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Life Insurance Terms And Definitions
Like any industry, the life insurance industry has it's own
unique terms.
Term Life America Insurance
we wants you to understand our language so you can make the best
choice for your family. Therefore, we are providing this
glossary of life insurance terms.
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Adjusted Gross Income (AGI)
-
An interim
calculation in the computation of income tax liability.
It is computed by subtracting certain allowable
adjustments from gross income. top
-
Administrator
-
A person appointed by
the court to settle an estate when there is no will. top
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After-Tax Return
-
The return from an
investment after the effects of taxes have been taken
into account. top
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Aggressive Growth Fund
-
A mutual fund whose
primary investment objective is substantial capital
gains. top
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Alternative Minimum
Tax
-
A method of
calculating income tax that disallows certain
deductions, credits, and exclusions. This was intended
to ensure that individuals, trusts, and estates that
benefit from tax preferences do not escape all federal
income tax liability. People must calculate their taxes
both ways and pay the greater of the two. top
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Annuity
-
An insurance-based
contract that provides future payments at regular
intervals in exchange for current premiums. Annuity
contracts are usually purchased from banks, credit
unions, brokerage firms, or insurance companies. top
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Asset
-
Anything owned that
has monetary value. top
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Asset Allocation
-
The process of
repositioning assets within a portfolio to maximize
return for a given level of risk. This process is
usually done using the historical performance of the
asset classes within sophisticated mathematical
models. top
-
Asset Class
-
A category of
investments with similar characteristics. top
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Audit
-
The examination of
the accounting and financial documents of a firm by an
objective professional. The audit is done to determine
the records' accuracy, consistency, and conformity to
legal and accounting principles. top
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Balanced Mutual Fund
-
A mutual fund whose
objective is a balance of stocks and bonds. Such funds
tend to be less volatile than stock-only funds. top
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Bear Market
-
When the stock market
appears to be declining overall, it is said to be a bear
market. top
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Beneficiary
-
A person named in a
life insurance policy, annuity, will, trust, or other
agreement to receive a financial benefit upon the death
of the owner. A beneficiary can be an individual,
company, organization, and so on. top
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Blue Chip Stock
-
The common stock of a
company with a long history of profitability and
consistent dividend payments. top
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Bond
-
A bond is evidence of
a debt in which the issuer promises to pay the
bondholders a specified amount of interest and to repay
the principal at maturity. Bonds are usually issued in
multiples of $1,000. top
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Book Value
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The net value of a
company's assets, less its liabilities and the
liquidation price of its preferred issues. The net asset
value divided by the number of shares of common stock
outstanding equals the book value per share, which may
be higher or lower than the stock's market value. top
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Bull Market
-
When the stock market
appears to be advancing overall, it is said to be a bull
market. top
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Buy-Sell Agreement
-
A buy-sell agreement
is an arrangement between two or more parties that
obligates one party to buy the business and another
party to sell the business upon the death, disability,
or retirement of one of the owners. top
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Capital Gain or Loss
-
The difference
between the sales price and the purchase price of a
capital asset. When that difference is positive, the
difference is referred to as a capital gain. When the
difference is negative, it is a capital loss. top
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Cash Equivalents
-
Short-term investments, such as U.S. Treasury
securities, certificates of deposit, and money market
fund shares, that can be readily converted into cash. top
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Cash Surrender Value
-
The amount that an
insurance policyholder is entitled to receive when he or
she discontinues coverage. Policyholders are usually
able to borrow against the surrender value of a policy
from the insurance company. Loans that are not repaid
will reduce the policy's death benefit. top
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Certified Financial
Planner (CFP)
-
A designation granted
by the CFP Board of Standards (Denver, CO) to
individuals who complete a comprehensive curriculum in
financial planning, pass a written examination, and have
qualifying experience. This curriculum includes risk
management, tax planning, employee benefits,
investments, and estate planning. top
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Certified Public
Accountant (CPA)
-
A professional
license granted by a state board of accountancy to an
individual who has passed the Uniform CPA Examination
(administered by the American Institute of Certified
Public Accountants) and has fulfilled that state's
educational and professional experience requirements for
certification. top
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Charitable Lead Trust
-
A trust established
for the benefit of a charitable organization under which
the charitable organization receives income from an
asset for a set number of years or for the trustor's
lifetime. Upon the termination of the trust, the asset
reverts to the trustor or to his or her designated
heirs. This type of trust can reduce estate taxes and
allows the trustor's heirs to retain control of the
assets. top
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Charitable Remainder
Trust
-
A trust established
for the benefit of a charitable organization under which
the trustor receives income from an asset for a set
number of years or for the trustor's lifetime. Upon the
termination of the trust, the asset reverts to the
charitable organization. The trustor receives a
charitable contribution deduction in the year in which
the trust is established, and the assets placed in the
trust are exempt from capital gains tax. top
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Chartered Financial
Consultant (ChFC)
-
A designation granted
by the American College (Bryn Mawr, PA) to individuals
who pass a series of written examinations on topics
related to financial services, taxation, economics, and
estate planning. top
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Chartered Life
Underwriter (CLU)
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A designation granted
by the American College (Bryn Mawr, PA) to individuals
who pass a series of written examinations on topics
related to insurance, taxation, economics, and estate
planning. top
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COBRA
-
The Consolidated
Omnibus Budget Reconciliation Act is a federal law
requiring employers with more than 20 employees to offer
terminated or retired employees the opportunity to
continue their health insurance coverage for 18 months
at the employee's expense. Coverage may be extended to
the employee's dependents for 36 months in the case of
divorce or death of the employee. top
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Coinsurance or
Co-Payment
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The amount an insured
person must pay for a covered medical and/or dental
expense if his or her insurance doesn't provide 100
percent coverage. top
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Commodities
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The generic term for
goods such as grains, foodstuffs, livestock, oils, and
metals which are traded on national exchanges. These
exchanges deal in both "spot" trading (for current
delivery) and "futures" trading (for delivery in future
months). top
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Common Stock
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A unit of ownership
in a corporation. Common stockholders participate in the
corporation's profits or losses by receiving dividends
and by capital gains or losses in the stock's share
price. top
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Community Property
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State laws vary, but
generally all property acquired during a marriage -
excluding property one spouse receives from a will,
inheritance, or gift - is considered community property,
and each partner is entitled to one half. This includes
debt accumulated. There are currently nine community
property states: Arizona, California, Idaho, Louisiana,
Nevada, New Mexico, Texas, Washington, and Wisconsin. top
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Compound Interest
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Interest that is
computed on the principal and on the accrued interest.
Compound interest may be computed continuously, daily,
monthly, quarterly, semiannually, or annually. top
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Consumer Price Index
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The U.S. Department
of Labor's main indicator of inflation. The Consumer
Price Index is calculated each month from the cost of
some 400 retail items in urban areas throughout the
United States. top
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Deduction
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An amount that can be subtracted from
gross income, from a gross estate, or from a gift,
thereby lowering the amount on which tax is assessed. top
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Defined Benefit Plan
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A qualified
retirement plan under which a retiring employee will
receive a guaranteed retirement fund, usually payable in
installments. Annual contributions may be made to the
plan by the employer at the level needed to fund the
benefit. The annual contributions are limited to a
specified amount, indexed for inflation. top
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Defined Contribution
Plan
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A retirement plan
under which the annual contributions made by the
employer or employee are generally stated as a fixed
percentage of the employee's compensation or company
profits. The amount of retirement benefits is not
guaranteed; rather, it depends upon the investment
performance of the employee's account. top
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Diversification
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Investing in different companies, industries, or asset
classes. Diversification may also mean the participation
of a large corporation in a wide range of business
activities. top
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Dividend
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A pro rata portion of
earnings distributed in cash by a corporation to its
stockholders. In preferred stock, dividends are usually
fixed; with common shares, dividends may vary with the
fortunes of the company. top
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Dollar Cost Averaging
-
A system of investing
in which the investor buys a fixed dollar amount of
securities at regular intervals. The investor thus buys
more shares when the price is low and fewer shares when
it rises, and the average cost per share is lower than
the average price per share. This strategy does not
protect against loss in declining markets and involves
continuous investments, regardless of fluctuating price
levels. top
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Efficient Frontier
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A statistical result
from the analysis of the risk and return for a given set
of assets that indicates the balance of assets that may,
under certain assumptions, acheive the best return for a
given level of risk. top
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Employer-Sponsored
Retirement Plan
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A tax-favored
retirement plan that is sponsored by an employer. Among
the more common employer-sponsored retirement plans are
401(k) plans, 403(b) plans, simplified employee pension
plans, and profit-sharing plans. top
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Equity
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The value of a
person's ownership in real property or securities; the
market value of a property or business, less all claims
and liens upon it. top
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ERISA
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The Employee
Retirement Income Security Act is a federal law covering
all aspects of employee retirement plans. If employers
provide plans, they must be adequately funded and
provide for vesting, survivor's rights, and
disclosures. top
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ESOP (employee stock
ownership plan)
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A defined
contribution retirement plan in which company
contributions must be invested primarily in qualifying
employer securities. top
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Estate Conservation
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Activities coordinated to provide for the orderly and
cost-effective distribution of an individual's assets at
the time of his or her death. Estate conservation often
includes wills and trusts. top
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Estate Tax
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Upon the death of a
decedent, federal and state governments impose taxes on
the value of the estate left to others (with
limitations). top
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Executive Bonus Plan
-
The employer pays for
a benefit that is owned by the executive. The bonus
could take the form of cash, automobiles, life
insurance, or other items of value to the executive. top
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Executor
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A person named by the
probate courts or the will to carry out the directions
and requests of the decedent. top
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Fixed Income
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Income from investments such as CDs,
Social Security benefits, pension benefits, some
annuities, or most bonds that is the same every
month. top
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401(k) Plan
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A defined
contribution plan that may be established by a company
for retirement. Employees may allocate a portion of
their salaries into this plan, and contributions are
excluded from their income for tax purposes (with
limitations). Contributions and earnings will compound
tax deferred. top
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403(b) Plan
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A defined
contribution plan that may be established by a nonprofit
organization or school for retirement. Employees may
allocate a portion of their salaries into this plan, and
contributions are excluded from their income for tax
purposes (with limitations). Contributions and earnings
will compound tax deferred. top
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Fundamental Analysis
-
An approach to the
stock market in which specific factors - such as the
price-to-earnings ratio, yield, or return on equity -
are used to determine what sotck may be favorable for
investment. top
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Gift Taxes
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A federal tax levied on the transfer of
property as a gift. This tax is paid by the donor. The
first $10,000 a year from a donor to each recipient is
exempt from tax. Most states also impose a gift tax. The
gift tax exemption is indexed annually for inflation. top
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Holographic Will
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A will entirely in
the handwriting of the testator. Without witnesses,
holographic wills are valid and enforceable only in some
states. top
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Index
-
A calculation that uses a selection of
stocks or bonds to guage a certain market. The Dow Jones
Industrial Average, for example, is an index of 30 large
industrial companies on the New York Stock Exchange. top
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Individual Retirement
Account (IRA)
-
Contributions to a traditional IRA - up to $2,000 per
year - are deductible from earned income in the
calculation of federal and state income taxes if the
taxpayer meets certain requirements. The earnings
accumulate tax deferred until withdrawn, and then they
are taxed as ordinary income. Individuals not eligible
to make deductible contributions may make nondeductible
contributions, the earnings on which would be tax
deferred. top
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Inflation
-
An increase in the
price of products and services over time. The
government's main measure of inflation is the Consumer
Price Index. top
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Insured
-
a person whose interests are protected by an insurance policy; a person who
is in contract with an insurance company and who indemnified against loss. top
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Intestate
-
A person who dies
without leaving a valid will. State law then determines
who inherits the property or serves as guardian for any
minor children. top
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Investment Category
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A broad class of
assets with similar characteristics. The five investment
categories include cash equivalents, fixed principal,
equity, debt, and tangibles. top
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Irrevocable Trust
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A trust that may not
be modified or terminated by the trustor after its
creation. top
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Joint and Survivor Annuity
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Most pension plans
must offer this form of pension plan payout that pays
over the life of the retiree and his or her spouse after
the retiree dies. The retiree and his or her spouse must
specifically choose not to accept this payment form. top
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Joint Tenancy
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Co-ownership of property by two or more people in which
the survivor(s) automatically assumes ownership of a
decedent's interest. top
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Jointly Held Property
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Property owned by two
or more persons under joint tenancy, tenancy in common,
or, in some states, community property. top
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Keogh Plan
-
This retirement plan, named for Eugene
Keogh, is designed for self-employed individuals. Up to
$30,000 or 25 percent of self-employed income (whichever
is less) may be deducted from compensation and set aside
into the plan. top
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Liability
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Any claim against the assets of a person
or corporation: accounts payable, wages, and salaries
payable, dividends declared payable, accrued taxes
payable, and fixed or long-term obligations such as
mortgages, debentures, and bank loans. top
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Limited Partnership
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Limited partnerships
pool the money of investors to develop or purchase
income-producing properties. When the partnership
subsequently receives income from these properties, it
distributes the income to its investors as dividend
payments. top
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Liquidity
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The ease with which
an asset or security can be converted into cash without
loss of principal. top
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Living Trust
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A trust created by a
person during his or her lifetime. top
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Lump-Sum Distribution
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The disbursement of
the entire value of a profit-sharing plan, pension plan,
annuity, or similar account to the account owner or
beneficiary. Lump-sum distributions may be rolled over
into another tax-deferred account. top
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Marginal Tax Bracket
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The range of taxable
income that is taxable at a certain rate. Currently,
there are five marginal tax brackets: 15 percent, 28
percent, 31 percent, 36 percent, and 39.6 percent. top
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Marital Deduction
-
A provision of the
tax codes that allows all the assets of a deceased
spouse to pass to the surviving spouse free of estate
taxes. This provision is also referred to as the
unlimited marital deduction. top
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Money Market Fund
-
A mutual fund that
specializes in investing in short-term securities and
that tries to maintain a constant net asset value of
$1. top
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Municipal Bond
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A debt security
issued by municipalities. The income from municipal
bonds is usually exempt from federal income taxes. In
many states, it is also exempt from state income taxes
in the state in which the municipal bond is issued. top
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Municipal Bond Fund
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A mutual fund that
specializes in investing in municipal bonds. top
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Mutual Fund
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A collection of
stocks, bonds, or other securities purchased and managed
by an investment company with funds from a group of
investors. top
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Net Asset Value
-
The price at which a
mutual fund sells or redeems its shares. The net asset
value is calculated by dividing the net market value of
the fund's assets by the number of outstanding
shares. top
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Policy Owner
-
If you own an insurance policy,
you are the "policy owner'. A policy owner may or may
not be the person covered by the policy. "see insured
above" The policy owner has the right by contract
to change the beneficiary or ownership of the policy to
another person or entity.
top
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Pooled Income Fund
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A trust created by a
charitable organization that combines the contributions
of several donors and distributes income to those donors
based on the earnings of the trust. The trust is managed
by the charitable organization, and contributions are
partially deductible for income tax purposes. top
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Portfolio
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All the investments
held by an individual or mutual fund. top
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Preferred Stock
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A class of stock with
claim to a company's earnings, before payment can be
made on the common stock, and that is usually entitled
to priority over common stock if the company liquidates.
Generally, preferred stocks pay dividends at a fixed
rate. top
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Prenuptial Agreement
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A legal agreement
arranged before marriage stating who owns property
acquired before marriage and during marriage and how
property will be divided in the event of divorce. ERISA
benefits are not affected by prenuptial agreements. top
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Price/Earnings Ratio
(P/E Ratio)
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The market price of a
stock divided by the company's annual earnings per
share. Because the P/E ratio is a widely regarded
yardstick for investors, it often appears with stock
price quotations. top
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Principal
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In a security, the
principal is the amount of money that is invested,
excluding earnings. In a debt instrument such as a bond,
it is the face amount. top
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Probate
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The court-supervised
process in which a decedent's estate is settled and
distributed. top
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Profit-Sharing Plan
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An agreement under
which employees share in the profits of their employer.
The company makes annual contributions to the employees'
accounts. These funds usually accumulate tax deferred
until the employee retires or leaves the company. top
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Prospectus
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A document provided
by mutual fund companies to prospective investors. The
prospectus gives information needed by investors to make
informed decisions prior to investing in a specific
mutual fund. The prospectus includes information on the
minimum investment amount, the fund's objectives, past
performance, risk level, sales charges, management fees,
and any other expense information about the fund, as
well as a description of the services provided to
investors in the fund. top
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Qualified Domestic Relations Order (QDRO)
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At the time of
divorce, this order would be issued by a state domestic
relations court and would require that an employee's
ERISA retirement plan accrued benefits be divided
between the employee and the spouse. top
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Qualified Retirement
Plan
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A pension,
profit-sharing, or qualified savings plan that is
established by an employer for the benefit of the
employees. These plans must be established in conformity
with IRS rules. Contributions accumulate tax deferred
until withdrawn and are deductible to the employer as a
current business expense. top
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Revocable Trust
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A trust in which the
creator reserves the right to modify or terminate the
trust. top
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Risk
-
The chance that an
investor will lose all or part of an investment. top
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Risk-Averse
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Refers to the
assumption that rational investors will choose the
security with the least risk if they can maintain the
same return. As the level of risk goes up, so must the
expected return on the investment. top
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Rollover
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A method by which an
individual can transfer the assets from one retirement
program to another without the recognition of income for
tax purposes. The requirements for a rollover depend on
the type of program from which the distribution is made
and the type of program receiving the distribution. top
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Roth IRA
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A nondeductible IRA
that allows tax-free withdrawals when certain conditions
are met. Income and contribution limits apply. top
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Security
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Evidence of an investment, either in
direct ownership (as with stocks), creditorship (as with
bonds), or indirect ownership (as with options). top
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Simplified Employee
Pension Plan (SEP)
-
A type of plan under which the employer
contributes to an employee's IRA. Contributions may be
made up to a certain limit and are immediately
vested. top
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Single-Life Annuity
-
An insurance-based
contract that provides future payments at regular
intervals in exchange for current premiums. Generally
used as a supplement to retirement income and pays over
the life of one individual, usually the retiree, with no
rights of payment to any survivor. top
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Split-Dollar Plan
-
An arrangement under
which two parties (usually a corporation and employee)
share the cost of a life insurance policy and split the
proceeds. top
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Spousal IRA
-
An IRA designed for a
couple when one spouse has no earned income. The maximum
combined contribution that can be made each year to an
IRA and a spousal IRA is $4,000 or 100 percent of earned
income, whichever is less. This total may be split
between the two IRAs as the couple wishes, provided the
contribution to either IRA does not exceed $2,000. top
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Tax Bracket
-
The range of taxable income that is taxed
at a certain rate. Brackets are expressed by their
marginal rate. top
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Tax Credit
-
Tax credits, the most
appealing type of tax deductions, are subtracted
directly, dollar for dollar, from your income tax
bill. top
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Tax Deferred
-
Interest, dividends, or capital gains that grow untaxed
in certain accounts or plans until they are
withdrawn. top
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Tax-Exempt Bonds
-
Under certain
conditions, the interest from bonds issued by states,
cities, and certain other government agencies is exempt
from federal income taxes. In many states, the interest
from tax-exempt bonds will also be exempt from state and
local income taxes. top
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Taxable Income
-
The amount of income
used to compute tax liability. It is determined by
subtracting adjustments, itemized deductions or the
standard deduction, and personal exemptions from gross
income. top
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Technical Analysis
-
An approach to
investing in stocks in which a stock's past performance
is mapped onto charts. These charts are examined to find
familiar patterns to use an an indicator of the stock's
future performance. top
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Tenancy in Common
-
A form of
co-ownership. Upon the death of a co-owner, his or her
interest passes to his or her chosen beneficiaries and
not to the surviving owner or owners. top
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Term Insurance
-
Term life insurance
provides a death benefit if the insured dies. Term
insurance does not accumulate cash value and ends after
a certain number of years or at a certain age. top
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Testamentary Trust
-
A trust established
by a will that takes effect upon death. top
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Testator
-
One who has made a
will or who dies having left a will. top
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Total Return
-
The total of all
earnings from a given investment, including dividends,
interest, and any capital gain. top
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Trust
-
A legal entity
created by an individual in which one person or
institution holds the right to manage property or assets
for the benefit of someone else. Types of trusts
include: top
-
Trustee
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An individual or
institution appointed to administer a trust for its
beneficiaries. top
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Trustee-to-Trustee
Transfer
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A method of
transferring retirement plan assets from one employer's
plan to another employer plan or to an IRA. One benefit
of this method is that no federal income tax will be
withheld by the trustee of the first plan. top
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Unified Credit
-
A credit that may be applied against an
individual's gift or estate taxes. The unified credit
will increase in gradual steps until it eventually
exempts an estate valued up to $1,000,000 from federal
estate taxes in 2006. top
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Universal Life
Insurance
-
A type of life
insurance that combines a death benefit with a savings
element which accumulates tax deferred at current
interest rates. Under a universal life insurance policy,
the policyholder can increase or decrease his or her
coverage, with limitations, without purchasing a new
policy. top
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Variable Universal Life Insurance
-
A type of life
insurance that combines a death benefit with a savings
element that accumulates tax deferred at current
interest rates. Under a variable universal life
insurance policy, the cash value in the policy can be
placed in a variety of subaccounts with different
investment objectives. The policyholder can transfer
funds among the subaccounts as he or she wishes. Fees
are charged after a certain number of transfers. top
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Volatility
-
The range of price
swings of a security or market over time. top
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Welfare Benefit Plan
-
An employee benefit
plan that provides such benefits as medical, sickness,
accident, disability, death, or unemployment
benefits. top
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Whole Life Insurance
-
A type of life
insurance that offers a death benefit and also
accumulates cash value, tax deferred at fixed interest
rates. Whole life insurance policies generally have a
fixed annual premium that does not rise over the
duration of the policy. Whole life insurance is also
referred to as "ordinary" or "straight" life
insurance. top
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Will
-
A legal document that
declares a person's wishes concerning the disposition of
property, the guardianship of his or her children, and
the administration of the estate after his or her
death. top
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Yield
-
In general, the yield is the amount of
current income provided by an investment. For stocks,
the yield is calculated by dividing the total of the
annual dividends by the current price. For bonds, the
yield is calculated by dividing the annual interest by
the current price. The yield is distinguished from the
return, which includes price appreciation or
depreciation. top
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Zero-Coupon Bond
-
This type of bond
makes no periodic interest payments but instead is sold
at a steep discount from its face value. Bondholders
receive the face value of their bonds when they
mature. top
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