Glossary
Definitions for complex financial terms
When you are learning about the different vehicles for financial planning, sometimes it can be difficult to keep up with all the different terms and acronyms that are used. We hope this glossary helps you in your quest to take control of your financial future!
| Term | Definition |
|---|---|
| 529 Programs | Based on the Internal Revenue Code section that created qualified tuition programs, a 529 is an account into which persons deposit funds to save for university-related expenses. The funds in a 529 account are tax-deferred and, if used directly to pay for college, tax-exempt at the federal level. A 529 generally allows larger annual contributions than the Coverdell IRA. However, certain limits still apply. |
| Annual Renewable Term (ART) | A term life insurance policy where the premium increases annually, while the coverage stays the same. |
| Annuitant | A person who receives an annuity. |
| Annuitization | The act of converting the assets in a deferred annuity into income payments. |
| Annuity | A periodic payment to the annuitant that begins at a specified date and continues for a fixed period or for the duration of a designated life or lives. |
| Bond | A promise to repay the principal along with interest (coupons) on a specified date (maturity). When an investor buys a bond, he/she becomes a creditor of the issuer. |
| Business Continuation Planning | Developing and implementing a plan of succession for your business. Usually called a “buy-sell” agreement, it determines who will take over your business should you die prematurely, become disabled, or simply decide to retire. |
| Cash Value Life Insurance | Cash values can be borrowed against tax-free to help fund your child’s education or supplement retirement income. Cash values generally are not included as an asset for the purposes of calculating financial aid for college.* *Certain limitations may apply to loans and withdrawals. Policy loans and withdrawals will reduce the death benefit and cash values, and may be taxable under certain circumstances. |
| Charitable Gift | Allows you to distribute a portion of your assets to selected organizations—when and in whatever amounts you designate—thus reducing the amount of taxes you owe. |
| Charitable Remainder Trust | Passing income from assets to your beneficiaries, and at their death, passing the assets on to a charity, thus removing them from your taxable estate. |
| Coverdell IRA (formerly known as an Educational IRA) | Eligible parents, grandparents, and others may make annual non-deductible contributions to a Coverdell IRA for a child under 18, subject to certain maximum limits. |
| Death Benefit | The amount of money to be paid under the terms of a life insurance policy to the designated beneficiary upon the death of the insured. |
| Deferred Annuity | An annuity contract designed to build wealth, where the right to the annuity income is deferred until a future date. Money invested grows tax-deferred until withdrawn. |
| Disability Insurance | Insurance providing income to a policyholder who is disabled and cannot work. |
| Dividends | A return of premium issued by a life insurance company to participating, permanent life policy owners. Dividend amounts are based on the mortality experience, expenses, and performance of the company for the previous year. Dividends are not guaranteed. |
| Fixed Annuity | An annuity that earns fixed interest at rates guaranteed by the insurance company. |
| Immediate Annuity | An annuity contract designed to distribute funds, where income payments begin within one payment interval of purchase. Typically, purchasers can choose monthly, quarterly, semi-annual, or annual income payments. |
| Insured | The person(s) whose life is covered by a life insurance policy. |
| IRA | An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for retirement savings in the United States. Primarily, it allows your money to grow tax-deferred. If you are under the age of 70½ and you earn an income, you may contribute to a Traditional IRA. If you are married, your non-working (non-income producing) spouse may also contribute to their own IRA. |
| Irrevocable Life Insurance Trust | The Irrevocable Life Insurance Trust (or "ILIT") is often the preferred alternative for individuals who wish to exclude the insurance from the taxable estate, yet maintain at least some measure of indirect control over the management of the policy and proceeds through instructions incorporated into the trust. |
| Level Term | A term insurance policy where premiums are the same amount annually until the end of the term. |
| Life Insurance | Insurance providing for payment of a sum of money to a named beneficiary upon the death of the policyholder. |
| Living Trust | A trust that an individual establishes during his or her lifetime, enabling the person to control the assets contributed to the trust. A living trust allows for the passing of assets to heirs without the expense, publicity, and delay of probate. |
| Loan Provision | The ability to borrow funds from the policy account within a permanent policy. |
| Long-Term Care Insurance | Enables you to transfer some of the financial risk of potential long-term care costs to an insurance company, and can cover a wide range of services, from nursing home care to assisted living and community-based care. |
| Medicare | Medicare is the U.S. Government’s health insurance program for eligible people aged 65 and older and some disabled individuals. |
| Medicaid | A U.S. government program, which is financed by federal, state, and local funds, to provide hospitalization and medical insurance for persons of all ages within certain income limits. |
| Minimum Guaranteed Interest Rate | Most fixed annuities and fixed accounts offer a minimum guaranteed rate. Renewal interest rates are guaranteed never to fall below the guaranteed minimum. |
| Mutual Funds | Pooled funds that are professionally managed, allowing low initial investments and a wide range of growth objectives. |
| Non-Qualified Dollars | Income that has already been subject to income taxes (eg, your paycheck). |
| Non-Qualified Premiums | Premium payments paid with money that has already been taxed. |
| Permanent Life Insurance | A company’s promise to pay a specified amount upon the death of the insured. Offers lifelong protection and you can accumulate cash value on a tax-deferred basis. Premiums are considerably higher than what you would pay for a term policy with the same face amount. |
| Policy Owner | The person who has all rights to the insurance policy. |
| Probate | The legal process to authenticate (or “prove”) the deceased’s will. Probate authorizes the executor of a will to dispose of assets according to the deceased’s wishes, as well as pay taxes and other debts out of estate assets. |
| Prospectus | A legal document that provides complete detail about an investment opportunity. Prospectuses are filed with the Securities and Exchange Commission and contain required information presented in a standard format. |
| QTIP Trust | Passing income and principal from assets on to a surviving spouse, while ensuring the assets pass to a named individual after the spouse’s death. |
| Qualified Dollars | Income that has not yet been subject to income tax (e.g. your salary, before deductions have been taken for federal and state income taxes). |
| Stock | An ownership share in a company. |
| Sub-Account | Sub-accounts are the investment portfolios offered in variable life insurance policies and annuity contracts where premiums may be allocated. |
| Survivorship Life Insurance | A permanent life insurance policy that covers two people. The death benefit is paid upon the death of the surviving insured. |
| Tax Deferral | The postponement of income taxes on earnings from the current year to a future date. |
| Term Life Insurance | A life insurance policy that guarantees coverage until the end of a term. Nothing is paid if the insured survives the end of that period. |
| Trust | A legal agreement or entity that is set up to manage or invest assets for one or more beneficiaries. Trusts are generally used to reduce or eliminate taxes, control assets, and/or provide for individuals who may be unable to manage their own finances. |
| Universal Life Insurance | A permanent life insurance policy in which the payments of the insured are placed in an investment fund, earnings from which pay the premium on term life insurance while any remainder continues to increase the policy's value. |
| Variable Annuity | An annuity that offers investment choices that vary in value based on the value of underlying investments such as stocks, bonds, and/or money markets. Variable annuities may also include a fixed and/or market value adjustment account. |
| Variable Universal Life Insurance | A type of universal life insurance in which the policy owner directs how the cash value will be invested, and thus bears investment risk to which the death benefit is linked. |
| Will | A legal declaration of how you want your assets to be distributed when you die. |
| Withholding Trap | When you have to pay income taxes, and possibly penalties, on money you are transferring from one retirement plan to another. The trap is triggered when you request a distribution from your qualified plan in the form of a check made payable to you. |
Now, you may want to use the Worth for Women Calculator to determine the value of your contributions.
