Annuity Term Glossary
§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until withdrawn.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.
A
Annual Reset
An indexing method under which index growth is measured annually. The index value staring point is reset every year.
Averaging
Use of the average values of an index over a period of time rather than the value of the index on a given day. Averaging tends to soften the effects of both market increases and market decreases.
Action at end of Penalty Period
At the end of a surrender penalty period, some annuities require the contract owner to take action or decide what to do with the annuity.
NONE: at the end of the penalty period, no action is required. The contract owner may leave the money in the annuity. The annuity will continue to earn interest as declared by the company.
RRR: The contract owner will have three options at the end of thee penalty period.
1) Renew- the company will declare a new interest rate, usually at the rate paid on new annuities. The annuity will begin a new penalty period. This is the default option unless the owner elects on of the following options.
2) Remove- the annuity may be surrendered for its cash value. Income taxes will be incurred on the interest earnings in the year received.
3) Rollover- the annuity may be rolled over or transferred to another annuity with the same or a different insurance company on a tax free exchange basis.
Annuitize
The annuity must be paid out over a period of time to escape surrender penalties.
Annual Fees
There are no front end sales charges with most annuities. However a few annuities charge annual maintenance fees. Generally these fees are low.
Additional Premiums Allowed
If additional premiums are allowed to the same annuity, there will be a minimum amount stated in the contract, normally about $50.
SINGLE PREMIUM DEFERRED ANNUITY (SPDA): Only one premium is allowed to this type of annuity. Occasionally additional premium can be added in the first year.
FLEXIBLE PREMIUM DEFERRED ANNUITY (FPDA): Contract owners may make additional deposits to their annuity in the future if they desire. Additions may be made monthly or as frequently as defined in the contract. Bank drafts may also be employed, especially in qualified plans.
Annuity Funds Investment Type
The method used by the insurance company to set renewal rates after the initial rate period.
PORTFOLIO: Funds are pooled by type of annuity. All annuities of the same type will earn the same rate, regardless of issue date, after the initial rate guarantee period. Renewal rates may float up or down, depending on overall portfolio investment yield.
BANDED: Funds are pooled by rate and/or time period. Old annuities, based upon the time period they were purchased, may earn a different rate from new annuities. The old rate may be higher or lower than new money. Renewal rates will lag behind the market. As interest rates go down, old money will generally earn more interest than new money. Conversely, as rates go up, old money will earn lower interest than new money.
CD TYPE: These annuities are called CD type because 100% of the annuity value is available to be withdrawn at the end of the rate guarantee period. At the end of the rate guarantee period, either the penalties expire completely or the contract owner will be given a window of time to renew it, remove it or roll it over into a new annuity.
CD/INDEX: These annuities are CD annuities because 100% of the annuity value is available to be withdrawn at the end of the rate guarantee period. They are also designated Index because the company will credit any increase in the index in addition t the fixed rate. If the market is down you still get the fixed rate.
INDEXED: These annuities set a fixed rate which is only applicable if the index performance is equal to or greater than the beginning point or previous contract anniversary point. If the index is down from the previous anniversary, no credit is applied.
Annuitant
The person to whom annuity payments will be made.
Annuity Commencement Date
The date on which the annuitant will begin receiving payments from the annuity.
Annuity Purchase Value
Total premium plus accrued interest minus any previous withdrawals and state premium tax, if applicable.
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 guaranty the validity of the assignment.
Accelerated Benefits
A provision in some life insurance policies that allows insureds who are terminally ill
to collect part or all of their life insurance benefits before they die, primarily to pay
for the care they require. When the insured dies, the remainder of the death benefit is paid to the beneficiary, just as under a traditional life insurance policy.
Accrued Benefit
The amount of retirement benefit that has been accumulated on behalf of a
participating employee. In the case of a defined benefit plan, an employee's accrued benefit would be expressed as the amount he or she could expect to receive at normal retirement if no future funds were contributed to the plan. In the case of a money-purchase plan or profit-sharing plan, a participant's accrued benefit means the balance presently accrued in his or her individual account.
Accrued Interest
Interest earned but not yet paid for a period of time that has elapsed since the last
interest payment.
Accrued Liability
The amount of money needed to offset a participant's accumulated benefits under a retirement plan. A plan's accrued liability is equal to the difference between the
present value of future benefits promised and the present value of future
contributions. A plan is considered fully funded when the funds held under the plan
equal the plan's accrued liability. Conversely, when the assets of a plan are less than its accrued liability, the plan is deemed to have an unfunded accrued liability.
Accumulated Benefit Obligation
An accounting term representing the value of retirement benefits already earned by
an employee through prior service.
Accumulated Earnings Tax
A penalty tax imposed on a corporation's accumulated earnings and profits in excess of $250,000 or, if greater, the reasonable needs of the business. The accumulated earnings and profits for certain personal service corporations is limited to $150,000, unless the accumulated earnings and profits are for the reasonable needs of the personal service corporation.
Accumulated Surplus
A surplus accumulated by a corporation from its profits.
Accumulation Period
In retirement and annuity plans, the period when funds are accumulated for later
disbursement. This is in contrast to the income period, when the accumulated funds
are disbursed in the form of annuity or pension benefits.
Accumulation Trust
A trust in which the income is retained and not paid out to beneficiaries until certain conditions are met.
Adjustable Term Insurance Rider (ATR)
An Adjustable Term Insurance Rider (ATR) is used to add death benefit coverage to
the base or primary policy. An Adjustable Term Insurance Rider allows the policy
owner to apply for the pattern of the death benefits appropriate for anticipated
needs.
Adjusted Gross Estate
The gross estate less debts, funeral costs, and administrative expenses. This is the
starting point for the federal estate tax computation.
Administration of An Estate
The court-supervised distribution of the probate estate of a deceased person. If there is a will, the will names an executor (the person who manages the distribution). If not, the court appoints someone, who is generally known as the administrator.
Administrator
An individual appointed by a probate court to handle the estate of a person who died intestate. They have the same duties as an executor.
Adverse Selection
Tendency of persons with a higher-than-average chance of loss to seek insurance at standard (average) rates, which, if not controlled by underwriting, results in higher than-expected loss levels.
After-Tax Retirement Income
The distributions in the form of loans or withdrawals taken from an insurance policy
as retirement income. The retirement income is adjusted by the policy owner's tax
bracket for taxable distributions.
Agent
An individual or firm authorized to act on behalf of another (called the principal),
such as by executing transactions or selling and servicing an insurance policy. The
agent does not assume any financial risk in the transaction.
Alternate Valuation Date
A date used by the administrator to value a decedent's estate. This date is not to
exceed six months after date of death. The value of the assets must be lower and
result in a reduction of the gross estate and reduction in the estate tax liability to
qualify for its use.
Alternative Minimum Tax (AMT)
An alternative tax computation that adds certain tax preference items back into
adjusted gross income. If the AMT is higher than the regular tax liability for the year, the regular tax and the amount by which the AMT exceeds the regular tax are paid. It is intended to ensure that high-income individuals, corporations, trusts and estates pay at least some minimum amount of tax, regardless of deductions, credits or exemptions.
Amount At Risk
The pure insurance element of a life insurance policy. The net amount at risk is equal to the difference between the face value of the policy and its accrued cash value at a given time. The net amount at risk decreases as the cash value increases each year.
If the cash value becomes the face value, the policy is said to mature or endow.
From the IRS perspective, a corridor of protection or net amount of risk must be
apparent in a life insurance policy if the policy is to retain its tax advantaged
treatment.
Ancestor
One from whom a person is descended, whether through father or mother. Also can
mean one from whom an estate has descended.
Annual Gift Tax Exclusion
Every person is permitted to give away up to $10,000 per year (under 2001 law) to
any other person without incurring any gift tax liability. There is no limit on the
number of people who can receive these gifts in a year. To qualify for this exclusion, the gift must be a gift of a present interest, meaning that the recipient can enjoy the gift immediately and the donor must not have any control over the asset after it is given away. This can present problems when gifts are made to trusts. This exclusion can be doubled to $20,000 per person, per year, if the donors are married and both spouses consent to join in making the gift. This is called gift splitting. The $10,000 per year amount is indexed for inflation.
Annuity
A contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. Fixed annuities guarantee a certain payment amount, while variable annuities do not, but may have the potential for greater returns.
Applicable Estate Tax Exemption Amount
An estate tax exemption amount used to reduce the tax on transfers of property at
death (estate tax). Created by the Economic Growth and Tax Relief Reconciliation Act of 2001, the applicable estate tax exemption amount will gradually increase to
$3,500,000 in 2009 and is unlimited in 2010.
Articles of Organization
May also be called certificate of formation. This is the initial document filed with the
state to form or organize a Limited Liability Company (LLC). It includes basic
provisions concerning the life, nature, management, owners, etc., of the LLC and
becomes a matter of public record.
Asset Protection
The process of taking steps to minimize the risk of creditors or other claimants from
being able to reach your assets. This can include setting up a different entity, such
as a family limited partnership or limited liability company for each property,
business, etc.
Assets
Things of value owned by a person, family, or business. Everything of economic
value that is owned, whether real or personal property.
Assignment
Transfer of ownership or an asset to another person or party.
At-Risk
The at-risk rules limit the amount of tax losses that can be deducted from a businessor investment to the amount that is at-risk in that investment. The amount at-risk includes the cash and the fair market value of any property invested in the business. The amount at-risk (the deduction limit) also includes debts for which the taxpayer is personally liable.
Attorney-in-fact
A person who holds a power of attorney, and therefore is legally designated to
transact business and execute documents on behalf of another person.
Automatic Premium Loan
Cash borrowed from a life insurance policy's cash value to pay an overdue premium
after the grace period for paying the premium has expired.
B
Base Interest Rate
The Base Rate is the Current Rate less the Bonus Rate if any. In many cases the Base Rate and the Current Rate are the same.
Bonus Rate
A Bonus Rate is the "extra" or "additional" interest paid during the first year. (the initial guarantee period) The term "Bonus Rate" also means that extra interest paid as a pure bonus with no vesting requirements to earn it…a true bonus!
Bonus Credited On
The annuity may pay a premium or rate bonus on different amounts. Some on initial premium only, all new premiums received in the first year only, or on all new premiums received in all years.
Bail Out Interest Rate
After the initial rate period, if the interest rate drops below this rate, the annuity may be surrendered or transferred to another company without paying a surrender penalty.
Beneficiary
Before the Annuity Commencement Date, the person to whom payments will be made if the annuitant/owner dies. After the Annuity Commencement Date, the person to who payments will be made if the annuitant dies.
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.
Binder
A temporary, binding agreement, secured by a payment to evidence good faith, used until a formal contract takes effect.
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.
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.
C
Cap
The Maximum interest rate that can be credited to your equity index annuity policy in a policy year or over the term of the policy
Compounding of Gains
Interest that is credited to your policy is added to your principal as well as interest credited in prior policy years. Some companies do not compound the gains credited to equity index policies from prior years. This dramatically reduces the overall rate of return earned by your money.
Current Interest Rate
This is the interest rate that an annuity is paying it is the sum of the base rate, if any and the bonus rate, if any. The current rate is set by the insurance company at the time of issue and is guaranteed for a specific length of time.
Cash Value (Surrender Value)
The amount that is available for full or partial surrenders.
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 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 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.
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.
Codicil
A legal document, which supplements and changes an existing will. Generally utilized
to make minor changes to the original will.
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.
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.
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.
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.
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 Planned Premium
The total of the planned premiums scheduled to be paid to date by the policy owner.
Cumulative Loan
The total of the annual loans and loan interest, if accrued, to date.
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.
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.
D
Deferred Annuity
An annuity contract under which income payments are deferred until later; the contract is in the accumulation phase. This financial planning product serves the two primary purposes of wealth accumulation on a tax-deferred basis and systematic payouts on various retirement income schedules.
Downside Protection
Occurs when principal and prior earnings are not subject to decrease due to market declines.
Days Rate Held on Rollovers
If you rollover an existing annuity to a new annuity with a different insurance company, the new company will usually hold the rate for a period of time. If the money is not received from the old company within that period, the new annuity will receive the rate in effect on the date the money is received.
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.
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.
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.
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.
Donor
A person who makes a gift. The person setting up a trust can be called donor,
trustor, grantor, or settlor.
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.
E
Equity Indexed Annuity (EIA)
Combines some features of both fixed and variable annuities- the guarantee of principal and prior earnings and minimum policy values found in the fixed annuity with the earnings potential of market-linked rates found in variable annuities. EIAs also provide protection against downside market risk. The buyer only enjoys the potential increases of the market- the account value can only go up, it can never decline due to market risk. The market participation element is tied to an accepted market index (S&P 500). An EIA allows the individual investor to participate in the benefits of passive investing, long enjoyed by institutional investors. Even better, the individual is protected against downside market risk.
Effective Annual Yield (EAY)
Most companies compound and credit interest daily. The rate shown is the effective annual yield after compounding the daily nominal rate. Some companies pay a first year bonus on their interest to encourage new business. The EAY includes the bonus if it is Non-Forfeitable. If the bonus is forfeitable for any reason, it is not included in the EAY.
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 Security Life of Dever's alternative term products (single life alternative term or joint survivor alternative term).
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.
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, profitsharing, 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 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.
Endorsement
Written provision that adds to, deletes, or modifies the provisions in the original
contract.
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.
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.
Executor or Executrix
An individual or institution nominated in a will and appointed by a court to settle the
estate of a deceased.
F
Floor
The minimum interest rate that can be credited to your policy equity index annuity in a year or over the term of your contract.
Fixed Annuity
Annuity under which the carrier guarantees a minimum interest return and guaranteed minimum cash values. The interest rate is declared by the carrier and is not a direct reflection of the underlying assets.
Flexible Premium Deferred Annuity (FPDA)
An annuity contract that accepts recurring periodic payments.
Free Withdrawals
Withdrawals that are free of carrier-imposed surrender charges. Such as 10% of the accumulation value annually. Future account values may be affected by using the free withdrawal provision.
Free Withdraws Per Year
The number of withdrawals allowed each contract year without incurring a penalty. Most annuities allow for one free withdrawal per year, some allow more, few don’t allow any at all.
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.
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-Period Option
Life insurance settlement option in which the policy proceeds are paid out over a
fixed period of time.
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.
G
Guarantee Return of Principal
During the surrender charge period, the company guarantees the contract owner will never receive less than the total premiums paid.
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.
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
The person who establishes the trust. Also called the creator, settlor, donor or
trustor.
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 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 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 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 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 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.
H
High-Water Mark
An indexing method under which index growth is measured from the beginning of the term to the highest index anniversary value over the term.
Heir
A person entitled by law to inherit part or all of the estate of an ancestor who died
without leaving a valid will.
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.
I
Immediate Annuity
An annuity contract under which income payments start immediately
Index Benefit
The amount of earnings credited to an EIA account. The formula for it is: index growth times participation rate.
Index Growth
Change in the value of an index as measured between defied points in time.
Indexing
An investment strategy that seeks to match the performance of a defined group of securities. This group of securities forms a recognized market measure, called and index. An index is a benchmark of performance, like the Consumer Price Index that tracks the prices of consumer goods from year to year. Indexing only seeks to match the overall performance of the index. The specific securities purchased and their quantity is predetermined by the composition of the index.
Indexing Method
The method used to measure index growth. Though this term has become popular within the EIA market, it is important to note that in this context it refers to the method of calculating the Index Benefit.
Inflation
The increase in prices that erodes the buying power of a dollar over time.
Insurance Company
Insurance Companies are the only financial institution that may underwrite and issue annuity contracts.
Investor Returns vs. Investment Returns
Investment returns are the actual yield produced by an investment. Investor returns are usually lower than investment returns due to the behavior of the investor, who will tend to by and sell at the wrong time to avoid risk.
Interest Rate History on New Premium
The history shows how the rate for different annuities has varied on new money over the last few months. The purpose of this info is to compare a company’s rate to other companies for the same time period. It is important to know if a company is normally competitive, or if they jump up with a high interest rate to buy new money.
IRA
This is an individual retirement account (annuity).
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 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
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.
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).
Initial Reserve
In life insurance, the reserve at the beginning of any policy year.
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.
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.
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 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.
J
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.
L
Liquidity
Ease of availability of funds (principle plus earnings) and the ability to obtain funds without paying charges.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
M
Minimum Premium Amount
The minimum amount required to purchase and annuity varies by contract and company. Although the minimum deposit amount is a more accurate description and understood by most people, most insurance departments prohibit insurance companies from using the word deposit in sales literature and require the use of the work premium for money placed in an annuity.
Minimum Rate Guarantee After Initial Period
This minimum rate guarantee serves two purposes:
1) It provides a minimum interest rate a company may credit to an annuity after the initial rate period. Rarely will a company pay the minimum interest rate.
2) More importantly, it is the rate that insurance company actuaries use to calculate reserve requirements in order to meet stat insurance laws.
Maximum Issue Age
The maximum age of the owner and or annuitant required at the time of contract issue. Usually this is based upon attained age on last birthday, not nearest age.
Maximum Annuitization Age
The insurance company may declare the max. age that the annuitant may attain without annuitizing or cashing in the annuity. There is no max. Annuitization age under current IRS Tax Codes for Qualified or Non-Qualified money. Although qualified money must begin distributions at age 70½, it does not have to be annuitized to do so.
Monthly Income Checks Available
Most annuities offer a one time per year withdrawal or monthly interest checks, which may be started and stopped as the contract owner desires.
Market Value Adjustment (MVA)
1) If the contract rate is higher than current rates on new money, a positive adjustment may be made in the cash value. Therefore, if rates go down after the purchase date, the penalty will be less than shown.
2) If the contract rate is lower than current rates on new money, a negative adjustment is made in the cash value. Therefore, if rates go up after the purchase date, the surrender penalty will be higher than shown.
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.
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.
N
Name of Annuity
Companies assign a marketing name to each of their annuities as a means of identification.
Non-Qualified Annuity
Any annuity which is not part of a Qualified Pension plan or IRA. Premium to fund the annuity has already been taxed to the individual. Accrued interest is taxable when withdrawn.
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").
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.
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.
O
Old Money Rates or Renewal Rates
The Old Money Rate is that rate declared by the company after the initial rate guarantee. After the initial interest rate guarantee the company decides what the interest rate will be for the following policy year. This rate is based on the company's original investment portfolio and how the company designed the product.
For example, if the annuity policy at the time of issue paid a “current rate” of 7.50% which was guaranteed for one year and had a "base rate" of 6.50%, the company could declare a new interest rate for the second policy year of 6.0%. Each policy year thereafter the company would declare a new interest rate for that policy year.
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.
P
Penalty for Early Withdrawal
Charge imposed for early termination of the contract. Generally a percentage of the value surrendered. AKA Surrender Charge.
Point to Point
An indexing method under which index growth is measured between two points in time.
Probate Free Death Benefit
If payable to a named beneficiary, annuity death benefit proceeds avoid the expense, delay and publicity of the probate process.
Participation Index Rate
The amount of the percentage change (which is set by the company) used to determine the amount to be credited to your policy for that year. If the Participation Index Rate was 90% and the percentage change of the S&P 500 Index was 10%. Then the 10% change would be multiplied by the Participation Index Rate of 90% resulting in an Interest Rate of 9.0% being credited to your policy for that term.
Percentage Change
The change in the S&P 500 Index from the beginning of the term to the end of the term expressed as a percentage. The term could be one policy year, 5 policy years or 7 policy years etc. If the S&P 500 was 500 at the beginning of the policy year and closed at 550 at the end of the policy year, there would have been a 10% increase in the S&P 500 Index. In years where the S&P 500 Index is negative the percentage credited to your policy is (0). In this case there would be no change in your policy value.
Premium Bonus
Additional money that is credited to the accumulation account of an annuity policy under certain conditions. First, the amount of money credited to the policy is calculated as a percentage of your initial premium. Secondly, the money credited to you accumulation account "vests" in your policy after a certain number of years.
For example; if your initial premium is $10,000 and the policy pays a 4.0% premium bonus and vest in years 6 through 9, your policy is credited with $400.00. The $400.00 earns interest as if it were your original premium, however if you surrender your policy, during the first 5 years you DO NOT receive the Premium Bonus and the interest it earns. During year 6, 7, 8 and 9 you "vest in to” 25% of the Premium Bonus and its earned interest each year.
Penalty Applied From Date Of:
The date the clock starts running for early surrender penalties.
CONTRACT: The penalty period begins on the date of the contract, not from the date of future premiums, if any are made. All single premium annuities use this method and most flexible premium annuities as well.
PREMIUM: Some flexile premium annuity penalties are based on date of deposit, not the date of the contract. They generally use the First in Firs Out (FIFO) method to determine if a penalty is applicable.
Penalty Waived with Pay Out Over
Most companies waive the surrender penalty if the cash value is paid out or annuitized over a minimum period of time, usually five years or longer.
Penalty Waived at Death of
Most annuities waive all surrender penalties in the event of death of the annuitant or some waive penalties at the death of the owner. Some waive penalties at the time of death of the annuitant or owner. A few annuities do not waive penalties at death of the owner and annuitant.
Parties to an Annuity
All annuities will have three parities named in the annuity application.
1) OWNER: This is the person or organization that owns and is in control of the money in the annuity. Whenever possible, it is always recommended that the owner and the annuitant be the same person. Joint ownership is normally not recommended.
2) ANNUITANT: Must always be a natural person and is used as the measuring life in traditional annuities.
3) BENEFICIARY: Upon death of the annuitant, the full value is paid to the stated beneficiary, normally without surrender charges. In most cases, this avoids the delays, expenses and frustrations of probate. It is easy to change beneficiaries in the future if desired.
a) Primary Beneficiary: The natural person and/or organizations who will receive the proceeds. Multiple beneficiaries may be named to share as directed
b) Contingent Beneficiary: The natural person and/or organizations who will receive the proceeds if the primary beneficiary dies before the annuitant. Multiple beneficiaries may be named to share as directed
c) OPTION: Contingent Owner: The person or organization that inherits the contract at the death of a natural person owner. Sometimes called the Owner’s Beneficiary.
Policy Year
The 12-month period following the Policy Date of the contract. The first policy year starts on the policy date. Each subsequent year starts on the anniversary of the policy date.
Periodic Premium Deferred Annuities
These annuities are offered to provide individuals incentive to start a systematic savings alternative to the Single Premium Annuity.
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.
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.
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.
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.
Primary Beneficiary
Beneficiary of a life insurance policy who is first entitled to receive the policy
proceeds on the insured's death.
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.
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.
Q
Qualified Annuity
Any annuity which is part of a Qualified Pension plan or IRA. Withdraws from the annuity are fully taxable to the annuitant when withdrawn. 457 plans are not considered qualified.
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
Plans that qualify for favorable tax treatment under the Internal Revenue Code, and
are subject to restrictive rules and extensive regulations. Qualified plans are secured by a trust, as opposed to a nonqualified plan.
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
R
Rollover
The transferring of funds accumulated within an employer sponsor retirement plan to another employer sponsored retirement plan or IRA.
Real Return
The return on an investment after the rate of inflation is factored in.
Retirement Income Option
Systematic payments of the annuity value. Payment options vary.
Risk Tolerance
An investor’s ability and willingness to tolerate risk to principal.
Rate Guaranty Period
The period of time, usually listed in years, that the company agrees to pay the initial rate.
Rate Bonus
Some annuities pay a bonus on the base rate. For example, if the base rate is 6.00% and there is a 1.00% bonus in the first year, the EAY will be 7.00%.
Rate Subject To
After the initial rate period, the rate is subject to:
FLOAT: The rate may float up or down depending on the type of annuity, prevailing interest rates and where the insurance company invested the premium
RANGE: Annuities with a bail-out clause will normally be found in this category. The bail out rate is usually lower than the initial rate. It is a protection rate during a period of falling rates.
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.
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.
Representative
Someone who is authorized to act on your behalf, such as an executor or a trustee.
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.
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
S
Section 1035(a) Exchange
The tax-free exchange of one nonqualified annuity contract or life insurance policy for another with a different company. For example the transfer of a life to life; life to annuity; annuity to annuity policy. Partial transfers are also permitted.
Serial Issue
A number of annuity contracts, issued by the same company within a twelve month period to the same owner.
Settlement Options
The methods by which the insurer may pay annuity or life insurance policy proceeds to the annuitant, contract owner, policy owner or beneficiary.
Single Premium Deferred Annuity (SPDA)
An annuity contract that accepts a one time payment.
Surrender Charge
A charge imposed for early termination of the contract or for withdrawing funds over the allowed amount. These charges are stated in the contract and are generally level or decreasing percentage of the amount of the surrender.
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.
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 taxexempt 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.
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.
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 Approach
A benefit funding technique wherein assets are set aside in order to accumulate the
necessary funds to pay future benefit expenses.
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.
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.
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 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.
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.
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.
T
Transfer
The direct transfer of funds from one financial institution to another financial institution for the benefit on an individual. For example; the transfer of IRA funds from a bank to an insurance company. The check issued to the insurance company is for "the benefit of James Jones". The direct transfer avoids the 20% withholding since the check is issued an institution "for the benefit of James Jones" and is not paid directly to James Jones.
Term
The time period during which surrender penalties are imposed. Other features suck as participation rates and cap rates may or may not be guaranteed over this period.
Tax Deferred Accumulation
Taxes on current income are deferred until withdrawn. Values grow more quickly than taxable vehicles since money that is otherwise paid in taxes is retained and continues to earn compound interest.
Tax Status of Annuity
Annuities may be purchased with two types of money.
NON-QUALIFIED: Purchased with After Tax dollars. Income taxes have been paid on the principle. This is just plain old money.
QUALIFIED: Purchased with Pre Tax dollars. Income taxes have never been paid on this money. Such as an: IRA, TSA, 403b, SEP or Pension Plan.
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.
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.
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 Trust
A 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.
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.
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.
U
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.
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.
V
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.
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.
W
Waiver Options
In certain circumstances such as nursing home or LTC confinement, terminal illness, unemployment or disability surrender penalties may be partially or entirely waived.
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.
Will
A person's written declaration of desires for disposal of his or her property after
death