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Definitions of financial terms
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Definitions of Investment and Financial Planning Terms

Many of the term definitions given below are based on the context from which they are referenced within this site. To view the term within its applied context click the term being defined.

401(k) Plans - Qualified Employer Sponsored Retirement Plans
401K Plans are Qualified Employer Sponsored Retirement Plans whereby the employer contributes a set percentage of the employee"s salary either through salary deferral or at the employer"s expense to the account set up for each participating employee. The written plan must provide that each participant receive all benefits by April 1st of the calendar year that the participant retires or by April 1st of the calendar year after the participant turns 70 1/2.
529 Plans - Qualified Tuition Plans
Federal tax-advantaged savings plans sponsored by states, state agencies, or educational institutions to encourage savings for future education costs.
529 State Prepaid Plans
Federal tax-advantaged plans sponsored by states or state agencies and designed to prepay fees and tuition at in-state colleges and universities. By prepaying tuition, participants benefit by purchasing some percentage of future tuition at today's tuition price.
Activities of Daily Living
Activities such as bathing, dressing, eating, toileting, transfering, and continence.
Annual Gross Income
Total personal income in a year, before taking taxes or deductions into account.
Annuity
An annuity is a contract under which a series of payments are promised to a person in exchange for a single payment or series of payments.
Automatic 401(k)
A 401(k) plan that includes an automatic enrollment feature which permits the employer to automatically reduce the employee’s wages by a fixed percentage or amount and contribute that amount to the 401(k) plan unless the employee has affirmatively chosen not to have his salary reduced.
Available Assets and Insurance
Total account balances of resources that would be available to the survivors, e.g., 401(k)s, IRAs, stocks, mutual funds, bank savings, proceeds for the sale of a home if downsizing, face amounts on existing life insurance policies, etc.
Benefit Period for Disability Insurance
If applying for Short Term Disability Insurance it is recommended to choose a benefit period of at least 2 years to provide you an income while you wait to be approved for Social Security Disability Income.The length of time for which the benefit is payable under a policy. In choosing a benefit period for Long Term Care Insurance keep in mind that in 2004, the average length of stay in a nursing home was 2.4 years.
Benefit Period for Long Term Care Insurance
The length of time for which the benefit is payable under a policy. In choosing a benefit period for Long Term Care Insurance keep in mind that in 2004, the average length of stay in a nursing home was 2.4 years.
Burial Insurance or Final Expenses Insurance
A life insurance policy (usually simplified issue whole life) whose main purpose is not to provide a benefit for a beneficiary, but to pay the cost of burial and/or other expenses not paid while the insured was alive. These are usually offered with a lower face amount than most policies (most below $15,000).
Cost of Living Adjustment
An option that increases the benefit by a percentage or the latest Consumer Price Index measure. Simple increases use the original monthly benefit to determine the increase each year. Compound increases are based on the previous year's benefit, including the original benefit and the increase. Compound increases approximate the increase to the cost of living. Increases with both options are not applied until after the insured has been eligible for 365 days.
Coverdell Education Savings Account (CESA or ESA) Plans
Federal tax-advantaged savings plan restricted to families with incomes limited to a maximum AGI of $110,000 for single filers and $220,000 for joint filers. CESA is set to expire on December 31, 2010 and it is unknown as to whether or not Congress will extend it.
Daily Benefit Amount
The amount of daily benefit paid in the event the insured requires long term care. In 2004 the U.S. national average cost for long term care was $169 per day for a semi-private room and $192 per day for a private room. The average hourly rate for a Home Health Aide was $18.
Desired Years of Survivor Income
Enter the number of years you would like to replace income for your survivors. For exammple, if you would like to provide income until your spouse is age 85, and he/she is currently 45, enter 40 years.
Disability Insurance or Disability Income Insurance
Replaces a percentage of lost income due to a disability.
Education Savings Bonds
Series EE bonds issued January 1990 and later, and all Series I Bonds purchased for the purpose of funding higher education. Interest earned is federal income tax-free for qualified withdrawals (subject to income limits).
Elimination Period
The number of days from the onset of the event triggering benefit eligibility (disability in the case of disability income insurance or when the insured can no longer perform a specified number of activities of daily living in the case of long term care insurance). The longer the elimination period the lower the premium.
Equity Indexed Annuity
Equity Indexed annuities guarantee a minimum annual rate of interest plus they may provide a bonus should the S&P index rise above the guaranteed minimum interest rate. Equity index annuities provide tax deferral plus all the benefits outlined above. Equity Indexed Annuities are primarily for investors who don't want to risk losing any of their deposits but also want an opportunity to participate in stock market gains.
Estimated Future College Costs
Over the past decade, total charges, including room and board in addition to tuition and fees, rose at an average rate of 2.6 percent per year after inflation at private four-year colleges and universities, and 3.5 percent at public four-year institutions.
Final Expenses
Total account balances of any debts you would like to pay off with the insurance proceeds, such as credit cards, investment debt, installment loans, and mortgages. Final expenses including funeral and burial costs range from $5,000-$10,000.
Fixed Annuity
Fixed annuities guarantee a minimum fixed rate of interest each year while preserving principal. All the tax deferral features mentioned above apply to fixed annuities. Fixed annuities are primarily for investors who don't want to risk losing any of their deposits.
Future Income Option
Allows you to increase your coverage as your income grows, without medical documentation.
Gross Income
All current income before taxes, including earned W-2 income, unearned income, interest income, rental income, dividends, etc.
Home Care Benefit
Pays a percentage of the daily benefit for the cost for services provided by a certified or licensed home care agency, or an independent home health caregiver. These services may include help with bathing, dressing, cooking, cleaning and doing laundry. Some policies may allow the caregiver to be a family member if they receive caregiver training and may even pay for such training. The Home Care Benefit may be a standard or an optional benefit.
Independent 529 Plans
Federal tax-advantaged programs set up by an organization of colleges and universities over various states. The plans are designed to prepay fees and tuition at participating colleges and universities. By prepaying tuition, participants benefit by purchasing some percentage of future tuition at today's tuition price. When the student is ready to attend he/she may use the purchased tuition certificates or units at the participating institution of choice, assuming the student is accepted.
Inflation Guard
Inflation Guard insures that your family's standard of living will not decline with rising inflation. Historically, inflation has averaged between 3 and 6 percent. Enter 0 if you want to provide a level benefit. This number will also be used to adjust the yearly Social Security benefit.
Instrumental Activities of Daily Living
Activities such as shopping, cooking, and managing money.
Insured
The person who is covered by the insurance policy.
Investment Return on Insurance
In order to determine the amount in today´s dollars that will provide the funds needed to replace income, we need to assume a before-tax return on the interest generated by the tax-free death benefit paid by the insurance company. Depending on the investment vehicle that the surviving spouse chooses, the return may range from 5 to 10 percent.
Law of Large Numbers
One of the basic principles of insurance, it states that the larger the number of individual risks in a group the more certainty there is as to the amount of loss to be expected in that group.
LTD Insurability
Lets you increase your individual income protection without medical documentation if you lose access to employer-provided disability benefits.
Medical Conditions
List any conditions for which you are receiving treatment or have received treatment in the past, such as diabetes, heart disease, etc. Include any medication you are taking, dosage, frequency, and the reason it was prescribed.
Medical Exam
When applying for insurance related to health, life, disability, etc., if the applicant has any prior conditions or family history of health conditions, or any situation for which the insurance company may wish to confirm the current health status of an applicant a medical exam may be required. The medical exam may be a complete exam or specific tests related to the health question(s) of concern.
MIB - Medical Insurance Bureau
MIB Group, Inc. ("MIB") is a membership corporation owned by approximately 470 member insurance companies in the US and Canada. Organized in 1902, MIB's core fraud protection services protect insurers, policyholders and applicants from attempts to conceal or omit information material to the sound and equitable underwriting of life, health, disability income, critical illness and long-term care insurance.
Source: http://www.mib.com/html/about_mib_group.html 09-15-08
MYG - Multi-year Guarantee Annuity
An annuity that offers a choice of periods (in years) in which a guaranteed rate or rates apply. The annuitant chooses the period at purchase and therefore can expect a set minimum return of premium plus interest at maturity of the annuity.
Nondiscrimination Testing
In a retirement plan that requires nondiscrimination testing it compares plan participation and contributions of rank-and-file employees to owners/managers. If the company is found to not meet the requirements as set forth by the IRS it will not qualify for tax-favored treatment (deductions or credtis) that it might otherwise receive.
Nursing Home Costs - 2008
State Avg. Daily Nursing Home Rate : Private  Avg. Daily Nursing Home Rate : Semi-Private  Avg. Monthly Cost in Assisted Living Facility Home Health Aide Average Hourly Rate Homemaker Services Average Hourly Rate Adult Day Services Daily Rate
Alabama State Average 158 149 2,440.00 46 15 32
Alaska State Average 515 515 4,567.00 49 24 99
Arizona Phoenix 209 160 2,473.00 29 19 41
Rest of State 197 163 2,761.00 28 18 50
State Average 203 162 2,617.00 29 19 46
Arkansas State Average 137 125 1,981.00 21 15 43
California Los Angeles 209 166 3,318.00 29 19 77
Oakland 254 202 3,197.00 47 22 97
Sacramento 252 196 2,716.00 35 21 73
San Diego 226 189 2,922.00 33 21 79
San Francisco 274 212 3,668.00 34 24 73
San Jose 247 203 2,599.00 50 23 65
Santa Ana 238 191 3,379.00 32 19 78
Rest of State 200 176 2,989.00 29 20 73
State Average 238 192 3,099.00 36 21 77
Colorado Denver 198 182 3,392.00 28 19 50
Rest of State 206 176 3,105.00 26 18 63
State Average 202 179 3,249.00 27 19 57
Connecticutt Bridgeport 362 336 4,346.00 23 19 70
Rest of State 328 306 3,511.00 26 19 71
State Average 345 321 3,929.00 25 19 71
Delaware State Average 210 197 3,774.00 31 19 67
District of Columbia Upper Northwest 238 216 3,693.00 19 17 70
Washington 216 203 4,027.00 20 18 62
State Average 227 210 3,860.00 20 18 66
Florida Jacksonville 193 177 2,490.00 25 17 52
Miami 249 213 2,753.00 17 15 52
Orlando 207 187 2,726.00 18 17 57
Tampa 212 192 2,760.00 21 19 42
Rest of State 202 183 2,480.00 20 18 57
State Average 213 190 2,642.00 20 17 52
Georgia Atlanta 173 162 2,495.00 43 17 43
Rest of State 143 135 2,184.00 40 16 56
State Average 158 149 2,340.00 42 17 50
Hawaii State Average 295 267 3,443.00 32 18 59
Idaho State Average 185 172 2,749.00 25 17 66
Illinois Chicago 199 171 4,507.00 27 19 51
Rest of State 157 132 2,956.00 32 17 61
State Average 178 152 3,732.00 30 18 56
Indiana Indianapolis 193 157 2,484.00 21 18 52
Rest of State 188 154 2,979.00 21 17 49
State Average 191 156 2,732.00 21 18 51
Iowa State Average 137 125 2,614.00 28 19 66
Kansas State Average 133 124 2,468.00 22 16 72
Kentucky State Average 177 155 2,793.00 39 16 56
Louisiana State Average 125 118 2,528.00 41 13 52
Maine State Average 233 208 4,103.00 38 20 44
Maryland Baltimore 230 215 2,912.00 25 18 70
Rest of State 195 186 2,827.00 27 18 68
State Average 213 201 2,870.00 26 18 69
Massachusetts Boston 300 281 4,504.00 26 22 59
Rest of State 291 276 3,870.00 29 21 54
State Average 296 279 4,187.00 28 22 57
Michigan Detroit 217 195 3,117.00 24 18 53
Rest of State 201 187 2,533.00 27 18 47
State Average 209 191 2,825.00 26 18 50
Minnesota Minneapolis 171 146 3,677.00 26 22 67
Rest of State 141 121 2,731.00 25 19 49
State Average 156 134 3,204.00 26 21 58
Mississippi State Average 174 169 2,277.00 44 14 43
Missouri Kansas City 175 154 3,521.00 30 18 63
St. Louis 184 146 2,848.00 24 19 56
Rest of State 126 119 2,048.00 20 17 61
State Average 162 140 2,806.00 25 18 60
Montana State Average 163 157 2,826.00 23 19 67
Nebraska State Average 156 142 2,335.00 23 16 55
Nevada Las Vegas 213 180 2,076.00 27 19 77
Rest of State 209 186 2,933.00 46 20 69
State Average 211 183 2,505.00 37 20 73
New Hampshire State Average 259 238 3,426.00 32 20 58
New Jersey New York 290 264 4,442.00 24 18 82
Rest of State 263 240 4,921.00 28 19 81
State Average 277 252 4,682.00 26 19 82
New Mexico State Average 162 149 2,981.00 23 18 23
New York New York City 398 380 3,319.00 20 18 95
New York, Newark, Edison (Not NYC) 355 332 3,938.00 27 19 75
Rochester,Buffalo, Syracuse 272 263 2,969.00 24 18 64
Rest of State 251 241 2,955.00 28 19 54
State Average 319 304 3,295.00 25 19 72
North Carolina Charlotte 184 171 3,066.00 27 16 45
Rest of State 183 170 2,395.00 29 17 45
State Average 184 171 2,731.00 28 17 45
North Dakota State Average 139 125 2,236.00 24 17 73
Ohio State Average 191 173 2,932.00 18 17 47
Oklahoma State Average 141 120 2,138.00 29 17 48
Oregon Portland 222 201 2,797.00 33 20 63
Rest of State 193 179 3,430.00 33 19 102
State Average 208 190 3,114.00 33 20 83
Pennsylvannia Philadelphia 274 241 3,708.00 26 19 81
Rest of State 221 205 2,663.00 22 17 46
State Average 248 223 3,186.00 24 18 64
Rhode Island State Average 248 224 3,136.00 22 19 64
South Carolina State Average 158 149 2,669.00 29 16 50
South Dakota State Average 157 142 2,191.00 20 19 15
Tennessee Nashville 164 145 2,984.00 27 18 46
Rest of State 159 150 2,729.00 32 15 49
State Average 162 148 2,857.00 30 17 48
Texas Austin 150 123 2,998.00 29 17 55
Dallas 166 118 2,763.00 34 17 43
Houston 155 120 2,562.00 24 18 40
San Antonio 185 127 3,019.00 26 16 29
Rest of State 144 109 2,479.00 28 16 29
State Average 160 119 2,764.00 28 17 39
Utah State Average 157 143 2,433.00 24 20 37
Vermont State Average 232 220 2,569.00 24 20 59
Virginia Richmond 189 163 3,140.00 25 17 49
Rest of State 170 159 2,886.00 24 16 55
State Average 180 161 3,013.00 25 17 52
Washington Seattle 230 213 3,467.00 38 23 52
Rest of State 211 193 2,598.00 51 19 58
State Average 221 203 3,033.00 45 21 55
West Virginia State Average 185 176 2,717.00 32 14 42
Wisconsin State Average 198 183 3,170.00 25 18 53
Wyoming State Average 176 167 2,449.00 24 19 60
Wisconsin State Average 198 183 3,170.00 25 18 53
Paramed Exam
A paramedical exam consists of questions about your medical history, measurements of your height and weight, blood pressure and pulse. A urine specimen is also collected. Undressing is not required and the exam usually lasts 20 to 30 minutes.
Percentage of Current Income Desired at Retirement
Financial professionals generally recommend replacing 70 to 80 percent of current income at retirement in order to maintain the same standard of living.
Percentage of Current Income Desired for Survivors
Financial professionals generally recommend replacing about 70 percent of your pre-tax income in order for your survivors to maintain the same standard of living. This amount my be reduced if you elect to have the insurance proceeds pay off any debts such as a mortgage. For example, if 20 percent of your gross income currently goes to debts service and you elect to pay off the balances you would enter 50% here (70% minus 20%).
Policyowner
The policyowner is the individual or entity that has purchased the insurance policy. It may or may not be the insured.
Post-retirement Investment Return
Estimated before-tax percentage of return on your savings after retirement. During retirement, portfolios tend to be invested more conservatively and hence, a lower return may be appropriate.
Pre-retirement Investment Return
Estimated before-tax percentage of return on your savings prior to retirement.
Probate
Probate is a legal process whereby a court oversees the distribution of assets of a deceased person.
Qualified Plan
Any employer-based or individual retirement plan which meets the federal guidelines to grow tax-deferred inside of a savings vehicle such as an annuity or mutual fund.
Retirement Savings
Total account balances of resources earmarked for retirement, such as 401(k) plans, IRAs, stocks, mutual funds, bank savings, etc.
Risk Pooling (or Loss Sharing)
A basic principle of life insurance that states that the financial loss experienced from one person's death, that would normally be catastrophic to that person's family, if spread over a large group would be very minimal.
Safe Harbor Plan
A 401(k) plan in which the employer is required to either match each eligible employee"s contribution, up to 3 percent of the employee"s compensation, and 50 cents on the dollar for the employee"s contribution that exceeds 3 percent, but not 5 percent, of the employee"s compensation or it can make a nonelective contribution equal to 3 percent of compensation to each eligible employee"s account. All employer contributions are immedicately 100% vested.
SIMPLE 401(k) Plan
A SIMPLE 401(k) Plan is an employer sponsored retirement plan as defined by the IRS, in which employer contributions are limited to either a dollar-for-dollar matching contribution, up to 3 percent of pay or a nonelective contribution of 2 percent of pay for each eligible employee. It is designed to be simple to implement and maintain.
Simplified Issue
Simplified Issue refers to a type of medical underwriting that is not as extensive as other products of its kind, but is simplified. It normally entails that the applicant answer a few health and lifestyle related questions as opposed to a medical exam or paramed. A DMV and or MIB check may also be included.
Single Premium Immediate Annuity
An immediate annuity funded by a single premium. Pays a monthly benefit (an annuity) for a specified length of time or for the life of the annuitant.
Sinking Funds (Personal)
A Sinking Fund is money set aside each month to pay for irregular bills. For instance tires for a car, or property taxes, etc. In contrast to an Emergency Fund which is for unexpected expenses, a sinking fund is for irregular but expected expenses.
Social Insurance Substitute
Also known as Social Security Offset Rider, it coordinates benefits with any benefits received through Social Security or other public programs. For example: If your monthly benefit is $3000, but you receive $1200 from Social Security, you will only receive $1800 from the insurer. Since this means a potential reduction in benefits, choosing this option will also reduce your monthly premium.
Surrender Charge (applies to annuities)
A charge applied to withdrawals from annuities above the allowed amount before the length of the annuity contract has expired. Usually the charge is a decreasing percentage of the withdrawal based upon the length of time the contract has been in effect.
Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA)
Provide tax-advantaged treatment from custodial accounts held and controlled for a child by an adult custodian when withdrawals are used to pay for higher education expenses.
Variable Annuity
Variable annuities combine guaranteed interest rates with totally variable returns. These variable returns are essentially the return of the mutual funds that the variable annuities separate account invests in. Variable annuities provide tax deferral plus all the benefits outlined above with the exception of principal guarantee. Variable annuities are for more aggressive investors who are comfortable with investing in mutual funds and have a reasonable time frame to retirement. A variable annuity provides you the most flexibility and control over your investments with full exposure to market risks.
Vesting
Vesting refers to ownership. If an employee is 100 percent vested in his account he owns all benefits in the account and the employer may not take it back even if the employee is terminated. Often an employer may, depending on the type of plan, apply a vesting schedule such that an increasing percent of the employer"s contributions are vested each year until the employee owns 100 percent of the account.