Financial & Estate Planning Terms

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12(b) 1 Fee
A plan that permits a fund to pay some or all of the costs of distributing its shares to the public. Some of these plans provide for payment of specific expenses, such as advertising, sales literature and dealer incentives. Others are simply intended to protect the fund against possible claims that certain operating expenses, such as administrative or advisory costs, constitute indirect forms of distribution expenses. Both load and no-load funds may adopt 12(b) 1 plans. They are not hidden charges, but are clearly explained in the fund's prospectus and in its semi-annual and annual reports. Many funds have 12(b) 1 plans that have not been activated. The majority of such plans have maximum annual charges of 0.25% (one quarter of 1%). 12(b) 1 charges are included in the total expense ratio figures which are provided in a fund's literature. Some fund's expense ratios, including management fee and 12(b) 1 charges, may be lower than the ratios of funds that do not have 12(b) 1 plans.

401(k) Plan
A qualified profit sharing or stock bonus plan under which plan participants have an option to put money into the plan or receive the same amount as taxable cash compensation. Amounts contributed to the plan are not taxable to the participants until withdrawn. Generally funded entirely or in part through salary reductions elected by employees. Salary reductions are subject to an annual limit.

403(b) Plan
A tax-deferred annuity retirement plan available to employees of public schools and certain nonprofit organizations.

404(c)
Optional regulation on plan sponsor to provide certain information and fund choices so plan participants can make informed decisions about their retirement plan investments.

Absolute Assignment
A policy assignment under which the assignee receives full control over the policy and full rights to its benefits. As a general rule, when a policy is assigned to secure a debt, the owner retains all rights in the policy in excess of such debt, even though the assignment may be absolute in form. The insurance company does not guarantee the validity of the assignment.

Accrued Interest
The amount credited to a bond or other fixed-income security between the last payment and when the security is sold, or any intermediate date. The buyer usually pays the seller the security's price plus the accrued interest.

Actual Contribution Percentage (ACP)
In a 401k plan, this is the result of the average of ratios of combined contributions to compensation for both highly compensated and non-highly compensated employees. Each employee’s ratio is calculated and then averaged for the group.

Actual Deferral Percentage (ADP)
This is the proportion of a plan participant’s compensation that is contributed to a 401k plan as an employee elective deferral.

Annuity
A contract by which an insurance company agrees to make regular payments to someone for life or for a fixed period.

Appreciation
Increase in the value of an investment over time.

Ask price
The price a seller is willing to accept for the security; also called the offer price. This price is usually higher than the Bid price.

Asset
A resource that has economic value to its owner. Examples of an asset are cash, accounts receivable, inventory, real estate, and securities.

Asset allocation
Dividing your investment portfolio among the major asset categories. The most important decision you will make.

Asset Allocation Fund
A common trust fund or mutual fund that spreads its portfolio among a wide variety of investments, including domestic and foreign stocks and bonds, government securities, and real estate stocks. This gives small investors far more diversification than they could get allocating money on their own. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change.

Automatic Enrollment
The practice of enrolling all eligible employees in a plan and beginning participant deferrals without requiring the employees to submit a request to participate. Plan design specifies how these automatic deferrals will be invested. Employees who do not want to make deferrals to the plan must actively file a request to be excluded from the plan. Participants can generally change the amount of pay that is deferred and how it is invested.

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Balance sheet
The firm's financial statement that provides a picture of its assets, debts, and net worth at a specific point in time.

Balanced Fund
A common trust fund or mutual fund that maintains a balanced portfolio, generally 50% bonds or preferred stocks and 50% common stocks, but this percentage can and does vary.

Before-Tax Earnings
A taxpayer's gross income from salary, commissions, sales, fees, etc., before deductions for federal, state or other income taxes.

Beneficial Interest
A financial or other valuable interest arising from an insurance policy regardless of who formally owns the policy.

Beneficiary
An individual, institution, trustee or estate which receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract.

Beta
A measure of a stock's risk relative to the market, usually the Standard & Poor's 500 index. The market's beta is always 1.0; a beta higher than 1.0 indicates that, on average, when the market rises, the stock will rise to a greater extent and when the market falls, the stock will fall to a greater extent. A beta lower than 1.0 indicates that, on average, the stock will move to a lesser extent than the market. The higher the beta, the greater the risk.

Bid price
The price a buyer is willing to pay for a security. This price is usually lower than the Ask price.

Binder
A temporary, binding agreement, secured by a payment to evidence good faith, used until a formal contract takes effect.

Blackout Period
When a plan sponsor decides to switch from one plan vendor to another, there is typically a period during which participants are not permitted to make changes in their investment selections. This is known as the blackout period. Once the blackout period commences and until it ends, participants can no longer direct the investments in their accounts. Blackout periods can last up to 60 days.

Bond
A certificate of debt issued by a company or the government. Bonds generally pay a specific rate of interest and pay back the original investment after a specified period of time.

Book Value
An accounting term. The book value of a stock is determined from a company's records, by adding all assets then deducting all debts and other liabilities, plus the liquidation price of any preferred issues. The sum arrived at is divided by the number of common shares outstanding and the result is book value per common share. Book value of the assets of a company or a security may have little relationship to fair market value.

Broker
An individual or firm which acts as an intermediary between a buyer and seller, usually charging a commission. For securities and most other products, a license is required.

Bundled Plan
A 401k package which includes all investment, administration, education, and recordkeeping that is sold as one unit. This is in contrast to a basic 401k plan in which the plan sponsor can individually hire each component provider separately.

Business and industry risk
Uncertainty of an investment's return due to a fall-off in business that is firm-related or industry-wide.

Buy-and-hold
A strategy in which the stock portion of your portfolio is fully invested in the stock market at all times.

Buy-Sell Agreement
An agreement between the owners of a business that provides that the shares owned by any one of them who dies or withdraws from the business shall be sold to and will be purchased by the surviving co-owners or by the entity itself at a value or formula previously agreed upon by the parties and stipulated in the agreement. Also applies to buyout arrangements between owners and key employees.

Bypass Trust
An estate planning device (also called a credit shelter trust, family trust, or B trust in "AB" plans where the A trust funds for the marital deduction) used to minimize the combined estate taxes payable by spouses whereby, at the death of the first spouse, the estate is divided into two parts and one part is placed in trust usually to benefit the surviving spouse without being taxed at the surviving spouse's death, while the other part passes outright to the surviving spouse or is placed in a marital deduction trust. A by-pass trust permits a maximum of $1.350,000 transfer to heirs of the spouses on an estate tax free basis under the unified gift and estate tax credits as they exist in 2001.

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Call option
The right to purchase stock at a specified (exercise) price within a specified time period.

Callable bond
A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called.

Capital Gain or Capital Loss
The profit or loss from the sale of a capital asset.

Capitalization
The total amount of the various securities issued by a corporation. Capitalization may include bonds, debentures, preferred and common stock, long term debt and surplus. Bonds and debentures are usually carried on the books of the issuing company in terms of their par or face value. Preferred and common shares may be carried in terms of par or stated value. Stated value may be an arbitrary figure decided upon by the board of directors or may represent the amount received by the company from the sale of the securities at the time of issuance.

Cash Balance Plan
A defined benefit plan in which each participant has an account that is credited with a dollar amount that resembles an employer contribution, generally determined as a percentage of pay. Each participant's account is credited with earned interest. The plan provides the benefits in the form of a lump-sum distribution or annuity.

Cash Basis Method
A method of determining when income must be reported and when expenses can be deducted. It is used by most individual taxpayers. Certain partnerships, corporations, and other taxpayers may not use the cash method. Under the cash method, income is generally reported in the tax year money is received, and expenses are usually deducted in the tax year they are paid.

Cash or Deferred Arrangement (CODA)
See Salary Reduction Plan.

Cash Surrender Value
The equity amount available to the owner of a life insurance policy should he or she decide it is no longer wanted. Calculated separately from the legal reserve.

Cash Value
The equity amount available to the policy owner when a life insurance policy is surrendered to the company, or the amount upon which the total available for a policy loan is determined. During the early policy years in a traditional whole life policy, the cash value is the reserve less a surrender charge; in the later policy years, the cash surrender value usually equals or closely approximates the reserve value.

Catch-up Provision
A provision found in some 401k plans that allows an eligible employee who are at least age 50 to make higher annual contributions in the years prior to retirement.

Certificate of Deposit
A bank deposit that pays a specified rate of interest for a certain period of time.

Certified Financial Planner (CFP)
Professional designation granted to someone who has attained a high degree of technical competency in financial planning and has passed a series of professional examinations by the College for Financial Planning.

Charitable Gift Annuity
An arrangement whereby the donor makes a gift to charity and receives back a guaranteed lifetime (or joint lifetime) income based on the age(s) of the annuitant(s).

Charitable Lead Trust
An arrangement whereby the charity receives an income from a trust for a period of years, then the remainder is paid to non-charitable beneficiaries (generally either the donor or his or her heirs).

Charitable Remainder Annuity Trust
A charitable trust arrangement whereby the donor or other beneficiary is paid annually an income of a fixed amount of at least 5% but not more than 50% of the initial fair market value of property placed in the trust, for life or for a period of up to 20 years; one or more qualified charitable organizations must be named to receive the remainder interest upon the death of the donor or other income beneficiaries, and the value of the charitable remainder interest must be at least 10% of the net fair market value of all property transferred to the trust, as determined at the time of the transfer.

Charitable Remainder Trust
An arrangement wherein the remainder interest goes to a legal charity upon the termination or failure of a prior interest.

Charitable Remainder Unitrust
A charitable trust arrangement whereby the donor or other beneficiary is paid annually an income of a fixed percentage of at least 5% but not more than 50% of the annually revalued trust assets, for life or for a period of up to 20 years; one or more qualified charitable organizations must be named to receive the remainder interest upon the death of the donor or other income beneficiaries, and the value of the charitable remainder interest must be at least 10% of the net fair market value of all property transferred to the trust, as determined at the time of the transfer.

Chartered Financial Consultant (ChFC)
Professional designation granted to an individual who has attained a high degree of technical competency in the fields of financial planning, investments, and life and health insurance and has passed ten professional examinations administered by The American College.

Chartered Life Underwriter (CLU)
Professional designation granted to an individual who has attained a high degree of technical competency in the fields of life and health insurance and who is expected to abide by a code of ethics. Must have minimum of three years of experience in life or health insurance sales and have passed ten professional examinations administered by The American College.

Churning
The unethical and excessive trading of a client account in order to generate commissions for a broker, but which may not in the best interests of the client. Not only does the client pay high commissions, they also get stuck with a high tax bills due to the short-term holding of assets.

Cliff Vesting
A 401k plan with "Cliff Vesting" vests 100% of employer contributions after a specified number of years of service. After three years of service, benefits must be fully vested.

Codicil
A legal document, which supplements and changes an existing will. Generally utilized to make minor changes to the original will.

Collateral Assignment Method (Split Dollar)
A policy ownership arrangement under a split-dollar arrangement using life insurance where the employee (or a third party) owns the policy and names a personal beneficiary but assigns part of the policy or death benefit to the employer as collateral for the employer's premium advances under the policy.

Collateral Assignment
When a life insurance contract is transferred to an individual or other party as security for a debt. This usually temporary assignment does not transfer all policy rights.

Collective Trust Fund
Work and act much like a mutual fund. Collective trust (also known as a common trust fund) funds offer investors many of the same benefits as mutual funds, such as portfolio diversification, professional management and investment flexibility. But since collective funds do not impose the same administrative fees and do not have some of the regulatory requirements that mutual funds do, they generally have lower operating expenses.

Commission
Broker's fee for buying or selling securities.

Common Stock
An investment representing ownership interest in a corporation.

Community Property
Ten states (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) use some form of the community property system to determine the interest of a husband and wife in property acquired during marriage.

Compliance testing
Testing required by the IRS to make sure that the 401k plan is fair to both highly compensated and ordinary employees.

Compounding
The ability of an asset to generate earnings that are then reinvested and generate their own earnings (earnings on earnings).

Concealment
Deliberate failure of an applicant for insurance to reveal a material fact to the insurer.

Conditions
Provisions inserted in an insurance contract that qualify or place limitations on the insurer's promise to perform.

Consideration
One of the elements of a binding contract; the exchange of values by the parties to the contract. Such values may be money, promises, property, etc. In insurance, the policy owner's consideration is the first premium payment and the application; the insurance company's consideration is the contract itself.

Constructive Receipt Doctrine
A federal tax rule, which provides that when a taxpayer has an unrestricted right to receive a pecuniary benefit, that is when it is made available without a substantial risk of forfeiture, the benefit is considered to have been received for income tax purposes whether or not it was actually received.

Contingent Beneficiary
Beneficiary of a life insurance policy who is entitled to receive the policy proceeds on the insured's death if the primary beneficiary dies before the insured; or the beneficiary who receives the remaining payments if the primary beneficiary dies before receiving the guaranteed number of payments.

Conversion premium
The amount, expressed as a dollar value or as a percentage, by which the price of the convertible security exceeds the current market value of the common stock into which it may be converted.

Convertible
Term life insurance that can be exchanged for a cash value life insurance policy without evidence of insurability.

Corporate Owned Life Insurance (COLI)
Life insurance owed by a corporation, insuring the lives of its employees.

Corpus of a Trust
The term used to designate the body of assets placed in a trust. The trust holds title to all property included in the corpus.

Cost of Insurance (COI)
The cost of insurance rate charged on the difference between the death benefit and account value, also known as the net amount at risk. The cost of insurance rate is set to cover more than the cost of providing the death benefit. The cost of insurance rate helps cover administrative costs, taxes, and other expenses. The cost is deducted from the account value monthly.

Credit Shelter Trust
An estate planning device (also called a bypass trust, family trust, or B trust in "AB" plans where the A trust funds for the marital deduction) used to minimize the combined estate taxes payable by spouses whereby, at the death of the first spouse, the estate is divided into two parts and one part is placed in trust usually to benefit the surviving spouse without being taxed at the surviving spouse's death, while the other part passes outright to the surviving spouse or is placed in a marital deduction trust. A credit shelter trust permits a maximum of $1.350,000 transfer to heirs of the spouses on an estate tax free basis under the unified gift and estate tax credits as they exist in 2001.

Cross Purchase Buy Sell Plan
In a cross purchase plan, the surviving owners (rather than the business itself) agreed to buy the deceased or departing owner's business interests. That purchase is made for an agreed-on price or according to an agreed-on formula.

Crummy Trust
A trust established granting a beneficiary a limited power to withdraw income or principal or both. This power is exercisable during a limited period of time each year and is non-cumulative. The power of withdrawal is generally limited to the amount excludable from gift tax liability under the annual gift tax exclusion or to the greater of $5,000 or 5 percent of the trust property.

Cumulative Loan The total of the annual loans and loan interest, if accrued, to date.

Cumulative Planned Premium
The total of the planned premiums scheduled to be paid to date by the policy owner.

Cumulative Retirement Income
The total of the annual retirement income distributions projected to be taken to date from an insurance policy whether by way of loans or withdrawals.

Current ratio
Current assets, including cash, accounts receivable and inventory, divided by current liabilities, including all short-term debt. A rough measure of financial risk: the smaller current assets relative to current liabilities, the greater the risk of credit failure.

Current yield
Annual income (interest or dividends) divided by the current price of the security. For stocks, this is the same as the dividend yield.

Custodian
The bank or trust company that maintains a retirement plan's assets, including its portfolio of securities or some record of them. Provides safekeeping of securities, but has no role in portfolio management.

Custodianship
An ownership arrangement in which property management rights are given to a custodian for the benefit of a child beneficiary under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act; a custodian's duties resemble those of a trustee, although the custodian does not take legal title to the trust property and custodianship ends when the minor reaches the age of majority as specified by state law. May also apply to property management rights of individuals who are determined to be incompetent to handle their own affairs.

Cyclical industry
An industry, such as automobiles, whose performance is closely, tied to the condition of the general economy. The company (and their stock) does well during good economic times, and not as well during poor economic times.

Death Benefit Only Arrangement (DBO)
A type of deferred compensation arrangement in which an employer agrees to pay only a death benefit to a deceased employee's heirs rather than the customary retirement benefit (and perhaps ancillary benefits) associated with conventional deferred compensation.

Debt-to-equity ratio
Long-term debt divided by stockholders' equity. The ratio identifies the relationship of debt to ownership interest in the firm's financial structure. A measure of financial risk.

Decedent
The person who has died.

Declarations
Statements in an insurance contract that provide information about the property or life to be insured and used for underwriting and rating purposes and identification of the property or life to be insured.

Deemed IRA
The "Deemed IRA" (also called a "Sidecar IRA") was part of "The Economic Growth and Tax Reconciliation Act of 2001" (EGTRRA), although the concept has been around since the early 1980’s. Basically, if your 401k plan adopts this provision of EGTRRA, for plan years beginning on or after January 1, 2003, a 401k plan may allow employees to make voluntary employee contributions to a "Deemed IRA" which is a separate account established under the plan.

Deep discount bond
A bond that has a coupon rate far below rates currently available on investments and whose value is at a significant discount from par value.

Default risk
The risk that a company will be unable to pay the contractual interest or principal on its debt obligations.

Deferred Compensation Plan
A plan in which the executive elects to defer compensation into an account in the expectation of receiving the deferrals plus earnings at retirement; may involve company contributions.

Defined Benefit Plan
A plan in which the company specifies the benefit the plan will deliver. Typically involves only company contributions; company bears the investment risk. (Examples: pension or cash balance plan).

Defined Contribution Plan
A plan in which the company defines the contribution it will make to the employee's account in the plan rather than a fixed benefit the employee will receive. Typically involves both company and employee contributions; employee bears the investment risk.

Deflation
The increase of purchasing power due to a general decrease in the prices of goods and services.

Depreciation
Decrease in the value of an investment over time.

Direct Rollover
A tax-deferred transfer of assets from one qualified retirement plan to another qualified retirement plan or IRA. Sometimes called a "trustee to trustee" transfer. The transfer is made without any funds being sent directly to the plan participant.

Direct Skip
An outright generation-skipping transfer, either by gift or at death, to a recipient, known as a "skip person," who is two or more generation levels below the transferor. This type of property transfer prompts the generation-skipping transfer tax.

Direct Transfer
The movement of a tax-deferred retirement asset from one plan or custodian directly to another. A direct transfer is not a withdrawal and does not incur any taxes or penalties.

Discount Bond
A bond that is valued at less than its face amount.

Discount Broker
A stockbroker who charges a reduced commission and provides no investment advice.

Discount Rate
The interest rate used in discounting future cash flows; also called the "capitalization rate."

Discrimination Testing
All tax qualified retirement plans must be administered in compliance with several regulations to meet Internal Revenue Service guidelines; every tax qualified retirement plan (like a 401k) must pass a series of numerical measurements each year. These include the ADP Test (Actual Deferral Percentage), ACP Test (Actual Contribution Percentage), Multiple Use Test and Top-heavy Test. Typically, doing these tests is called discrimination testing.

Distributions and withdrawals
When money is withdrawn from a 401k plan, the withdrawal is referred to as a distribution. 401k plan assets can be withdrawn without penalty after age 59 1/2. Employees are required to begin taking distributions after age 70 1/2.

Diversification
The practice of spreading risk by investing in a number of securities that have different return patterns over time. When one investment is yielding a low or negative rate of return in a diversified portfolio, another investment may be enjoying positive or above-normal returns.

Dividend
Payments by a company to its stockholders. A dividend is usually a portion of profits. Payment of dividends on common stock is generally discretionary. Dividends to common-stock shareholders may be withheld if business is poor or if the corporation's directors decide to retain earnings to invest in business operations.

Dividend payout ratio
Annual dividends per share divided by annual earnings per share.

Dividend yield
Annual dividends per share divided by price per share. An indication of the income generated by a share of stock. The dividend yield plus capital gains percentage equals total return.

Dollar-Cost Averaging
A process of buying securities at regular intervals and at a fixed dollar amount. When prices are lower, the investor buys more shares or units; when prices are higher, the investor purchases fewer shares or units. Over time, this typically results in a better average price for all shares or units purchased.

Donor
A person who makes a gift. The person setting up a trust can be called donor, trustor, grantor, or settlor.

Dow Jones Industrial Average (DJIA)
Price-weighted average of 30 actively traded blue-chip stocks, traditionally of industrial companies.

Dower
The life estate of a widow in the property of her husband. At common law a wife had a life estate in one-third (in value) of the property of her husband who died without leaving a valid will or from whose will she dissented. In many states common law dower has been abolished by statute or never has been recognized.

Durable Power of Attorney
A written legal document which allows one person (the principal) to authorize another person (the attorney-in-fact or agent) to act on his or her behalf with respect to specified types of property, and which may remain in effect during a subsequent disability or incompetency of the principal.

Durable Power of Attorney for Health Care
A written legal document which grants decision-making powers related to health care to an agent; generally provides for removal of a physician, the right to have the incompetent patient discharged against medical advice, the right to medical records, and the right to have the patient moved or to engage other treatment.

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Earnings multiplier
An estimated price-earnings ratio adjusted for the current level of interest rates. Used to determine the value of a stock, based on Graham's formula relating value to recent earnings and expected earnings growth rates.

Earnings per share
The net income of the firm divided by the number of common stock shares outstanding.

Earnings yield
Earnings per share for the most recent 12 months divided by market price per share. Relates the generation of earnings to share price. It is the inverse of the price-earnings ratio.

Economic Benefit Doctrine
A federal tax rule, which provides that when an employer provides an economic benefit to an employee, that benefit is includable in the employee's gross income even if not received in cash or property.

Economic Benefit
The value of the death benefit protection provided to employee under a split dollar plan, as defined by IRS revenue rulings and notices. The economic benefit amount is equal to the employee death benefit multiplied by the economic benefit rate, plus the cost of "other benefits" that are owned, controlled by or otherwise provided to the employee under the policy. The economic benefit rate is an age specific rate per thousand, which may be determined from government tables (i.e., IRS Table 2001 for individual policies, or the rate calculated by applying the Greenberg to Greenberg formula to IRS Table 2001 rates for joint survivor policies) or by using rates found in ING Security Life's alternative term products (single life alternative term or joint survivor alternative term).

Employee Benefit Plan
A plan established or maintained by an employer or employee organization, or both, for the purpose of providing employees a certain benefit, such as pension, profit-sharing, stock bonus, thrift medical, sickness accident, or disability benefits.

Employee Benefit Trust
A trust established to hold the assets of an employee benefit plan.

Employee Retirement Income Security Act. ERISA, passed in 1974, is a comprehensive package dealing with all areas of pensions and employee benefits. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration. ERISA also mandated the creation of PBGC.

Employee Stock Ownership Plan
An Employee Stock Ownership Plan (ESOP) is essentially a stock bonus plan in which employer stock is used for contributions. A "KSOP" plan also includes §401(k) Plan features. Employer contributions are tax deductible and are not currently taxed to the employee. Earnings accumulate income tax deferred and distributions are generally taxed as ordinary income.

Employer discretionary contributions
Some employers also make an additional contribution at plan-year end in the form of increased matching contributions and/or a profit sharing contribution. These employer contributions are considered a tax-deductible business expense and also grow on a tax-deferred basis.

Employer matching contribution
The amount, if any, that the employer contributes to the employee's 401k account. Matching contributions are usually configured to provide a set percentage of an employee's contribution up to a fixed limit.

Endorsement Method (Split Dollar)
A life insurance policy ownership arrangement under a split-dollar arrangement in which the employer owns the policy and an endorsement to the policy spells out the employee's rights.

Endorsement
Written provision that adds to, deletes, or modifies the provisions in the original contract.

Equities
Investments in which the investors obtain a portion of ownership. Real estate and common stocks represent equity instruments. Usually, their chief benefit is potential growth in value. It is another word for stock.

Equity risk premium
An extra return that the stock market must provide over the rate on Treasury bills to compensate for market risk.

Equity Split-Dollar
An arrangement in which the employer's share of the cash value and death benefit of life insurance on an employee's life is confined to its aggregate net premium payments; any cash value in excess of the employer's premiums inures to the benefit of the other party (employee or third party). The taxation of this arrangement is addressed in IRS Notice 2001-10.

ERISA
The acronym for the Employee Retirement Income Security Act of 1974, a federal law that established minimum standards for certain employee benefit plans, especially qualified employer retirement plans.

Errors and Omissions Insurance
Liability insurance policy that provides protection against loss incurred by a client because of some negligent act, error, or omission by the insured.

Escheat
Assignment of property to the state because there is no verifiable legal owner - typically, where there is no heir to property.

Estate
Everything of value (all property) that a person owns while living or at the time of death.

Estate Planning
Process designed to conserve estate assets before and after death, distribute property according to the individual's wishes, minimize federal estate and state inheritance taxes, provide estate liquidity to meet costs of estate settlement, and provide for the family's financial needs.

Estate Tax
A tax imposed on the transfer of property from a decedent to his or her heirs, legatees or devisees.

Excess returns
Returns in excess of the risk-free rate or in excess of a market measure such as the S&P 500 index.

Executor or Executrix
An individual or institution nominated in a will and appointed by a court to settle the estate of a deceased.

Expected return
The average of a probability distribution of possible returns.

Expense Ratio
The ratio of total expenses to net assets of a mutual fund. Expenses include management fees, 12(b) 1 charges, if any, the cost of shareholder mailings and other administrative expenses. The ratio is listed in a fund's prospectus. Expense ratios may be a function of a fund's size rather than of its success in controlling expenses.

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Face value
The stated principal amount of a debt instrument.

Fair Market Value
The price at which an item can be sold at the present time between two unrelated people, neither under compulsion to buy or sell.

Family Attribution Rules
A federal tax rule that may cause the ownership of stock by one family member to be attributed to another for purposes of determining the income tax consequences of a distribution by the corporation in redemption of the stock.

Fee Simple Ownership
Outright ownership of property with absolute rights to dispose of or gift it to anyone.

Fiduciary
A person in the position of great trust and responsibility, such as the executor of a will or the trustee of a trust.

Fiduciary
An individual or an institution charged with the duty of acting for the benefit of another party as to matters coming within the scope of the relationship between them. The relationship between a guardian and his ward, an agent and his principal, an attorney and his client, one partner and another partner, a trustee and a beneficiary, a person who exercises discretionary control or authority over management of a benefit plan, each is an example of fiduciary relationship.

Fiscal Year
An accounting period consisting of 12 consecutive months.

Five and Five Power
A provision that allows a trust beneficiary to withdraw the greater of $5,000 or five percent of the principal from a trust without causing the entire trust property to be included in his or her estate for federal estate taxation.

Fixed-Income Securities
Investments that represent an IOU from the government or a corporation to the investor and offer specific payments at predetermined times. Public and private bonds, government securities, and the 401k's guaranteed accounts, are fixed-income investments. Guaranteed fixed-income accounts offer investors a guarantee against the loss of both principal and the interest earned on that principal.

Fixed-Period Option
Life insurance settlement option in which the policy proceeds are paid out over a fixed period of time.

Fundamental analysis
This valuation of stocks based on fundamental factors, such as company earnings, growth prospects, and so forth, to determine a company's underlying worth and potential for growth.

Funding Instrument
An insurance contract or trust agreement that states the terms under which the funding agency will accumulate, administer, and disburse the pension funds.

Future Interest
An ownership interest in property in which unlimited possession or enjoyment of property is delayed until some future time.

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General obligation bond (GO)
A municipal bond backed by the full faith, credit, and "taxing power" of the issuing unit rather than the revenue from a given project.

General Partner
A general partner is a partner of a partnership who is personally liable for all partnership debts and is permitted to participate in the management of the partnership.

General Partnership
A partnership that has only general partners and no limited partners. Each partner is liable for all partnership debts and there is no limited liability.

General Power of Appointment
A power of the donee (the one who is given the power) to pass on an interest in property to whomever he pleases, including himself or his estate.

Generation Skipping Transfer (GST)
A transfer of property, usually in trust, that is designed to provide benefits for beneficiaries who are two or more generations younger than the generation of the grantor.

Generation Skipping Transfer Tax (GST)
A transfer tax generally assessed on transfers to grandchildren, great grandchildren and others who are at least two generations younger than the donor.

Generation Skipping Transfer Tax Exemption
An exemption from generation-skipping tax for transfers by an individual either during life or at death.

Generation Skipping Trust
Any trust having beneficiaries who belong to two or more generations younger than the grantor.

Gift
A voluntary transfer of property for which nothing of value is received in return. If the Internal Revenue Service is to recognize a transfer as a gift, the donor(s) must unconditionally transfer all title and control of the property to the recipient(s) at the time the gift is given.

Gifting
A means of implementation of an estate plan through gifts to intended successors in the ownership of assets owned by the person(s) making the gifts.

GNMA (Ginnie Mae)
Fixed-income securities that represent an undivided interest in a pool of federally insured mortgages put together by GNMA, the Government National Mortgage Association.

Going public
Selling privately held shares to new investors for the first time.

Grace Period
Period of time during which a policyowner may pay an overdue premium without causing the policy to lapse.

Grantee
A person to whom property is transferred by deed or to whom property rights are granted by means of a trust instrument or some other document.

Grantor Retained Annuity Trust
A trust in which the grantor retains the right to a set annual dollar amount (the annuity) for a fixed term and gives the principal to others, such as the grantor's children, at the end of that term. If the grantor survives until the end of the annuity term, all of the trust principal will be excluded from the grantor's estate for estate tax purposes. A grantor retained annuity trust is sometimes referred to as a "GRAT."

Grantor
The person who establishes the trust. Also called the creator, settlor, donor or trustor.

Grantor Trust
For purposes of the income taxation of trusts, a trust in which the grantor or a third party, because of certain rights to income or principal or certain powers over the disposition of income and principal, is treated as the owner of the trust and taxed on the income thereof. Consequently, a grantor trust is not treated as a separate entity for income tax purposes.

Gross domestic product (GDP)
A measure of output from United States factories and related consumption in the United States. It does not include products made by U.S. companies in foreign markets.

Gross Estate
The total value of all property in which a deceased had an interest. This must be included in his or her estate for federal tax purposes.

Group "Carve Out" Life Insurance Plan
This plan is an alternative to group term insurance. It provides life insurance coverage to selected employees by "carving out" all or a portion of their coverage under an employer sponsored group term plan and then provides them with individual policies. The plan can be designed as either a Bonus §162 Plan or a split dollar plan.

Group Life Insurance
Life insurance provided on a number of persons in a single master contract. Physical examinations are not required, and certificates of insurance are issued to members of the group as evidence of insurance.

Group-Term Life Insurance Program
An employer may provide employees with life insurance coverage through an IRC §79 group-term policy, the first $50,000 of which generally produces no taxable cost to the employee.

Guaranteed Insurability
An insurance policy in which the insurer is required to renew the policy for a specified amount of time regardless of changes to the health of the insured. The agreement requires that premiums are paid on time and that the insurer makes no changes except if a premium change is made for an entire class of policyholders. Also called guaranteed renewable or conversion privilege or convertible term insurance.

Guaranteed Investment Contract (GIC)
A debt instrument issued by an insurance company, usually in a large denomination, and often bought for retirement plans. The interest rate paid is guaranteed, but the principal is not.

Guaranteed Net Surrender Value
The guaranteed surrender value which equals the guaranteed net policy value minus the surrender charge, if any.

Guardian
A person legally entrusted with the care of, and managing the property and rights of, another person, usually a minor child.

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Heir A person entitled by law to inherit part or all of the estate of an ancestor who died without leaving a valid will.

Highly Compensated Employee
A Highly Compensated Employees (HCE) is an employee who received more than $100,000 ($95,000 in 2005) in compensation during the last plan year OR is a 5% owner in the company.

Holding period return/yield
Income plus price appreciation during a specified time period divided by the cost of the investment.

Holographic Will A will written entirely in the testator's own handwriting

Human Life Value
For purposes of life insurance, the present value of the family's share of the deceased breadwinner's future earnings.

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Incapacity
The lack of ability to act on your own behalf.

Incidents of Ownership
Includes a variety of rights and powers that an insured decedent may have held over a life insurance policy; the possession of one or more of these incidents of ownership within three years of death will bring the policy proceeds into the insured's gross estate.

Income Beneficiary
The beneficiary of a trust who is entitled to receive the income from it.

Income Dividend
Payment of interest and dividends earned on a fund's portfolio of securities after operating expenses are deducted.

Income Fund
A common trust fund or mutual fund that primarily seeks current income rather than growth of capital. It will tend to invest in stocks and bonds that normally pay high dividends and interest.

Income in Respect of a Decedent (IRD)
Income earned by a decedent or income to which the decedent had a right prior to death, but which was not properly includible in his or her gross income prior to death

Income statement
The financial statement of a firm that summarizes revenues and expenses over a specified time period; a statement of profit and loss.

Incontestable Clause
A provision in a life insurance policy that prevents the insurer from revoking coverage because of alleged misstatements by the insured after a specified period, usually about two years.

Index
A statistical measure of the changes in a portfolio representing a market. The Standard & Poor's 500 is the most well-known index, which measures the overall change in the value of the 500 stocks of the largest firms in the U.S.

Index Fund
A common trust fund or mutual fund that seeks to mirror general stock-market performance by matching its portfolio to a broad-based index, most often the Standard & Poor's 500-stock index.

Individual Retirement Account (IRA)
A tax-deferred retirement account for an individual that can be established by a person with earned income. Earnings accumulate tax-deferred until the funds are withdrawn beginning at age 59 ½ or later (or earlier, with a 10% penalty).

Individual Retirement Account (IRA) Rollover
A provision in the IRA law allowing individuals who receive lump-sum payments from pension or profit-sharing plans to "roll-over" into, or invest that sum in, an IRA. IRA funds can be "rolled-over" from one investment to another.

Inflation risk
Uncertainty over the future real (after-inflation) value of your investment.

Inflation
The loss of purchasing power due to a general rise in the prices of goods and services.

Initial Reserve
In life insurance, the reserve at the beginning of any policy year.

In-service Withdrawal
A withdrawal from a retirement savings plan by a participant who remains employed. In-service withdrawals are severely restricted by law and most plans. In-service withdrawals of elective deferrals (employee salary reduction contributions) are prohibited by law prior to age 59 1/2. While allowed by law after that age, most plans do not allow it. In-service withdrawals of employer contributions are allowed under some circumstances prior to age 59 1/2, but most plans prohibit it.

Insider trading
Trading by management or others who have special access to unpublished information. If the information is used to illegally make a profit, there may be large fines and possible jail sentences.

Installment Sale
A sale in which taxable gain is recognized over a number of years as the payment for the property sold is received.

Insurable Interest
The expectation of a monetary loss that can be covered by insurance.

Insurance
Pooling of fortuitous losses by transfer of risks to insurers who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk.

Insurance Trust An irrevocable trust established to own an insurance policy or policies and thereby prevent them from being included in the insured's estate.

Insuring Agreement
That part of an insurance contract that states the promises of the insurer.

Intangible Property
Property that cannot be touched and that represents real value such as bonds, stock certificates, promissory notes, certificates of deposit, bank accounts, contracts, leases, and other similar items.

Integration
A pension design tool in which contributions reflect the existence of Social Security benefits. In this process, FICA taxes are considered part of the contribution to the pension fund. Since Social Security provides a greater percentage benefit to lower paid employees, integration allows the company to increase contributions to higher paid employees.

Inter vivos Trust
A type of trust created during the settlor's lifetime.

Interest Credit
The nonguaranteed amount credited to the policy's account value based upon a rate of interest specified by the insurance company.

Interest Option
Life insurance settlement option in which the principal is retained by the insurer and interest is paid periodically.

Interest
What a borrower pays a lender for the use of money. This is the income you receive from a bond, note, certificate of deposit, or other form of IOU.

Intergenerational Succession
Succession in property ownership in which the property is transferred from one generation to another; usually from members of an older generation to members of a younger generation.

Intestate
A person who dies without having made and left a valid will.

Intestate Succession
The distribution of property to heirs according to the statutes of the state of residency upon the death of a person who owned the property but did not leave a valid will.

Investment adviser
A person who manages assets, making portfolio composition and individual security selection decisions, for a fee, usually a percentage of assets invested.

Investment Gain/Loss
The total increase or decrease in account value as a result of investment division performance during the policy year.

Irrevocable Beneficiary
Beneficiary designation allowing no change to be made in the beneficiary of an insurance policy without the beneficiary's consent.

Irrevocable Trust
A trust that cannot be changed or terminated after it is established.

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Joint Tenancy
A form of ownership shared with an unlimited number of individuals. Each tenant owns an equal undivided share of the property.

Joint Tenancy with Rights of Survivorship (JTWRS)
The holding of property by two or more individuals in a manner that upon the death of one tenant, the survivor(s) succeed to full ownership by operation of law.

Junk bond
Bond purchased for speculative purposes. They are usually rated "BB" and lower, and they have a higher default risk.

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Keogh Plan (HR-10 Plan)
Retirement plan individually adopted by self-employed persons.

Keogh Plan
A tax-deferred retirement account for self-employed individuals or employees of unincorporated businesses. Keogh plans can be funded with mutual fund shares. (Also know as H.R. 10 Plans.)

Kiddie Tax
Unearned income (dividends, rents, interest, etc) of a child under age 14 will be taxed to the child at the parent's highest income tax rate.

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Lack of Marketability Discount
When the value of an asset is less than its initial or expected fair market value due to unusual circumstances that make it not readily saleable. For example, a limited partnership interest.

Lagging indicator
Economic indicator that changes directions after business conditions have turned around.

Lateral Succession
Succession in property ownership in which the property is transferred between members of the same generation.

Law of Large Numbers
Concept that the greater the number of exposures, the more closely will actual results approach the probable results expected from an infinite number of exposures.

Leading indicator
Economic indicator that changes direction in advance of general business conditions.

Legal Reserve
Liability item on a life insurer's balance sheet representing the redundant or excessive premiums paid under the level-premium method during the early years. Assets must be accumulated to offset the legal reserve liability. Purpose of the legal reserve is to provide lifetime protection.

Letters of Administration
Document issued by the probate court giving the administrator authority to administer the estate.

Letters Testamentary
Document issued by the probate court giving the executor authority to administer the estate under the provisions of the decedent's will.

Liability
A financial obligation, debt, claim, or potential loss.

Life Income Option
Life insurance settlement option in which the policy proceeds are paid during the lifetime of the beneficiary. A certain number of guaranteed payments may also be payable.

Life Insurance Planning
Systematic method of determining the insured's financial goals, which are translated into specific amounts of life insurance, then periodically reviewed for possible changes.

Lifestyle Fund
A mutual fund that maintains an asset allocation based on the expected retirement age of the investor; generally, the investor's portfolio will be shifted into less-risky assets as s/he grows older or closer to the time when s/he wants to withdraw his investment.

Limit order
An order placed with a broker to buy or sell at a price as good as or better than the specified limit price.

Limited Liability Company (LLC)
An entity formed under state statute that has the legal characteristic of limited liability similar to that of a corporation, while it may qualify to be treated as a partnership for tax purposes.

Limited Partner
A partner in a partnership who can't participate in the management of the partnership's business. A limited partner's liability is limited to loss of his investment in the partnership.

Limited Partnership
Form of partnership composed of both a general partner(s) and a limited partner(s); the limited partners have no control in the management of the company and are usually financially liable only to the extent of their investment in the partnership.

Liquidity
The degree of ease and certainty of value with which a security can be converted into cash.

Living Trust
A written legal document into which you place all of your property, with instructions for its management and distribution upon your disability or death.

Loan Interest Charge
The annual interest expense charged to the policy owner on the amount borrowed from a policy's cash value. If loan interest is not paid in cash, it is added to the outstanding loan balance. The unpaid loan interest will then increase the amount borrowed.

Loan
Money that is lent. In life insurance a loan can be taken against the cash value of a life insurance policy. If the insured dies while there is an outstanding loan balance, the amount of the loan and any unpaid interest due will be deducted from the death proceeds.

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Margin
The use of borrowed money to purchase securities (buying "on margin").

Marital Deduction
A deduction allowing for the unlimited transfer of any or all property from one spouse to the other generally free of estate and gift tax.

Market capitalization
Number of common stock shares outstanding times share price. Provides a measure of firm size.

Market order
An order placed with a broker to buy or sell a security at whatever the price may be when the order is executed.

Market risk
The volatility of a stock price relative to the overall market or index as indicated by beta.

Market sentiment
The feeling, sentiment, or tone of a market. This is usually shown by the activity or price movement of the securities represented within the market. For example, a bullish market sentiment would be indicated by rising prices and strong demand for securities, while a bearish sentiment would be indicated by falling prices and a lack of demand for securities.

Market timing
Attempting to leave the market entirely during downturns and reinvesting when it heads back up.

Maturity
The length of time until the principal amount of a bond must be repaid.

Medical Information Bureau (MIB)
Bureau whose purpose is to supply underwriting information in life and health insurance to member companies, which report any health impairments of an applicant for insurance.

Minor Child
A person who has not yet reached the legal age of majority. This age can differ with each state, but generally is between 16 and 21 years. The term does not apply to an emancipated minor.

Minority Discount
A discount applied to the value of an interest in a corporation, limited liability company or limited partnership that is not publicly marketable to reflect the fact that a minority interest in the company has less value than a controlling interest, since the holder of the former cannot control business actions.

Money Market Fund
A common trust fund or mutual fund that aims to pay money market interest rates. This is accomplished by investing in safe, highly liquid securities, including bank certificates of deposit, commercial paper, U.S. government securities and repurchase agreements. Money funds make these high interest securities available to the average investor seeking immediate income and high investment safety.

Money Purchase Pension Plan (MPPP)
A defined contribution plan in which employer contributions are usually determined as a percentage of pay. Forfeitures resulting from separation of service prior to full vesting can be used to reduce the employer's contributions or be reallocated among remaining employees.

Mutual Fund
An open-end investment company that buys back or redeems its shares at current net asset value. Most mutual funds continuously offer new shares to investors.

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NASDAQ
National Association of Securities Dealers Automated Quotations System. This is a computerized system that provides up-to-the-minute price quotations on about 5,000 of the more actively traded over-the-counter stocks.

National Association of Insurance Commissioners (NAIC)
Group founded in 1871 that meets periodically to discuss industry problems and draft model laws in various areas and recommends adoption of these proposals by state legislatures. The NAIC opposes federal regulation of insurance.

Needs Approach
Method for estimating amount of life insurance appropriate for a family by analyzing various family needs that must be met if the family head should die and converting them into specific amounts of life insurance. Financial assets are considered in determining the amount of life insurance needed.

Net Amount at Risk
In life insurance, the difference between the face value of a life insurance policy and its cash value (also known as "pure amount of protection").

Net Asset Value (NAV)
The current market worth of a mutual fund share. Calculated daily by taking the funds total assets securities, cash and any accrued earnings deducting liabilities, and dividing the remainder by the number of shares outstanding.

Non-discrimination Rules
Rules denying an employer, employee or both the benefit of tax advantages if the plan discriminates in favor of highly compensated or key employees as demonstrated by government-specified tests.

Nonforfeiture
Law
State law requiring insurance companies to provide at least a minimum nonforfeiture value to policyowners who surrender their cash value life insurance policies.

Non-Highly Compensated Employee (NHCE)
This group of employees is determined on the basis of compensation or ownership interest. See Highly Compensated Employees.

Nonqualified Deferred Compensation Plan
A contractual arrangement that calls for paying an individual or group of executives future benefits. It does not qualify for favorable tax treatment, but has far fewer restrictions than qualified plans. Non-qualified plans are unsecured and subject to risks; they must remain "unfunded" to avoid current taxation.

Non-Qualified Deferred Compensation Plan
A plan subject to tax, in which the assets of certain employees (usually Highly Compensated Employees) are deferred. These funds may be reached by an employer’s creditors.

Non-qualified Plan
A pension plan that does not meet the requirements for preferential tax treatment. This type of plan allows an employer more flexibility and freedom with coverage requirements, benefit structures, and financing methods.

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Odd lot
A transaction involving fewer shares than in a "round" lot, which for most stocks is 100 shares.

Orphan plan
A defined contribution plan for which there is no plan sponsor or other plan fiduciary willing to act with respect to the plan.

Overbought
A security, usually a stock, that has had a sharp rise, usually as a result vigorous buying, making prices too high. This is the opposite of being oversold.

Oversold
A security, usually a stock (also sometimes a whole market), believed to have declined to an unreasonable level due to vigorous selling. This is the opposite of being overbought.

Over-the-counter market
A communications network through which trades of bonds, non-listed stocks, and other securities take place. Trading activity is overseen by the National Association of Securities Dealers (NASD).

Ownership Clause
Provision in life insurance policies under which the policyowner possesses all contractual rights in the policy while the insured is living. These rights can generally be exercised without the beneficiary's consent.

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Par value (bond)
The face value of a bond, generally $1,000 for corporate issues, with higher denominations for many government issues.

Participant contributions
The dollars that employees contribute to their 401k plans.

Participant Directed Account
A plan that allows participants to select their own investment options. See Participant Directed Investing.

Participant Directed Investing
In this case, the employee decides how to invest his or her funds. It is the company's responsibility to offer a variety of investment opportunities so that the employee can make investments according to his or her long term goals and risk.

Partition
The judicial separation of the respective interests in property of joint owners or tenants in common so each may take possession, enjoy, and control his or her share of the property.

Partnership
A type of unincorporated business organization in which multiple individuals, called general partners, manage the business and are equally liable for its debts.

Paul v. Virginia
Landmark legal decision of 1869 establishing the right of the states, and not the federal government, to regulate insurance. Ruled that insurance was not interstate commerce.

Payout ratio
Dividends per share divided by earnings per share. Provides an indication of how well earnings support the dividend payments. The lower the ratio, the more secure the dividend.

PBGC
Pension Benefit Guarantee Corp. The PBGC is a guarantee fund, established by ERISA, which covers all defined benefit pension plans. Companies with a defined benefit plan must pay premiums into this fund according to the number of employees in the plan and the current ratio of assets to liabilities in the plan.

Per Stirpes
A way of distributing an estate so that the surviving descendants will receive only what their immediate ancestor would have received if he or she had been alive at the time of death. State law definitions can vary.

Personal Representative
An executor, administrator, or anyone else who is in charge of a decedent's property.

Phantom Stock Plan
An incentive compensation arrangement where the employee is credited with a hypothetical number of shares (phantom stock units) of the company. These units are credited to the employee's account, which is dynamic in that it includes future dividends and stock splits. Upon termination of employment, the employee is entitled to a cash amount based on the per share equivalent value of each of the phantom stock units credited to his or her account.

Plan Administrator
The individual, group or corporation named in the plan document as responsible for day to day operations. The plan sponsor is generally the plan administrator if no other entity is named.

Plan Sponsor
The entity (generally the employer) responsible for establishing and maintaining the plan.

Plan Vendor
Companies that administer service and/or sell 401k plans. They are generally employed by the plan sponsor.

Plan Year
The calendar or fiscal year for which plan records are maintained.

Planned Premium
The premium amount specified by the policy owner as the amounts intended to be paid at fixed intervals over a specified period of time. Premiums may be paid on a monthly, quarterly, semi-annual or annual basis. If policy values are adequate, the specified premium need not be paid, and can be changed at any time. Within limits, premium payments that are more or less than the specified premium amount may be permitted.

Policy Basis
The policy basis represents the policy owner's investment in the policy. Policy basis is used in determining the taxable portion of a policy distributions when a taxable event occurs. For example, the portion of the surrender proceeds or withdrawal distribution that exceeds the policy basis is reported as taxable income (gain).

Policy Loan
A loan made by an insurance company to a policyholder on the security of the cash value of the policy.

Pooled Income Fund
A trust arrangement which accepts gifts of cash or certain properties from persons who want to provide support for the charitable organization; gifts made to the fund are commingled and invested by the trustee and units of participation are awarded to the donor for his or her gift; income is then paid to the donor proportionate to his or her share of fund earnings.

Portability
This occurs when, upon termination of employment, an employee transfers pension funds from one employer's plan to another without penalty.

Portfolio
The group of individual securities held by a person or an institution.

Pour Over Will
This is a Will used to transfer (pour over) into a trust any property that is left in a person's estate after death.

Power of Appointment
A right given to another in a written instrument, such as a will or trust that allows the other to decide how to distribute your property. The power of appointment is "general" if it places no restrictions on who the distributees may be. A power is "limited" or "special" if it limits the eventual distributee.

Power of Attorney
A written legal document that gives an individual the authority to act for another. If the authority is to act for the principal in all matters, it is a general power of attorney. If the authority granted is limited to certain specified things, it is a special power of attorney. If the authority granted survives the disability of the principal it is a durable power of attorney.

Premium bond
A bond that is valued at more than its face amount.

Present value
The value today of a future payment, or stream of payments, discounted at some appropriate interest rate.

Price-earnings ratio (P/E)
Market price per share divided by the firm's earnings per share. A measure of how the market currently values the firm's earnings growth and risk prospects.

Price-to-book ratio
Market price per share divided by book value (tangible assets less all liabilities) per share. A measure of stock valuation relative to net assets. A high ratio might imply an overvalued situation; a low ratio might indicate an overlooked stock.

Primary Beneficiary
Beneficiary of a life insurance policy who is first entitled to receive the policy proceeds on the insured's death.

Principal
The original amount of money invested or lent, as distinguished from profits or interest earned on that money.

Probate
A court procedure for settling the personal affairs of a decedent by formally proving the validity of a will and establishing the legal transfer of property to beneficiaries, or appointing an administrator and supervising the legal transfer to property to heirs if there is no valid will.

Profit margin
Net earnings after taxes divided by sales. Measures the ability of a firm to generate earnings from sales.

Profit sharing plan
A defined contribution pension plan that uses a variable level of contributions based on company profits. Profit sharing plans allow firms to limit allocations to a pension fund in lean years. However, they suffer from lower maximum deduction limits than standard plans.

Program trading
Computer-based trigger points are established in which large volume trades are indicated. The technique is used by institutional investors.

Prohibited Transaction
Activities regarding treatment of plan assets by fiduciaries that are prohibited by ERISA. This includes transactions with a party-in-interest, including, sale, exchange, lease, or loan of plan securities or other properties. Any treatment of plan assets by the fiduciary that is not consistent with the best interests of the plan participants is a prohibited transaction.

Projected Benefit Obligation (PBO)
An accounting term representing the anticipated value of retirement benefits to be earned by an employee by his/her retirement date.

Prospectus
The written statement that discloses the terms of a securities offering or a mutual fund. Strict rules govern the information that must be disclosed to investors in the prospectus. You should always read the prospectus on any mutual fund before investing.

Prudent Investor Rule
The latest development in evaluating fiduciary prudence. The current (1992) model uniform act differs from the traditional Prudent Man Rule in that it indicates that: (1) no asset is automatically imprudent, but must be suitable to the needs of the beneficiaries, (2) the entire portfolio is viewed when evaluating the prudence of a fiduciary, and (3) certain actions can be delegated to other agents and fiduciaries. ERISA [§ 404(a) (1) (C)] generally follows the approach of the Prudent Investor Rule.

Prudent Man Rule
A rule originally stated in 1830 by the Supreme Judicial Court of Massachusetts in Harvard College v. Amory [9 Pick. (Mass.) 446], that, in investing, all that can be required of a trustee is that s/he conduct themselves faithfully and exercise a sound discretion and observe how a person of prudence, discretion, and intelligence manage their own affairs not in regard to speculation, but in regard to the permanent disposition of their funds considering the probable income as well as the probable safety of the capital to be invested. The current (1959) model uniform rule categorizes certain types of assets as automatically imprudent, looks at each investment separately in determining prudence, and prohibits the delegation of responsibilities. Most states have adopted the Rule as a part of state fiduciary law, usually with certain different specifics from state to state.

Put option
The right to sell stock at a specified (exercise) price within a specified period of time.

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Qualified Domestic Relations Order (QDRO)
A judgment, decree or order that creates or recognizes an alternate payee’s (such as former spouse, child, etc.) right to receive all or a portion of a participant’s retirement plan benefits.

Qualified Domestic Trust
A trust arrangement which allows property transferred to a surviving spouse who is not a U.S. citizen to qualify for a special exclusion in lieu of the regular marital deduction; and which ensures that, at the death of the surviving spouse who is not a United States citizen, the assets placed in such a trust will incur federal estate taxation since the tax was avoided at the first spouse's death

Qualified Plan
A private retirement plan that meets the rules and regulations of the Internal Revenue Service. Contributions to such a plan are generally tax-deductible; earnings on such contributions are always tax sheltered until withdrawal.

Qualified Stock Option Plan
A tax favored plan for compensating executives by granting incentive stock options (ISOs) to buy company stock. If the plan meets the requirements of IRC §422, the executive is not taxed at the time of the grant or the time of the exercise of the option. Taxation occurs when the stock purchased under the option is sold by the executive. Corporation granting the option does not ordinarily receive a tax deduction.

Qualified Terminable Interest Property (QTIP)
Property qualifying for the marital deduction at the election of the donor or the decedent's personal representative. The spouse retains a qualified income interest in the property for life, with the income payable at least annually. The corpus ultimately passes to a specified remainderman, under a special power of appointment given to the spouse

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Rabbi Trust
A trust, owned by the company, that holds assets to help meet non-qualified benefit payments. Rabbi trusts are taxable trusts, and trust assets must be available to corporate creditors in the event of a bankruptcy.

Rate
Price per unit of insurance.

Ratio Percentage Test
A test that a qualified pension plan must meet to receive favorable income tax treatment. The pension plan must benefit a percentage of employees that is at least 70 percent of the highly compensated employees covered by the plan.

Real rate of return
The annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or deflation.

Rebating
A practice-illegal in virtually all states-of giving a premium reduction or some other financial advantage to an individual as an inducement to purchase the policy.

Relative strength
Price performance of a stock divided by the price performance of an appropriate index over the same time period. A measure of price trend that indicates how a stock is performing relative to other stocks.

Representative
Someone who is authorized to act on your behalf, such as an executor or a trustee.

Required rate of return
The rate of return demanded to induce investors to invest in a security.

Retention ratio
The percent of earnings retained in the firm for investment purposes.

Return
Consists of income plus capital gains (or losses) relative to investment.

Return on equity (ROE)
A ratio calculated by dividing common stock equity (net worth) at the beginning of the accounting period into net income for the period after preferred stock dividends, but before common stock dividends. ROE tells common stockholders how effect their money is being employed.

Revenue bond
A municipal bond supported by the revenue from a specific project, such as a toll road, bridge, or municipal coliseum.

Revocable Beneficiary
Beneficiary designation allowing the policyowner the right to change the beneficiary without consent of the beneficiary.

Revocable Trust
A trust that can be changed after it is established. Assets can be added or removed from the corpus of the trust, the beneficiary(ies) can be changed, and other changes including termination of the trust, are allowed.

Rider
Term used in insurance contracts to describe a document that amends or changes the original policy.

Risk
Possibility that an investment's actual return will be different than expected; includes the possibility of losing some or all of the original investment. Measured by variability of historical returns or dispersion of historical returns around their average return.

Risk Tolerance
The extent to which an investor will accept risk in the pursuit of a financial reward. The greater an investor's tolerance, the more risk s/he will accept in order to reach their goal.

Risk/return trade-off
The balance an investor must decide on between the desire for low risk and high returns, since low levels of uncertainty (low risk) are associated with low potential returns and high levels of uncertainty (high risk) are associated with high potential returns.

Rollover
An employee's transfer of retirement funds from one retirement plan to another plan of the same type or to an IRA without incurring a tax liability. The transfer must be made within 60 days of receiving a cash distribution. The law requires 20 percent federal income tax withholding on money eligible for rollover if it is not moved directly to the second plan or an investment company.

Round lot
The basic trading block for stocks--usually 100 shares.

Rule Against Perpetuities
A rule of common law that makes void any estate or interest in property so limited that it will not take effect or vest within a period measured by a life or lives in being at the time of the creation of the estate plus 21 years and the period of gestation. In many states the rule has been modified by statute. Sometimes it is known as the rule against remoteness of vesting.

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S Corporation
A corporation whose income is generally taxed to its shareholders, thus avoiding a corporate level tax. An election available to a corporation to be treated as a partnership for income tax purposes. To be eligible to make the election, a corporation must meet certain requirements as to kind and number of shareholders, classes of stock, and sources of income.

Salary Reduction Plan (Cash or Deferred Arrangement)
A CODA is a defined contribution plan that allows participants to have a portion of their compensation (otherwise payable in cash) contributed pre-tax to a retirement account on their behalf. They include 401k, 403b and 457 plans.

Savings or Thrift Plan
A defined contribution plan in which participants make contributions on a discretionary basis with limits and to which employers may also contribute, usually on the basis of fully or partially matching participants' contributions. Contributions are commonly made with after-tax earnings.

Secondary market
A market in which an investor purchases an asset from another investor rather than the issuing corporation. An example is the New York Stock Exchange.

Section 2503(c) Trust for Minors
A trust designed to comply with Section 2503(c) of the Internal Revenue Code so that a gift placed in such a trust for the benefit of a minor will qualify for the gift tax annual exclusion although they are not gifts of a present interest.

Section 303 Stock Redemption
When certain requirements are met, this section of the Internal Revenue Code allows a shareholder's estate or heirs to sell to the deceased's closely held corporation enough stock to pay federal and state death taxes, costs of estate administration, and funeral expenses without the corporation's distribution being treated as a dividend for income tax purposes

Section 401(k) Plan
A qualified profit sharing or thrift plan that allows participants the option of putting money into the plan or receiving funds as cash. The employee can voluntarily elect to have his or her salary reduced up to some maximum limit, which is then invested in the employer's Section 401(k) plan.

Section 457 Plan
A plan which provides an exclusion from gross income for a certain portion of salary deferred by a participant under the plan of a state or local government, a tax-exempt organization (excluding churches), or of an independent contractor of such government or organization (e.g., a physician providing independent services to a hospital).

Section 6166
A section of the Internal Revenue Code that allows for a 14-year spreadout of the estate tax for estates that qualify (generally estates that include closely held businesses or farms).

Secular Trust
An irrevocable trust which is a separate tax-paying entity from the company. Assets contributed to a secular trust are currently taxable to the trust beneficiary. In contrast to a rabbi trust, a secular trust is beyond reach of corporate creditors in the event of bankruptcy.

Security analyst
One who studies various industries and companies and provides research reports and valuation reports.

Security Depository
A physical location or organization where securities certificates are deposited and transferred by bookkeeping entry.

Security Lending
A practice where owners of securities, either directly or indirectly, lend their securities to (primarily) brokerage firms for a fee. The borrower pledges cash, securities, or a letter of credit to protect the lender. Securities are borrowed by cover fails of deliveries or short sales, provide proper denominations, and enable brokerage firms to engage in arbitrage trading activities.

Settlement Option
Ways in which life insurance policy proceeds can be paid other than in a lump sum, including interest, fixed period, fixed amount, and life income options.

Short sale
A market transaction in which an investor sells borrowed securities in anticipation of a price decline. If the seller can buy back that stock later at a lower price, a profit results. If the price rises, however, a loss results.

Sidecar IRA
See "Deemed IRA"

Simplified Employee Pension (SEP) IRA
A retirement program for self-employed people or owners of small companies allowing them to defer taxes on investments intended for retirement

Sinking Fund ApproachA benefit funding technique wherein assets are set aside in order to accumulate the necessary funds to pay future benefit expenses.

Sinking fund provision
A means of repaying funds advanced through a bond issue. The issuer makes periodic payments to the trustee, who retires part of the issue by purchasing the bonds in the open market.

Socially Responsible Investing
An investments strategy that only purchases securities of individual companies that espouse some form of social responsibility, e.g., "green" funds that target investments reflecting environmental awareness.

Soft Dollars
The purchase of research materials from brokerage firms and paid for by commissions (or part of the commissions) generated by securities transactions of trust accounts. Covered by Section 28(e) (1) of the Securities Exchange Act of 1934. Opposed to this is the purchase of materials by "hard dollars", which is when payment is made by the trust department itself, typically by issuing a check.

Sound Mind
The testator possesses sound mind for the purposes of making a will if he or she: (1) understands the nature of the act of making a will or codicil thereto, (2) knows the extent and character of the property subject to the will, (3) knows and understands the proposed disposition of that property, and (4) knows the natural objects of his or her bounty (i.e. his or her heirs). Whether the testator was of sound mind is tested (determined) by the state of the testator's mind at the time the will or codicil is executed (written and signed) and varies by state.

SPD
Summary Plan Description for ERISA employee benefit plans. ERISA requires a Summary Plan Description (SPD) be distributed to each plan participant and to each beneficiary receiving benefits under the plan as follows: For existing plans, a new participant must receive a copy of the SPD within 90 days after becoming a participant, and a beneficiary must receive a copy within 90 days after first receiving benefits.

Split
Dollar Plans
A method of purchasing life insurance in which the premium payments and policy benefits are divided, usually between an employer and employee. Many types of split dollar designs are possible. It can be a valuable executive benefit that provides life insurance protection for an executive's survivors at a minimal cost (the economic benefit cost) to the employee.

Standard & Poor's 500 Index
An index of 500 major U.S. corporations. It is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The index tracks industrial, transportation, financial, and utility stocks. The composition of the 500 stocks is flexible and the number of issues in each sector varies

State Death or Inheritance Taxes
The tax imposed by the state in which you live and/or where your property is located, if different, on the transfer of that property to another at your death.

Statute of Limitations
A statute, which bars lawsuits upon valid claims after the expiration of a specified period of time. The period varies by state law and for different kinds of claims.

Step Up In Basis
A decedent's capital gains property that passes to others escaping capital gains tax when sold by the person who inherits the property. Persons inheriting capital gains property receive the property at date-of-death fair market value. In effect, the basis in this property is deemed to be "stepped up" and does not reflect the decedent's original cost basis for determining applicable capital gains tax on the sale of the property.

Stock Appreciation Rights Plan (SAR)
A right granted to an employee to receive cash and/or stock equal to the increase in value of the company's stock after the date the stock appreciation right (SAR) is granted. Generally no tax consequences to the employer or employee upon the grant of the right. It is treated as an unfunded, unsecured promise to pay money in the future. The employee is ordinarily given the right to decide when the SAR will be exercised and will recognize ordinary income upon exercise in an amount equal to the cash and/or fair market value of the other assets received.

Stock Bonus Plan
A method of compensating selected executives by issuing company stock in lieu of or in addition to cash bonus compensation. The executive is taxed on the value of the stock as ordinary income and any increase in value of the stock is owned by the executive. The bonus is deductible by the employer if it is reasonable compensation for services rendered.

Stock Company
Company owned by stockholders who share in the profits of the company.

Stock dividend
A dividend paid in additional shares of stock rather than in cash.

Stock Redemption Plan
In a stock redemption or entity purchase plan, the business agrees to purchase a deceased or departing owner's interest. The purchase is made for an agreed-on price or according to an agreed-on formula.

Stock split
The division of a company's existing stock into more shares. In a 2-for-1 split, each stockholder would receive an additional share for each share formerly held and the price would be split in half.

Stockbroker
An agent who for a commission handles the public's orders to buy and sell securities.

Stockholders' equity (book value)
An indication of how well the firm used reinvested earnings to generate additional earnings.

Stop-limit order
An order placed with a broker to buy or sell at a specified price or better after a given stop price has been reached or passed.

Stop-loss order
An order placed with a broker to buy or sell when a certain price is reached; designed to limit an investor's loss on a security position.

Succession
A term used to describe transfers of asset ownership through inheritance, gifting, preferential sale, or other means that fulfill the wishes of the person(s) with present ownership of the assets.

Suicide Clause
Contractual provision in a life insurance policy stating that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; only premiums paid will be refunded.

Summary Plan Description
See "SPD"

Supplemental Executive Retirement Plan
A type of non-qualified deferred compensation plan often used to attract and retain executives. Generally, the promised benefits are paid from the employer's general assets, and no amounts are specifically earmarked for future benefit payments. Usually the employee has no option to receive the funds as current compensation.

Surrender Charge
The fee charged to a policy owner when a life insurance policy or annuity is surrendered for its cash value.

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Tangible Property
Property that is capable of being perceived by the senses - generally refers to real estate, personal property, and moveable property that has value of its own and is not merely a representation of real value. Land, machinery, buildings, crops, and livestock are examples of tangible property.

Target benefit
A target benefit plan is a defined contribution plan that acts much more like a defined benefit plan. Contributions are set for each year, but are variable based on the age of the employee. This allows older employees to receive similarly sized pensions as younger employees despite having less time for investments to grow.

Tax Basis
The owner's cost of an asset for income and estate tax purposes as determined under the Internal Revenue Code and IRS regulations.

Tax Free Rollover
Provision whereby an individual receiving a lump sum distribution from a qualified pension or profit sharing plan can preserve the tax deferred status of these funds by a "rollover" into an IRA or another qualified plan if rolled over within sixty days of receipt.

Technical analysis
An analysis of price and volume data as well as other related market indicators to determine past trends that are believed to be predictable into the future. Charts and graphs are often utilized.

Tenants In Common
A form of asset ownership in which two or more persons have an undivided interest in the asset and the ownership shares are not required to be equal.

Term Insurance
Type of life insurance that provides temporary protection for a specified number of years.

Testamentary TrustA trust established after the death of the grantor under the provisions of the grantor's will.

Testator
One who writes or has written and signs a will.

Total debt to total assets
Short-term and long-term debt divided by total assets of the firm. A measure of a company's financial risk that indicates how much of the assets of the firm have been financed by debt.

Trading range
The spread of prices that a stock normally sells within.

Transaction costs
Costs incurred buying or selling securities. These include brokers' commissions and dealers' spreads (the difference between the price the dealer paid for a security and for

Transfer for Value Rule
A federal income tax rule which states that if ownership of a life insurance policy was transferred for a valuable consideration, a portion of the death proceeds may be includible in gross income rather than qualifying for the usual income tax exemption of death proceeds. Five "safe harbor" exceptions to this rule exist. They include: a transfer to the insured, to a partner of the insured, to a partnership in which the insured is a partner, to a corporation in which the insured is a shareholder or officer, and to a corporation from another corporation in a tax-free reorganization.

Treasury bill
Short-term debt security issued by the federal government for periods of one year or less.

Treasury bond
Longer-term debt security issued by the federal government for a period of seven years or longer.

Treasury note
Longer-term debt security issued by the federal government for a period of one to seven years.

Trust
A legal arrangement in which an individual (the trustor) gives fiduciary control of property to a person or institution (the trustee) for the benefit of beneficiaries.

Trust Declaration or Trust Instrument
A document defining the nature and duration of the trust, the powers of the trustee, and identifying the trust's beneficiary(ies).

Trustee
An individual or organization which holds or manages and invests assets for the benefit of another.

Trusteed Cross-Purchase Buy-Sell Agreement
The use of a third party ("trustee") to hold the life insurance policies that fund a cross-purchase agreement, and to see that the terms of the agreement are fulfilled at an owner's death; may be used to avoid a multiplicity of policies when several owners are involved.

Twisting
Excessive trading in a client's account by a broker seeking to maximize commissions regardless of the client's best interests, in violation of NASD rules, also called churning or overtrading.

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Underwriting
The selection and classification of applicants for insurance through a clearly stated company policy consistent with company objectives.

Undivided Interest
The interest or right in property owned by each joint tenant or tenant in common. Each tenant has equal right to use and enjoy the entire property. Unless an agreement to the contrary exists, each tenant is entitled to an income share proportional to his or her ownership interest. If the property is sold, the sale proceeds are shared among tenants in proportion to the ownership shares held by each tenant.

Unfunded Prior Service Pension Liability
In a defined benefit pension plan, the difference between the actuarially-determined value of the projected future benefit costs (both vested and manifested) and administrative expenses, as well as the unamortized portion of prior benefit costs, under the plan, and the market value of the plan's assets.

Unfunded Vested Pension Liability
In a defined benefit pension plan, the difference between the actuarially-determined value of the vested (non-forfeitable) benefits under the plan, and the market value of the plan's assets.

Unified Tax Credit
Tax credit that can be used to reduce the amount of the federal estate or gift tax.

Uniform Gifts (Transfers) To Minors Act (UGMA or UTMA)
A method to hold property for the benefit of a minor, which is similar to a trust but the rules are governed by state law.

Universal Life Insurance
Life insurance which combines the low-cost protection of term insurance with a savings component that is invested in a tax-deferred account, the cash value of which may be available for a loan to the policy holder.

Unrelated Business Taxable Income (Ubti)
Income earned by an otherwise tax-exempt organization from activities unrelated to their tax-exempt purpose can be subject to taxation.

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Valuation
The process of determining the current worth of an asset.

Value Line index
The index represents 1,700 companies from the New York and American Stock Exchanges and the over-the-counter market. It is an equal-weighted index, which means each of the 1,700 stocks, regardless of market price or total market value, is weighted equally.

Variability
The possible different outcomes of an event. As an example, an investment with many different levels of return would have great variability.

Vest
To confer an immediate, fixed right of immediate or future possession and enjoyment of property.

Vesting
An ERISA guideline stipulating that employees must be entitled to their entire retirement benefits within a certain period of time even if they are no longer with the employer.

Vesting
The period of time an employee must work at a firm before gaining access to employer-contributed pension income. For 401k plans, employee contributions are immediately vested, but employer contributions may be vested over a period of several years.

Voting Right
The right of a common stockholder to vote for members of the board of directors and on matters of corporate policy - particularly the issuance of senior securities, stock splits and substantial changes in the corporation's business. A variation of this right is extended to variable annuity contract holders and mutual fund shareholders, who may vote on material policy issues.

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Wait-and-See Buy-Sell Agreement
A special type of buy-sell agreement between the owners of a business and the business itself, in which, typically, the business entity has a first option to purchase a deceased owner's interest; the surviving owners then have a second option to purchase any portion of the interest not already acquired by the business; and finally, the business entity is required to purchase any remaining interest not already sold under the two options.

Waiver-of-Premium Provision
Benefit that can be added to a life insurance policy providing for waiver of all premiums coming due during a period of total disability of the insured.

which he can sell it).

Will
A person's written declaration of desires for disposal of his or her property after death.

Wilshire 5000 equity index
A stock market measure comprising 5,000+ equity securities. It is the broadest US stock market index and includes all New York Stock Exchange and American Stock Exchange issues and the NASDAQ Stock Market. It is a capitalization-weighted index.

Wrap Account
A special type of brokerage arrangement where the investors place their funds and pay an annual fee for investment management services. All costs are "wrapped" into this one fee including all administrative fees, commission costs, management fees, etc.

Yield curve
A curve that shows interest rates at a specific point for all bonds having equal risk but different maturity dates. Usually, government bonds are used to construct such curves.

Yield
The amount of interest paid on a bond divided by the price. A measure of the income generated by a bond. A yield is not a total return measure because it does not include capital gains or losses.

Yield to maturity
The rate of return anticipated on a bond if it is held until the maturity date.

Zero coupon
A bond bought at a discount to its face value that does not pay interest, but pays face value on maturity. The longer the time between when you purchase the bond and it matures, the deeper the discount. Your earnings on this type of bond are the difference between your purchase price (the discount) and the face value at maturity.