403(b) plan: A salary deferral plan that is similar to a 401(k) plan, but that may be offered only to the employees of a 501(c)(3) tax-exempt charitable organization or a public school system. Also known as a tax sheltered annuity.
adjustable death benefit: Certain life insurance products allow the policyowner to increase or decrease the face amount (within limits and often only with evidence of insurability). For instance, universal and adjustable life policyowners can increase or decrease the amount of death benefit payable by adjusting the level of their premium payments.
adjustable life insurance: Many of the most attractive features of both term and whole life are contained in this highly flexible type of coverage. Premiums, death benefits, duration of coverage, and cash value levels can all be adjusted (both upward and downward within limits) by the policyowner to meet changing needs and circumstances.
adjustable premium: Term applicable to policies where the insurance company has the contractual right to modify or change premium payments under certain specified conditions or to policies where the policyowner has the right to change scheduled premiums in universal or adjustable life.
alternate payee: An individual in whose favor a qualified domestic relations order is granted. The alternate payee can be a spouse, former spouse, child, or other dependent.
amortize: To pay off a debt by periodic payments set aside for the purpose, or to allocate the cost of an asset over its life.
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 a 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.
annual exclusion: A federal gift tax or generation-skipping transfer tax exclusion of $10,000 (as indexed; $12,000 in 2007) allowed to the donor each year for each donee, provided the gift is one of a present interest (that is, the donee must be given an immediate right to possession or enjoyment of the property interest).
annuity: A series of substantially equal periodic payments, at least annually, over an individual's life or life expectancy, or a fixed term. In some cases, the payments may vary somewhat to reflect factors such as investment experience, cost of living increases, or guarantees.
annuity contract: A contract purchased from an insurance company that provides for substantially equal periodic payments beginning at a specified date and extending for a life (or lives) or a fixed period of time.
asset allocation: Selecting the proportions of various types of assets to include in a portfolio. Proper asset allocation can optimize returns, while reducing risk.
back-end load: A load is a charge against policy values for business expenses of the insurer in issuing the contract. These charges can be imposed at the inception of the contract (i.e., a "front-end" load) or at the termination of the contractual relationship (i.e., a "back-end" load). In the case of most variable, universal, and current-assumption life insurance products, the load is imposed when the policy is surrendered. Back-end loads typically decrease each year and disappear completely after the number of years specified in the contract.
balance to the credit: An employee's vested account balance or vested accrued benefit in the employer's plan. If there is more than one plan, all plans of an employer that are the same type (e.g., all profit sharing plans, all stock bonus plans, all defined benefit plans) must be treated as one for purposes of determining the balance to the credit.
bankruptcy: The condition of a business or individual that has been declared insolvent (unable to pay debts) by a court proceeding and whose financial matters are being administered by the court through a receiver or trustee.
basis: Amounts in the plan or investment that have already been taxed, for example, nondeductible contributions or P.S. 58 costs. With respect to qualified plans, life insurance, and annuities, also referred to as investment in the contract.
bear: Someone who believes that the stock market will decline. See bull.
bear market: A declining market. See bull market. bearer bond: A bond that does not have the owner's name registered on the books of the issuing company and that is payable to the holder. See coupon bond, registered bond.
beneficiary: The recipient of funds, property, or other benefits from a qualified plan, an IRA, an annuity, an insurance policy, will, or other settlement. The individual or entity entitled to the beneficial interest of a trust.
bond: An IOU or promissory note of a corporation or governmental body, usually issued in multiples of $1,000 or $5,000. A bond is evidence of a debt on which the issuer usually promises to pay the bondholders a specified amount of interest for a specified length of time, and to repay the loan on the expiration date.
bond ladder: A bond ladder is a series of bonds purchased at equal intervals across the maturity spectrum. As a bond matures, the investor purchases a new bond at the longest maturity that the ladder was established at. Bond ladders are used to moderate interest rate risk.
bull: A person who believes that the stock market will rise. See bear. bull market: An advancing market. See bear market.
bypass (or credit shelter) trust: An estate planning vehicle that typically uses the unified credit of the first spouse to die to protect the property in the trust from being subject to estate tax at the first death and avoids inclusion in the estate of the second spouse to die.
call: The process of redeeming a bond or preferred stock issue before its scheduled maturity. Sometimes used to refer to a call option.
capital conservation method: When an individual's needs are ascertained, there are two choices for determining how much income a given amount of capital will produce. One method assumes only income will be used so as to protect (conserve) capital. The capital conservation method, therefore, assumes only the earnings on principal (not the principal itself) will be used to satisfy those needs. The other approach is to annuitize capital (i.e., break down capital and pay out both income and capital to meet needs). This will generally result in a lower amount of capital needed (but at the expense of less future security and inheritance for others).
capital gain or capital loss: Profit or loss from the sale of a capital asset. A capital gain is either short-term or long-term. Capital gain is short-term if the asset was held for 1 year or less; the gain is long-term if the asset was held for more than 1 year. This more-than1-year period necessary to qualify a capital gain as long-term is often referred to as the "long-term capital gain holding period." Net long-term capital gain (i.e., the excess of long-term capital gains over short-term capital losses) is taxed at special tax rates.
capital utilization method: A "needs computation" method based on the assumption that both the earnings and principal will be used up over the period during which the income will be needed. This method should be compared and contrasted with the capital conservation method of needs analysis.
cash accumulation policy: A life insurance contract that builds significant cash value or equity. Such policies include whole life policies, endowment policies, universal life, and the various variable life products.
cash flow: The amount of cash generated over time from an investment, usually after any tax effects.
cash or deferred arrangement: A plan funding mechanism that offers participants the opportunity to receive a portion of their salary in cash or to defer it into a retirement trust or annuity.
cash refund annuity: A cash refund annuity pays a lump-sum cash benefit to a beneficiary if the annuitant dies before a recovery of premiums paid. The lump-sum cash benefit is equal to the difference between the total amount paid by the purchaser over the total annuity payments received before the annuitant's death.
cash surrender value: Cash surrender value is the amount available to the policyowner when a life insurance policy is surrendered. It is also the amount upon which a policy loan is based. In the first 8 to 10 years after a policy is issued, the cash value is typically the insurer's reserve to meet future liabilities reduced by a surrender charge that enables the insurer to recover expenses incurred in setting up the policy. If a policy is surrendered in later years, the cash surrender value usually equals or closely approximates the reserve value of the policy.
charitable deduction: The income, gift, or estate tax deduction provided for most gifts to public charities (or certain private foundations). Generally, the full amount of a transfer to charity of cash is deductible. Various limitations based on adjusted gross income (AGI) may apply to charitable gifts for income tax purposes.
common stock: Securities that represent an ownership interest in a corporation.
compound interest: Interest earned on interest.
convertible: A bond, debenture, or preferred share that may be exchanged by the owner for common stock or another security, usually of the same company, in accordance with the terms of the issue.
coupon: Evidence of interest due on a bond, usually every six months. With a bearer bond, the coupon is detached from the bond and presented for payment of interest to the issuer's agent or the bondholder's bank. In the case of a registered bond, the issuing corporation will mail a check for the semiannual interest to the owner of record on each interest payment date.
coupon bond: A bond with interest coupons attached. The coupons are removed ("clipped") as they come due and are presented by the holder for payment of interest. See bearer bond, registered bond.
coupon rate: The stated rate of interest on a bond.
credit shelter (or bypass) trust: An estate planning vehicle that typically uses the unified credit of the first spouse to die to protect the property in the trust from being subject to estate tax at the first death and avoids inclusion in the estate of the second spouse to die.
currency risk: The potential gain (or loss) on an investment denominated in a foreign currency due to fluctuations in exchange rates.
current interest rate: This is the interest rate credited to current-assumption and universal life products (versus the fixed rate of traditional life insurance policies).
current yield: The percentage relation of the annual interest received to the current price of a bond, or other debt obligation.
declared interest rate: In a universal life policy (or in the general account of a variable universal life or interest-sensitive whole life policy), cash values earn a minimum interest rate. However, they will actually be credited with a current rate of return that may be substantially higher. This rate is declared by the insurance company and may be periodically changed.
deemed distribution: A deemed distribution is the result of a plan loan that fails to meet the requirements or limitations for plan loans. Deemed distributions are taxed to the participant as if the plan had made an actual distribution.
default: Failure to pay principal or interest promptly when due. Also, if a life insurance policyowner fails to make a premium payment by a policy's final due date or by the end of its grace period, the policy is in default and will lapse.
deferred annuity: A series of payments that are not begun until the lapse of a specified period of time; until the annuitant reaches a specific age; until the owner or, possibly, the annuitant dies; or until specified by the owner.
defined benefit plan: A qualified retirement plan that provides participants with a fixed benefit at retirement, and that is funded with actuarially determined contributions that are pooled together for all participants.
defined contribution plan: A qualified retirement plan that provides an individual account for each participant, which is funded with specified contributions allocated to each account.
designated beneficiary: An individual (or a trust meeting special requirements) that is named as beneficiary of an IRA or qualified plan benefit prior to the required beginning date.
direct rollover: A transfer of a retirement benefit at the request of the participant directly from the trustee of one plan to the trustee of another plan or an IRA.
discount: The amount by which a preferred stock or bond may sell below its par value. Also used as a verb to mean "takes into account" (e.g., "the price of the stock has discounted the expected dividend cut"). See premium.
distributable amount: Typically an employee's distributable amount, for purposes of a hardship distribution, is limited to the total of his elective deferrals, less any prior hardship distributions.
distribution: A disbursement of money or property to a participant or beneficiary from a retirement plan trust or an IRA, other than in the form of a plan loan. A distribution is usually made in the form of money, but it can also be made in the form of stock, or other property held by the plan.
dividend: A payment made from earnings to the stockholders of a corporation. It is authorized by the board of directors and paid among the shares outstanding. In the case of common shares, payment is made on a pro rata basis; however, preferred shares may be entitled to a specific dividend rate that is different from that paid common shareholders. Special income tax rates may apply to qualified dividends.
Also, when a policy participates in the favorable investment, mortality, and expense experience of the insurer (so called "par" policies), the policyowner receives "dividends" as a refund of an "overcharge" in premiums. For tax and other purposes, these dividends are considered a return of capital rather than a profit payment. Dividend options generally include receiving payments in cash, applying them to reduce premiums, purchasing additional paid-up insurance, having them held by the insurer to earn interest for the policyowner, or purchasing additional term insurance.
dividend yield: The ratio of the current dividend to the current price of a share of stock.
dollar cost averaging: A system of buying securities at regular intervals with a fixed dollar amount of capital.
donee: The recipient of a gift. The term also is used to refer to the recipient of a power of appointment.
donor: The person who makes a gift. The term also refers to the person who grants a power of appointment to another.
duration: Duration is the weighted average maturity of a bond's cash flows. Interest rate risk can be neutralized by calculating the duration of liabilities (cash flow needs for retirement) and establishing a portfolio of bonds with equal duration.
early (or premature) distribution: Generally means a distribution received from an IRA, qualified plan, or tax sheltered annuity before the participant or account owner reaches age 59 1/2.
earnings per share (EPS): The earnings available to common stockholders divided by the number of common shares outstanding. It is considered to be a measure of how well a company is doing by its common shareholders.
eligible rollover distribution: In general, any distribution of all or a portion of the "balance to the credit" of the employee that is not (a) part of a series of substantially equal periodic payments, (b) made over a specified term of 10 years or more, (c) a required minimum distribution, (d) a hardship distribution from a 401(k) plan, or (e) an amount that is excludable from income.
endowment: A life insurance contract that provides for the payment of the face amount at the end of a fixed period, or at a specified age of the insured, or at the death of the insured before the end of the stated period.
ESOP (employee stock ownership plan): A defined contribution plan that is designed to invest primarily in employer securities.
estate tax: A federal tax on the right to transfer property at death. It is imposed on a decedent's taxable estate, and can be as high as 45% in 2007 to 2009 (55% in 2011 and thereafter). EGTRRA 2001 repeals the estate tax for one year in 2010.
excess interest: The positive difference between the rate of interest an insurer guarantees to pay on proceeds left under settlement options and the higher interest actually paid. A second meaning of the term is the difference between the guaranteed rate of return on cash value and the higher, current rate in universal life and other interest-sensitive policies.
expiration date: The last day on which an option (call or put) can be exercised.
extra dividend: A dividend in the form of stock or cash in addition to the regular or usual dividend a company has been paying.
fiduciary: A person occupying a position of trust, (e.g., an executor, administrator, trustee, or custodian).
five-year rule: An alternate method for timing of required distributions from the plan account or IRA of a participant who dies before his required beginning date. If it applies, the account must be distributed in full within five years after the decedent's death.
fixed annuity: An annuity that provides fixed payments during the annuity period. For contrast, see: variable annuity.
flexible premium annuity: An annuity that allows the owner of the contract to vary premium payments (within limits) from year to year.
floating-rate bond: A bond on which the interest rate is adjusted, usually every six months, for the subsequent six months, according to a formula based on the then prevailing interest rates. The prime rate, federal funds rate, commercial paper rate, and Treasury bill rates are frequently used indices.
fresh start election: The right of a spouse beneficiary to elect to treat a deceased participant's IRA as his or her own, or to roll over the deceased participant's plan benefit to an IRA of his or her own.
fresh start rule: A provision in the regulations that allows a spouse beneficiary to treat the plan benefit or IRA as the spouse's own, thus setting a new required beginning date and a new beneficiary designation.
generation-skipping transfer (GST) tax: Tax on transfers to a skip person, generally a person two or more generations younger than the transferor.
gift: Property or property rights or an interest gratuitously passed on or transferred for less than an adequate and full consideration in money or money's worth to another--whether the transfer is in trust or otherwise, direct or indirect.
gift tax: Tax on taxable gifts.
government bonds: Obligations of the United States government; regarded as the highest grade issues in existence.
hardship distribution: Some profit sharing or stock bonus plans permit a distribution from an employee's account in the event of a financial hardship, such as heavy medical expenses or the need to prevent a mortgage foreclosure.
historical simulations: Use historical return data to generate iterations of returns to model potential retirement scenarios.
immunization: Attempts to ensure that interest rate changes will not affect the required value of a portfolio of bonds to provide retirement income. The most common techniques attempt to match cash flows together.
in kind distribution: A distribution of property other than cash, such as employer securities or a life insurance contract.
income in respect of a decedent (IRD): Income to which the plan participant or IRA owner was entitled at death, but which he had not yet received. IRD is included in the estate of the plan participant or IRA owner as well as being subject to income tax in the hands of the beneficiary. However, the beneficiary is permitted an income tax deduction for his proportionate share of any estate tax on the IRD. Annuities are also IRD.
indenture: A written agreement under which bonds and debentures are issued, setting forth maturity date, interest rate, and other terms.
inflation risk: The risk of continual loss of purchasing power from savings (things keep costing more).
interest: Payments a borrower pays a lender for the use of money. A corporation pays interest on its bonds to its bondholders. See bond. Interest income is taxable; interest expense may be deductible.
investment risk: The risk that an investment or portfolio will not achieve the return necessary to fund retirement income needs.
investment: The use of money for the purpose of making more money in order to gain income, increase capital, or both.
IRA: An individual retirement account or individual retirement annuity. Types of IRAs include: traditional, Roth, SEP, and SIMPLE.
irrevocable life insurance trust: An irrevocable trust that is established to hold life insurance, and designed to have the effect of removing the policy from the estate of the grantor.
joint and survivor annuity: A life annuity payable over the lives of two or more annuitants that continues to make payments until the death of the last surviving annuitant.
joint and survivor life expectancy: A numerical value, based on the ages of two individuals (i.e., second to die), taken from: Table VI for annuities, and from the RMD joint and survivor table for required minimum distribution (RMD) and substantially equal periodic payment (SEPP) purposes.
joint and X-percent survivor annuity: An annuity that pays an income to two individuals. The specified percentage of the joint income continues to the survivor for life if the principal annuitant dies first. If the secondary annuitant dies first, the unreduced joint benefit continues to the principal annuitant for life. In its second-death form, X percent of the joint income is paid to the survivor regardless of which individual dies first. Common percentages are 100%, 75%, 66%, or 50%.
leverage: The use of funds borrowed at a fixed rate in an attempt to reinvest them at a higher rate. Borrowing against the established equity. The term is also used with investments that offer enhanced return without increased investment, such as options and warrants, even without borrowing.
lien: A claim against property that has been pledged or mortgaged to secure the performance of an obligation. A bond may be secured by a lien against specific property owned by the company issuing the bonds.
life annuity: An annuity contract that pays only until the annuitant dies. Payments cease at that time even if the amount paid by the insurer does not equal the total premiums paid by the annuity owner. Payments foregone by those who die early, in effect, benefit those who live longer.
life expectancy: The average remaining term of life for a number of persons of a given age, according to probability statistics of a mortality table.
liquid assets: Cash or assets that can readily be converted into cash (for retirement income) without a serious loss of capital.
load: The portion of the offering price of shares of a mutual fund that covers sales commissions and all other costs of distribution. A load incurred on purchase is a "front-end" load. See no-load. The term is also used with life insurance and annuities.
longevity risk: The risk of living longer than expected and possibly running out of retirement income. An annuity for life can provide retirement income that will last for life (or the lives of the retiree and the retiree's spouse).
margin: The buying of stocks or bonds on credit (known as "buying on margin").
marketability: The ease or difficulty with which a security or other asset can be sold in the secondary market.
maturity: The date on which a loan, bond, or debenture comes due and is to be paid off.
modified endowment contract (MEC): A life insurance policy that has failed the seven-pay test of IRC Section 7702A. Distributions (including loans) from a MEC are taxed less favorably than distributions from a life insurance policy that has met the requirements of the seven-pay test.
money market: Financial markets in which funds are borrowed or loaned for short periods, typically less than one year.
money market fund: A type of mutual fund that invests in short-term government securities, commercial paper, and repurchase agreements.
mortality risk: The risk of death, or of living shorter than expected and not being able to provide sufficient retirement income for a spouse. With regard to life insurance, the risk carried by a life insurance company and sometimes called the pure insurance risk. The degree of risk is the difference between the policy reserve (usually equal to the cash value of a permanent life policy) and the face amount of the policy.
mortgage: A pledge of property designated as security for a loan.
mortgage bond: A bond backed by a lien on a specific property.
mortgagee: One who lends funds on the security of specific property (mortgage).
mortgagor: The borrower who uses specific property as collateral for a loan.
municipal bond: A bond issued by a state or a political subdivision, such as a county, city, town, or village. The interest paid on many municipal bonds is exempt from federal income taxes and state and local income taxes within the state of issue.
mutual fund: An investment company that uses the proceeds from the sale of its shares in order to invest in the securities of other companies.
net unrealized appreciation: Any increase in the value of employer securities from the time the plan trustee purchased them until the date they were distributed to the plan participant or beneficiary.
no-load: A mutual fund, an annuity, or life insurance on which no sales commission is paid.
nonforfeiture values: Those values or benefits in a life insurance policy that by law the policyowner does not forfeit, even if he or she chooses to discontinue payment of premiums. It usually includes cash value, loan value, paid-up insurance value, and extended term insurance value.
nonqualified plan: An employer funded trust or annuity that is designed to provide retirement income to selected employees, and that does not qualify for the tax favored treatment provided by IRC Section 401(a).
offset distribution: If a plan participant's accrued benefit is reduced (e.g., upon retirement or termination of service) to repay a plan loan, the reduction is referred to as an offset distribution.
ordinary life: Also referred to as straight life and whole life insurance. These three synonymous terms refer to the type of life insurance policy that continues during the whole of the insured's life, generally with level premiums payable each year until death or until age 100 when the policy endows if the insured is still living.
par value: The nominal or face value of a bond (or a stock).
pay out ratio: The percentage of earnings paid out in the form of dividends.
pension plan: A qualified retirement plan designed primarily to provide definitely determinable benefits to its employees after retirement. A pension plan can be either a defined contribution plan or a defined benefit plan.
portfolio: Securities held by an individual or institution. A portfolio may consist of bonds, stocks, or other securities of various types of institutions.
premature (or early) distribution: Generally means a distribution received from an IRA, qualified plan, or tax sheltered annuity before the participant or account owner reaches age 59 1/2.
premium: The amount by which a bond (or preferred stock) may sell above its par value. Also, amounts paid for an annuity or life insurance.
price-earnings ratio: The price of a share of stock divided by earnings per share for a 12-month period. For example, a stock selling for $20 with earnings per share of $2 is said to be selling for a price-earnings ratio of 10 to 1.
profit sharing plan: A qualified defined contribution plan to which the employer makes recurring and substantial contributions.
prospectus: A document issued for the purpose of describing a new security issue.
qualified domestic relations order (QDRO): Generally a judgment or decree from a state domestic relations court that meets IRC requirements for granting an interest in an individual's qualified retirement benefit, generally to a former spouse.
qualified joint and survivor annuity (QJSA): A joint and survivor annuity that must be offered by a qualified retirement plan for the life of a participant and spouse. Special requirements for QJSAs are set forth in the IRC, and a spouse must consent in writing to any waiver of a QJSA.
qualified plan: A retirement plan established by an employer for the benefit of its employees to provide tax-favored retirement benefits under the requirements of IRC Section 401(a).
qualified preretirement survivor annuity (QPSA): An annuity that must be provided by a qualified retirement plan to the surviving spouse of a participant who dies prior to retirement age. Special requirements for QPSAs are set forth in the IRC, and a spouse must consent in writing to any waiver of a QPSA.
qualified terminable interest property (QTIP) trust: An estate planning vehicle that essentially uses the unlimited estate tax marital deduction to avoid estate tax at the death of the first spouse to die. Typically, trust income is payable annually to the surviving spouse for life, with the principal payable as a remainder interest, as designated by the grantor spouse.
rating: A formal opinion by an outside professional service on the credit reputation of an issuer and the investment quality of its securities. Insurance and annuity companies may also be rated for their claims paying ability.
real estate investment trust (REIT): An organization similar to a mutual fund in which investors pool funds that are invested in real estate or used to make construction or mortgage loans. registered bond: A bond that is registered on the books of the issuing company in the name of the owner. It can be transferred only when endorsed by the registered owner. See bearer bond, coupon bond.
reinvestment risk: The risk that one will not be able to reinvest current investments at a suitable rate of return when amounts are distributed from the current investment.
required beginning date: The date on which payouts must begin from an IRA or qualified plan. For lifetime distributions, this is generally April 1 of the year after the individual reaches age 70 1/2. Distributions from a Roth IRA do not have to begin until after the death of the IRA owner.
required distributions: Amounts required under the IRC to be disbursed from an IRA, qualified plan, or tax sheltered annuity starting at the required beginning date. Also known as required minimum distributions (RMD).
retirement horizon: The period of years for which retirement income will be needed. Often projected as remaining life expectancy, plus some additional number of years (e.g., five years added to remaining life expectancy).
retirement income policy: A type of limited-pay life insurance contract designed to build cash values with the principal objective of funding a desired level of guaranteed monthly income for life, beginning at a certain age, usually 65. Unlike annuities, they also provide a death benefit.
reverse mortgage: A reverse mortgage allows an older (at least age 62) homeowner to convert equity in a home into cash without selling the home or incurring additional mortgage obligations. The lender makes payments (loan amounts) to the homeowner. The homeowner generally does not have to repay the reverse mortgage loan until the homeowner dies, sells the home, or moves from the home.
rollover: The transfer of a distribution from a qualified plan, tax sheltered annuity, or IRA to an eligible plan or IRA under the rules set forth in the IRC and regulations. Generally, a rollover is a nontaxable event. Rollover from an eligible plan or nonRoth IRA to a Roth IRA is generally a taxable event.
Roth IRA: An IRA that has been established (or converted from an eligible plan or nonRoth IRA) under special rules in the IRC for Roth IRAs. With a Roth IRA, the money contributed to the IRA has already been taxed, and distributions of both principal and income from the account are tax free if certain requirements are met (qualified distributions).
Section 401(a)(9): The section of the IRC that governs required minimum distributions from qualified plans.
SEP IRA: An IRA that is established by an employer for an employee for the purpose of receiving contributions made under a simplified employee pension (SEP) and that can receive an expanded rate of contributions. Distributions from SEPs are treated in the same manner as from traditional IRAs.
separate account: An investment account that is segregated from the general investment portfolio of the insurer. Required by law for assets backing variable products.
separation from service: Generally occurs only when an employee retires, resigns, is fired, or dies.
SIMPLE IRA: An IRA established by an employer for an employee for the purpose of receiving contributions under a SIMPLE IRA plan. Distributions from SIMPLE IRAs are treated in the same manner as those from traditional IRAs, except that the premature distribution penalty is 25% (instead of 10%) for the first two years of participation.
single life expectancy: A numerical value , based on the age of one individual, taken from: Table V for annuities; and from the RMD single life table for required minimum distribution (RMD) and substantially equal periodic payment (SEPP) purposes.
social security: Can provide retirement income for a worker and a worker's spouse, as well as survivor benefits for a spouse. Payments are adjusted for inflation.
stochastic modeling: Various methods, such as Monte Carlo simulation, used to simulate ranges of outcomes for systems that are to some extent random and unpredictable.
substantially equal periodic payments (SEPPs): A series of payments made at least annually over the life or life expectancy of a plan participant or IRA owner (or the joint lives of the individual and a beneficiary). The payments must continue for at least five years or until age 59 1/2, whichever is later, in order to avoid the early (or premature) distribution penalty.
surrender: The policyowner's return of a policy to the insurance company in exchange for the policy's cash surrender value or other equivalent nonforfeiture values. See also: nonforfeiture values.
surrender charge: In a variable or universal life policy, or a variable annuity, a special charge that is levied on the available cash value to reimburse the insurer for the unrecovered costs of issuing the policy.
sustainable withdrawal rates: The amount, as an initial percentage of assets, that theoretically can be withdrawn/ spent on a regular basis without an undue risk of running out of retirement income or needing to reduce the future standard of living. The amount may be increased for inflation in future years.
systematic withdrawal: An arrangement where a mutual fund automatically liquidates sufficient shares to pay an investor a predetermined amount of money at regular intervals.
traditional IRA: An IRA that is not part of a SEP or SIMPLE plan, and that is not designed to meet the requirements for Roth IRAs. Subject to limits, deductible and nondeductible contributions can be made to a traditional IRA. Deductible contributions are subject to phaseout based on adjusted gross income (AGI) in the case of an active participant in an employer plan. Distributions are included in income except to the extent of nondeductible contributions (amount excludable is determined using a special pro rata formula).
Treasury inflation-protected securities (TIPS): TIPS are U.S. government bonds that pay a small rate of interest (compared to government bonds of similar maturity), and adjust for inflation.
uniform distribution period: A distribution period determined under the RMD Uniform Lifetime Table. The table provides a uniform life expectancy period for individuals on the basis of age, which is generally used to calculate lifetime required minimum distributions.
universal life: A flexible-premium, current-assumption, adjustable-death-benefit policy. Similar to traditional policies, universal life pays a death benefit and accumulates cash value. Unlike traditional products, universal life completely separates the protection element from the accumulation element of the policy.
variable annuity: An annuity contract under which the annuity holder has the ability to allocate the annuity premiums among several available investment choices. The annuity holder, not the company issuing the contract, assumes the investment risk associated with the investment decisions.
variable death benefit: A death benefit option in most variable life policies. The death benefit varies based on a formula relating the cash value to the death benefit. The death benefit is also variable in variable universal life policies under option B (or II) which pays a pure level death benefit plus the cash value at the time of the insured's death.
variable life insurance: Life insurance that provides a guaranteed minimum death benefit, but the actual benefit paid may be more, depending on the fluctuating market value of investments in the separate account backing the contract at the time of the insured's death. The cash surrender value generally fluctuates with the market value of the investment portfolio.
variable universal life: The generic name for a flexible-premium universal life insurance policy, distinguished by a flexible premium and separate cash value investment accounts.
whole life insurance: A form of life insurance offering protection for the whole of life, proceeds being payable at death. Premiums may be paid under a continuous premium arrangement or on a limited payment basis for virtually any desired period of years (e.g., 1, 10, 20, 30, or to ages 60 or 65). See also: ordinary life.
yield: Also known as return. The dividends or interest paid by a company expressed as a percentage of the current price. A stock with a current market value of $25 per share paying dividends at a rate of $2.50 is said to return 10% ($2.50 / $25.00).
yield to maturity: The average annualized rate of return that an investor will receive if a bond is held until its maturity date. It differs from "yield" or "current yield" in that it takes into consideration the increase to par of a bond bought at a discount, and the decrease to par of a bond bought at a premium.
zero coupon bond: A bond that pays no interest during the life of the bond and that is normally issued at a substantial discount from par. The face amount of the bond, when it is paid at maturity, includes the payment of interest.
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|Publication:||Tools & Techniques of Retirement Income Planning|
|Date:||Jan 1, 2007|
|Previous Article:||Appendix F: substantially equal periodic payments (SEPPs).|