Glossary

Account Balance

The amount held in an account at the end of a reporting period. For example, a credit card account balance would show the amount owed to a lender as a result of purchases made during a specific period.

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that is adjusted periodically based on an index. Adjustable-rate mortgages generally have lower initial interest rates than fixed-rate mortgages because the lender is able to transfer some of the risk to the borrower; if prevailing rates go higher, the interest rate on a variable mortgage may adjust upward as well.

Adjusted Gross Income (AGI)

One figure used in the calculation of income tax liability. AGI is determined by subtracting allowable adjustments from gross income.

Administrator

A probate-court-appointed person who is tasked with settling an estate for which there is no will.

Alternative Minimum Tax (AMT)

A method of calculating income tax with a unique set of rules for deductions and exemptions that are more restrictive than those in the traditional tax system. The AMT attempts to ensure that certain high-income taxpayers don’t pay a lower effective tax rate than everyone else. To determine whether or not the AMT applies, taxpayers must fill out IRS Form 6251.

Appraisal

A formal assessment of a property’s value at a specific point in time, performed by a qualified professional.

Asset

Anything owned that has a current value that may provide a future benefit.

Audit

In accounting, the formal examination of a company’s financial records by a qualified professional to determine the records’ accuracy, consistency, and conformity to legal standards and established accounting principles. In taxes, the formal examination of a tax return by the Internal Revenue Service or other authority to determine its accuracy.

Beneficiary

The person or entity who will receive benefits upon the death of an individual.

Book Value

The value of a company’s assets minus its liabilities, preferred stock, and redeemable preferred stock.

Buy-Sell Agreement

A legal contract that provides for the purchase of all outstanding shares from a business owner who wishes to sell, wants to terminate involvement, is permanently disabled, or has died. Buy-sell agreements are often funded with life insurance.

Cash Surrender Value

The amount a policyholder would receive when voluntarily terminating a cash-value life insurance policy before the insured event occurs or when cashing out an annuity contract before its maturity. Computation of cash surrender value is stated in the life insurance or annuity contract.

Claim

A request for payment under the terms of an insurance policy.

COBRA

A federal law that requires group health plans sponsored by employers with more than 20 employees to offer terminated or retired employees the opportunity to continue their health insurance coverage for a specified period at the employees’ expense.

Coinsurance or Co-Payment

A policy provision under which an insurance company and the insured party share the total cost of covered medical services after the policy’s deductible has been met.

Community Property

State laws under which most property and debts acquired during a marriage—except for gifts or inheritances—are owned jointly by both spouses and are divided upon divorce or annulment. In the United States, nine states have community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Compound Interest

A process under which interest is computed both on an account’s principal and on any gains reinvested in prior periods. This is contrasted with simple interest, in which interest is calculated only on the principal amount.

Consumer Price Index (CPI)

The U.S. government’s main measure of inflation, calculated monthly by the Department of Labor.

Convertible Term Insurance

A term life insurance policy under which the policyholder has the right to convert the policy to permanent life insurance, subject to limitations. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Corporation

A legal organization created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. Corporations are taxable entities—they are taxed separately from their members or shareholders. Corporations are able to borrow money and to make a profit separately from their members or shareholders.

Credit Score

A statistical estimation of how likely a potential borrower is to pay his or her debts and, by extension, how much credit he or she should have.

Debt

An obligation owed by one party (the debtor) to a second party (the creditor).

Debt-to-Equity Ratio

The ratio of a company’s total debt to its total shareholder equity. Some use the debt-to-equity ratio to attempt to ascertain a company’s capability to repay its creditors.

Deduction

An amount that can be subtracted from gross income before income taxes are calculated.

Deed

A legal document that confirms ownership of an asset or that confirms the passage of an interest, right, or ownership in the asset from one person or legal entity to another.

Deflation

A reduction in the price of goods and services. Deflation is the opposite of inflation.

Dependent

A person who relies on another for his or her financial support. Within limits, those who support dependents are allowed to claim certain exemptions when filing income taxes.

Disability Income Insurance

An insurance policy that pays a portion of the insured’s income when a specified disability makes working uncomfortable, painful, or impossible.

Equity

The value of real property or a business after all liabilities have been paid. A home worth $300,000 with a $200,000 mortgage would have $100,000 in equity.

Estate Management

The preparations necessary to manage a person’s financial and healthcare matters during his or her lifetime and to effectively and economically distribute the assets within that estate upon his or her death.

Estate Tax

Federal and/or state taxes that may be levied on the assets of a deceased person upon his or her death. These taxes are paid by the deceased person’s estate rather than his or her heirs.

Executive Bonus Plan

An executive benefit paid for by an employer.

Executor

A person named by a will or appointed by the probate court to distribute the deceased’s assets as directed by the will or, in the absence of a will, in accordance with the probate laws of the state.

Federal Income Tax Bracket

A series of income ranges within which a taxpayer’s income is taxed at a certain rate. Taxpayers pay the tax rate in a given bracket only for that portion of their overall income that falls within the bracket’s range.

Federal Reserve System (The Fed)

The United States’ central bank. The Federal Reserve System consists of a series of 12 independent banks that operate under the supervision of a seven-member, federally appointed board of governors. The Fed strives to maintain maximum employment, stable price levels, and moderate long-term interest rates. It establishes and enforces the regulations banks, savings and loans, and credit unions must follow. It also acts as a clearing house for certain financial transactions and provides banking services to the federal government.

Financial Aid

Loans, grants, scholarships, and work-study programs provided by federally and privately funded sources to enable students to attend college.

Financial Statement

A formal record of the financial activities of a business, person, or other entity. For a business, financial statements typically include a balance sheet, a profit and loss statement, and a cash flow statement.

First-to-Die Life Insurance

Joint life insurance taken out on the lives of two or more people that pays its death benefit when the first insured person dies.

Fixed-Rate Mortgage

A mortgage with a set interest rate that will not change over the life of the loan.

Foreclosure

The legal process under which a creditor seizes the property of a borrower who has not made timely payments on his or her debt.

Fundamental Analysis

A method of evaluating securities that examines financial and economic factors—such as the current finances of a company and the prevailing economic environment—to determine whether the company’s future value is accurately reflected in its current stock price.

Gift

The voluntary transfer of assets under which the giver receives no compensation and retains no interest in his or her gift.

Gift Tax

A tax the federal government and some states levy on the transfer of property as a gift. Generally gift taxes increase with the amount of the gift and are paid by the donor.

Gross Monthly Income

Total monthly income generated from all sources before taxes and other expenses are considered.

Group Life Insurance

Life insurance that insures all the members of a specific group, most often the employees of a specific company or the members of a professional association.

Health Savings Account (HSA)

An account that offers individuals covered by high-deductible health plans a tax-advantaged means to save for medical expenses. Within certain limits, funds contributed to the account are not subject to federal income taxes. Unlike Flexible Spending Accounts (FSAs), funds can be rolled over from year to year if not spent.

Home Equity

The real value of a home after all liabilities have been paid. Thus a home worth $300,000 with a $200,000 mortgage would have $100,000 in equity.

Income

Monies or other compensation received from any source. This includes wages, commissions, bonuses, Social Security and other retirement benefits, unemployment compensation, disability, interest, and dividends. Generally, all income is taxable unless it is specifically exempted by law.

Inflation

An upward movement in the average level of prices. Each month, the Bureau of Labor Statistics reports on the average level of prices when it releases the Consumer Price Index (CPI).

Interest Rate

The cost to borrow money expressed as a percentage of the loan amount over one year.

Intestate

The condition of an estate when its owner dies without leaving a valid will. In such circumstances, state law normally determines who inherits property and who serves as guardian for any minor children.

Irrevocable Trust

A trust that cannot be altered, stopped, or canceled after its creation without the permission of the beneficiary or trustee. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

Joint Tenancy

A form of property ownership under which two or more people have an undivided interest in the property and in which the survivor or survivors automatically assume ownership of the interest of any joint tenant who dies.

Jointly Held Property

Property owned simultaneously by more than one person. All co-owners have an equal right to use the property, and no co-owner can exclude another co-owner from the property. The most common forms of jointly-held property are joint tenancy, tenancy in common, and, in some states, community property.

Key Employee

An employee who has valuable skills, knowledge, or organizational abilities, who is considered critical to the success of a given company.

Key Person Insurance

Company-owned insurance designed to cover the cost of replacing a key employee if he or she were to die or become disabled.

Life Insurance

A contract under which an insurance company promises, in exchange for premiums, to pay a set benefit when the policyholder dies. Several factors will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Living Trust

A trust created by a living person which allows that person to control the assets he or she contributes to the trust during his or her lifetime and to direct their disposition upon his or her death.

Living Will

A written document that allows the originator to designate someone to make medical decisions on his or her behalf in the event that he or she becomes incapacitated due to accident or illness.

Long-Term-Care Insurance

Insurance that covers the cost of medical and non-medical services needed by those who have a chronic illness or disability—most commonly associated with aging. Long-term-care insurance can cover the cost of nursing home care, in-home assistance, assisted living, and adult day care.

Marital Deduction

A provision of the tax code that allows an individual to transfer an unlimited amount of assets to his or her spouse at any time—including upon the individual’s death—without triggering a tax liability.

Medicaid

The federal government’s health program for eligible individuals and families with low income and resources. It is means tested, meaning those who apply for benefits must demonstrate they have need.

Medicare

The federal government’s health program for individuals aged 65 and over and for individuals who have certain disabilities or end-stage renal disease.

Net Income

A company’s total revenues minus its costs, expenses, and taxes. Net income is the bottom line of a company’s income statement (which may also be called the profit and loss statement).

Net Worth

The value of a company’s or individual’s assets minus liabilities.

Old-Age, Survivors, and Disability Insurance (OASDI)

The official name of the Social Security program. In addition to retirement benefits, it offers disability income, veterans’ pensions, public housing, and food stamps.

Partnership

A contract under which two or more individuals manage and operate a business venture.

Permanent Life Insurance

A class of life insurance policies that do not expire—as long as premiums are kept current—and which combine a death benefit with a savings component. This savings portion can accumulate a cash value against which the policy owner may be able to borrow funds. Several factors will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Policy Loan

A loan made by an insurance company to a policyholder. Policy loans are secured by the cash value of a life insurance policy. Withdrawals of earnings are fully taxable at ordinary income tax rates. If you are under age 59½ when you make the withdrawal, you may also be subject to a 10% federal income tax penalty. Also, withdrawals may reduce the benefits and value of the contract.

Policy Rider

A provision to a life insurance policy that is purchased separately from the basic policy and that provides additional benefits at additional cost.

Policyholder

The person or entity who holds an insurance policy; usually the client in whose name an insurance policy is written.

Power of Attorney

A legal document that grants one person authority to act for another person in specific legal or financial matters in the event that said individual becomes incapacitated.

Prenuptial Agreement

A contract entered into by those contemplating marriage that sets forth how their individual property will be divided should they ultimately divorce.

Prime Interest Rate

The interest rate commercial banks charge their most credit-worthy or “prime” customers. The prime interest rate is influenced by the federal funds rate.

Probate

The court-supervised process in which a deceased person’s debts are paid and any remaining assets distributed to his or her heirs.

Property

Anything over which a person or business has legal title. Property may be held in common or privately owned.

Revenue

The amount of money a company brings in from its business activities during a given period, before expenses and taxes have been subtracted.

Revocable Trust

A trust that can be altered or canceled by its grantor. During the life of the trust, any income earned is distributed to the grantor; upon the grantor’s death, the contents of the trust are transferred to its beneficiaries according to the terms of the trust.

Split-Dollar Plan

An arrangement under which an employer and employee share the obligations and benefits of a life insurance policy.

Split-Dollar Life Insurance

An arrangement under which a life insurance policy’s premium, cash values, and death benefit are split between two parties—usually a corporation and a key employee or executive. Under such an arrangement an employer may own the policy and pay the premiums and give a key employee or executive the right to name the recipient of the death benefit. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Taxable Income

A taxpayer’s gross income, minus any adjustments, itemized deductions or the standard deduction, and personal exemptions. Taxable income is used to compute tax liability.

Tenancy in Common

A form of property ownership under which two or more people have an undivided interest in the property and in which the interest of a deceased owner passes to his or her beneficiaries rather than to the surviving owners.

Term Insurance

Life insurance that provides coverage for a specific period. If the policyholder dies during that time, his or her beneficiaries receive the benefit from the policy. If the policyholder outlives the term of the policy, it is no longer in effect. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Testamentary Trust

A trust created by a will or trust that is established on the death of the trustor. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

Title

A legal document that serves as evidence of ownership of an asset or security.

Trust

A trust is a legal arrangement that creates a separate entity which can own property and is managed for the benefit of a beneficiary. A living trust is created while its grantor is still alive. A testamentary trust is created upon the grantor’s death—usually by another trust or by a will. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

Trustee

An individual, corporation, or other entity that manages property held in a trust.

Universal Life Insurance

Permanent life insurance that allows the policyholder to vary the amount and timing of premiums and, by extension, the death benefit. Universal life insurance policies accumulate cash value which grows tax deferred. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Unlimited Marital Deduction

A provision of the tax code that allows an individual to transfer an unlimited amount of assets to his or her spouse at any time—including upon the individual’s death—without triggering a tax liability.

Whole Life Insurance

Permanent life insurance with fixed premiums and death benefit. Whole life insurance policies accumulate cash value which grows tax deferred. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Will

A legal document by which an individual or a couple identifies their wishes regarding the distribution of their assets after death as well as the guardianship of any minor children.