“TRUST-ME” ANNUITY A more traditional design of an annuity whereby the initial rate is guaranteed for a short period of time (usually one year). Also, the surrender charge schedule lasts beyond the interest rate guarantee. Therefore, you are left to “trust” the company to offer a favorable renewal rate above the common minimum guarantee of 3 or 4% in following years.
10% Penalty Tax A penalty imposed by the IRS for withdrawing untaxed money (pre-tax contributions or earned interest) from an annuity prior to age 591/2.
1035 EXCHANGE A section 1035 exchange (1035 refers to tax code number) is a tax-free method of exchanging an existing life insurance or annuity policy for a new policy with a different company. This procedure is often exercised when it is beneficial for the policy owner to move to a more favorable contract that offers rates or features they don’t currently have.
12b-1 fee Fee associated with certain sales and marketing expenses of a mutual fund.
401(k) Plan A qualified retirement plan that is funded by the employee on a pre-tax basis for retirement purposes. Employers can also contribute.
403(b) Plan A qualified retirement plan that can only be offered by schools and 501(c)(3) non-profit organizations for the benefit of the employees. Both the employee and the employer on a pre-tax basis can fund the plan.
408A A Roth IRA. Special IRA which accepts only nondeductible annual contributions. See Roth IRA.
457 Plan State and local governments can establish 457 plans that allow their employees to defer compensation on a tax-favored basis. Available to states, political subdivisions of states or any state agency or instrumentality.
501(c)(3) Organization Certain tax-exempt organizations as specified in the Internal Revenue Code section that can have a 403(b) plan. A corporation, community chest, fund, or foundation that is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes; for fostering national or international amateur sports competition; or for the prevention of cruelty to children or animals will probably qualify for 501(c)(3) status.
529 Plan A savings plan by which earnings and withdrawals for qualified higher education expenses are free from federal tax (through 2010 unless extended by Congress).
ACCRUED INTEREST Interest that has accumulated on a bond since the last interest payment was made; the buyer of the bond pays the market price plus accrued interest to the seller.
ACTUARY A statistical mathematician who calculates premiums, dividends, reserves, pension, insurance and annuity rates for an insurance company or other program involving fiscal risk.
ADJUSTED GROSS INCOME (AGI) Interim calculation in the computation of income tax liability. From the taxpayer’s gross income, subtract the adjustments, which can include: contributions to an IRA, payments to a Keogh account, penalty on early withdrawal of savings and alimony paid. Itemized deductions (Sched. A) or the standard deduction, allowed charitable contributions (for those who do itemize) and personal exemptions are then subtracted from the AGI to calculate taxable income.
ADMINISTRATOR The person or bank appointed by a court to carry out the distribution of a decedent’s estate when the deceased has left no will or has left a will that fails to name an executor who is able to perform these duties.
AFTER-TAX DOLLARS Money after taxes have been paid on it.
AGE-WEIGHTED PLAN A defined-contribution plan that allocates contributions t participants in such a way that when contributions are converted to equivalent benefit accruals (stated as a percentage of compensation), each participant receives the same rate of benefit accrual.
AMORTIZATION In banking, the gradual reduction of a debt by means of equal periodic payments sufficient to meet current interest and liquidate the debt at maturity.
ANNIVERSARY DATE The anniversary of your annuity’s starting (or effective) date.
ANNUAL PERCENTAGE RATE (APR) Cost of a consumer loan, expressed as a simple annual percentage.
ANNUITANT The person whose life expectancy is used to measure the length of time income payments are payable under the immediate annuity contract. This person is usually designated to receive the income.
ANNUITIZATION Converting the value of an annuity contract into a stream of income payouts for a certain period or for life or both.
ANNUITY A retirement product that allows you to save for your future on a tax-deferred basis and then allows you to choose a payout option that best meets your need for income when you retire.
ANNUITY CERTAIN A type of immediate annuity income option that is payable for a stated period of time, regardless of whether the annuitant lives or dies.
ANNUITY CONTRACT A legally enforceable written agreement under which an insurer promises to make a series of periodic payments to a named person, starting on a specified date, in exchange for a premium or series of premiums paid to the insurer.
ANNUITY PERIOD The time span between each of the income payments in a series of periodic annuity income payments, such as monthly, quarterly, semi-annually, or yearly.
ARBITRAGE The simultaneous purchase and sale of foreign exchange, stocks, bonds, silver, gold or other commodities in two markets to take advantage of price differentials between those markets.
ASK PRICE The price at which the specialist or dealer offers to sell shares
ASSUMED INVESTMENT RATE The rate assumed in a variable annuity that the investment portfolio must earn in order for benefit payments to remain level. If the experience rate or actual investment rate is higher than the assumed investment rate, then annuity payouts will be higher. Conversely, if the experience or actual investment rate is lower than the assumed rate, annuity payouts will be lower.
AUDIT Examination of accounting and financial documents by a professional for their accuracy, consistency and conformity to legal and accounting principals.
BAILOUT PROVISION An annuity contract provision that enables the contract owner to surrender the annuity contract, usually without a surrender charge applying, if renewal interest rates on a fixed annuity fall below a pre-established level.
BASIS POINT 100 basis points is equal to one percentage point
BEAR MARKET A downward trend in the stock market
BEFORE-TAX DOLLARS Money that has not been taxed.
BENEFICIARY The person or legal entity that receives the annuity death benefit upon death of the contract owner or annuitant.
BETA A statistical measurement that shows how an individual stock or portfolio has moved up or down (its volatility) relative to the general market over a specified period. Theoretically, the higher the volatility, the higher the beta.
BID PRICE The price at which the specialist or dealer offers to buy shares.
BLUE CHIP The common stock of a company with a reputation for quality and wide acceptance of its products or services, as well as a strong history of profitability and dividend payment.
BOND When an institution such as a government, a government agency, or a corporation wants to borrow money, it can do so by creating a form of debt called a bond. In return, bond purchasers receive periodic interest payments. Unlike a mortgage, where each payment is part interest and part principal, the principal amount of a bond is usually repaid in a lump-sum, no later than a specified future date.
BONUS ANNUITY An annuity that usually offers a higher first-year interest rate that is guaranteed for one year. The “base rate” is the interest rate that the company projects it will pay in the second year and thereafter, but is NOT guaranteed in most cases. The difference between the actual rate in the first year and the projected base rate is the bonus rate. Quite often the “renewal rate” that the company declares on each contract anniversary from the second year and beyond is different than the projected base rate.
BROKER/DEALER As defined by the SEC Act of 1934, a broker is “any person engaged in the business of effecting transactions in securities for the account of another.” A dealer means “any person engaged in the business of buying or selling securities for his own account.” Accordingly, a broker/dealer trades for his or her own account and for the accounts of others.
BULL MARKET An upward trend in the stock market
BUSINESS CYCLE The recurring patterns of expansion, boom, contraction, and recession in the economy.
BUY-SELL AGREEMENT An arrangement to dispose of a business interest in the event of the death, retirement or disability of the business owner.
CAFETERIA PLAN A plan that provides flexible benefit dollars that an employee can allocate to pay for certain benefits from a menu of benefit choices (such as life insurance, health insurance, or child care) and/or place in a 401(k) plan.
CALL An option to buy a specified number of shares of stock at a stated price within a specified period.
CAP RATE The maximum interest rate credited to an equity-indexed annuity.
CAPITAL GAIN (Loss) The change in price on a security over some period of time.
CAPITAL MARKET The market for long-term securities such as bonds and stocks.
CASH SURRENDER VALUE The amount that an insurance policyholder is entitled to receive should he or she discontinue the coverage.
CATCH-UP PROVISION A provision that allows employees covered by a 403(b) plan to make larger than typically permitted contributions to the plan.
CERTIFICATE ANNUITY An annuity where the interest rate guarantee period equals the surrender charge period.
CERTIFICATE OF DEPOSIT (CD) A receipt issued by a bank for a cash deposit for a specified period of time at a fixed rate of interest. Upon maturity the bank pays the depositor the principal plus all accumulated interest.
CHARITABLE DEDUCTION A deduction that may be taken by an individual or an estate for the transfer of property to a qualified charity.
CHARITABLE GIFT ANNUITY When a donor transfers an asset to a charity in exchange for an income for one or two lives.
CHARTER The authority to do business granted by a state government to a corporation.
CLIFF VESTING A vesting schedule under which an employee is not entitled to any percentage of his or her retirement benefit until he or she is fully vested after the attainment of a specific amount of years of service. The maximum amount of years of service that an employee can be forced to wait in a qualified plan is 5 years.
COLLATERAL Specific property pledged by a borrower as security for the repayment of a loan.
COMMERCIAL LOAN A short-term loan made by a bank to a business enterprise for the production, manufacture or distribution of goods or to finance related services.
COMMERCIAL PAPER Short-term (nine months or less) unsecured notes issued by banks and corporations, usually backed by bank lines of credit.
COMMON STOCK An equity security representing the ownership interest in a corporation.
COMPOUND INTEREST The process by which money earns interest on both the principal and the accumulated interest.
CONFINEMENT WAIVER Surrender charges are waived if it becomes medically necessary for the annuitant (or owner) to be confined to a hospital or long-term care facility (subject to company/product variations and state approval).
CONSUMER PRICE INDEX The government’s method of measuring the price of goods and services bought by urban wage earners and clerical workers.
CONTRACT OWNER The individual or entity that applies for and purchases an annuity contract and is responsible for funding the annuity.
CONTRACT VALUE The sum of premiums paid, plus earnings, less any applicable charges, withdrawals or fees.
CONVERTIBLE BONDS Bonds that are convertible, at the holder’s option, into shares of common stock of the same corporation.
CORPUS The property placed in a trust; synonymous with principal.
COST-OF-LIVING ADJUSTMENT (COLA) An adjustment, usually made annually, of wages, pensions, Social Security benefits, etc. based on changes in the consumer price index or other measure of inflation.
COUPON BOND A bearer bond carrying detachable certificates that the bondholder presents to receive periodic interest payments.
COUPON RATE The rate of interest on a bond.
COVARIANCE An absolute measure of the extent to which two variables tend to covary, or move together.
CURRENT INTEREST RATE The interest rate an insurer promises to pay for a specified time period. It is based on the prevailing interest rates in the economy.
CUSTODIAN Person or institution that holds the assets of another; a bank that serves as a depository for the assets of a mutual fund, corporation, or individual; or an adult who assumes responsibility for the financial transactions of a minor.
DEATH BENEFIT The annuity benefits that are paid to the beneficiary upon the death of the contract owner or annuitant.
DEBENTURE An unsecured bond backed by the general worthiness of the firm.
DEFERRED ANNUITY An annuity that provides a means to accumulate funds on a tax-deferred basis.
DEFERRED COMPENSATION An agreement that states that compensation for services rendered is postponed until sometime after the services in question have been performed.
DEFINED BENEFIT PLAN A type of pension plan that guarantees a lifetime income upon retirement based on the employee’s income and/or years of service.
DEFINED CONTRIBUTION PLAN A type of pension plan that specifies the annual contribution the employer will deposit into the plan on behalf of each plan participant. The retirement income will depend on the performance on the amounts that are contributed.
DEFLATION Decline in the price of goods and services.
DERIVATIVE SECURITIES Securities that derive their value in whole or in part by having a claim on some underlying security.
DISCRETIONARY INCOME The amount of an individual’s income remaining after essential expenses (taxes, housing, food, etc.) have been paid.
DIVERSIFICATION The process of spreading assets among a variety of investments to minimize the risk associated with any one investment. Potential losses in one area may be offset by potential gains in others.
DIVIDEND The portion of a corporation’s net profits that its board of directors assigns for distribution to stockholders. A dividend is declared at a certain amount per share to be paid in cash (cash dividend) or in additional shares of stock (stock dividend).
DOLLAR COST AVERAGING An investor buys the same stock or mutual fund at regular intervals; i.e., monthly or quarterly, and with a fixed amount of investment dollars. Over a period of time, as market prices fluctuate, the average cost per share to the investor will be less than the average price per share.
DOW JONES INDUSTRIAL AVERAGE A stock indicator calculated each trading day that tracks the market value of 30 leading industrial stocks.
DOW THEORY A technique for detecting long term trends in the aggregate stock market.
DUE DILIGENCE The research conducted by broker-dealers and other financial advisors on the legal and economic soundness of an investment.
EARNINGS per SHARE A corporation’ net income (after taxes and payments to preferred shareholders and bondholders) divided by the number of outstanding shares of common stock. This is a key indicator in the analysis of corporate performance.
EFFICIENT PORTFOLIO A portfolio with the highest level of expected return for a given level of risk or a portfolio with the lowest risk for a given level of expected return.
EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) The act that laid the foundation for modern pension law. ERISA established the nondiscrimination requirements, reporting and disclosure requirements, plan funding standards, vesting and participation requirements, and fiduciary responsibilities.
ENDORSEMENT In insurance, a written addition to a policy, the provisions of which supersede the original policy; also called a rider.
ENDOWMENT In insurance, a policy that pays the face amount to the insured if living on the maturity date, or to a beneficiary if the insured dies before that date.
EQUITY INDEXED ANNUITY A variation of a fixed annuity that earns interest linked to an external equity index. One of the most common indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500).
ESCROW The deposit of instruments and funds with a third, neutral party until the provisions of an agreement or contract are carried out.
ESTATE All assets owned by an individual at the time of his or her death: funds, personal effects, interest in business enterprises, titles to property and evidences of ownership (i.e., stocks, bonds, mortgages owned and notes receivable).
EXCLUSION RATIO Regarding payments from an immediate annuity or annuitization, part of each payment the annuitant receives is considered to be a return of principal, which is not taxed. The remaining portion of the payment consists of interest earnings and is taxable. The exclusion ratio determines the taxable and nontaxable portions of each payment.
EXECUTOR The person named in a will to carry out the decedent’s wishes for the distribution of his or her assets; the executor fulfills his or her duties under court supervision.
EXERCISE PRICE The price at which the stock or futures contract underlying an option can be purchased (call option) or sold (put option); also called strike price.
FACE VALUE The principal value of an instrument; the individual or other legal entity that issues a note, bond or other obligation, contracts to repay the face value of the obligation at maturity. The yield on interest-bearing obligations is based on face value.
FIDUCIARY A person or corporation that exercises any discretionary authority or control over the management of the plan or plan assets, renders investment advice for a fee, or has any discretionary authority or responsibility in the administration of the plan.
FIFO to LIFO In 1982 the tax treatment of annuity distributions changed from “FIFO” (first in, first out), meaning your principal came out first, then interest, to “LIFO” (last in, first out) meaning interest is distributed before principal.
FISCAL YEAR A 365-day period used for accounting and tax purposes; does not necessarily coincide with the calendar year.
FIXED ANNUITY An annuity contract that guarantees a minimum rate of interest, as well as a higher current rate of interest for shorter periods, during the accumulation phase of a deferred annuity.
FLEXIBLE PREMIUM DEFERRED ANNUITY (FPDA) An annuity for which the contract owner pays premiums with varying amounts and frequencies from year to year.
FORFEITURE The amount that is lost when a participant terminates employment before being fully vested under the plan’s vesting schedule.
FOURTH MARKET A communications network linking large institutional investors.
FREE LOOK PROVISION An annuity contract provision that states that the contract owner has approximately 10 to 20 days to examine the annuity contract immediately after purchase, with the option of returning it to the insurer for a full refund. State rules may vary.
FREE WITHDRAWAL PROVISION An annuity contract provision that grants the owner the right to withdraw a portion of the annuity’s contract value (usually 10-15%) during the accumulation period without incurring a withdrawal charge.
FRONT-END LOAD A sales charge incurred on the purchase of an investment. Sales charges incurred upon sale of the investment are called back-end load.
FROZEN PLAN A qualified plan that does not permit continued accruals of benefits or additional contributions for existing employees and does not recognize new plan participants.
FUTURES CONTRACT Agreement providing for the future exchange of a particular asset at a currently determined market price.
GENERAL ACCOUNT Houses all of an insurance company’s assets. Within the account, the insurance company will offer the fixed account option or options that complement the variable annuity separate account choices.
GIFT TAX A federal tax levied on the transfer of property as a gift; the tax is paid by the donor. The first $10,000 a year to each recipient is exempt from the tax ($20,000 if the donor or donee is a married couple) and gifts between spouses are exempt. Most states also impose a gift tax.
GOODMAN RULE Result of Goodman Rule is that for life insurance and annuities, the owner must also be either the insured (annuitant) or the beneficiary. If the owner, insured and beneficiary are 3 different persons, then the death of the insured results in the owner making a taxable gift to the beneficiary.
GOVERNMENT SECURITIES Bonds and other debt instruments issued by the U.S. Treasury. Government securities have high credit ratings and are backed by the full faith and credit of the federal government.
GROWTH FUND A mutual fund with an investment objective of long-term capital growth and capital gains, rather than of current income.
GUARANTEED INTEREST RATE A minimum interest rate (typically 3-4%) that the insurance company promises to credit during the accumulation phase of the annuity contract.
HEDGE A strategy using derivatives to offset or reduce the risk resulting from exposure to an underlying asset.
HOLDING COMPANY In general, a corporation that owns enough stock in another corporation to control management and policies.
HOLDING PERIOD The length of time that an investor has owned a capital asset.
ILLIQUID A security that does not have an active secondary market and is therefore difficult to convert to cash before maturity without significant loss of value, similarly, a tangible asset that cannot be converted into cash readily.
IMMEDIATE ANNUITY An annuity contract in which annuity payouts begin immediately or within one year.
INCIDENTS of OWNERSHIP In life insurance, the totality of rights held by a policyowner (e.g., to cash in the policy, to borrow against it).
INCOME DATE The date stated in the annuity contract when income payments are scheduled to begin.
INCOME FUND A mutual fund whose investment objective is current income rather than capital growth. Income funds are often invested in bonds and other fixed-income securities.
INCOME or PAYOUT OPTIONS Different ways by which the annuitant can receive income from an immediate annuity.
INDEX A statistical measurement system that tracks the performance of a group of similar investments.
INDEX FUND Mutual fund holding a bond or stock portfolio designed to match a particular market index.
INDIVIDUAL RETIREMENT ACCOUNT (IRA) An arrangement that allows people with earned income to deposit a portion of that income in a tax-deferred savings plan. An IRA can be established and funded at any time between January 1st of the current year, up to and including the date an individual’s income tax return is due (generally, April 15 of the following year), not including extensions.
INFLATION An increase in the general (average) level of prices, commonly measured by the consumer price index. Click here for historical chart
INITIAL INTEREST RATE The interest rate applied to the first deposit into a fixed deferred annuity. The annuity contract will specify how long the initial interest rate is guaranteed.
INITIAL PUBLIC OFFERING (IPO) Common stock shares of a company being sold for the first time.
INTEGRATION A method of dovetailing a qualified plan with social security benefits. Because social security discriminates in favor of low-paid employees, an integrated plan is allowed to discriminate in favor of highly paid employees to the extent permitted under the integration rules.
INTEREST The fees that bond issuers, banks, and other financial institutions pay for the use of borrowed money.
INTEREST RATE RISK The variability in a security’s returns resulting from changes in interest rates.
INTERNAL RATE OF RETURN (IRR) The interest rate at which the present value of expected cash flows equals the value of the initial outlay.
INTRINSIC VALUE The estimated value of a security.
INVESTMENT GRADE A bond rating of BBB or better by Standard & Poor’s or another investment rating service. Issues below this level are speculative and are sometimes called junk bonds.
IRREVOCABLE LIFE INSURANCE TRUST Created while the trustor is still living and cannot be revoked by the trustor. Used to reduce the size of the estate.
JOINT ANNUITANT An individual who is named in the contract with the annuitant, whose age and life expectancy are also used in the calculations to determine what the annuity payments will be.
JOINT OWNER A person who shares ownership of an annuity contract and would have the same right as the contract owner to approve any decisions made about the contract.
JUNK BONDS Bonds that carry ratings of BB or lower, with correspondingly higher yields.
KEOUGH PLAN An arrangement that allows self-employed persons to deposit a portion of their income earned from self-employment in a tax-deferred savings plan.
KEY EMPLOYEE An employee who owns more than 5% of the business, an officer who earns over one-half of the 415 defined-benefit limit, an employee who owns one of the 10 largest shares of the company, or a 1% owner who earns over $150,000.
LEAPS Puts and calls with longer maturity dates, up to two years.
LEVERAGE In investments, the investor’s use of borrowed money such as the purchase of stocks on margin or the securing of a mortgage to finance the purchase of income-producing real estate. In business, financial leverage is the relation of a company’s debt to its equity; shareholders benefit if the return on the borrowed funds exceeds the interest cost and as long as earnings are sufficient to retire the debt.
LIEN A claim against property that has been pledged or mortgaged to secure the performance of an obligation. A bond may be secured by a lien against specified property of a company.
LIMIT ORDER An order to buy or sell at a specified (or better) price.
LIQUID ASSET Cash or a marketable security easily converted into cash.
LIQUIDITY The ability of an individual or company to convert assets into cash without a significant loss of value.
LOAD Any sales fee or charge the contract owner pays in purchasing an annuity contract.
LONG POSITION An agreement to purchase an asset at a specified future date at a specified price.
LONG-TERM DEBT In securities, a bond or other debt instrument with a maturity of ten years or longer; in finance, a debt that will not come due for at least one year.
MARKET ORDER An order to buy or sell at the best price when the order reaches the trading floor.
MARKET TIMING A strategy based on various economic or stock market indicators for deciding when to buy or sell securities.
MARKET VALUE ADJUSTMENT (MVA) A feature that is often attached to deferred annuities with longer rate guarantees (usually 3 to 10 years). The MVA could increase or decrease the accumulation value of an annuity only if more than the penalty-free amount is withdrawn or the contract is surrendered during the surrender charge period. In general, if interest rates are lower at the time of withdrawal than at the time the contract was issued, the accumulation value will be increased (market value adjusted). If interest rates are higher at the time of withdrawal than at the time of issue, the accumulation value will be reduced. More detailed explanation
MATURITY DATE (or starting date) The date at which an annuity begins income (or annuitization) payments.
MINIMUM REQUIRED DISTRIBUTION See RMD
MONEY MARKET The market for short-term highly liquid, low-risk assets such as Treasury bills and negotiable CDs.
MONEY MARKET FUND A mutual fund that invests in various short-term debt instruments (like CD’s and Treasury bills).
MORTALITY AND EXPENSE RISKS (M&E) CHARGE This fee only applies to variable annuities. In most cases, the “M&E” pays for the guaranteed death benefit, ensures that the expense risks charged on the contract won’t increase, covers a guaranteed interest rate paid on one type of variable annuity subaccount, and may cover the overhead expenses the insurer incurs with the annuity contract.
MUNICIPAL BOND Debt instruments issued by states, counties, cities, and local government authorities such as a school or water district. With few exceptions, interest income from municipal bonds (or “munis”) is exempt from Federal and state income tax. Normally traded in multiples of $5,000.
MUTUAL FUND An account established by a financial services company that combines the money of many people and invests it in a variety of financial instruments.
NASDAQ National Association of Securities Dealers Automated Quotation. The automated quotation system for the Over-the-Counter (OTC) market, showing current bid-ask prices for thousands of stocks.
NATIONAL ASSOCIATION OF SECURITIES DEALERS (NASD) A nonprofit self-regulatory organization of brokers and dealers in the over-the-counter securities business, under supervision of the SEC.
NET ASSET VALUE (NAV) The price at which a mutual fund sells or redeems its shares, calculated each trading day by dividing the net market value of the fund’s assets by the number of shares outstanding.
NET WORTH For and individual, the difference between the total value of all his or her assets and the total sum of all his or her liabilities.
NEW MONEY RATE The rate at which the company pays interest on new premium deposits.
NEW YORK STOCK EXCHANGE (NYSE) The major secondary market for the trading of equity securities.
NO-LOAD FUND A mutual fund that does not assess a sales charge (load) on the purchase or redemption of shares.
NON-CALLABLE A security that cannot be redeemed by the issuer before the maturity date.
NON-NATURAL OWNER The owner of an annuity contract that is not a person but is an entity such as a trust, a partnership, or a corporation.
NON-QUALIFIED ANNUITY A type of annuity that has no contribution limit and no required minimum distributions at age 701/2 (unlike qualified). It can be funded with after-tax dollars from any source and is available to any investor.
NON-ROLLING SURRENDER CHARGE In a flexible premium deferred annuity (allowing additional contributions) the stated length of the surrender charge term will start the day the initial premium deposit is received. Future deposits will not change the point at which all of the funds are penalty free.
ODD LOT Less than a round lot (which is 100) of shares.
OPTIONS Calls (puts) that give the holder the right to buy (sell) 100 shares of stock within a specified period at a specified price.
OPTIONS CLEARING CORPORATION (OCC) Stands between buyers and sellers of options to ensure fulfillment of obligations.
ORDINARY INCOME Income earned from personal service; money one works for.
OVER-THE-COUNTER MARKET (OTC) A network of securities dealers linked together to make markets in securities.
P/E RATIO (earnings multiplier) the ratio of stock price to earnings, using historical, current, or estimated data.
PAR VALUE (Face Value) The redemption value of a bond paid at maturity, typically $1,000.
PARTICIPATION RATE The percentage of the increase in the index that will be credited to an equity indexed annuity account value (subject to the cap in some contracts). This is also known as the “Index Rate.”
PAYOUT PERIOD The period during which the payee (annuitant) receives payments from an immediate annuity.
PAYOUT RATIO Dividends divided by earnings.
PENSION PLAN A qualified plan structured to provide a pension at retirement. Characteristics include an annual funding commitment by employers, and inability to access retirement funds through pre-retirement withdrawals by employees, and a limitation on investments to 10% of employer stock.
PERIOD CERTAIN An income option offered by an immediate annuity where the contract owner can select to receive periodic payments for a specified period of time. The payout amount is determined by the contract value and the length of the period selected.
PERPETUITY A security without a maturity date.
PORTFOLIO The securities held by an investor taken as a unit
PREFERRED STOCK An equity security with an intermediate claim (between the bondholders and the stockholders) on a firm’s assets and earnings.
PREMATURE DISTRIBUTIONS Withdrawals of earnings from an annuity made before the contract owner is age 591/2.
PREMIUM BONUS Additional money credited to the annuity by the company as a percentage of the amount deposited.
PREMIUM TAX A separate tax levied on life insurance and/or annuity premiums by individual states. Not all states impose the tax. Of the states that do, the tax for qualified and non-qualified funds may differ.
PREMIUM TAXES A tax on premiums paid into an annuity that some states charge. It is based on the state of residence of the owner, not the issue state (if it should be different).
PRIME RATE The interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers). The rate is almost always the same amongst major banks. Adjustments are made by banks at the same time; although, it does not adjust on a regular basis.
PRINCIPAL The total amount the contract owner has invested in an annuity, not including interest earned.
PRIVATE ANNUITY A contract between two individuals to exchange a valuable asset for a lifetime income.
PRIVATE-LETTER RULING (PLR) An IRS interpretation of the law in light of a specific set of circumstances that face a taxpayer. A method by which a taxpayer can inquire about the acceptability of a specific transaction in which he or she is engaged.
PROBATE The process that the state uses to identify assets within a decedent’s estate for the purposes of determining tax liability, executing the will and distributing property to beneficiaries and heirs. If no will exists, the probate process provides for the orderly payment of claims from the estate and disposal of the assets of the estate.
PROFIT SHARING PLAN A defined contribution plan structured to offer an employee participation in company profits that he or she may use for retirement purposes.
PROFIT-SHARING PLAN A defined-contribution plan structured to offer an employee participation in company profits that he or she may use for retirement purposes.
PROSPECTUS A written document federal regulations require be given to any prospective variable annuity buyer before the sale. It describes the investment objectives of any separate accounts, past performance of subaccounts, as well as any fees or expenses.
PS 58 COSTS A present benefit received by a participant in the form of current life insurance protection that must be included in taxable gross income for that year. The cost attributable to this pure life protection will be the lower of the actual cost as provided by the carrier or the rates supplied by the so-called PS 58 table.
PUT An option to sell a specified number of shares of stock at a stated price within a specified period.
QUALIFIED ANNUITY An annuity that is purchased to either fund or distribute funds from a tax-qualified plan. In most instances, premiums paid can reduce current income taxes and the accumulations are tax-deferred
QUALIFIED DOMESTIC RELATIONS ORDER (QDRO) A judgment, decree or order that recognizes the existence of an alternate payee’s (usually a spouse’s) right to receive qualified plan benefits payable with respect to the plan participant.
QUALIFIED PLAN An employer-sponsored retirement program that meets a complex set of statutory and regulatory requirements.
QUOTATION The bid to buy and the lowest offer to sell a security in a given market at a given time; often shortened to “quote.”
RABBI TRUST A trust established and funded by the employer that is subject to the claims of the employer’s creditors (thus avoiding current taxation for the employee), but the funds in the trust cannot be used by, or revert back to, the employer.
REALIZED RETURN Actual return on an investment for some previous period of time.
REDEMPTION Repayment of a bond, bill or note on or before maturity. Redemption prices are stated in the initial offering. Bonds called for redemption that are not surrendered cease to accrue interest.
RENEWAL RATE The new interest rate that is credited to the annuity when the current interest rate time period ends, usually the contract anniversary. The renewal rate may be higher or lower than the current interest rate, depending upon the economy and how the insurer has invested the funds.
REQUIRED MINIMUM DISTRIBUTION (RMD) IRA’s and qualified plans both have certain “required” distributions. For IRA’s, you must begin to withdraw funds by April 1st of the year following the calendar year you attain age 701/2. For qualified plans, withdrawals must begin by April 1st of the year following the later of, (a) the year you reach age 701/2, or (b) the year you retire.
REQUIRED RATE of RETURN (ROR) The minimum expected rate of return necessary to induce an investor to purchase a security.
RESISTANCE LEVEL A price range at which a technician expects a significant increase in the supply of a stock.
RETURN on ASSETS The accounting rate of return on a firm’s assets.
RETURN on EQUITY The accounting rate of return on stockholders equity.
REVOCABLE LIVING TRUST Created while the trustor is still living but can be revoked or amended during his or her lifetime. Assets in the trust will avoid probate expenses, delay and publicity.
RISK AVERSE An investor who will not assume a given level of risk unless there is an expectation of adequate compensation for having done so.
RISK TOLERANCE The degree to which an investor can accept risk and uncertainty in either the performance and/or the value of his or her investments.
RISK-RETURN TRADE-OFF Risk and return are directly related in that the higher the risk the greater return and vice versa. Age and investment time frame should be considered when determining the levels of risk appropriate.
ROLLING SURRENDER CHARGE In a flexible premium deferred annuity (allowing additional contributions) each deposit will have it’s own independent surrender charge schedule. (i.e. with a 5 year surrender charge, each deposit will start the 5-year period the day the money is received by the company). Therefore, different amounts of the annuity will be free of surrender charge at different times.
ROLLOVER Funds from an IRA or qualified retirement plan that are moved to another of the same type, or to an IRA, preserving its tax-deferred status.
ROTH IRA Similar in concept to the traditional IRA, the Roth IRA differs in that contributions are never deductible, and, if certain requirements are met, distributions from the account may be received free of federal income tax.
ROUND LOT The standard unit of trading, or a multiple thereof, on an exchange; usually 100 shares for stocks and $1,000 par value for bonds.
RULE OF 72 A simple method for approximation the number of years it takes an investment to double at a given compound interest rate; divide the interest rate into 72.
S&P 500 COMPOSITE INDEX (S&P 500) Market value index of stock market activity covering 500 leading stocks.
SAVINGS BOND A non-transferable U.S. government bond issued in denominations from $50 to $10,000. They are sold at discount with their effective interest pegged to Treasury securities. Income from savings bonds is exempt from state and local income taxes and federal income tax is deferred until redemption.
Section 72(t) Penalty Imposes a 10% penalty tax on premature withdrawals from qualified plans, 403(b) TDAs, SEPs, and IRAs.
SECTOR FUND A mutual fund that invests only in one industry or industrial sector (e.g., energy, financial services, health care, precious metals, technology, utilities).
SECURITIES and EXCHANGE COMMISSION (SEC) A federal regulatory and enforcement agency that oversees public investment trading activities.
SELLING SHORT The sale by an investor of stock or a commodity futures contract that the investor does not own but has borrowed from his or her broker in expectation of a drop in the stock’s value. If the stock does decline, the investor can purchase it at the lower price to cover this short position; if the stock price rises, the investor suffers a loss.
SEPARATE ACCOUNT Not a part of the general account assets of the insurance company. Maintained for the purpose of making investments for the contract owner.
SHARE Unit of equity ownership in a corporation, mutual fund or limited partnership. Shareholder’s rights are detailed in the bylaws of the corporation or in the partnership agreement.
SHORT-TERM DEBT Debt obligation that will come due within the ensuing year.
SIMPLE INTEREST The interest that is credited on the principal. If the return on an investment is based on simple interest, then each year the interest received will be exactly the same, as long as the interest rate is the same.
SIMPLIFIED EMPLOYEE PENSION (SEP) A retirement plan that uses an individual retirement account (IRA) as the receptacle for contributions. A SEP is a simplified alternative to a profit-sharing or 401(k) plan.
SINGLE PREMIUM DEFERRED ANNUITY (SPDA) An annuity that can only be purchased with a single premium.
SINGLE PREMIUM IMMEDIATE ANNUITY (SPIA) An annuity that can only be purchased with a single premium and whose payments begin soon after it is purchased.
SINKING FUND Money regularly set aside in a custodial account by a company to redeem its bonds, debentures or preferred stock.
SOCIAL RISK (Regulatory Risk) A risk that an otherwise profitable business or security will be impaired by adverse regulations, legislation or other public policy.
SPLIT-FUNDED ANNUITY A contract by which the annuity owner “splits” their initial premium into two contracts. Part of the premium deposit goes into a fixed deferred annuity with a guaranteed interest rate for a given term, and the other part into an immediate annuity that pays an income for that same term. It is usually structured where the deferred annuity grows back to the total deposit originally invested, while receiving income from the immediate annuity throughout that time.
SPOUSAL IRA An IRA for a nonworking spouse that can be up to $2,000 in any given year.
STANDARD DEVIATION A measure of the dispersion in outcomes around the expected value.
STATE GUARANTY FUNDS Each of the 50 states has enacted legislation to protect the contract owners of that state should an insurance company be faced with insolvency. Most state guaranty funds assess their admitted insurers an extra charge to cover any carrier insolvencies within the state. Different states have different limits of protection. All guaranty associations are funded by insurance companies and administered by the states.
STOCK The terms “stock” and “share of stock” both refer to ownership of a business corporation. When a corporation is first founded, investors provide the capital (money) to get the business going. Those who provide this financing become part owners of the company. A “stock certificate” is then issued, showing the number of “shares” that each investor holds, as evidence of this ownership status.
STOCK BONUS PLAN A defined-contribution profit-sharing plan in which all employer contributions are in the form of employer stock and distributions to participants can be made in the form of employer stock.
STOCK DIVIDEND A payment by the corporation in shares of stock rather than cash.
STOCK SPLIT The issuance by a corporation of shares of common stock in proportion to the existing shares outstanding.
STOP ORDER An order specifying a certain price at which a market order takes effect.
STRIKE PRICE Price per share at which an option may be exercised.
SUBACCOUNT The investment portfolios offered in variable annuity contracts where premiums may be allocated.
SURRENDER CHARGE A penalty imposed by the issuing company for withdrawing funds from an annuity prematurely.
SURRENDER VALUE The amount received if the annuity contract is surrendered and all the cash is withdrawn.
SWEEPS The contract owner deposits his/her initial premium into the variable annuity’s general account. Then periodically, the insurer “sweeps” the account interest into the separate account based on the allocation specified by the contract owner.
SYSTEMATIC (Market) RISK Risk attributable to broad macro-factors affecting all securities.
TAX-DEDUCTIBLE An expense that is deducted from a taxpayer’s adjusted gross income to determine taxable income, for example, medical expenses, state and local taxes, mortgage interest paid and charitable contributions that are itemized on Schedule A.
TAX-DEFERRAL Taxes on earnings are postponed until any earnings are withdrawn from the annuity.
TAX-FREE TRANSFERS Contract owners can move assets between variable annuity subaccounts without incurring a tax liability.
TAX-SHELTERED ANNUITY (TSA) A retirement annuity sold only to public school teachers and employees of hospitals, colleges, and other organizations offering qualified retirement plans under section 403(b) of the US Internal Revenue Code.
TAXABLE EQUIVALENT YIELD A method for comparing the after tax returns on taxable and tax-exempt investments.
TEMPORARY ANNUITY A life annuity that expires after a given period of time.
TESTAMENTARY TRUST Created in the trustor’s will and takes effect only at his or her death. Can be used to avoid tax on a portion of the first spouse’s share of the estate.
THRIFT PLAN A plan under which employees contribute a fixed percentage of salary to the plan and the employer makes a contribution in the same amount or in a reduced amount.
TOP-HEAVY PLAN A plan that unduly favors key employees by providing 60% or more of the benefits or contributions to these employees. These plans are subject to additional restrictions.
TREASURIES General term for all negotiable securities of the U.S. government. Treasury bills (T-bills) are short-term obligations (3-month and 6-month maturities) that do not pay interest but are sold at a discount from their face value. Treasury bonds are issued in $1,000 units with maturities ten years or longer. Treasury notes are medium-term obligations (one to ten years).
TWO-TIER ANNUITY An annuity usually structured with a high first-year rate relative to the market, as are subsequent guarantees. The higher rates are usually predicated on the assumption the contract owner will stay through annuitization. If the owner does not stay, their contract will be assessed an applicable surrender charge and be retroactively credited with lower interest rates back to the inception of the contract (i.e. the contract owner gets one tier of interest rates by staying with the contract through annuitization and another, lower tier of rates if he or she does not).
UNDERWRITER In securities, an investment banker who buys an entire issue of securities from the issuer and then sells them to individual and institutional investors.
UNIT INVESTMENT TRUST An unmanaged form of investment company, typically holding fixed-income securities, offering investors diversification and minimum operating costs.
VARIABLE ANNUITY An annuity contract that allows you to allocate premium among a number of investment portfolios (subaccounts). The policy’s contract value can fluctuate in accordance with the performance of the underlying investments.
VESTING The acquisition by an employee of his or her right to receive a present or future pension benefit.
WARRANT A corporate-created option to purchase a stated number of common shares at a specified price within a specified time (typically several years).
WASTING TRUST The trust that holds plan funds when a qualified plan is frozen. Under a wasting trust, payouts are made to plan participants when called for under the terminated plan, but no new contributions are received by the trust.
WITHDRAWAL CHARGE A percentage charge that is assessed by the issuing company if a withdrawal above any free withdrawal amount is made during the surrender charge period.
WRAP ACCOUNT A type of brokerage account where all costs are wrapped in one fee.
YIELD In general, the amount of profit on an investment of capital. The income component of a security’s return.
YIELD CURVE A graph that shows the interest rate for bonds of comparable quality and different maturities. If short-term rates are higher, the graph shows a positive yield curve; if long-term rates are higher, it shows a negative yield curve. When short-term and long-term rates are roughly equal, the yield curve is flat.
YIELD TO CALL The yield of a bond were it to be redeemed by the issuer at the earliest call date allowed.
YIELD TO MATURITY The yield of a bond were it held to maturity, including purchase price, coupon rate and present value.
ZERO COUPON BOND A bond sold with no coupons at a discount and redeemed for face value at maturity.