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Glossary of financial terms

This section contains a condensed listing of words and phrases that are commonly used in retirement planning.

A

A-share variable annuity: A form of variable annuity contract where the contract holder pays sales charges up front rather than eventually having to pay a surrender charge. 

Account maintenance fee:
A fee a financial provider charges for administrative expenses including the expense for establishing and maintaining the variable account option. 

Account value: The value inherent in an annuity to the annuitant if (s)he does not surrender the contract. Cash surrender value is that value net of penalties which is stated in the contract. These penalties usually last seven years. At the end of year seven, account value equals surrender value. 

Accumulation period or accumulation phase:
The period of time, prior to retirement, during which an annuitant is making payments or investments in an annuity. Such payments will accumulate on a tax-deferred basis. 

Accumulation unit value (AUV):
An annuity's sub-account price per share during the accumulation phase. It's the net asset value after income and capital gains have been included and sub-account management expenses have been subtracted. 

Accumulation value: The amount of money, consisting of premiums paid, any expense charge deductions and interest credited, that accumulates under an annuity contract during the accumulation phase. 

Active fund management style: Fund manager actively analyzes and trades in securities that meet the overall objective of the fund. As its name implies, an active fund management style is more aggressive than passive fund management style. 

After-tax: The effective cost of, or return from, an investment, after the tax liability or credit has been taken into account. 

Aggressive growth fund:
A mutual fund whose primary investment objective is substantial capital gains, as opposed to current dividend income, and usually at above-average risk. 

Annual annuity contract fee: Covers the cost of administering an annuity contract. 

Annual insurance fee: This covers mortality and expense (M & E) risk charges and other administrative expenses. It also provides for a guaranteed death benefit and for lifetime guaranteed income payouts. 

Annual payment annuity: An annuity that was purchased by the payment of annual premiums for a specified period of time. 

Annual policy fee:
This covers the costs of maintaining and administering an account during the accumulation phase. It is often waived, however, when an account's value reaches a certain level (which is stated in the contract). 

Annual sub-account fee: A fee deducted for fund operating costs, management fees, and other asset-based costs incurred by the fund. This charge is assessed at the sub-account level and is not deducted from policy values. 

Annuitant: The person(s) who receives the income from an annuity contract. Usually the owner of the contract or his or her spouse. 

Annuitization:
The conversion of the account balance of a deferred annuity contract to income payments. 

Annuitize:
To begin a series of payments from an annuity. When someone who has been investing in an annuity retires, the built-up capital is annuitized and a payout schedule is selected according to need. The insurance company that sold the annuity then pays a fixed-dollar amount for an extended period of time, often the rest of the policyholder's life. 

Annuity:
Form of contract sold by life insurance companies that guarantees a fixed or variable payment to the annuitant at some time in the future, usually retirement. Annuities are either immediate or deferred. Immediate annuities are single-premium contracts that begin paying installments immediately. For example, an immediate monthly annuity would begin payments to the annuitant one month after the premium was paid and the contract issued. A deferred annuity is one in which payments to the annuitant are delayed to a specified future date, usually called the annuity date. Prior to the annuity date, during the accumulation phase of the contract, the cash values of the annuity accumulate tax deferred, with specific contractual guarantees and at competitive interest rates. During the payout phase, a fixed annuity will ultimately pay out the accumulated value in regular installments varying only with the payout method selected. In a variable annuity, the cash accumulations reflect the performance of an underlying portfolio of investments such as stocks and bonds. While these investments can provide a hedge against inflation and an increased opportunity for growth, there is also the risk that investment performance will be poor and that an annuity's value will decrease or be lost. Unit values and variable annuity payments will depend on the value of the underlying investments. 

Annuity administrative charges:
Cover the cost of customer services for owners of variable annuities. 

Annuity beneficiary: In certain types of annuities, a person who receives annuity contract payments if the annuity owner or annuitant dies while payments are still due. 

Annuity certain: An annuity that pays income for a fixed number of years regardless of whether the insured lives or dies. If it pays for life after the certain period, it is called an "annuity certain and for life thereafter." 

Annuity contract:
The written agreement between an insurance company and a customer outlining each party's obligations in an annuity coverage agreement. An agreement similar to an insurance policy for other insurance products such as auto insurance. 

Annuity contract owner:
The person or entity that purchases an annuity and has all rights to the contract. Usually, but not always, the annuitant (the person who receives income from the contract). 

Annuity death benefits: The guarantee that if an annuity contract owner dies before annuitization (the switchover from the savings to the payment phase), the beneficiary will receive the value of the annuity that is due. 

Annuity due:
An annuity under which the benefits are paid at the beginning of the benefit period rather than at the end. 

Annuity insurance charges:
Covers administrative and mortality and expense risk costs. 

Annuity investment management fee:
The fee paid for the management of variable annuity invested assets. 

Annuity issuer:
The insurance company that issues the annuity. 

Annuity option:
A method of liquidating and distributing an annuity's principal and interest designed to last for the lifetime of the annuitant. 

Annuity period:
The period of time, usually at retirement, during which the annuitant begins to receive annuity payments or benefits from the insurance company. 

Annuity prospectus:
A legal document providing detailed information about variable annuity contracts. Must be offered to each prospective buyer. 

Annuity purchase rate: The cost of an annuity based on such factors as the age and gender of the contract owner. 

Annuity with period certain:
An annuity that pays throughout the life of the insured, but also guarantees to pay income for a specific number of years regardless of whether the insured lives or dies. If the insured is living at the end of the time specified in the policy, benefits continue beyond the guaranteed period until the death of the insured. 

Appreciation: An increase in the value of a property, such as the market value of a stock. For real estate, it is often expressed as a percentage increase per year. 

Asset:
Property that a person or business owns which has commercial or exchange value. Personal assets may be classified as financial (cash, gold, savings, stocks) or non-financial (real estate, automobiles, furniture). Business assets may be classified as current (convertible into cash within one year) or long-term (used in the production of income and not readily convertible into cash). 

Asset allocation:
A method of portfolio management that allows investors to determine an appropriate portfolio mix to produce the maximum reward given the level of risk they are willing to accept. It involves assigning a percentage weight to various asset classes – in combination they are called a portfolio. 

Asset category:
A broad group of assets that corresponds to a traditional investment objective -- such as growth, income or stability. Stocks represent the asset category for growth, bonds for income, and cash equivalents for stability. 

Asset class:
A group of assets that is similar in type and investment objective, for example, large company stocks or international government bonds. 

Asset management fee:
Fees charged by the investment advisor to manage the assets in a plan. 

Assumed interest rate (AIR): An assumed value which is assigned to the annuitant's account during the annuity period. It is an estimated return for the separate account. Monthly annuity payments are based on the AIR in relation to the actual rate of return experienced by the separate account of a variable annuity. 

Average annual return:
See "Historical mean return." 

Average recovery time:
How long it will take, on average, to recover from an average statistical loss. 

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B

B-share variable annuity: A form of variable annuity contract with no initial sales charge, but if the contract is canceled, the holder pays deferred sales charges (usually from 5 to 7 percent the first year, declining to zero after from five to seven years). This is the most common form of annuity contract. 

Back-end load fund: An open- or closed-end investment company that charges a fee upon the redemption or sale of its fund shares. Typically, loads are reduced based on the value of the shares and/or the passage of time. Are also referred to as Class B shares. 

Balanced mutual fund: A mutual fund that purchases common stock, preferred stock and bonds. Such funds tend to be less volatile than all-equity funds, potentially outperforming them in a declining market, but potentially underperforming them in a rising market. 

Basic medical insurance:
Insurance that provides coverage for normal hospital expenditures, surgical expenses and other miscellaneous expenses. Only expenses that are incurred while the insured is in the hospital are covered. 

Beneficiary: A person designated to receive the income or other benefits from a will, insurance policy, annuity contract, trust, etc. 

Beta coefficient:
Measure of a stock's relative volatility. The beta is the covariance of a stock in relation to the rest of the stock market. The Standard & Poor's 500 Stock Index has a beta coefficient of one. Any stock with a higher beta is more volatile than the market, and any with a lower beta can be expected to rise and fall more slowly than the market. 

Blue chip stock:
The common or preferred stock of well-known, major corporations that is traded on a national stock exchange. Blue chip status is derived from long periods of earnings growth, dividend payments and financial stability. 

Bond: A certificate of debt or negotiable promissory note of a corporation or public body that promises to repay on a maturity date some years in the future and to pay periodic interest until then. 

Bond fund: A fund that holds corporate, municipal or U.S. Treasury bonds, or a combination of those in the attempt to earn as much income as possible. Certain types of bonds such as investment grade or U.S. government bonds tend to be less riskier than high yield corporate bonds.  

Book value per share:
The value of a single share of stock, calculated by dividing a company's net assets (i.e., assets minus liabilities) by the total number of shares issued. 

Brokerage firm: A company in the business of handling orders to buy and sell securities and commodities for a commission or fee. 

Budget: A tool for planning short-term income and expenditures in order to achieve long-term financial goals. The budget shows income and expenses within a given period of time. 

Buy and hold strategy:
Contributions and assets are allocated to various types of investments and held for extended periods of time. This is the opposite of "market timing." 

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C

C-share variable annuity: A form of variable annuity contract where the contract holder pays no sales commissions up front or surrender charges. Owners can claim full liquidity at any time. 

Capital: Wealth in the form of money or property, which is usually available for investment. 

Capital appreciation:
An increase in the market value of an investment. 

Capital asset: Financial assets such as stocks or bonds. 

Capital gain/loss:
The difference between the sale price of a capital asset — such as a mutual fund, stock or bond — and the original cost of the asset. 

Capital gains (in a mutual fund):
Payments made to mutual fund shareholders that come from the profits a fund makes on the sale of its securities. Such payments may be automatically reinvested in the shareholders’ accounts. 

Capital value:
The worth of capital assets. 

Cash equivalent:
A short-term investment with a high degree of safety that can be converted to cash quickly (i.e., T-bills and money market instruments). 

Cash flow statement:
A listing of the sources and uses of the cash receipts and cash outlays of a person or business. 

Cash refund annuity:
A form of annuity contract which provides that if at the death of the annuitant installments paid out have not totaled the amount of the premium paid for the annuity, the difference will be paid to a designated beneficiary in a lump sum. 

Catch-up contribution:
An additional amount over basic IRC limits that participants age 50 or older may contribute to eligible retirement plans. 

Certificate owner:
The person or entity that purchases the annuity. 

Certificate of deposit (CD):
A receipt issued by a bank for a cash deposit for a specified period of time at a fixed rate of interest (determined by the marketplace). Upon maturity, the bank pays the depositor the principal plus all accumulated interest. Negotiable CDs may be transferred before maturity; non-negotiable CDs are not readily transferable, and early withdrawals are subject to interest penalties. 

Charitable gifts:
Donations of cash, tangible or intangible property to eligible recipients, usually tax-exempt organizations. 

Closed-end fund:
A fund that is operated with a limited number of shares outstanding. A closed-end fund starts with a set number of shares, often listed on an exchange, where they are traded like any other stock. 

Coinsurance: For most major medical insurance policies, the portion of medical expense the covered person must bear once the deductible has been satisfied, commonly 20% to 25%. 

Collective trust: An investment option that is established for the collective investment of institutional investors (i.e., qualified pension plans). 

Commercial paper:
Short-term obligations with maturities ranging from two to 270 days issued by banks and corporations to investors with temporarily idle cash. Such instruments are unsecured and usually discounted, although some are interest-bearing. 

Commodity futures: A contract providing for the delivery of a tangible asset at a specified future date and price. The commodities traded in futures markets include cocoa, copper, corn, eggs, frozen concentrated orange juice, lumber, oats, wheat and soybeans. Commodities futures are traded to profit from price changes or provide cash flow to producers and shippers. 

Common stock:
A security representing ownership of a corporation's assets. The right of common stock to dividends and assets is subordinate to the rights of bonds, preferred stocks and other creditors. Generally, shares of common stock carry voting rights. 

Common stock fund:
A fund where the portfolio consists primarily of common stocks. At times, such a fund may take a defensive position in cash, bonds and other senior securities. 

Commodities:
Generic term for anything bought or sold or any article of commerce that is traded on national exchanges. 

Community property: Property owned in common by a husband and wife as a kind of marital partnership. Defined by statute in the various states in which community property is recognized. 

Compounding: The accrual of interest earned on an investment and its reinvested earnings. 

Comprehensive major medical insurance: A medical insurance plan that combines basic hospital, surgical and medical expense coverage with traditional major medical protection to form a single policy. 

Consequential losses:
Indirect losses (i.e., those that occur in connection with or as a result of the direct or main loss). Some policies cover only direct losses, others cover both direct losses and indirect losses. 

Consumer Price Index (CPI):
Measure of changes in the cost of consumer goods (housing, food, transportation, medical care, entertainment, etc.). The U.S. Department of Labor calculates the index each month from the cost of items in urban areas across the nation. 

Contingent annuity:
An annuity in which payment of benefits is contingent upon the occurrence of an uncertain event, such as death of a person not an annuitant. For example, an annuity might be purchased to pay benefits to a wife in the event of the death of her husband. 

Contingent annuitant:
A person who will receive annuity payments in case the first annuitant dies before annuity payments begin. 

Contingent deferred sales charge:
Also called “back-end load” or “redemption fee.” The sales charge or commission paid when selling or taking money out of an investment such as a mutual fund or annuity. 

Contribution allocation/mix change:
Changing how the participant’s future payroll deductions are divided among stocks, bonds and short-term reserves. This action affects only future payroll deductions. It does not affect money already deposited in the participant’s account. 

Convertible securities:
Securities carrying the right (either unqualified or understated conditions) to exchange the security for other securities of the issuer. Most frequently applies to preferred stocks or bonds carrying the right to exchange for given amounts of common stock. 

Corporate bond:
A debt security issued by a corporation at a given rate of interest for a specified term, usually in units with a par value of $1,000. 

Correlation coefficient: A number that expresses the amount of similarity or dissimilarity in behavior between two asset classes. 

Credit life insurance: A type of life insurance sold in conjunction with installment loans that decreases at the same rate as the balance on the loan. This type of policy is often required by a lender to be taken out by a borrower to cover a substantial loan or large installment purchase. 

Current yield: Annual return on a bond, computed by dividing the annual coupon rate by the market price. Current yield equals the coupon rate for bonds purchased at par and exceeds it for bonds purchased at discount. 

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D

Death benefit: The payment made to a beneficiary from an annuity policy when the policyholder dies. Also called a survivor benefit. 

Debenture: A bond that is backed only by the general credit of the issuer. 

Debt: The amount owed to creditors. 

Debt securities:
Securities that provide interest payments as compensation for the use of an investor's (i.e., lender's) funds. These payments usually last for a specific period. The principal (original loan amount) is usually paid at the end of this period. Some debt securities are backed by the credit of the issuer (i.e., Treasury bonds are backed by the credit of the U.S. government). However, other debt securities are backed by specific assets of the issuer. These securities are known as asset-backed bonds. 

Declaration: Descriptive material in insurance policies relating to the subjects covered, persons injured, premiums charged, period of coverage, policy limits and warranties or promises made by the insured regarding the nature and control of various hazards. 

Deductible: Amounts not covered by an insurance policy. The deductible is paid by the insured or by another insurance policy. 

Deferred annuity:
An annuity in which payments to the annuitant (or named beneficiary) are to begin either at a stated number of years in the future or when the annuitant reaches a certain age. During the accumulation period, the cash values of the annuity accumulate on a tax-deferred basis. 

Deferred compensation:
Arrangement through which the compensation to the employee for past or current services is postponed until some future date. 

Defined-benefit plan:
An employer-sponsored retirement plan under which the benefit the employee is to receive in the future is based upon a predetermined formula. (Example: $10 per month income at retirement for each year employed.) The amount of the required annual employer contributions depends on the level of benefits to be provided and the estimated number of years in the accumulation period. 

Defined-contribution plan: An employer-sponsored plan under which the amount of the employee's retirement benefit is determined by contributions, not a predetermined formula. The amount of the employee's benefit equals the accumulated contributions plus earnings the fund will produce in terms of a retirement income or lump-sum payment. 

Deposit administration: A group annuity providing for the accumulation of contributions in an undivided fund out of which annuities are purchased for each covered person in the group for retirement purposes. 

Deposit administration group annuity:
A group contract providing a deposit fund prior to retirement, with annuities bought from the fund at retirement. 

Depreciation: A form of tax deduction that permits the recovery of the cost of an asset over its useful life in the form of tax savings. It is a bookkeeping entry and does not represent a cash outlay. The simplest method is straight-line depreciation, which allocates a constant amount each year during an asset's life. For example, an asset with a useful life of 10 years and no salvage value would generate an annual deduction of 10% of its cost. Accelerated depreciation is a method that permits deduction of a greater percentage of the cost of an asset in the early years of the asset's useful life with smaller deductions in later years. Examples of accelerated depreciation are the double-declining balance and the sum of the years-digits method. A recent method put into use is the Accelerated Cost Recovery System (ACRS), which applies accelerated methods of cost recovery over statutory periods. 

Derivative security: A financial security whose value is determined, in part, from the value and characteristics of another security. 

Disability insurance: Insurance designed to provide the insured person with specified payments for a specified period of time to replace income if the person is unable to work as a result of a covered illness or injury. 

Distributions: Withdrawals from an employer-sponsored retirement plan or IRA typically made after the participant leaves the company. These may or may not be participant-initiated. Plan rules sometimes require full distribution of account balances below a specific minimum amount. Federal tax law requires distributions begin after a certain age or retirement. 

Diversification:
The combination in a portfolio of assets that have dissimilar behavior. 

Dividends (investments):
The portion of a corporation's earnings that it distributes among its stockholders, in proportion to the number and kind of shares they own. The decision to pay dividends is typically made by the board of directors, and they usually are paid quarterly, in the form of cash, stock, or rarely, some other property. Preferred stock dividends usually are fixed over a period of time, whereas common stock dividends are more dependent on the company's earnings and current cash position. 

Dollar-cost averaging: A system of buying a fixed-dollar amount of securities at regular intervals. For example, the investor buys more shares when the price is low and fewer shares when it rises. The average price per share should be lower than it would have been had the investor periodically bought a fixed number of shares.

Double indemnity: A rider to a life insurance policy that provides the beneficiary with an amount equal to twice the face amount of the policy if the insured dies an accidental death.


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E

Earnings: Something earned, especially wages. As a financial term, earnings also refers to the balance of revenue after deducting costs and expenses. 

Earnings income:
Interest or dividends that are credited or paid to an investor. See "Income." 

Efficient portfolio: A portfolio that minimizes historical portfolio risk for a given potential return, or maximizes portfolio potential return for a given level of historical risk. 

Employee stock ownership plan (ESOP): A plan for profit sharing by employees in the companies for which they work. A company introducing an ESOP subscribes cash for common stock (shares) of the company that are deposited with a trust for the benefit of all participating employees. The stock does not usually immediately become the property of the employees, but is vested with them gradually over a period of time. 

Endorsement:
Document used with insurance policies that modifies the policy by adding special provisions. 

Equity: An owner's interest in property or business; the market value of the property or business, less all claims and liens on it. 

Equity indexed annuity: A non-traditional fixed annuity. The specified rate of interest guarantees a fixed minimum rate of interest like traditional fixed annuities. At the same time, additional interest may be credited to policy values based upon positive changes, if any, in an established index such as the S&P 500. The amount of additional interest depends upon the particular design of the policy. They are sold by licensed insurance agents and regulated by state insurance departments. 

Employer contribution:
Money an employer contributes to a participant’s retirement plan account. 

Employer-matching contribution:
One type of contribution plan in which an employer contributes to a participant’s retirement plan account. However, the amount contributed by the company depends on how much the participant contributes, based on a predetermined formula. 

ERISA: Employee Retirement Income Security Act of 1974. The federal law that established legal guidelines for private pension plan administration and investment practices. 

Estate:
The assets and liabilities of an individual. 

Estate planning:
Planning for the orderly handling, disposition and administration of an estate when the owner dies. Estate planning includes writing a will, setting up trusts and minimizing estate taxes, perhaps by passing property to heirs before death or by setting up a testamentary trust. 

Exclusion:
Item or loss exposure not covered in a particular insurance policy. Exclusions reduce the broad coverage provided in the insurance policy. 

Expense guarantee:
One of the guarantees of all annuities; that is, the guarantee that expenses, the cost of doing business, will not be increased or exceed a certain percentage of the annuity contributions. 

Expected life:
Number of years a person is expected to live, given his/her current age. The expected life is usually obtained from a mortality table. 

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F

Federal Home Loan Mortgage Corporation (FHLMC): A publicly chartered agency that buys qualifying residential mortgages from lenders, packages them into new securities backed by those pooled mortgages, provides certain guarantees, and then resells the securities on the open market. The corporation's stock is owned by savings institutions across the U.S. and is held in trust by the Federal Home Loan Bank System. The corporation, nicknamed Freddie Mac, has created a secondary market, which provides more funds for mortgage lending and allows investors to buy high-yielding securities backed by federal guarantees. 

Federal National Mortgage Association (FNMA): A publicly owned, government-sponsored corporation chartered in 1938 to purchase mortgages from lenders and resell them to investors. The agency, known by the nickname Fannie Mae, mostly packages mortgages backed by the Federal Housing Administration, but also sells some non-governmentally backed mortgages. Shares of FNMA itself, known as Fannie Maes, are traded on the New York Stock Exchange. 

Fee simple form of ownership: The ownership of property where the owner is entitled to the entire property without conditions or limitations. 

Financial risk: Risk related to the amount of debt used in financing a company. 

Fixed annuity: An annuity that pays a set rate of interest. 

Fixed-income investment:
A security that pays a set rate of interest over the duration of the investment term (i.e., a bond). 

Fixed investment option: A fund that has a guaranteed or a “fixed” rate of interest. 

Flexible premium annuity: A deferred annuity contract that allows the owner to make continual payments. The amounts and times of these payments are often left completely up to the owner. Interest is paid from the date payments are received and the amount available to annuitize is dependent on when and how much is received. 

Flexible premium:
A premium that can be varied as to the amount and time of payment at the option of the premium payor. 

Five-year annualized total return: This percentage figure reflects a sub-account's total return (gain or loss) averaged over five years. 

Front-load fund: An open- or closed-end investment company that charges a fee upon the purchase of its shares. This fee, called "the load," is deducted from the amount invested. Also called Class A shares. 

Fund: A portfolio of stocks, bonds and/or cash equivalents. The portfolio manager buys and sells securities. 

Funded pension plan: In this type of retirement plan, the employer puts aside enough money each year to cover the cost of currently promised pension benefits. 

Futures contract:
A contract providing for the delivery or receipt of financial assets at a specified date and price. 

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G

Government National Mortgage Association (GNMA): A government-owned corporation, nicknamed Ginnie Mae, which is an agency of the U.S. Department of Housing and Urban Development. The GNMA purchases mortgages from private lenders, such as banks and savings and loans, packages them into securities called Ginnie Maes, and sells the certificates to investors. The agency guarantees the timely payment of principal and interest to the Ginnie Mae holders. 

Government savings bond:
A bond issued by the United States Treasury at a discount equal to the present value of a future interest payment. The amount paid at maturity is the face amount which, in this case, is principal and interest. 

Government securities:
Bonds and other debt instruments issued by federal agencies. Although government securities have high credit ratings, they are not backed by the full faith and credit of the federal government. 

Grantor Retained Annuity Trust (GRAT):
A trust in which the grantor substitutes retention of a right to payment of a fixed income in exchange for a fixed period of time. 

Gross estate:
Consists of all property owned directly by the decedent; property transferred during the decedent's lifetime, but with certain strings attached, annuities and life insurance benefits receivable by the beneficiary and jointly owned property over which the decedent had certain controls. 

Group annuity: A retirement plan designed for a group of persons (usually employees of a single employer) funded by a single annuity contract that is written on a group basis. 

Growth fund:
A fund with an investment objective of long-term capital growth and capital gains, rather than of current income. 

Growth and income fund: An investment with this objective seeks a combination of current income (dividends and interest) and growth (capital appreciation). 

Growth investments: Investments that allow for capital growth, but are not highly speculative, for example, mutual funds, managed equities and stocks, among others. Growth investments are riskier than conservative fixed-interest investments (certificates of deposit, government securities) but less risky than speculative investments, such as collectibles, penny stocks or commodities. 

Growth stock: A stock that has shown better-than-average growth in market price appreciation and is expected to continue to do so through discoveries of additional resources, development of new products, or expanding markets. 

Guarantee period:
Period during which the level of interest specified under a fixed annuity is guaranteed. 

Guaranteed death benefit: Basic death benefits guaranteed under variable annuity contracts which are backed by the claims-paying ability of the issuer. 

Guaranteed insurance option: Permits the policyholder to purchase up to a specified amount of additional life insurance regardless of his or her health. 

Guaranteed living benefit: A guarantee in a variable annuity that a certain level of annuity payment will be maintained. Serves as a protection against investment risks. Several types exist. 

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H

Health maintenance organization (HMO): Organization that provides members with medical services, rather than reimbursements for healthcare costs. For a fixed fee, members are covered for all hospital bills, as well as surgical bills and other medical costs. 

Hedge: An investment undertaken to offset the risk entailed by another investment. 

Historical loss risk:
The likelihood of experiencing a loss, a return less than zero measured in a probability. 

Historical mean return:
The statistical average return provided by an asset, asset category or portfolio mix over a specified time period. Also referred to as "average annual return". 

Historical variation ranges:
A statistical measure of the historical variation of asset class returns that shows the minimum and maximum returns at a given confidence level. This gives the investor a broad view of the historical characteristics of asset classes and provides a valid method for comparison of portfolio allocations. 

Holding period:
The length of time that an investor has owned a capital asset. The Tax Reform Act of 1984 shortened the capital gains holding period from a year and a day to six months and a day.


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I

Immediate annuity: A product purchased with a lump sum, usually at the time retirement begins or afterwards. Payments begin within about a year. Immediate annuities can be either fixed or variable. 

Immediate payment annuity:
An annuity that is purchased with a single payment and begins to pay out right away. 

Income:
Earnings, generally from interest or dividends, which are credited or paid to an investor. 

Income bond: A type of bond on which interest is paid only when earned by the issuing entity. 

Income/Income dividend:
Payment to mutual fund or variable account shareholders of interest or dividends generated by a fund’s investments. These are reinvested in the shareholders’ accounts. 

Income fund:
A fund whose investment objective is current income rather than capital growth. Income funds are often invested in bonds and other fixed-income securities. 

Income investments:
Interest-bearing corporate or government bonds. The issuer must pay the bondholder a specified sum of money on a specified maturity date and pay periodic interest until that time. Bondholders have no corporate ownership privileges. 

Indemnity:
Insurance compensation for loss or injury sustained. 

Index:
A tool that is used to measure the performance of the economy, a particular market or a group of investments (i.e., the S&P 500 Index). 

Indexing:
A method of investment in funds by which the portfolio manager seeks to emulate the performance of a broad-based index (i.e., the S&P 500 Index). 

Individual retirement account or annuity (IRA): A personal investment account that may be established by any individual who has earned income. Annual contributions to an IRA may be deductible from gross income in the calculation of federal and state income taxes (this is severely restricted by Tax Reform 1986 and state laws vary). Income taxes on the earnings are deferred until withdrawal or when annuity payments begin, usually at retirement, at which time the untaxed contributions and earnings are taxed as ordinary income. IRA funds withdrawn prior to age 59-1/2 may also be subject to a 10% early withdrawal penalty. IRA funds can be invested in stocks, bonds, funds, limited partnership units and annuities. Life insurance, collectibles (other than certain U.S. gold and silver coins) and any investments made on margin are prohibited. 

Individual retirement account rollover:
Provision of the federal law that enables persons receiving lump-sum payments from their company's pension, profit-sharing plan or other eligible retirement plan, because of retirement or other termination of employment to roll over the amount into an IRA within 60 days. Also, current IRAs may also be rolled over within the 60-day period. Through an IRA rollover, the capital continues to accumulate tax deferred until time of withdrawal. 

Inflation:
A condition in which the overall prices of goods and services continue to rise, usually caused by an undue expansion in paper money and credit relative to the supply of goods. In the U.S., the rate of inflation is measured by the Consumer Price Index. 

Inflation hedge: An investment undertaken to offset the risk of inflation. 

Inflation risk:
The risk that inflation will erode the value of an investment. Investments with low historical earnings have more inflation risk than investments that generally have had higher earnings. 

Initial public offering (IPO):
The first sale of a corporation's stock to general investors. 

In-service withdrawal: A participant-initiated withdrawal from an employer-sponsored retirement plan while the participant is still employed by the company. 

Installment refund annuity: An annuity that promises to continue the periodic payments after the death of the annuitant, until the combined benefits paid to the annuitant and to the beneficiary have equaled the purchase price of the annuity. 

Insurance:
Insurance is a method of eliminating or reducing the financial burden of risk that involves serious financial consequences by dividing the losses they produce among many individuals. 

Insuring agreement:
An agreement that documents the broadly defined coverage in an insurance policy. 

Interest on a loan:
A payment made to a lender for the use of borrowed money. 

Interest-bearing account: An account that pays interest on the money deposited. 

Interest rate risk: The risk that the value of existing investments may be adversely affected due to the changes in the level of interest rates in the capital market. 

Investment opportunity curve: The set of the most efficient portfolios for a given set of asset classes, with the asset classes constrained according to the investor's risk tolerance. 

Investment company: A corporation or trust through which investors pool their money to obtain supervision and diversification of their investments (funds). 

Investment income: Income earned from investment. 

Investment/fund objectives:Objectives indicate the investment goals of the sub account of a particular variable annuity contract. Broad investment objectives include: 

  • Growth - seek capital appreciation, not current income, through investments in stocks and stock funds. 
  • Income - seek current income through investments in interest-bearing government or corporate bonds or bond funds. 
  • Stability - seek preservation of capital through investments in cash equivalents such as fixed annuities, Treasury bills and money-market fund options. 

Morningstar's fund objectives include the following:

  • Aggressive Growth - Sub accounts seek rapid growth of capital, often through investments in smaller companies and with investment techniques involving greater-than-average risk, such as short-selling, leveraging, and frequent trading. 
  • Growth - Sub accounts seek capital appreciation by investing in equity securities of companies with earnings that are expected to grow at an above-average rate. Current income, if considered at all, is a secondary objective. 
  • Growth & Income - Sub accounts seek capital appreciation and current income equally by investing in equity securities that have above-average yields and some potential for appreciation. 
  • International Stock - Sub accounts invest heavily in foreign equity securities; domestic stocks may or may not be held. 
  • Specialty Fund - Sub accounts seek capital appreciation by investing 65% of assets in equities of a single industry or sector, such as natural resources, utilities, real estate, or precious metals. 
  • Balanced - Sub accounts seek total return by investing in both stocks and bonds through either a fixed or a highly flexible strategy. 
  • High-Yield Bond - Sub accounts seek income by investing 80% or more of their assets in bonds rated below investment grade. 
  • Corporate Bond - Sub accounts invest primarily in corporate bonds of various quality ratings (and other fixed-income securities). 
  • Government Bond General - Sub accounts seek income by investing at least 65% of assets in U.S. government securities, including a blend of mortgage-backed securities, Treasuries, and agency securities. 
  • International Bond - Sub accounts seek current income by investing at least 65% of assets in bonds (not U.S. currency-denominated bonds), which are frequently obligations of foreign governments. 
  • Money Market - Sub accounts seek to achieve a reasonable amount of current income consistent with preservation of capital by investing exclusively in short-term vehicles. 

Investment planning: Planning to achieve your investment objectives by managing your investment portfolio. 

Investment portfolio:
A collection of stocks, shares or other securities held by an investor. 

Investment risk: The risk that your invested capital may be lost or reduced. 

Irrevocable life insurance trust: Trusts used to keep life insurance proceeds of the estate of the deceased who was insured. 

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J

Joint and survivor annuity option: An option under which an employee may elect to receive a reduced amount of an annuity with a specified amount continuing after the employee's death to another person(s) designated as the contingent annuitant(s). 

Joint tenancy:
A form of ownership by which two or more joint tenants each hold an "undivided interest" in the property, each entitled to full use and disposition of the property and share in any rights and obligations.       

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K

Keogh: A tax-qualified retirement plan under Section 401(a) of the IRC which self-employed persons have the right to establish retirement plans for themselves and their employees that permit them the same tax advantages available to corporate employees covered by tax-qualified employer-sponsored plans. 

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L

L-Share variable annuities: A form of variable annuity contract usually with short surrender periods and higher mortality and expense risk charges. 

Large capitalization: A company with a relatively high total stock market value. Also known as large-cap companies, these firms usually compete in mature markets. They will utilize competitive advantages (i.e., production capabilities or low costs) to sustain consistent earnings growth. 

Leverage: The use of borrowed money or other senior capital to increase business and earnings opportunities. 

Liability: A debt or obligation. 

Life annuity:
An annuity that provides an income, paid in installments, over a person's life. 

Life with period certain: An annuity option which provides a lifetime income to the annuitant plus an extra guarantee of income for a specified period of time such as five or 10 years. The period certain provides income to the annuitant or the annuitant's survivor. 

Life expectancy: Age to which an average person can be expected to live, as calculated by an actuary. Insurance companies base their projections of benefit payouts on actuarial studies of such factors as sex, heredity and health habits, and base their rates on actuarial analysis. Life expectancy can be calculated at birth or some other age and generally varies according to age. 

Limited partner: A member of a partnership who has little, if any, role in the management of the partnership and generally limited liability. Limited partners are also called silent partners. Their potential loss is limited to their capital contribution, and usually they receive a fixed-dollar return that is payable in full before the general partner shares in any profits. 

Liquidity: The ability and availability of assets to be readily converted into cash. 

Living trust: A type of trust created by the grantor during his or her lifetime. Also called an inter vivos trust. 

Loan provision: A feature of a retirement plan that details a participant’s ability to take a loan from the plan. Loan amounts are based on the participant’s account balance. 

Long-term debt: In securities, a bond or other debt instrument with a maturity of 10 years or longer; in finance, a debt that will not come due for at least one year. 

Long-term gain (or loss): Profit (or loss) on the sale of an asset or security that has been held for longer than six months. 

Lump-sum distribution: A distribution in which the entire balance of a retirement plan is received in a single tax year.


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M

Major medical insurance: A type of medical insurance developed to meet the need for protection against a broad range of catastrophic medical expenses, whether incurred in or out of the hospital. The major medical expense benefit usually is subject to a deductible. 

Management fee: The charge made by an investment adviser for supervision of a portfolio. Frequently includes various other services and is usually a fixed or declining percentage of average assets at market value. 

Margin: The amount of money paid by investors when they use their broker's credit to buy a security. 

Marital deduction: The deduction allowed for gift tax and estate tax purposes for qualifying property transferred to the spouse. 

Market: A public place where goods and services are traded, purchased and sold. 

Market risk: The possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets. The market as a whole for an asset may decline, as in the financial crises of 1929 and 1987, and in other economic recessions. 

Market timing: A strategy, based on various economic or stock market indicators, for deciding when to buy and/or sell securities. 

Marketability:
The ability to buy or sell a security quickly, without consideration for loss. 

Market value: The current price of an asset, as indicated by the most recent price at which the asset was traded on the open market. 

Market value adjustment (MVA):
An adjustment made when withdrawals or transfers are made from certain fixed accounts prior to the end of the guaranteed interest period. The adjustment might be positive, negative or neutral, based on the difference in the selected interest rate at the time the guaranteed interest rate was established and at the time of the withdrawal or transfer. 

Maturity: The date on which a debt instrument (bond) must be repaid. 

Mean-variance optimization: Based on an approach to asset allocation developed by Harry Markowitz in the 1950s, whose goal is to provide the maximum return for a given risk or a given return for the minimum risk. 

Minimum distribution: The minimum annual required distribution amount from an employer-sponsored retirement plan account or IRA. Distributions from an IRA are required when the owner reaches age 70½. Distributions from an employer-sponsored plan are required when the participant reaches age 70½ or retires, whichever is later. Also called a required minimum distribution (RMD). 

Modern portfolio theory: A theory of managing investment risk proven by Harry Markowitz in 1955, and refined by William Sharpe. The underlying theory of asset allocation, which holds that diversification of investments among more than one asset class with opposite historical performance (negative correlation) helps to maximize return and minimize risk. 

Money market deposit account: Market-sensitive bank account that has been offered since December 1982. The funds are liquid, that is, they are available to depositors at any time without penalty. The interest rate is generally comparable to rates on money market mutual funds. 

Money market fund: A fund that invests in various short-term debt instruments (i.e., commercial paper, negotiable certificates of deposit, banker's acceptances, Treasury bills, etc.). Shares seek to maintain a net asset value of $1, but the interest rate changes daily. 

Mortality and expense (M&E) risk charge: A fee that covers such annuity contract guarantees as death benefits. 

Morningstar rating: A rating of annuity products based on their quality as measured by Morningstar, a leading, independent provider of investment information. Annuity sub-accounts are rated with one to five stars, with five being the best possible rating. 

Mortgage-backed security: Security collateralized by mortgages that are issued by federal, state and local government agencies and private institutions. Designed to be long-term investments. 

Municipal bond: A bond issued by a state, state agency or authority, or a political subdivision (county, city, town or village). In general, interest paid on municipal bonds is exempt from federal income taxes and from state and local income taxes within the state of issue. 

Municipal bond fund: Unit investment trust or open-end company whose shares represent diversified holding of tax-exempt securities, the income from which is exempt from federal taxes. 

Mutual fund:
A fund established by an investment management company to invest the pooled money of individual shareholders in a diversified portfolio of securities selected to meet stated goals (for example, current income, capital growth). New shares are sold and outstanding shares redeemed on demand; all transactions are made at the fund's net asset value, which fluctuates daily. Funds offer shareholders diversification, liquidity and professional management. 

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N

Negative correlations: Investments that react in generally opposite ways to changes in the economy are said to have negative correlations. For example, as one investment gains value, the other tends to lose value. See “Modern Portfolio Theory.” 

Net asset value:
Used by investment companies to measure net assets. It is calculated by subtracting liabilities from the value of a fund's securities and other items of value and dividing this by the number of outstanding shares. Net asset value is popularly used in newspaper mutual fund tables to designate the price per share for the fund. 

Net worth: The unencumbered amount of an individual or corporation's financial resources. Net worth is calculated by subtracting total liabilities from total assets. 

No-load fund: An open- or closed-end fund investment that charges no fees or commissions upon the sale or redemption of its shares. 

Non-forfeiture option: A benefit available from a "cash value" life insurance policy if it is canceled before the insured dies. There are usually three types of non-forfeiture options: (1) cash surrender value, (2) reduced paid-up life insurance, or (3) extended term life insurance. 

Nonqualified annuity: A type of annuity offered outside of a tax-favored, employer-sponsored retirement plan to which contributions are made with after-tax dollars. Taxes on earnings and interest are deferred until withdrawal or when annuity payments begin, usually at retirement. 

Negotiable Order of Withdrawal (NOW) account: A NOW account is similar to a checking account except that it often requires advance notice of withdrawal. It can be viewed as an interest-earning checking account. 

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O

Open-end fund: A fund whose shares are redeemable at any time at approximate asset value. In most cases, new shares are offered for sale continuously. 

Optimal portfolio:
The efficient portfolio allocation that is best suited to the individual investor's financial situation, risk tolerance, time horizon and investment preferences and, provides the lowest level of historical risk for a specific potential return, or the highest return for a given level of historical risk. See “Efficient portfolio” and “Asset allocation.” 

Optimization constraints: Constraints, or limitations, on including certain types of investments in a portfolio. Constraining the asset classes to allow for minimums and maximums of certain classes of assets prior to optimization produces "personalized" portfolios to meet a specific risk tolerance, time horizon and investment preferences. 

Optional Retirement Program (ORP):
A state-sponsored, defined-contribution plan designed to help state employees save for retirement, usually within a tax-deferred annuity or fund and often as an alternative or option (hence the name) to a state-sponsored defined-benefit plan. 

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P

Payout phase or Payout period: The period during which the money accumulated in an annuity is paid out as regular income payments. 

Passive fund management style: Fund manager seeks to emulate the performance of a particular market index. Generally more passive than the active fund management style. 

Pension fund:
Fund established by a corporation, labor union or other public or private sector organization to invest employer and, in many cases, employee contributions and administer retirement benefits. 

Pension plan:
A form of investment in which regular contributions over a period of time are invested, with the earnings reinvested, and are paid out as an allowance or other series of regular payments after retirement. The term "pension plan" usually refers to a company plan offered by an employer to employees, in which both make periodic contributions. 

Portfolio: Holding of diverse securities and financial assets by an individual or institution. A portfolio could contain, for example, stocks, bonds or stock and bond funds. 

Portfolio manager:
One of the individuals who control the assets of a mutual fund or variable account. The portfolio manager chooses and monitors investments and allocates funds. 

Portfolio optimization:
A computer-based process of combining assets of dissimilar behavior to improve the risk/return trade-off of a portfolio. The process seeks to create a portfolio with either the highest potential return at a specific historical risk, or the lowest historical risk for a specific potential return. 

Positive correlations:
Investments whose performance emulates each other at various stages of the investment cycle are said to have positive correlations. For example, CD investments at two separate banks will react similarly when interest rates fall. 

Preferred stock:
A security, such as common stock, that represents ownership in a corporation, but has a claim ahead of common stock on the payment of dividends and on the corporation's assets in the event it is dissolved. The dividend paid on preferred stock usually is at a set rate, similar to the coupon rate of bonds, so preferred are classed as a fixed-income security. Unlike bond interest, however, preferred dividends may be decreased or even omitted at the discretion of the company's directors. 

Premium (insurance):
Amount paid for the purchase of an insurance policy. 

Pretax contributions:
Money that is taken from a participant’s pay and directed into his or her plan account before any federal taxes are withheld. Making pretax contributions can reduce current taxable income so that a participant might pay less in current taxes. 

Price-earnings (P/E) ratio:
Price of a stock divided by its earnings per share. The P/E ratio may either use the reported earnings from the latest year or employ an analyst's forecast of next year's earnings. The price-earnings ratio, also known as the multiple, gives investors an idea of how much they are paying for a company's earning power. 

Prime rate: Interest rate banks charge to their most creditworthy customers. The rate is determined by the market forces affecting the bank's cost of funds and the rates that borrowers will accept. 

Principal: A capital sum placed in an investment to earn interest or used as some type of fund. 

Principal payment:
An amount paid in addition to the regularly scheduled loan payment to reduce an outstanding plan loan if the plan accepts partial prepayments. 

Principal risk:
The risk that an investment will be worth less at the time it is sold than it was worth when it was bought. 

Probate: Judicial process whereby the will of a deceased person is presented to a court and an executor or administrator is appointed to carry out the will's instructions. 

Profit-sharing: Agreement between a corporation and its employees that allows the employees to share in company profits. Annual contributions are made by the company, when it has profits, to a profit-sharing account for each employee, either in cash or in a deferred plan, which may be invested in stocks, bonds or cash equivalents. The funds in a profit-sharing account generally accumulate tax deferred until the employee retires or leaves the company. 

Prospectus:
In the case of mutual funds, a prospectus describes the fund's objectives, history, manager background and financial statements, and is a document that makes investors aware of the risks of an investment. 

Purchasing power risk:
The risk that the principal and income from investments will lose their purchasing power because inflation occurs faster than investment growth. 

Pure life annuity:
A form of annuity that ends payments when the annuitant dies. Payments may be fixed or variable.


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Q

Qualified annuity: A form of annuity purchased with pretax dollars as part of a retirement plan that benefits from special tax treatment, such as a 401(k) plan. 

Qualified retirement plan:
Plan that meets the qualification requirements set out in detail in Internal Revenue Code sections 401 and 403(a), and as such, are plans established, operated and supported by employers, which have been submitted to and formally approved and "qualified" by the Internal Revenue Service. 

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R

Rate of return: For a stock, the annual dividend divided by the purchase price; for a bond, the coupon rate divided by the purchase price; for a mutual fund, total return is capital appreciation (increase in the price of an asset) plus income return (dividend paid to the shareholder). 

Real Estate Investment Trust (REIT):
An organization similar to an investment company, but concentrating its holdings in property or real estate investments. REITs are required to distribute as much as 90% of their income so the yield is generally very attractive. 

Rebalancing: Adjusting a portfolio, through fund transfers or sales or purchases, to re-establish the initial allocation of assets. 

Refund annuity: A form of annuity that provides for a cash or installment refund to the beneficiary if the annuitant dies before having drawn benefits equal to the total consideration that (s)he paid on the policy. 

Refund life annuity: An annuity paying installments as long as the insured lives and installments after death to the beneficiary until the amount paid equals the principal sum of insurance. 

Required rate of return:
The minimum expected return on an asset that an investor requires before investing. 

Retirement annuity: A form of annuity contract that is entered into before a selected retirement age with the consideration paid in installments until that age is reached. It is a form of deferred annuity. 

Retirement income gap: The difference between the funds likely to be available at retirement from Social Security, employer-sponsored retirement plans, and/or personal savings, and the amount of living expenses needed or wanted during retirement. 

Return: The pretax profit of an investment, expressed as an annual percentage of the investor's original capital. The sum of the net change in the investment's market value and any dividends or interest paid is divided by the purchase price. 

Reversionary annuity (or insurance): A contract providing annuity benefits only if the annuitant is living upon the death of the insured, such as the wife upon the death of her husband. Although labeled an annuity, this contract is actually a form of life insurance on the life of the person whose death will initiate the benefit. 

Revocable trust: A trust in which the grantor reserves the right to revoke the trust. The provisions of such a trust may be altered as many times as the grantor pleases, or the entire trust agreement can be canceled, unlike irrevocable trusts. The grantor may receive income from the assets, but the property passes directly to the beneficiaries at the grantor's death, without having to go through probate court proceedings. Since the grantor retains the right to change or revoke the trust, these assets are considered part of the grantor's estate at time of death and will not escape estate taxes. This kind of trust differs from an irrevocable trust, which permanently transfers assets from the estate during the grantor's lifetime and, therefore, escapes estate tax. 

Reward: See "Return." 

Rider:
An addition to a life insurance policy that modifies the policy by adding special provisions. 

Risk: Statistically, the measurable possibility of loss or no gain on an investment; expressed as the standard deviation calculated from historical returns. 

Risk aversion:
An unwillingness to expose financial assets to loss conditions. 

Rollover:
The nontaxable transfer of assets from one eligible retirement plan to another, such as from a defined contribution plan to an IRA. 

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S

Security: Evidence of direct ownership (stock), creditorship (bond) or indirect ownership (rights, warrants, and options). 

Separate account:
An account that houses all the variable options in a variable annuity (sub-account). The Separate Account is segregated from the general funds of the insurance company, and is maintained for the purpose of making investments for the contract holder. 

Separate account charges:
Charges set by the fund company that compensate the company for assuring certain risks such as guaranteeing payments during the payout period; paying interest-guaranteed death benefits; and issuing, administrating and marketing the product. 

Simplified employee pension (SEP):
Pension plan in which the employer contributes to an Individual Retirement Account for each of its employees. The employee is vested immediately and pays no taxes on the employer's contributions. The contributions and all earnings on funds in the plan are tax deferred until withdrawn. 

Single-premium deferred annuity (SPDA): Tax-deferred annuity that is created to accept one lump-sum premium. The value of the sum appreciates during the years prior to distribution. Taxes are deferred on the interest and earnings until withdrawal or when annuity payouts begin, usually at retirement. 

Small capitalization:
In general, a public company with a total stock value (that is, market capitalization) of less than $1 billion. Small companies may have higher earnings growth rates than large companies because they may operate in new markets. 

Speculative risk:
Exposure that offers extreme opportunity for both gain and loss. 

Speculative stock:
Common or preferred stock that offers extreme degrees of unrealized appreciated valuation and depreciated valuation. Typically, speculative stocks are issued by start-up, emergent-technology firms, or firms experiencing a decline in their financial condition. 

Split life insurance: A combination of installment annuity and term insurance under which the amount of annuity consideration (premium) paid determines the amount of one-year renewable term insurance an annuitant can purchase and place on the life of anyone designated. 

Standard deviation: A measure of the range of variation from an average of a group of measurements. Sixty-eight percent of all measurements fall within one standard deviation of the average. Ninety-five percent of all measurements fall within two standard deviations of the average. 

Stock:
Ownership shares of a corporation. 

Stock call and put options:
Contracts to buy or sell securities within a specific period of time. A call option is an option to purchase a specified number of shares of stock at or before some future date for a stated "striking" price. A put option is an option to sell a specified number of shares of stock at or before a specified future date for a stated striking price. 

Stock dividend:
A dividend paid in securities rather than cash: either additional shares of the issuing company or shares of another company (usually a subsidiary) held by the issuing company. These shares are not taxable until they are sold. 

Strategic asset allocation: Historical data is used in an attempt to determine how an asset class has performed and is likely to perform during long time periods. The goal is not to "beat" the market, but to establish a long-term investment strategy using a core mix of asset classes. 

Striking price: The amount at which a call or put option can be exercised, normally a price set close to the market price of the stock at the time the option is issued. 

Surrender charge:
A fee imposed for terminating an annuity contract prior to its maturity. 

Survivor: The beneficiary of an annuity contract, i.e., the annuitant's survivor. 

Systematic risk: Also called market risk, or non-diversifiable risk. It is risk attributable to factors affecting all investments. 

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T

Tactical asset allocation: Uses periodic assumptions about asset classes and the economy in general. The fund manager tries to improve portfolio performance by making "mid-course" changes in the long-term strategy based on near-term expectations. 

Target rate of return: This return is the starting point for the optimization program to search for more efficient portfolios and may be based on the client's required return to meet an investment goal. 

Tax deferred: Description of an investment whose earnings are not taxed until they are distributed to an investor. For example, funds placed in an individual retirement account (IRA) or employer-sponsored plan are not taxed until withdrawal or when annuity payments begin. 

Tax-deferred annuity (TDA):
A tax-favored plan that permits an employee of a qualifying organization to enter into an agreement with his or her employer to have a portion of his or her earnings set aside for retirement. If pretax contributions, income tax is deferred on the contributions, provided the amounts are used to purchase an annuity contract or regulated investment company's shares, as well as the interest and earnings. Contribution amounts are limited by tax law and taxes are due on all contributions and interest and earnings upon withdrawal or when annuity payments begin, usually at retirement. 

Tax-exempt securities: Bonds offering income payments that are not subject to taxation. These securities are issued by various state and local governments and are often called "municipals" or "munis." 

Tax-qualified retirement plan:
A retirement plan that is afforded special tax treatment by the IRS. Contributions are generally made on a pretax basis and earnings can accumulate tax deferred. 

Tax-sheltered annuity (TSA): See "Tax-deferred annuity."       

Taxable estate: Gross estate reduced by allowable deductions; the amount subject to the estate tax. 

Tax deferral:
A description of an investment whose earnings are not taxed until they are distributed to an investor. For example, funds placed in an IRA or employer-sponsored plan are not taxed until withdrawal or when annuity payments begin. 

Tenancy by the entirety:
A form of property ownership similar to joint tenancy, but which carries no rights of survivorship, no exclusions from the probate process, and no protection from lawsuits and creditors. 

Term life insurance:
Insurance that covers the insured for a specified period such as one, five or 10 years, often with an option to renew. Premiums are paid throughout this time, but generally become higher during the course of the term, as the policyholder grows older. 

Testamentary trust: A type of trust created in the decedent's will. It technically comes into existence at the time of death. 

Thrift plan:
A defined contribution plan that requires employee contributions. These contributions are generally matched by employer contributions. Earnings on contributions accumulate on a tax-deferred basis until withdrawal or when annuity payments begin, usually at retirement. 

Time horizon:
The amount of time remaining until the investor will need the money. 

Ticker symbols: A system of letters used to uniquely identify a stock or mutual fund. Symbols with up to three letters are used for stocks that are listed and traded on an exchange. Symbols with four letters are used for NASDAQ stocks. Symbols with five letters are used for NASDAQ stocks other than single issues of common stock. Symbols with five letters ending in X are used for mutual funds. 

Total return: The rate of return on an investment, including all dividends and interest, plus or minus any change in the value of the asset. Also, an investment strategy that seeks a combination of growth and income. 

Trading: See "Ticker symbol."  

Trading symbol: See "Ticker symbol."  

Transfer: A nontaxable movement of funds between like plans that does not result in any reporting for federal income tax purposes. 

Transfer of value (TOV): A movement of money between investment options within a retirement plan. A TOV only affects money already in the account. It does not affect future payroll deductions. 

Treasuries: General term for all negotiable securities of the U.S. government. Treasury bills (T-bills) are short-term obligations (three-month and six-month maturities) that do not pay interest, but are sold at a discount from their face value. Treasury bonds are issued in $1,000 units with maturities of 10 years or longer and are traded on the market like other bonds. Treasury notes are medium-term obligations (one to 10 years) sold by subscription. 

Trust: A right of property, real or personal, held by one person for the benefit of another.


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U

Umbrella policy: An insurance policy that provides excess liability coverage for both homeowners and automobile insurance, as well as coverage in some areas not provided for in either of these policies. 

Underlying investments: The stocks, bonds, cash equivalents or other investments purchased with the money invested in an annuity. 

Unit investment trust:
Investment vehicle that purchases a fixed portfolio of income-producing securities, such as corporate, municipal or government bonds, mortgage-backed securities, or preferred stock. Unit holders receive an undivided interest in both the principal and the income portion of the portfolio in proportion to the amount of capital they invest. The portfolio of securities remains fixed until all the securities mature and unit holders have recovered their principal. 

Universal life insurance:
A hybrid insurance product that combines the protection of a conventional term insurance policy with cash values and investment yields. Unlike traditional whole life policies, universal life divides death protection and cash value accumulations into separate components. 

Unsystematic risk:
Also called non-market or diversifiable risk. It is risk attributable to factors unique to the security. 

U.S. government securities: Securities issued by the U.S. government (i.e., Treasury bills, notes and bonds). 

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V

VALIC: VALIC (The Variable Annuity Life Insurance Company), ranks in the top 10 of all U.S. and Canadian life insurance companies, based on its $85 billion in assets under management as of December 31, 2013. VALIC has high financial strength ratings from the major, independent industry analysts. The ratings apply to the claims-paying ability of The Variable Annuity Life Insurance Company (VALIC), not to the safety or the performance of the variable options. 

Variable annuity: A tax-advantaged retirement-planning and payout vehicle offered only through a life insurance/annuity company. A variable annuity serves as an accumulation vehicle prior to retirement by accepting contributions and providing the investor with a choice from among variable-return investment options. It serves as an income vehicle, starting at retirement, and bases its income payments on the performance of the underlying variable-return investments. 

Variable investment option:
A fund that has a rate of interest that varies with the performance of the funds in the underlying account. 

Variable universal life insurance: A form of life insurance within which the benefits, payable upon death or surrender and/or the premium vary with the investment performance of the assets backing the contract. These contracts usually include a choice of investments, such as stocks, bonds, money market accounts, etc. Earnings from variable life policies are tax deferred until distributed. 

Variation in returns:
See "Historical variation ranges." 

Vesting: A participant’s right of ownership to the money in his or her plan account. A participant’s contributions and their earnings are always 100% vested; however, company contributions and employer matching contributions may become vested over a period of time. 

Volatility:
Accepted by academics and financial planning practitioners as a representation of risk, expressed statistically as the standard deviation, which analyzes the fluctuation of returns of an investment around an average. Also defined as the tendency of a security or market to fluctuate in price. 


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W

Wall Street Journal symbol: The symbol under which an investment option is listed in The Wall Street Journal. This symbol may be different in other newspapers. 

Whole life insurance: Form of life insurance policy that offers protection in case the insured dies and also builds cash value. The policy stays in force for the lifetime of the insured, unless the policy is canceled or lapses. The policyholder usually pays a set annual premium to whole life, which does not rise as the person grows older, as in the case with term insurance. Whole life insurance is also known as ordinary life or permanent life insurance. 

Will: A written document that allows a person, called a testator, to determine the disposition of property at his or her death. 

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Y

Yield: In general, the amount of profit on an investment of capital. For stocks or bonds, it is the rate of annual dividends or interest expressed as a percentage of the current market price. 

Yield equivalence:
The rate of interest at which a tax-exempt bond and a taxable security of similar quality provide the same return. To calculate the yield that must be provided by a taxable security to equal that of a tax-exempt bond for investors in different tax brackets, the tax-exempt yield is divided by the reciprocal of the tax bracket (100 less 28%, for example) to arrive at the taxable yield. To convert a taxable yield to a tax-exempt yield, the formula is reversed, that is, the tax-exempt yield is equal to the taxable yield multiplied by the reciprocal of the tax bracket. 

Yield to maturity:
The yield of a bond were it held to maturity, including purchase price, coupon rate and present value. 

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Z

Zero coupon bonds: Debentures and/or guaranteed debt securities issued at a discount of their redemption price. The investor's return is equal to the difference between the face amount of the bond, which is paid to the investor at maturity, and the purchase price.


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401(a), 403(a) plans: Retirement plans sponsored by a business or organization for its employees. Contributions are generally pretax and the earnings grow tax deferred. In most cases, income taxes are payable upon withdrawal. Federal restrictions and a 10% federal early withdrawal penalty can apply to withdrawals taken prior to age 59½. 

401(k) plan:
A defined contribution plan generally offered by a for-profit business to its employees that allows employees to set aside tax-deferred contributions for retirement purposes. Some governmental entities may also have grandfathered 401(k) plans. In some cases, employers will match their employees’ contributions to a certain percentage or dollar amount. In most cases, income taxes are payable upon withdrawal. Federal restrictions and a 10% federal early withdrawal penalty can apply to withdrawals taken prior to age 59½.  

403(b) plan: A tax-deferred defined contribution plan for employees of public schools and certain tax-exempt organizations. Contributions are generally pretax and the earnings grow tax deferred. In some cases, employers will match their employees’ contributions up to a certain percentage or dollar amount. In most cases, income taxes are payable upon withdrawal. Federal restrictions and a 10% federal early withdrawal penalty can apply to withdrawals taken prior to age 59½.  

457(b) Governmental plan: A tax-deferred, defined compensation plan for employees of state and local government institutions, including public school teachers. Income taxes are payable upon withdrawal. Federal restrictions can apply to withdrawals prior to age 70½. 

1035 exchange: A nontaxable transfer of funds from one annuity to another as provided under section 1035(a) of the Internal Revenue Code.

 

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