The difference between the face value of a life insurance policy and the value of the accumulated reserves at a given point in time; i.e. the amount of pure insurance protection provided.

Commuted Value

The discounted amount that is paid by the insurance company should a beneficiary elect to take a lump-sum settlement, rather than the installment payments originally contemplated by the policy. The discounting takes place because the insurance company has lost the use of the money over time, and thus pays the present value of the benefits. "Commutation" is the process of withdrawing this amount and is basically tantamount to an unlimited right of withdrawal.

Asset Allocation

The distribution of investment funds amongst various categories of investments, for instance, cash equivalents, equities, bonds or other fixed income investments. Categories may be further divided by type of tangible asset (real estate, precious metals, collectibles). Asset allocation is a theory of investment management that is intended to provide the maximum amount of return for a given amount of risk.

Annual Exclusion

The dollar amount that may be excluded from federal gift tax per individual, per year. Currently, the exclusion is $11,000 for an individual and $22,000 for a married couple filing jointly.

Administrator

The person appointed by the court to settle the estate in the event that a person dies intestate, i.e. without a will.

Executor

The person specified in the decedent's will to handle the estate settlement, including payment of debts, expenses and taxes, and filing estate tax returns.

Beneficiary

The individual named to receive benefits of a life insurance policy upon the insured's death or the proceeds of an annuity contract upon the annuitant's death. Proceeds may be paid in cash or in installments, depending on the contract/policy terms.

Annuitant

The individual, not necessarily the contract owner, whose lifetime is used as a determinant of the annuity payments.

Deductible

The initial amount of portion of a loss that is covered by insurance and is borne by the insured, rather than the insurer.

Coupon

The interest rate payable by the issuer to the bondholder on a debt security, stated as an annual percentage of the principal.

Interest Only Option

The method of death benefit payment in which death benefits remain with the insurance company and earn interest, with only the interest being distributed to the Beneficiary.

Book Value

The net worth of a company, determined by calculating value of assets less

Call Risk

The risk that a bond may be "called" or redeemed by the issuer before the maturity date, thereby depriving the bondholder the interest that would otherwise have been earned after the call.

Interest Rate Risk

The risk that an investment, e.g. a fixed-interest investment, will lose value as a result of a rise in interest rates.

Legislative Risk

The risk that the value of an investment will decrease as a result of the effectiveness of new or modified legislation.

Inflation Risk

The risk that the value of an investment will not keep pace with inflation, thus eroding the purchasing power or real value of the invested funds.

Liquidity Risk

The risk that there may not be a market for the investment at the time the investor wants to sell.

Level Term Insurance

The simplest form of term life insurance coverage, in which there is a level death benefit and level premium from year to year.

Diversification

The spreading of risk by placing assets in various categories of investments, e.g. stocks, bonds, cash equivalents; or in various industries, e.g. technology, utilities, pharmaceuticals, etc.

Adverse Selection

The tendency, in life or health insurance, of people who are already sick (or likely to die sooner rather than later) to buy coverage and keep it, of healthy people not to seek coverage, and to be more likely to drop coverage or to change plans with which they are dissatisfied.

Efficient Market

The theory that the market price of securities are based on the knowledge and expectations of all investors. Subscribers to this theory do not seek out undervalued stocks or attempt to predict market fluctuations.

Accumulation Period

The time during which monetary contributions to a deferred annuity, plus any earned interest, accrue with the insurance company on a tax-deferred basis. This period begins with the first contribution and lasts until funds are paid out to the annuitant or beneficiary.

Blackout Period

The time period during which no Social Security benefits are payable for a surviving spouse, extending from the time the youngest child reaches age 16 and until the spouse reaches age 60.

Defined Benefit Retirement Plan

The traditional pension, in which a specified dollar amount of benefit is paid to retirees during retirement.

Face Value

The value of a bond, note, or other security (or life insurance policy), as expressed on the face of the instrument (or contract). Also known as "Par Value."

Cost Basis

The value of one's investment in a particular asset. In annuity distributions, it is the portion of the annuity payment that represents the owner's investment in the contract, on which taxes have already been paid and thus is excluded from income when received.

Annual Return

Total return on an investment for a year-long period, including dividends or interest and capital gains and losses but excluding any management fees, commissions, or other transactional expenses.

Breakpoint Discounts

on mutual fund sales charges that are available in certain circumstances; for instance, investments of a certain amount in a particular fund or family of funds, or investments made within a certain period of time, etc. Breakpoints vary with the different mutual fund class shares. Breakpoint availability must be disclosed to an investor, and failure to disclose them, or failure to utilize them when it would be in the best interest of the investor, is a violation of NASD rules.