#, A, B, C    

401(k) Plan A retirement plan in which participants have the ability to defer a portion of their salary into the plan before taxes. Often, the employer matches all or part of a participant’s contributions.

403(b)Tax-Sheltered Annuity (TSA) A qualified retirement plan available only to employees of certain nonprofit, tax-exempt organizations and public schools; also called Tax-Deferred Annuities, 403 (b) Annuities, or 501 (c) Annuities.

457(b) Deferred Compensation Plan (DCP) A tax-deferred plan that offers an additional opportunity to save on taxes and save for retirement. A portion of a participant’s salary is direct-deposited, before taxes, into the investment product of their choice. Federal income taxes on the amounts you contribute or on any earnings need not be paid until you withdraw the funds.

Accounting Rate of Return - A method for calculating the return on an investment in which the average annual cash flow from the investment is divided by the investment outlay.

Action Calendar An organizational tool used during the implementation phase of financial planning to identify each action that must be taken, who is responsible for doing it, and when it should be accomplished.

Activities of Daily Living (ADL) Activities, such as dressing, bathing, and eating, that are used in rating applicants for long-term care insurance; applicants who can perform the ADL’s are generally considered standard risks.

After-Tax Return The return on an investment, net of all applicable taxes.

Annuity The systematic liquidation of principal and interest over a specified time by means of periodic payments. Also a type of financial product in which an insurance company promises to pay monthly benefits over a period of time in exchange for the contract owner’s prior payment of premium(s).

Balance Sheet A financial statement showing an individual’s (or business’s) assets, liabilities, and net worth.

C Corporation A corporation that has not elected to be treated as an S Corporation. A C Corporation’s earnings are taxed at the corporate level when they are earned and again at the shareholder level when they are paid out as dividends.

Cafeteria Plan A benefits program in which employees are offered a choice between cash and one or more other fringe benefits, which allows employees to select the benefits most meaningful to them.

Cash Flow Statement A financial statement showing an individual’s or business’s cash inflows and cash outflows for a defined period.

Charitable Remainder Trust A trust in which the grantor reserves an income interest for life or a period of years, or gives such an income interest to another person, and provides that the remainder interest will pass to charity; the actuarial value of the charity’s interest qualified for the estate tax charitable deduction.

Coinsurance A feature of some medical insurance plans in which the insurer and insured share any expenses above the deductible amount.

Compounding The process of calculating the future value of a lump sum of stream of payments. Also see Discounting.

Conservation Strategy A retirement planning approach in which the client plans to conserve retirement assets for as long as possible and consume only the income from the assets. Also see Liquidation Strategy.

Corporation A business entity owned by shareholders, who have limited liability for the business’s debts. A corporation is an entity distinct from its shareholders and enjoys perpetual life.

Crummey Power A device used in irrevocable insurance trusts to secure the gift tax annual exclusion for the initial transfer of an existing life insurance policy into the trust and the subsequent transfers for the payment of premiums. Trust beneficiaries are given the right to withdraw amounts from the trust during limited periods of time, creating a present interest in the beneficiaries.

Current Yield A bond’s coupon interest divided by the bond’s current market value.

Currently Insured A status under the Social Security system that results from having at least six quarters of coverage in the last 13 calendar quarters. Also see Fully Insured.

D, E, F    

Deductible Under an insurance policy, the initial amount of loss the insured must pay before the coverage takes effect.

Deferred Annuity A type of annuity in which benefits begin more than one payment interval after the payment of the first premium and after the expiration of an accumulation period; may be purchased with either single premiums or annual premiums. Also see Immediate Annuity.

Defined Contribution Plan A retirement plan that does not promise a specific benefit at retirement. Instead, benefits are based on plan contributions, earnings, expenses, and losses.

Defined Benefit Plan A retirement plan that promises to provide a specific benefit at retirement. The retirement benefits are determined by any of several different benefit formulas.

Disclaimer The refusal to accept property as a gift or bequest; also called renunciation.

Discounted Payback Period A method of calculating the payback period that takes time-value of money principles into consideration.

Discounting The process of finding the present value of a lump sum of stream of payments. Also see Compounding.

Diversification Investing in a variety of investment instruments in a variety of industries as a way of diminishing the risk in a portfolio.

Elimination Period In a disability income insurance policy, the period the disabled person must wait before benefit payments begin; also called the waiting period.

Estate Splitting An estate planning technique in which spouses attempt to minimize the total estate tax liabilities of their estates by splitting marital assets to keep their estates in lower tax brackets and taking full advantage of the unified credit at the death of the first spouse.

Financial Planning An integrated process that focuses on determining the client’s total financial objectives, prioritizing those objectives, then designing, implementing, and monitoring a plan to achieve them.

Financial Risk The risk that a debtor will default on the payment of an obligation. This risk often affects bond investors.

Fixed Annuity A type of annuity that guarantees a specified number of dollars will be paid each month when benefits begin. Also see Variable Annuity.

Fully Insured A status under the Social Security system that generally results from having at least 40 quarters of coverage. Also see Currently Insured.

G, H, I    

General Partner A partner who has an active voice in management and unlimited liability for partnership debts. Also see Limited Partner.

General Partnership A partnership in which all partners are general partners.

General Power of Appointment A power of appointment that gives the holder the power to transfer property to a class of potential appointees that includes the holder, the holder’s estate, the holder’s creditors, or the creditors of the holder’s estate. Also see Limited Power Of Appointment.

Grantor The party who establishes a trust; sometimes called the settlor.

Holding Period Return (HPR) A method for measuring the return on an investment that considers the cash flows and appreciation during the entire period the investment is held.

Immediate Annuity A type of annuity that begins to pay out benefits one payment interval after the payment of a single premium. Also see Deferred Annuity.

Index Fund A mutual fund in which the fund portfolio is designed to mirror exactly the performance of some segment of the total market, such as the S&P 500 or the DJIA.

Individual Retirement Account (IRA) A type of retirement plan administered and funded by individuals for their own benefits. Also see Traditional IRA and Roth IRA.

Installment Sale A transaction in which one person sells property to another in exchange for payments that are made for a period of time; similar to a Private Annuity, except that the payments are for a fixed period instead of being measured by someone’s lifetime.

Interest Rate Risk The risk that the value of an investment will fluctuate with changes in the general level of interest rates.

Internal Rate of Return (IRR) The rate of return at which the present value of the cash inflows from an investment is exactly equal to the investment outlay.

Inter Vivos Trust See Living Trust.

Intestate Not having a valid will.

Intestate Succession The manner in which a person’s property will be distributed upon death if the person dies without a valid will.

Itemized Deductions Certain items deductible from adjusted gross income on an individual’s federal income tax return.

J, K, L, M, N    

Joint and Survivor Annuity An annuity in which benefits are paid for as long as either of two individuals is alive; payments stop at the second death.

Joint Life Annuity An annuity in which annuity payments are made only for as long as both annuitants are alive; payments stop at the first death.

Joint Ownership with Rights of Survivorship A type of joint ownership in which the property passes automatically to the surviving joint owner(s) when one joint owner dies.

Leverage The use of borrowed money to make investments.

Limited Partner A partner who has no voice in management but who enjoys limited liability for partnership debts. Also see General Partner.

Limited Partnership A partnership in which at least one partner is a limited partner.

Limited Power of Appointment A power of appointment that gives the holder the power to transfer property to anyone other than the four categories of persons that would make the power a general power of appointment. Also see General Power Of Appointment.

Liquidation Strategy A retirement planning approach in which the client plans to consume, over time, both the income and principal from retirement assets. Also see Conservation Strategy.

Liquidity Risk The risk that investment may not be convertible to cash without making price concessions.

Living Trust A trust created during the grantor’s lifetime; also called an Inter Vivos Trust.

Loan Fund A mutual fund that has a sales charge built into the price of fund shares, primarily to compensate representatives for selling the shares.

Long-Term Capital Gain The gain on a capital asset that has been held for more than 12 months; long-term gains are subject to favorable federal income tax rates.

Long-Term Care Insurance Insurance that protects individuals against the risk they will need long-term care; benefits typically include nursing home care, home health care, and adult day care.

Management Risk A type of risk referring to the extent to which an investment requires ongoing management.

Marital Deduction A provision in both the federal gift tax and the federal estate tax that permits an individual to give or leave an unlimited amount of property to his or her spouse, tax free.

Market Risk The risk that the value of an investment will fluctuate because of changes in the market for that type of investment; the best example is the stock market.

Marketability Risk The risk that the value of an investment will decline because there is no ready market for that investment.

Medical Savings Accounts A program that lets certain persons covered by high-deductible or catastrophic health plans make tax-deductible contributions to an account that can be used to pay medical expenses. Distributions are tax-free when used to pay certain un-reimbursed medical expenses.

Money Market Mutual Fund A mutual fund that offers small investors the opportunity to participate in the money market; advantages include safety of principal and relatively high returns.

National Association of Securities Dealers (NASD) A self-regulatory organization that regulates securities firms and broker-dealers.

Net Present Value (NPV) The difference between the present value of the expected cash inflows from an investment and the amount of the investment outlay; an investment is acceptable if the net present value is equal to or greater than zero.

Nominal Yield A bond’s coupon interest divided by the bond’s value at maturity.

Normal Retirement Age The age at which a worker can begin receiving full Social Security retirement benefits. Normal retirement age is currently 65, but phases into age 67 for people born in 1960 and after.

O, P, Q, R, S    

Ordinary Annuity An annuity in which the periodic payments are made at the end of each period.

Partnership A joint undertaking by two or more persons to conduct an ongoing business for profit.

Personal Auto Policy A package automobile policy that combines property and liability coverage in one package.

Power of Appointment A person’s power to control the disposition of property the person does not own; it may be either a general or a limited power of appointment.

Preferred Stock An equity interest in a corporation that also pays a fixed return, much like a bond; in the event of the issuer’s insolvency, preferred stockholders “stand in line” after bond holders but ahead of common stockholders.

Premature Distribution Generally, a distribution from a qualified retirement plan or IRA that is made before the participant reaches age 59½ ; unless certain requirements are met, premature distributions are subject to tax penalties.

Primary Insurance Amount (PIA) The amount used under the Social Security system to determine the amount of benefits, based on the individual’s earnings history and number of years in the Social Security system.

Probate Technically, the process for establishing the validity of a decedent’s will. The term is also used loosely to refer to the entire process of opening, administering, and closing a decedent’s estate.

Probationary Period In a disability income insurance policy, the period at the inception of the policy during which no benefits are payable; the purpose is to avoid paying benefits for pre-existing conditions.

Purchasing Power Risk The risk that the buying power of an investment will be diminished by inflation; also called inflation risk.

Qualified Plan A retirement plan that meets requirements established by the Internal Revenue Code and Department of Labor and that is therefore entitled to certain tax advantages.

Qualified Terminable Interest Property (QTIP) Property left to a surviving spouse that, if several requirements are met, qualifies for the federal estate tax marital deduction even though it is technically a terminable interest.

QTIP Trust A trust established to receive and administer qualified terminable interest property for the benefit of a surviving spouse.

Real Estate Investment Trust (REIT) A closed-end investment company whose underlying assets are invested in real estate; the REIT is a conduit, and its earnings flow through to its investors.

Return on Investment The reward that an investor gets, or hopes to get, for putting capital at risk.

Risk of Loss of Income The risk that an investment will not pay the income expected.

Risk of Loss of Principal The risk that an investor will lose the capital he or she has invested in an investment.

Risk-Reward Tradeoff The concept that an investor who wants higher potential returns must accept higher risk and that an investor who wants greater safety must be willing to accept lower returns.

Rollover A transfer of assets between qualified retirement plans, between a qualified plan and an IRA, or from one IRA to another; if certain requirements are met, a rollover may be accomplished without incurring any tax consequences.

Roth IRA A type of Individual Retirement Account (IRA) in which contributions are not tax deductible but withdrawals may be tax free.

S Corporation A corporation that has elected to be treated as a conduit entity, with income and losses flowing through and taxed directly at the shareholder level. Also see C Corporation.

Salary Continuation Plan An arrangement, often set up as a nonqualified plan, to defer part of an employee’s compensation for personal services until sometime in the future. Because the plan is non-qualified, the employer is free to discriminate in favor of key employees.

Section 2503 (c) Trust A type of trust, authorized under Section 2503(c) of the Internal Revenue Code, that lets a donor take the annual gift tax exclusion for a gift in trust to a minor, even if the gift is not technically a present interest.

Securities and Exchange Commission (SEC) The federal agency that regulates securities firms and broker-dealers.

Series EE Savings Bonds Nonmarketable federal securities sold at discount and that carry no coupons. Cash-basis taxpayers can elect to defer the recognition of interest until the bonds are surrendered.

Series HH Savings Bonds Federal securities that may be obtained only through the surrender of Series E bonds and that pay interest every six months at a fixed rate.

Short-Term Capital Gain The gain on a capital asset that has been held for 12 months or less.

SIMPLE Retirement Plan A qualified retirement plan available to certain small employers; the plan can take the form of either an employer-sponsored IRA or a 401(k) plan.

Simplified Employee Pension (SEP) A qualified retirement plan in which each eligible employee opens an IRA and the sponsoring employer makes tax-deductible contributions on the employees’ behalf. SEPs enjoy the tax benefits of other qualified plans but have relatively simple administrative rules.

Single Limits A limit of liability provision in an automobile insurance policy, expressed as a single number representing the maximum the insurer will pay for all bodily injury or property damage in any one occurrence.

Sole Proprietorship A business entity that is owned by a single person. The owner has unlimited liability for the business’s debts and the business terminates when the owner dies.

Special Use Valuation See Section 2032A Valuation.

Speculation A high-risk investment strategy in which the investor seeks very high returns on a short-term basis.

Straight Life Annuity An annuity that provides a monthly income for a period measured by one person’s life.

Survival Clause A clause in a will that is used to leave property to a surviving spouse, conditioned on the spouse’s surviving for a specified time. If certain requirements are met, property passing under a survival clause will qualify for the marital deduction even though it is technically a terminable interest.

T, U, V, W, X, Y, Z    

Tax Risk The risk of losing part of the gain on an investment to taxes.

Tax-Sheltered Annuity (TSA) A qualified retirement plan available only to employees of certain nonprofit, tax-exempt organizations and public schools; also called Tax-Deferred Annuities, 403 (b) Annuities, or 501 (c) Annuities.

Temperament Risk An individual’s ability to assume various types of risk.

Term Life Insurance Life insurance that builds no cash value and that provides only temporary coverage, usually for one year.

Terminable Interest Under federal estate and gift tax law, an interest in property that will terminate due to the passage of time or the occurrence or non-occurrence of some event. Generally, a terminable interest does not qualify for the marital deduction.

Testamentary Trust A trust created in the grantor’s will.

Time Value of Money A financial concept stating that a dollar received today is worth more than a dollar to be received in the future.

Traditional IRA A type of Individual Retirement Account (IRA) in which contributions may be tax deductible and withdrawals are generally taxed as ordinary income.

Trust An agreement under which a trustee holds legal title to property, which is transferred to the trust by the grantor, for the ultimate benefit of a beneficiary.

Universal Life Insurance Life insurance that provides for flexible premium payments, with appropriate adjustments to cash values and death benefits when premiums are paid.

Whole Life Insurance Life insurance that builds a cash value and for which premiums are typically paid for the insured’s whole life, or until age 100 if the insured lives that long.

Will A legal document that determines how a person’s property will be distributed when the person dies.

Wrap-Fee Account A type of investment account that offers investment advice, asset allocation, portfolio management, brokerage execution, custodial services, client reports, and performance monitoring all for one fee.

Yield to Maturity A method of calculating bond yield that attempts to take into account not only the bond’s interest earnings, but also the amortization of the discount or premium paid to acquire the bond.