Glossary
Alpha: A mutual fund’s risk in relation to the market index. An alpha of 5 would mean that the fund performed 5% better than the market index.
Alternative Minimum Tax (AMT): An income tax calculation which ignores several deductions in order to ensure taxpayers cannot escape paying their fair share to the government. If the AMT calculation comes out higher than the calculated normal tax, the taxpayer generally must pay the AMT rather than the normal tax.
Annuitant: An annuitant receives the money from an annuity.
Annuity: A long-term insurance contract that pays the annuitant at regular intervals in either fixed or variable amounts.
Asset Allocation: A process of tailoring portfolios to different situations and groups. According to the specific goals of the investor, money is divided into many markets to limit risk and maximize profits.
Basis: The total cost involved in purchasing assets.
Beneficiary: A person entitled to receive benefits from a will or financial contract upon the death of the insured.
Beta: A security’s tendency to fluctuate in relation to a market index. Higher beta values indicate that the security experiences more rapid price changes in relation to the market.
Bond: A security issued by a corporation or the government that pays the holder interest at regular intervals and repays the principal at a set date. The market value of bonds fluctuates with time, although the actual face value of the bond does not.
Contingent Beneficiary: On insurance documents, the insured may name both a primary beneficiary and a secondary beneficiary known as a contingent. If upon the death of the insured the primary cannot accept payment, it falls to the contingent beneficiary.
Coverdell Education Savings Account (Coverdell ESA): A system allowing parents to set aside tax-free money for their children’s college education; however, parents are subject to income eligibility and limited in the amount they may set aside.
Dollar-Cost Averaging: A method which uses a set amount of money to purchase shares at regular intervals regardless of a stock’s price. As a result, the investor generally ends up purchasing stocks at a lower price than buying all at once.
Exchange Traded Fund (ETF): A type of security representing many different stocks. Although similar to an index fund, the ETF is traded normally as a stock on the market and as such costs less.
IRA: A type of retirement plan available to employed adults. Funds within the account enjoy tax-deferred status, and under specific guidelines, contributions are tax-deductible. However, there are caps on annual contributions.
Irrevocable Trust: A trust which cannot be changed by the grantor without the permission of the trustee.
Medicaid: A federal and state program supplementing the cost of long-term medical and nursing home care for low-income individuals and their families.
Medical Savings Account (MSA): A tax-free savings account sponsored by an employer that combines low-premium, high-deductible healthcare with a savings account. The employer and employee cannot both contribute to the account.
Medicare: A federal program that subsidizes the hefty cost of medical care for individuals over the age of 65. Other individuals with specific disabilities and diseases may also qualify for the program.
Municipal Bond: Bonds issued by either a state or local government to pay for expensive projects, such as large-scale construction. To encourage investment, the interest from the municipal bonds is exempt from certain income taxes.
Mutual Fund: A security dealing with many different markets. The fund is divided into shares and each shareholder experiences a portion of the profits and losses.
Nonqualified Plan: A retirement plan that fails to meet IRS standards and does not receive tax reductions.
Preferred Stock: A security for equity in a corporation. Although preferred stock owners do not have the voting rights of common stock owners, their claims to the corporation’s profits takes priority over common stockholders.
Present Value: An estimate for a future sum of money based upon the rate of return and an amount of time.
Qualified Plan: A qualified plan refers to a retirement plan that meets IRS standards and receives tax deductions.
Rate of Return: A percentage over a given time designating the increase or decrease from an investment’s original cost.
Required Minimum Distribution (RMD): The legally required annual minimum that most IRA owners must remove from their retirement accounts by April 1st after they turn 70.5 years old. Certain plans allow participants to delay their RMD if they have not retired.
Reverse Mortgage: A loan typically used by seniors to provide financial security in their retirement years. The home owners borrow against their home equity and receive a lump sum or regular monthly payments from a lender.
Rollover: A tax-free transfer of money from one retirement account to another. Rollover also means the reinvestment of funds from one security to a new version of a similar security.
Roth IRA: A type of IRA which does not tax withdrawals and growth in funds. However, any contributions to a Roth IRA are nondeductible.
Roth IRA conversion: The process of changing a regular IRA into a Roth IRA. Depending on the situation, the investor may need to satisfy requirements and accept penalties.
SEP IRA(Simplified Employee Pension IRA): An employer established retirement plan. The employer rather than the employee funds the account. In exchange for their contributions, the employer receives tax deductions.
Simple IRA: An employer established retirement plan for small companies with no more than 100 people. Employees contribute a percentage of their salaries to the account, which the employer may choose to match. All contributions are subject to the same limitations and benefits of regular IRAs.
Stock: A security representing partial ownership of a company. Stock entitles the owner to a set portion of the company’s assets. There are two varieties of stock. Common stock entitles the owner to participate in stockholder meetings and voting rights for the board of directors. To balance this, preferred stock owners have a higher claim to company assets than common stock owners if the company falls apart.
Term Insurance: A type of life insurance which pays benefits only if the insured dies within a defined period of time.
Total Return: An investment’s return calculated over a given period of time at a given rate.
Universal Life Insurance: A life insurance policy which allows the insured to vary the premium intervals, cost of premiums, and the death benefit. The policy contains an investment option with the option to transfer funds between the two components.
UGMA/UTMA: UGMA, the Uniform Gifts to Minors Act, allows adults to transfer a limited amount of money tax-free to a minor without setting up a special trust fund in their name. The donor appoints a custodian to look after and spend the money on behalf of the minor. However, when the child turns 18, the money falls under their sole control. The UTMA, the Uniform Transfers to Minors Act, extends the scope of the UGMA to things other than money, such as property holdings and patents.
Whole Life Insurance: A life insurance policy with coverage spanning the insured’s lifetime. The policy generally features stable premium costs and continues as long as the premiums are paid. The insurance policy also has an investment component which the insured may use or borrow against.
401K: A retirement plan provided by employers. Employees contribute to the account by deducting a percentage of their wages, which the employer may choose to match. Although there are limits on the deductible percentage, the funds within the account enjoy tax-deferred status. However, any withdrawals prior to retirement are subject to penalties.
529 Plan: A state-supported savings plan meant to encourage higher education. The accounts receive tax benefits, but the money must go towards an eligible educational institution.
