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1035 exchange
Section 1035 sets out provisions for the
exchange of similar (insurance related) assets without any tax
consequence upon the conversion. If the exchange qualifies for
like-kind exchange consideration, income taxes are deferred until
the new property or asset is sold. The 1035 exchange provisions are
only available for a limited type of asset which includes cash value
life insurance policies and annuity contracts.
10K
An annual report filed by corporations each year as required by the
SEC. The 10K must be filed within 90 days after the end of the
fiscal year and provides a comprehensive overview of a company's
business practices and financial stability.
401(k) plan
A 401(k) plan is a tax-deferred defined contribution retirement plan
that gives eligible employees the opportunity to defer a portion of
their current compensation into the plan. Amounts that are deferred
are excluded from the participant's gross income for the year of the
deferral. The plan may provide for employer matching contributions
and discretionary profit-sharing contributions.
403(b) plan
Tax deferred annuity retirement plan available to employees of
public schools and colleges, and certain non-profit hospitals,
charitable, religious, scientific and educational organizations.
457 plan
Non-qualified deferred compensation plans available to employees of
state and local governments and tax-exempt organizations.
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accelerated death benefits (adb's)
Some life insurance policies make a portion of the death benefit
available prior to the death of the insured. Such benefits are
usually available only due to terminal illness or for long-term care
situations.
accidental death benefit
An accidental death benefit is a rider added to an insurance policy
which provides that an additional death benefit will be paid in the
event death is caused by and accident. This rider is often called
"double indemnity."
accounts payable
A balance sheet item representing the amount of money a company owes
to its creditors.
accounts receivable
A balance sheet item representing the amount of money a company is
owed by its customers for goods and services it has provided.
accrual basis
One of several methods of accounting. Requires that all interest and
income be included as it is earned and that all expenses are
included as incurred.
adjustable rate mortgage (arm)
An adjustable Rate Mortgage offers an initial interest rate that is
usually lower than a fixed rate, but that adjusts periodically
according to market conditions and financial indices. The rate may
go up and/or down, depending on economic conditions. To limit the
borrower's risk, the ARM will almost always have a maximum interest
rate allowed, called a "rate cap."
amortization
The amortization of a debt is its systematic repayment through
installments of principal and interest. An amortization schedule is
a periodic table illustrating payments, principal, interest, and
outstanding balance.
annual percentage rate (apr)
The Annual Percentage Rate is the cost of credit expressed as a
yearly rate. The APR is a means of comparing loans offered by
various lenders on equal terms, taking into account interest rates,
points, and other finance charges. The federal Truth-in-Lending Act
requires disclosure of the APR.
annuitant
An individual who receives payments from an annuity. The person
whose life the annuity payments are measured on or determined by.
annuity
A contract between an insurance company and an individual which
generally guarantees lifetime income to the individual or whose life
the contract is based in return for either a lump sum or periodic
payment to the insurance company. Interest earned inside an annuity
is income tax-deferred until it is paid out or withdrawn.
appraisal
An appraisal is an estimate of a property's value, usually real
estate, at a specific point in time and as determined by a qualified
professional appraiser.
appreciation
Appreciation is the increase in value of an asset. The term
"appreciation" may be applied to real estate, stocks, bonds, etc.
arm's length
Acting at arm's length predicates that two parties negotiate with
opposing economic interests.
ask price
The price that a seller is willing to sell a security or commodity
for.
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balance sheet
A balance sheet is a financial statement that is divided into three
major parts: assets, liabilities and shareholders' equity.
balloon mortgage
The terms on a balloon mortgage are insufficient to completely
amortize the loan. A balloon, or lump sum, payment is required at
the maturity of the loan to completely pay off the remaining
principal. Balloon mortgages often contain a contractual opportunity
to refinance when the balloon payment is due at prevailing rates.
bank reserves
The amounts that banks are required to keep on deposit at a Federal
Reserve Bank, as determined by reserve ratios. Funds in excess of
these reserves are loaned out or invested by the banks.
bankruptcy
A federal court proceeding in which a debtor who is unable to
continue to meet his/her financial obligations may be relieved from
the payment of certain debts. This action seriously affects the
borrower's credit worthiness.
basis
An amount usually representing the actual cost of an investment to
the buyer. The basis amount of an investment is important in
calculating capital gains and losses, depreciation, and other income
tax calculations.
basis points
Basis Points is a term used by investment professionals to describe
yields of bonds. One basis point equals one 100th of 1%, or .01%. A bond yield increase from 10.0% to 10.1% represents
an increase of 10 basis points.
bear market
A prolonged decline in overall stock prices occurring over a period
of months or even years.
beneficiary
The person who is designated to receive the benefits of a contract.
beta
A statistically generated number that is used to measure the
volatility of a security or mutual fund in comparison to the market
as a whole.
bid price
The price that a buyer is willing to pay for a security or
commodity.
blue-chip stocks
The equity issues of financially stable, well-established companies
that usually have a history of being able to pay dividends in bear
and bull markets.
bond
A certificate of indebtedness issued by a government entity or a
corporation, which pays a fixed cash coupon at regular intervals.
The coupon payment is normally a fixed percentage of the initial
investment. The face value of the bond is repaid to the investor
upon maturity.
bonding requirement
The individual(s) that are appointed to run the day-to-day
operations of a qualified plan, as well as the trustee(s) and
investment managers must be bonded. The bond is required to provide
protection to the plan against loss due to fraud, theft, forgery or
dishonesty.
book value
The value that belongs to a company's owners or shareholders after
total liabilities have been subtracted from total assets. Also
called shareholders equity.
bull market
A prolonged increase in
overall stock prices—usually occurring over a period of months or
even years.
buy-down
A buy-down refers to the payment of additional discount points in
return for a below market interest rate (and therefore a lower
monthly payment) on a home mortgage.
buy-sell agreement
An agreement between shareholders or business partners to
purchase each others' shares in specified circumstances.
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capital markets
A general term encompassing all markets for financial instruments
with more than one year to maturity.
capital stock
All ownership shares of a company, both common and preferred listed
at par value.
cash equivalents
Assets that can be quickly converted to cash. These include
receivables, treasury bills, short-term commercial paper, short-term
municipal and corporate bonds and notes.
cash value
Permanent life insurance policies provide both a death benefit and
in an investment component called a cash value. The cash value earns
interest and often appreciates. The policyholder may accumulate
significant cash value over the years and, in some circumstances,
"borrow" the appreciated funds without paying taxes on the borrowed
gains. As long as the policy stays in force the borrowed funds do
not need to be repaid, but interest may be charged to your cash
value account.
certificate of deposit (cd)
A Certificate of Deposit is a low risk, often federally guaranteed
investment offered by banks. A CD pays interest to investors for as
long as five years. The interest rate on a CD is fixed for the
duration of the CD term.
charitable remainder trust (crt)
The Charitable Remainder Trust is an irrevocable trust with both
charitable and non-charitable beneficiaries. The donor transfers
highly appreciated assets into the trust and retains an income
interest. Upon expiration of the income interest, the remainder in
the trust passes to a qualified charity of the donor's choice. If
properly structured, the CRT permits the donor to receive income,
estate, and/or gift tax advantages. These advantages often provide
for a much greater income stream to the income beneficiary than
would be available outside the trust.
closed-end fund
A fund whose value is held within a fixed number of shares. Until
the fund is wound up, shares can be bought and sold on the stock
exchange or the over-the-counter market.
co-borrower
A co-borrower is individually or jointly obligated to repay a loan
entered into with a third party. The co-borrower may or may not
share in ownership of loan collateral.
codicil
An instrument in writing executed by a testator for adding to,
altering, explaining or confirming a will previously made by the
testator; executed with the same formalities as a will; and having
the effect of bringing the date of the will forward to the date of
codicil.
collateral
Assets pledged as security for a loan. If the borrower defaults on
payment, the lender may dispose of the property pledged as security
to raise money to repay the loan.
commission
The fee a broker or insurance agent collects for administering a
trade or policy.
commodity
A commodity is a physical substance such as a food or a metal which
investors buy or sell on a commodities exchange, usually via futures
contracts.
common stock
A security that represents ownership in a corporation.
compounding
The computation of interest paid using the principal plus the
previously earned interest.
conduit IRA
An individual who rolled over a total distribution from a qualified
plan into an IRA can later roll over those assets into a new
employer's plan. In this case the IRA has been used as a holding
account (a conduit).
conforming loan
A mortgage loan that conforms to Federal National Mortgage
Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC)
guidelines. Currently, conforming first mortgages are under $275,000
($413,000 in Alaska and Hawaii).
construction loan
A construction loan is a short term loan applied to the construction
of a new home. The builder gradually withdraws the loan proceeds and
the home serves as collateral on the loan.
consumer debt
Debt incurred for consumable or depreciating non-investment assets.
Items include credit card debt, store-financed consumer purchases,
car loans, and family loans that will be repaid.
contrarian
An individual whose opinion is the opposite of the majority.
conventional mortgage
A conventional mortgage is not insured, guaranteed or funded by the
Veterans Administration, the Federal Housing Administration, or
Rural Economic Community Development.
convertible mortgage
A convertible mortgage is an adjustable mortgage (ARM) that allows
the borrower to convert to a fixed rate mortgage during a specified
period of time.
convertible term insurance
Term life insurance that can be converted to a permanent or whole
life policy without evidence of insurability, subject to time
limitations.
corporation
A legal business entity created under state law. Because the
corporation is a separate entity from its owners, shareholders have
no legal liability for its debts.
correction
A sudden decline in stock or bond prices after a period of market
strength.
co-signer
An individual or party who agrees to assume a debt obligation of a
third party in the event the principal borrower defaults on the
terms of the loan.
coupon rate
The rate of interest paid on a bond, expressed as a percentage of
the bond's par value.
credit cards
Cards such as Visa and MasterCard allow the holder to charge
purchases rather than pay cash.
credit bureau repositories
A credit bureau repository is an organization that compiles credit
history information directly from lenders and creditors into credit
summaries and reports. These reports are made available to lenders
and creditors to assist them in gauging an individual's credit
worthiness.
critical illness insurance
Insurance protection designed to provide a lump-sum payment
equal to the full value of the policy or a percentage of the policy
depending upon the product design, to the insured/policy owner upon
the diagnosis of a covered critical illness. Typical illnesses
covered include heart attack, stroke, cancer, paralysis, renal
failure and Alzheimer's disease. Many policies offer a partial
payment for certain medical procedures such as coronary bypass
surgery or angioplasty. Some policies offer a return of all
premiums in the event of death of the insured, others pay the full
benefit upon the insured's death.
currency risk
The level of risk when investing in international markets, due to
the fluctuations in exchange rates of the various world currencies.
Investing in any foreign country should be preceded by a careful
estimation of how well its currency is likely to do against the
dollar.
custodian
A financial institution, usually a bank or trust company, that holds
a person or company's cash and or securities in safekeeping.
cyclical companies
Companies that report strong earnings when the overall economy is
doing well and weaker earnings when the economy is in recession.
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debit cards
Debit cards allow the cost of a purchase to be automatically
deducted from the customer's bank account and credited to the
merchant.
debt markets
The fixed income sector of the capital markets devoted to trading
debt securities issued by corporations and governments.
debt to income ratio
The ratio of a person's total monthly debt obligations compared to
their total monthly resources is called their debt to income ratio.
This ratio is used to evaluate a borrower's capacity to repay debts.
decedent
The term decedent refers to a person who has died.
decreasing term
A term life insurance featuring a decreasing death benefit.
Decreasing term is well suited to provide for an obligation that
decreases over the years such as a mortgage.
deed of trust
A document used to convey title (ownership) to a property used as
collateral for a loan to a trustee pending the repayment of the
loan. The equivalent of a mortgage.
deferral
A form of tax sheltering in which all earnings are allowed to
compound tax-free until they are withdrawn at a future date. Placing
funds in a qualified plan, for example, triggers deductions [not all
qualified plans provide for tax deductions; contributions may,
however, be excluded from gross income, i.e. 401(k) plans] for the
current tax year and postpones capital gains or other income taxes
until the funds are withdrawn from the plan.
deferred compensation
Income withheld by an employer and paid at some future time, usually
upon retirement or termination of employment.
defined benefit plan
A defined benefit plan pays participants a specific retirement
benefit that is promised (defined) in the plan document. Under a
defined benefit plan benefits must be definitely determinable. For
example, a plan that entitles a participant to a monthly pension
benefit for life equal to 30 percent of monthly compensation is a
defined benefit plan.
defined contribution plan
In a defined contribution plan, contributions are allocated to
individual accounts according to a pre-determined contribution
allocation. This type of plan does not promise any specific dollar
benefit to a participant at retirement. Benefits received are based
on amounts contributed, investment performance and vesting. The most
common type of defined contribution plan is the 401(k)
profit-sharing plan.
deflation
A period in which the general price level of goods and services is
declining.
depreciation
Charges made against earnings to write off the cost of a fixed asset
over its estimated useful life. Depreciation does not represent a
cash outlay. It is a bookkeeping entry representing the decline in
value of an asset over time.
direct deposit
A means of authorizing payment made by governments or companies to
be deposited directly into a recipient's account. Used mainly for
the deposit of salary, pension and interest checks.
disability insurance
Insurance designed to replace a percentage of earned income if
accident or illness prevents the beneficiary from pursuing his or
her livelihood.
disposable income
After-tax income available for spending, saving or investing.
diversification
Spreading investment risk among a number of different securities,
properties, companies, industries or geographical locations.
Diversification does not assure against market loss.
dividend reinvestment plan (drip)
An investment plan that allows shareholders to receive stock in lieu
of cash dividends.
dividends
A distribution of the earnings of a company to it's shareholders.
Dividends are "declared" by the company based on profitability and
can change from time to time. There is a direct relationship between
dividends paid and share value growth. The most aggressive growth
companies do not pay a dividend, and the highest dividend paying
companies may not experience dramatic growth.
dollar cost averaging
Buying a mutual fund or securities using a consistent dollar amount
of money each month (or other period). More securities will be
bought when prices are low, resulting in lowering the average cost
per share.
Dollar cost averaging neither guarantees a profit nor eliminates
the risk of losses in declining markets and you should consider
your ability to continue investing through periods of market
volatility and/or low prices.
down payment
The down payment on a property is the amount of cash applied to the
purchase, with the remainder of the purchase accomplished through a
mortgage or other debt.
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earnest money
Similar to a deposit, earnest money is the money given by the buyer
to the seller of a property as an assurance of their intentions to
purchase the property.
earnings per share (eps)
Total net profits divided by the number of outstanding common shares
of a company.
economic cycle
Economic events are often felt to repeat a regular pattern over a
period of anywhere from two to eight years. This pattern of events
ends to be slightly different each time, but usually has a large
number of similarities to previous cycles.
effective tax rate
The percentage of total income paid in federal and state income
taxes.
efficient market
The market in which all the available information has been analyzed
and is reflected in the current stock price.
employee stock ownership plans (esops)
An ESOP plan allows employees to purchase stock, usually at a
discount, that they can hold or sell. ESOPs offer a tax advantage
for both employer and employee. The employer earns a tax deduction
for contributions of stock or cash used to purchase stock for the
employee. The employee pays no tax on these contributions until they
are distributed.
escrow funds
Escrow funds are funds accumulated and held in an account for the
periodic payment of property taxes and insurance.
estate
A decedent's estate is equal to the total value of their assets as
of the date of death. The estate includes all funds, personal
effects, interest in business enterprises, titles to property, real
estate, stocks, bonds and notes receivable.
estate planning
The orderly arrangement of one's financial affairs to maximize the
value transferred at death to the people and institutions favored by
the deceased, with minimum loss of value because of taxes and forced
liquidation of assets.
excess distributions
An individual may have to pay a 15% tax on distributions received
from qualified plans in excess of $150,000 during a single year. The
tax, however, does not apply to distributions due to death,
distributions that are rolled over, and distributions of after-tax
contributions.
executor
The person named in a will to manage the estate of the deceased
according to the terms of the will.
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face amount
The face amount stated in a life insurance policy is the amount that
will be paid upon death, or policy maturity. The face amount of a
permanent insurance policy may change with time as the cash value in
the policy increases.
fair market value
The fair market value of a property or other asset is the price that
a buyer and seller can establish in an arms-length transaction where
neither one is compelled to buy or to sell.
family trust
An inter vivos trust established with family members as
beneficiaries.
federal housing administration (fha)
The Federal Housing Administration (FHA) is a government agency that
sets standards for underwriting residential mortgage loans made by
private lenders and insures such transactions.
federal national mortgage association (fnma or fannie mae)
FNMA is a private corporation that acts as a secondary market
investor in buying and selling mortgage loans.
fiduciary
An individual or institution occupying a position of trust. An
executor, administrator or trustee.
financial planner
A person who helps you plan and carry out your financial future.
fixed investment
Any investment paying a fixed interest rate such as a money market
account, a certificate of deposit, a bond, a note, or a preferred
stock. A fixed investment is the opposite of a variable investment.
fixed rate mortgage
With a fixed rate mortgage, your interest rate will remain the same
for the entire term of the loan. Although the rate will begin
slightly higher than a comparable adjustable rate mortgage (ARM),
the interest rate you pay can never go up for as long as you have
the mortgage.
fluctuation
A variation in the market price of a security.
foreclosure
A foreclosure is the legal process by which a borrower losses their
ownership interest in a collateralized property due to default on
the attached loan.
fund manager
A person who manages the assets of a mutual fund.
fundamental analysis
Fundamental analysis is a technique of estimating a stock's future
value based on the in-depth study of the stock's underlying
financial statements. Fundamental analysis is the opposite of
technical analysis.
future value
The future worth of a payment, or stream of payments, projected at a
given interest rate for a given period of time.
futures market
A market in which contracts for future delivery of a commodity are
bought and sold.
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generally accepted accounting principals (gaap)
Conventions, rules and procedures that define accepted accounting
practices in the U.S.
grace period
A period (usually 31 days) following each premium due date, other
than the first due date, during which an overdue premium may be
paid, and during which time all policy provisions remain in force
and effect.
group insurance
A form of insurance designed to insure classes of persons rather
than specific individuals.
growth stock
The common equity of a company that consistently grows significantly
faster than the economy.
guaranteed investment certificate (gic)
A type of debt security sold to individuals by banks and trust
companies. They usually cannot be cashed before the specified
redemption date, and pay interest at a fixed rate.
guarantor
A third party who agrees to repay any outstanding balance on a loan
if you fail to do so. A guarantor is responsible for the debt only
if the principal debtor defaults on the loan.
guardian
A person or persons named to care for minor children until they
reach the age of majority. A will is the best way to ensure that the
person or persons whom you wish to have care for your minor children
are legally empowered to do so in the event of your death.
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hazard insurance
Hazard insurance protects the insured from losses arising due to
physical property damage associated with catastrophic hazards such
as flood, fire, earthquake, tornado, etc. Hazard insurance will
often be required by a lender to protect their collateral from such
risks.
home equity line of credit (heloc)
A home equity line of credit allows a homeowner to borrow against
the equity in their home with specific limits and terms. This is an
open end loan which allows the borrower to borrow and repay funds as
needed.
home equity loan
A home equity loan is a collateralized mortgage, usually in a
subordinate position, entered into by the property owner under
specific terms of repayment.
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illiquid
The description of a security for which it is difficult to find a
buyer or seller. An illiquid investment is an investment that may be
difficult to sell quickly at a price close to its market value.
Examples include stock in private unlisted companies, commercial
real estate and limited partnerships.
illustration
A life insurance illustration, or ledger, is a reference tool used
to illustrate how a given life insurance policy underwritten by a
specific insurer is expected to perform over a period of years. The
insurance illustration assumes that conditions remain unchanged over
the period of time that the policy is held.
income averaging
Income averaging allows individuals who were age 50 before January
1, 1986 to pay tax on a lump sum distribution as though it had been
received over a five or ten year period, rather than all at once. By
using income averaging individuals may be able to pay income tax at
a more favorable rate.
income statement
A financial statement that shows the components of profit, such as
sales, expenses, taxes and net profit.
income stocks
Stocks that have a consistent, stable, above-average dividend yield.
individual retirement account (ira)
An Individual Retirement Account (IRA) is a personal savings plan
that offers tax advantages to those who set aside money for
retirement. Depending on the individual's circumstances,
contributions to the IRA may be deductible in whole or in part.
Generally, amounts in an IRA, including earnings and gains, are not
taxed until distributed to the individual.
inflation
A term used to describe the economic environment of rising prices
and declining purchasing power.
in-force policy
An in-force life insurance policy is simply a valid policy.
Generally speaking, a life insurance policy will remain in-force as
long as sufficient premiums are paid, and for approximately 31 days
thereafter. (See Grace Period)
insurability
Insurability refers to the assessment of the applicant's health and
is used to gauge the level of risk the insurer would potentially
take by underwriting a policy, and therefore the premium it must
charge.
insured
A life insurance policy covers the life of one or more insured
individuals.
interest rate
The simple interest rate attached to the terms of a mortgage or
other loan. This rate is applied to the outstanding principal owed
in determining the portion of a payment attributable to interest and
to principal in any given payment.
interest rate risk
Is the uncertainty in the direction of interest rates. Changes in
interest rates could lead to capital loss, or a yield less than that
available to other investors, Putting at risk the earnings capacity
of capital.
intestate
A term describing the legal status of a person who dies without a
will.
investment banker
A firm that engages in the origination, underwriting, and
distribution of new issues.
investment company
A corporation or trust whose primary purpose is to invest the funds
of its shareholders.
investment considerations
Choosing which investments are right for you will depend on a number
of factors, including; your primary objectives, your time horizon
and your risk tolerance.
investment portfolio
A term used to describe your total investment holdings.
investment risk
The chance that the actual returns realized on an investment will
differ from the expected return.
investment strategy
The method used to select which assets to include in a portfolio and
to decide when to buy and when to sell those assets.
ira (individual retirement account)
An Individual Retirement Account (IRA) is a personal savings plan
that offers tax advantages to those who set aside money for
retirement. Depending on the individual's circumstances,
contributions to the IRA may be deductible in whole or in part.
Generally, amounts in an IRA, including earnings and gains, are not
taxed until distributed to the individual.
ira rollover
An individual may withdraw, tax-free, all or part of the assets from
one IRA, and reinvest them within 60 days in another IRA. A rollover
of this type can occur only once in any one-year period. The
one-year rule applies separately to each IRA the individual owns. An
individual must roll over into another IRA the same property he/she
received from the old IRA.
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jumbo loan
A loan that is larger than the limits set for conventional loans by
the Federal National Mortgage Association (FNMA) or Federal Home
Loan Mortgage Corportation (FHLMC). This limit is currently set at
$300,700.
junk bonds
A bond that pays an unusually higher rate of return to compensate
for a low credit rating.
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keogh
A Keogh is a tax deferred retirement plan for self-employed
individuals and employees of unincorporated businesses. A Keogh plan
is similar to an IRA but with significantly higher contribution
limits.
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leverage
Using "leverage" is the process of investing using borrowed funds.
Leveraging your investments magnifies your returns, both positive
and negative.
leveraged buyout (lbo)
Leveraged buyouts are deals in which a company is bought with mostly
borrowed money, money frequently raised through selling high-yield
and high-risk junk bonds.
liability risk
The risk that the legal system may assess punitive damages against
you if property damage or personal injuries can be attributed to
your carelessness or negligence.
lien
A lien represents a claim against a property or asset for the
payment of a debt. Examples include a mortgage, a tax lien, a court
judgment, etc.
life expectancy
Life expectancy represents the average future time an individual can
expect to live. Life expectancies have been increasing steadily over
the past century and may continue to increase in the future. As
people are living longer the cost of retirement is increasing.
life insurance
A contract between you and a life insurance company that specifies
that the insurer will provide either a stated sum or a periodic
income to your designated beneficiaries upon your death.
life settlement
Occurs when a person who does not have a terminal or chronic
illness sells his/her life insurance policy to a third party for an
amount that is less than the full amount of the death benefit. The
buyer becomes the new owner and/or beneficiary of the life insurance
policy, pays all future premiums, and collects the entire death
benefit when the the insured dies. Some states regulate the
purchase as a security while others may regulate it as insurance.
liquidity
Liquidity is the measure of your ability to immediately turn assets
into cash without penalty or risk of loss. Examples include a
savings account, money market account, checking account, etc.
living will
If you become incapacitated this document will preserve your wishes
and act as your voice in medical decisions, if you are unable to
speak for yourself as a result of medical reasons.
loan-to-value ratio
A loan-to-value ratio represents the relationship between all
outstanding and proposed loans on a property and the appraised value
of the property. For example, an $80,000 loan on a $100,000 property
would represent an 80% loan-to-value ratio. This ratio assists a
lender in determining the risk associated with the loan. The higher
this ratio, the riskier the loan.
long position
A long position in an investment indicates a current ownership in
that investment which would increase in value as the underlying
asset(s) increase in value, opposite of a short position.
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margin
The amount of money supplied by an investor as a portion of the
total funds needed to buy or sell a security, with the balance of
required funds loaned to the investor by a broker, dealer, or other
lender.
margin account
A special account set up by a broker for a client who wants to buy
and sell securities using margin.
margin call
A call from a broker to a client asking for more money to back up a
security purchased on margin when such a security has declined in
value. If more money is not supplied, the broker usually sells the
security.
market order
An order to buy at the lowest price going, or sell at the highest
price possible.
market risk
Every investment carries some element of market risk, the risk that
the entire market will decline, reducing the investment's value
regardless of other factors.
medical power of attorney
This special power of attorney document allows you to designate
another person to make medical decisions on your behalf.
minimum distributions
An individual must start receiving distributions from a qualified
plan by April 1 of the year following the year in which he/she
reaches age 70 ½ . Subsequent distributions must occur by each
December 31st. The minimum
distributions can be based on the life expectancy of the individual
or the joint life expectancy of the individual and beneficiary.
money purchase plan
A Money Purchase Plan has contributions that are a fixed percentage
of compensation and are not based on the employer's profits. For
example, if the plan requires that contributions be 10% of the
participant's compensation, the plan is a Money Purchase Pension
Plan. With this type of plan, the employer is committed to making
contributions each year even if the employer has no profits or is
experiencing cash flow problems. Employee contributions are limited
to 25% of compensation. Employer contributions are limited to the
smaller of $30,000 or 25 percent of a participant's compensation.
mortality
Mortality is the risk of death of a given person based on factors
such as age, health, gender, and lifestyle.
mortgage
A legal instrument providing a loan to the mortgagee to be used to
purchase a real property in exchange for a lien against the
property.
mortgage broker
A mortgage broker acts as an intermediary between a borrower and a
lender. A broker's expertise is to assist the borrower in
identifying mortgage lenders and products that they might not
identify otherwise.
mortgage insurance (mi)
Mortgage insurance protects the lender against the default of higher
risk loans. Most lenders require mortgage insurance on loans where
the loan-to-value ratio is higher than 80% (less than 20% equity).
municipal bonds
A bond offered by a state, county, city or other political entity
(such as a school district) to raise public funds for special
projects. The interest received from municipal bonds is often exempt
from certain income taxes.
mutual funds
A mutual fund is a pooling of investor (shareholder) assets, which
is professionally managed by an investment company for the benefit
of the fund's shareholders. Each fund has specific investment
objectives and associated risk. Mutual funds offer shareholders the
advantage of diversification and professional management in exchange
for a management fee.
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net asset value
The value of all the holdings of a mutual fund, less the fund's
liabilities [also describes the price at which fund shares are
redeemed].
net worth
Your net worth is the difference between your total assets and total
liabilities.
non-conforming loan
A loan that does not conform to Federal National Mortgage
Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC)
guidelines. Such loans include jumbo loan, sub-prime loans and high
risk loans.
note
A note is a legal document that acknowledges a debt and the terms
and conditions agreed upon by the borrower.
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odd lot
An uneven number of securities that represents less than a board
lot.
offer price
The price that a buyer is willing to pay for an investment.
open-end fund
An open-end mutual fund continuously issues and redeems units, so
the number of units outstanding varies from day to day. Most mutual
funds are open-end funds. The opposite of closed-end fund.
origination fee
The origination fee on a mortgage is usually the amount charged by
the lender for originating the loan. Origination fees vary by lender
and are expressed in points where one point is equal to 1% of the
original loan balance.
over-the-counter (otc) market
Market created by dealer trading as opposed to the auction market,
which prevails on most major exchanges.
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paper gain (loss)
Unrealized capital gain (loss) on securities held in portfolio,
based on a comparison of current market price to original cost.
par bond
A bond selling at par.
payroll deduction
Payments made on your behalf by your employer. They are
automatically deducted from your pay check.
points
Points are charges added to a mortgage loan by the lender and are
based on the loan amount. One point is equal to 1% of the original
loan balance.
policy
A contractual arrangement between the insurer and the insured
describing the terms and conditions of the life insurance contract.
policy loan
The policy owner can borrow from the cash value component of many
permanent insurance policies for virtually any purpose. Any policy
loans that are outstanding at the time of death of the insured will
be deducted from the benefit paid to the beneficiary.
political risk
Political risk is the risk that stock prices may decline
dramatically during periods of political unrest or crisis.
power of attorney
A legal document authorizing one person to act on behalf of another.
premium
The payment that the owner of a life insurance policy makes to the
insurer. In exchange for the premium payment, the insurer assumes
the financial risk (as defined by the insurance policy) associated
with the death of the insured.
present value
The current worth of a future payment, or stream of payments,
discounted at a given interest rate over a given period of time.
principal
The principal amount of a loan or mortgage is the outstanding
balance, excluding interest.
private mortgage insurance
Private mortgage insurance protects the lender against the default
of higher risk loans. Most lenders require private mortgage
insurance on loans where the loan-to-value ratio is higher than 80%
(less than 20% equity).
probate
The process used to make an orderly distribution and transfer of
property from the deceased to a group of beneficiaries. The probate
process is characterized by court supervision of property transfer,
filing of claims against the estate by creditors and publication of
a last will and testament.
profit sharing plan
A Profit-Sharing Plan is the most flexible and simplest of the
defined contribution plans. It permits discretionary annual
contributions that are generally allocated on the basis of
compensation. The employer will determine the amount to be
contributed each year depending on the cash-flow of the company. The
deduction for contributions to a Profit-Sharing Plan cannot be more
than 15% of the compensation paid to the employees participating in
the plan. Annual employer contributions to the account of a
participant cannot exceed the smaller of $30,000 or 25 percent of a
participant's compensation.
prohibited ira transactions
Generally, a prohibited transaction is any improper (self-dealing)
use of the IRA by the account owner. Some examples include borrowing
money from an IRA, using an IRA to secure a loan and selling
property to an IRA.
prospectus
A detailed statement prepared by an issuer and filed with the SEC
prior to the sale of a new issue. The prospectus gives detailed
information on the issue and on the issuer's condition and
prospects.
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qualified retirement plan
A qualified retirement plan is a retirement plan that meets certain
specified tax rules contained primarily in section 401(a) of the
Internal Revenue Code. These rules are called "plan qualification
rules". If the rules are satisfied the plan's trust is exempt from
taxes.
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refinance
To refinance one's mortgage is to retire the existing mortgage using
the proceeds of a new mortgage and using the same property as
collateral. This is usually done to secure a lower interest rate
mortgage or to access equity from the property.
registered representative
A registered representative is licensed with the NASD (National
Association of Securities Dealers), through association with an NASD
member broker / dealer, to act as an account representative for
clients and collect commission income.
revolving debt
A debt or liability that does not have a fixed principal balance or
payment. Examples include credit cards, home equity lines of credit,
etc.
rider
A life insurance rider is an amendment to the standard policy that
expands or restricts the policy's benefits. Common riders include a
disability waiver of premium rider and a children's life coverage
rider.
risk
Investment risk is the chance that the actual returns realized on an
investment will differ from the expected return.
rule of 72
A way to determine the effect of compound interest. Divide 72 by the
expected return on your investment. If your expected return is 8%,
assuming that all interest is reinvested, you will double your money
in 9 years.
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safety of principal
Safety of principal is an objective that emphasizes the security of
the invested principal.
salary reduction simplified employee pension (sarsep)
A SARSEP is a simplified alternative to a 401(k) plan. It is a SEP
that includes a salary reduction arrangement. Under this special
arrangement, eligible employees can elect to have the employer
contribute part of their before-tax pay to their IRA. This amount is
called an "elective deferral".
SEC
The main regulatory body regulating the securities industry is
called the Securities and Exchange Commission.
second mortgage
A mortgage on real property in a junior position to a primary or
first mortgage. The increased risk associated with a second mortgage
is often reflected in a higher interest rate and a shorter term of
repayment.
securities
Stocks and bonds are traditionally referred to as securities. More
specifically, stocks are often referred to as "equities" and bonds
as "debt instruments."
Securities and Exchange Commission
The main regulatory body regulating the securities industry is
called the Securities and Exchange Commission.
short position
A short position in an investment indicates a position in an
investment that would increase in value as the underlying asset(s)
decrease in value. Opposite of a long position.
short sale
The sale of stock that you do not yet own in order to take advantage
of an expected share price decline. If the stock declines in price,
the stock is purchased at the now lower price and the short position
is closed.
simplified employee pension (sep)
A SEP provides employers with a "simplified" alternative to a
qualified profit-sharing plan. Basically, a SEP is a written
arrangement that allows an employer to make contributions towards
his or her own and employees' retirement, without becoming involved
in a more complex retirement plan. Under a SEP, IRAs are set up for
each eligible employee. SEP contributions are made to IRAs of the
participants in the plan. The employer has no control over the
employee's IRA once the money is contributed.
small cap
A small cap stock is one issued by a company with less than $1.7
billion in market capitalization.
smart card
A card with an embedded computer chip which stores more information,
performs more functions and is more secure than a credit card or
debit card.
spousal ira
An individual can set up and contribute to an IRA for his/her
spouse. This is called a "Spousal IRA" and can be established if
certain requirements are met. In the case of a spousal IRA, the
individual and spouse must have separate IRAs. A jointly owned IRA
is not permitted.
stock
Stock certificates represent an ownership position in a corporation.
Stockholders are often entitled to dividends, voting rights, and
financial participation in company growth.
stock dividends
The investor's share of the income earned by the company issuing the
stock.
stock exchange
A market for trading of equities, a public market for the buying and
selling of public stocks.
stop-loss order
This is when you tell your broker to sell the stock if it drops to a
certain price.
succession planning
Planning for a business to pass to the next generation of
owner/managers.
surrender value
When a policy owner surrenders his/her permanent life insurance
policy to the insurance company, he or she will receive the
surrender value of that policy in return. The surrender value is
the cash value of the policy plus any dividend accumulations, plus
the cash value of any paid-up additions minus any policy loans,
interest, and applicable surrender charges.
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tax credit
An income tax credit directly reduces the amount of income tax paid
by offsetting other income tax liabilities.
tax deduction
A reduction of total income before the amount of income tax payable
is calculated.
tax-deferred
The term tax deferred refers to the deferral of income taxes on
interest earnings until the interest is withdrawn form the
investment. Some vehicles or products that enjoy this special tax
treatment include permanent life insurance, annuities, and any
investment held in IRA's.
technical analysis
Technical analysis is a technique of estimating a stock's future
value strictly by examining its prices and volume of trading over
time. Technical analysis is the opposite of fundamental analysis.
tenants in common
Two or more people who own the same piece of property, with the
inherent condition that if one of the tenants die, his interest
automatically passes on to his heirs.
term insurance
Term insurance is life insurance coverage that pays a death benefit
only if the insured dies within a specified period of time. Term
policies do not have a cash value component and must be renewed
periodically as dictated by the insurance contract.
testamentary trust
A trust created under the terms of a will and that takes effect upon
the death of the testator.
ticker symbol
A ticker symbol is a combination of letters that identifies a
stock-exchange security.
title
A legal document establishing property ownership.
title search
A detailed examination of legal records to determine the history and
legal ownership of a property.
top heavy plans
Each year, a qualified plan must be tested to determine whether it
is "top-heavy". Generally, a "top-heavy" plan is one in which more
than 60 percent of the benefits under the plan are for key employees
(usually owners and officers). Additional requirements apply to a
top-heavy plan such as faster vesting and mandatory employer
contributions.
total disability
In order to make a disability claim a person must meet the
definition of disability set forth in the insurance contract. There
are two general definitions of disability used in today's contracts.
The first definition is that the insured is unable to perform all of
the substantial and material duties of his/her own occupation. The
second, and more restrictive, definition is that the insured is
unable to perform any occupation for which he/she is reasonably
suited by education, training, or experience.
treasury bill
Treasury bills, often referred to as T-bills, are short-term
securities (maturities of less than one year) offered and guaranteed
by the federal government. They are issued at a discount and pay
their full face value at maturity.
treasury bond
Treasury bonds are issued with maturities of more than 10 years and
are offered and guaranteed by the U.S. Government. They are issued
at a discount and pay their full face value at maturity.
treasury note
Treasury notes are issued with maturities between one and 10 years.
These notes are offered and guaranteed by the U.S. Government. They
are issued at a discount and pay their full face value at maturity.
TSA (tax-sheltered annuity)
Tax deferred annuity retirement plan available to employees of
public schools and colleges, and certain non-profit hospitals,
charitable, religious, scientific and educational organizations.
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underwriter (banking)
A person, banker or group that guarantees to furnish a definite sum
of money by a definite date in return for an issue of bonds or
stock.
underwriter (insurance)
The one assuming a risk in return for the payment of a premium, or
the person who assesses the risk and establishes premium rates.
underwriter (investments)
In the bond/stock market means a brokerage firm or group of firms
that has promised to buy a new issue of bonds/shares from a
government or company at a fixed discounted price, then arranges to
resell them to investors at full price.
unemployment rate
The number of people unemployed measured as a percentage of the
labor force.
universal life insurance
An adjustable Universal Life insurance policy provides both a death
benefit and an investment component called a cash value. The cash
value earns interest at rates dictated by the insurer. The
policyholder may accumulate significant cash value over the years
and, in some circumstances, "borrow" the appreciated funds without
paying taxes on the borrowed gains (taxes may be required if policy
is surrendered). As long as the policy stays in force the borrowed
funds do not need to be repaid, but interest may be charged to your
cash value account. Premiums are adjustable by the policy owner.
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variable investment
A variable investment is any investment whose value, and therefore
returns, fluctuates with market conditions such as a common stock, a
plot of raw land, and a hard asset.
variable universal life insurance
A Variable Life insurance policy provides both a death benefit and
an investment component called a cash value. The owner of the policy
invests the cash value in subaccounts selected by the insurer. The
policyholder may accumulate significant cash value over the years
and "borrow" the appreciated funds without paying taxes on the
borrowed gains (taxes may be required if policy is surrendered). As
long as the policy stays in force the borrowed funds do not need to
be repaid, but interest may be charged to your cash value account.
variable rate mortgage (VRM)
A Variable Rate Mortgage offers an initial interest rate that is
usually lower than a fixed rate, but that adjusts periodically
according to market conditions and financial indices. The rate may
go up and/or down, depending on economic conditions. To limit the
borrower's risk, the VRM will almost always have a maximum interest
rate allowed, called a "rate cap."
venture capital
A common term for funds that are invested by a third party in a
business either as equity or as a form of secondary debt. In the
event of failure or business wind-up, these funds rank behind all
other secured creditors.
vesting
The law requires that a qualified plan have a schedule under which a
participant earns an ownership interest in employer provided
contributions based on his or her years of service with the
employer. Amounts contributed by the participant are always 100%
vested.
viatical settlement
Occurs when a person with terminal or chronic illness sells his/her
life insurance policy to a third party for an amount that is less
than the full amount of the death benefit. The buyer becomes the
new owner and/or beneficiary of the life insurance policy, pays all
future premiums, and collects the entire death benefit when the
insured dies. Some states regulate the purchase as a security while
others may regulate it as insurance.
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waiver of premium
A waiver of premium rider on an insurance policy sets for conditions
under which premium payments are not required to be made for a time.
The most popular waiver of premium rider is the disability waiver
under which the owner of the policy (also called the policyholder)
is not required to make premium payments during a period of total
disability.
whole life insurance
A traditional Whole Life insurance policy provides both a death
benefit and a cash value component. The policy is designed to remain
in force for a lifetime. Premiums stay level and the death benefit
is guaranteed. Over time, the cash value of the policy grows and
helps keep the premium level. Although the premiums start out
significantly higher than that of a comparable term life policy,
over time the level premium eventually is overtaken by the
ever-increasing premium of a term policy.
will
The most basic and necessary of estate planning tools, a will is a
legal document declaring a person's wishes regarding the disposition
of their estate. A will ensures that the right people receive the
right assets at the right time. If an individual dies without a will
they are said to have died intestate.
wrap account
An account offered by investment dealers whereby investors are
charged an annual management fee based on the value of invested
assets.
write-off
Any loan not expected to be recovered and is recorded as a loan
loss.
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yield
The yield on an investment is the total proceeds paid from the
investment and is calculated as a percentage of the amount invested.
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zero-coupon bond
A zero-coupon bond is a bond sold without interest-paying coupons.
Instead of paying periodic interest, the bond is sold at a discount
and pays its entire face amount upon maturity, which is usually a
one year period or longer.
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