Dictionary of Common Financial Product Terminology and Concepts
Accelerated Benefits – a provision in a life insurance policy that allows death benefits to be paid to the policy owner prior to the insured’s death when the insured is terminally ill and has a limited life expectancy
Accidental Death Benefit – a life insurance rider that increases the death benefit, usually doubling it, when the insured dies accidentally
Adjustable Life – life insurance that can be configured anywhere from short-duration term insurance through single premium whole life and that gives the policy owner the right to request and obtain a reconfiguration of the policy at specified intervals
Annual Percentage Yield (APY) – This reflects the annual compounded yield earned on an interest earning account. As examples, a 4.0% interest rate would also have an APY of 4.0% if interest was compounded annually, but the APY would be 4.06% if interest were compounded quarterly.
Annuity (Fixed) – A safe money place offered by an insurance company paying either a fixed interest rate or fixed participation in an index.
Annuity (Immediate) – Also called an income annuity, paying a regular income for a specific numbers of years, for life, or for a combination of the two.
Annuity (Variable) – an investment security offered by an insurance company aptly described as a mutual fund within a tax-deferred wrapper.
Assumption Whole Life – a variation of traditional whole life insurance that lies between adjustable life and universal life with a redetermination feature that recasts the premium amount, and in some instances, the death benefit in reaction to the most recent interval of experience. It is differentiated from universal life insurance by the absence of total premium flexibility in the renewal years
Basis Point – One one-hundredth of a percent. The difference between 5.02% and 5.03%
Brokered CD – A certificate of deposit purchased from a broker instead of directly from a bank. some brokered CDs cannot be surrendered before the end of the period.
Callable CD – A certificate of deposit whereby the bank can stop paying interest and send you back your money at their discretion, and this usually happens when current rates have dropped lower than what your callable CD is paying.
Cash Value – the amount of equity in a policy against which a loan can be made. The savings element results when premiums during the early years of a whole life policy exceed what is necessary to pay death claims. This excess is set aside and accumulates for the benefit of the insured.
Certificate of Deposit (CD) – A time deposit offered by a financial institution.
Commercial Paper – Short term loans offered by companies.
Compounding (Interest) – When interest is earned on interest. Interest earnings that are not distributed but are instead added to the original principal and reinvested at the same interest rate or at a different rate of interest; thus, it is interest on interest
Consumer Price Index (CPI) – A government cost of living index reflecting inflation.
Contestability – an insurance company’s right to refuse payment of a claim, often due to fraud or misrepresentations on an insured’s application
Cost of Insurance – the amount a policy owner must pay for protection; the sum that each policy owner must contribute as their pro rata share of death claims in any particular year current
Coupon – Another name for a bond’s interest rate dating back to the days when a bondholder physically clipped off an interest coupon and presented it to the lender for payment.
Credit Union – Offer the same safe money places as banks and the covered account values are also federally insured. Credit Unions are owned by their members and are non-profit entities.
Death Benefit Options – universal life insurance gives policy owners a choice between level death benefits and increasing death benefits. The level death benefit design is much like the traditional whole life design. When the death benefit stays constant and the cash value increases over the duration of the contract, the amount at risk, or the protection element, decreases. Under the increasing option, there is a constant amount at risk that is superimposed over the policy’s cash value. As the cash value increases, so does the total death benefit payable. The amount at risk is always the face amount
Deferred Annuity – Refers to the ability to defer taxes on interest earned and is available on a fixed rate, index or variable annuity.
Demand Deposit – Bank account money that can be withdrawn upon demand (a checking account)
Dividend – In the investment world it is a yield paid on a share of stock either in the form of cash or more stock. In the savings world it is money paid (interest) to credit union members on their deposits.
Electronic Funds Transfer – Consumer directed money sent electronically (bill paying), received (ATM) or transferred (from one bank account to another).
Endowment Life Insurance – a variation of whole life insurance that provides level death benefits and cash values that increase with duration so a policy’s cash value equals its death benefit at maturity, and allows the purchaser to specify the policy’s maturity date
FDIC Insurance – Covers deposit accounts, dollar for dollar, including principal and any accrued interest, up to the insurance limit.
FIFO/LIFO – dividends and cash values are generally taxed on a first-in first-out (FIFO) basis; that is, they are treated as a nontaxable return of capital (refund of premiums) to the extent of premiums paid. Withdrawals in excess of premiums paid are taxable as ordinary income. LIFO tax treatment, or last-in, first-out, means that gains (interest, profits, earnings) are recovered before contributions
Financial Needs Analysis – a method of determining budgetary needs based on income and cash needs. Because it uses both principal and interest from a survivor fund that may eventually be depleted, it is also known as the liquidating approach or the capital distribution method
Grace Period – a period of 30 or 31 days after the premium due date that the insurance company will accept late payments without requiring reinstatement to continue coverage. Coverage will extend for this period as well, but the past-due premium will be deducted from the death benefit
Guaranteed Insurability (Purchase) Option – an option to acquire additional increments of coverage at future date or upon future events without further evidence of good health or insurability
Guaranty Associations – Created by state legislatures to protect life, annuity and health insurance policyholders and beneficiaries of an insolvent insurance company. Every state (plus Puerto Rico) provides $100,000 in withdrawal and cash values for all individual fixed annuities. Seven states (and one District) have higher limits:
Incontestable Clause – a provision in the life insurance contract that gives the insurance company up to 2 years to void the contract on the basis of material misrepresentation, concealment, or fraud in applying for coverage. After that 2-year period, the insurer will not be able to void the coverage on those grounds unless the insured dies during that period
Increasing Term Insurance – term insurance that provides systematic increases in the amount of insurance from year to year
Index Annuity – A fixed annuity in which interest earned is linked to the performance of an external index.
Index CD – A certificate of deposit in which interest earned is linked to the performance of an external index.
Indexed UL – permanent life insurance that offers all the benefits of universal life with accumulation values tied to a stock market index. An IUL policy has a fixed interest rate component as well as an indexed account option that has the ability to receive index-linked gains as high as 18 percent or more. The policy owner can reap the rewards of stock market type gains, yet is protects with minimum guaranteed interest rates in case of stock market losses
Individual Retirement Account (IRA) – A government sanctioned tax advantaged savings vehicle.
Interest – Money paid or earned for use of money.
Interest Option – a life insurance settlement option under which the death proceeds are retained by the insurer temporarily, with only the interest earnings thereon distributed to the beneficiary
Interest-sensitive Whole Life – a contract in which mortality and expense charges are guaranteed because excess interest (credited interest minus guaranteed interest) credited to the cash value becomes the only non-guaranteed element in the contract
Laddering – A savings concept combining CDs, bonds, or annuities with different terms to maximize potential interest.
Life Settlement – life settlements are typically offers made to affluent senior clients over age 65 who have experienced a significant decline in health since the policy was first issued; the policy is more valuable due to the insured’s poor health. A life settlement is a way to release dormant cash values in a life insurance policy that is no longer needed or wanted
Linked Savings Accounts – Are linked to a personal checking account, and money to or from the saving account is electronically transferred at customer request.
Liquidity – The ability to get cash from an instrument now.
Market Value Adjustment (MVA) – An annuity feature where changes in the interest environment are taken into account if and only if the annuity is surrendered prematurely. What this can mean is if rates have risen since you started the annuity the penalties for cashing out could be higher than the schedule stated in the policy and if rates have fallen since you took out the annuity the penalties could be lower or even zero.
Maturity – The date bond principal is returned, a CD quits earning interest or a deferred annuity must begin paying an income.
Minimum Balance – The least dollars in an account that must be kept to avoid bank fees.
Minimum Guarantee – Only available with savings bonds and fixed annuities, a minimum return or interest rate that will be credited regardless of economic conditions. The annuity minimum guarantee is effective from day one, the savings bond minimum guarantee kicks in after 20 years.
Minimum Premium – The smallest amount of cash that buys an annuity.
Money Market Account – An FDIC backed bank account permitting limited withdrawals.
Money Market Fund – A non-FDIC backed mutual fund account permitting limited withdrawals.
National Credit Union Share Insurance Fund (NCUSIF) – A federal fund for credit union deposits backed by the full faith and credit of the United States government similar to FDIC.
Needs Analysis Approach – a way of determining how much life insurance a person could carry by analyzing the various needs a family or other dependents would experience if the income producer died
Nonforfeiture Options – a set of choices available to a policy owner regarding how a life insurance policy’s cash value can be used, including cash surrender value, reduced paid-up insurance, and extended term insurance
Nonparticipating Policy – an insurance contract under which a policy owner does not share in the profits experienced by the insurer, also called a guaranteed cost policy
Office of Thrift Supervision (OTS) – Regulates thrifts and savings banks.
Passbook Account – In which records of deposits, withdrawals and interest are stamped and recorded in a booklet.
Permanent Insurance – refers to whole life, universal life, and other cash value types of insurance, as distinguished from the temporary protection afforded by term insurance; also called permanent plan insurance
Prime Rate – The loan interest rate a bank charges its best customers.
Reduced Paid-Up Insurance – a surrender option that allows the insured to take a reduced amount of coverage payable upon the same conditions as the original policy. The protection continues in the reduced amount until the insured’s death unless the reduced policy is surrendered for cash, and no further premiums are called for under this plan
Reentry Term Insurance – a term insurance policy intended to charge higher premiums to those in poorer health when they renew their term insurance
Renewability – a feature commonly found in individual term life insurance that allows the policy owner to renew (extend) the policy for another period of protection, up to a stated point in time, without having to show evidence of insurability
Return-of-Premium (ROP) Term – under return-of-premium life insurance, if you live to the end of the policy period, your premiums are returned. If the policy is terminated, a few companies offer a partial return of premium. If the policy is surrendered, there may be no refund, and there may be a surrender charge in the early years. The longer premium payments are made, the higher the percentage of return will be
Risk Tolerance – is the degree to which a client is willing or reluctant to accept the risk that his investment may decline in value and that the premium may increase over time
Roth IRA – An IRA wherein contributions are not deductible but distributions are not taxed, which is the exact opposite of the way other qualified accounts work.
Savings Account – Bank instrument that usually features low yields that are fully taxable, but money is extremely liquid and FDICinsured. However, internet banks may offer very competitive savings accounts.
Seven-Pay Test – one of two tests applied to a life insurance policy to determine if it is a modified endowment contract (MEC). If the premium paid at any time during the first 15 years of the policy exceeds the level premium necessary to fully pay up the policy in 7 years with level payments, the policy will be an MEC. Tax law discourages single premium and other highly funded variations of life insurance
Simple Interest – When interest is earned only on original principal.
Single Life Insurance – a life insurance policy on a single life, as opposed to insurance on two or more persons as in joint life
Single-Premium Life – the ultimate limited-pay life. Under this plan the number of premiums is limited to one, so the policy is paid-up from inception
Spendthrift Clause – a statement in a settlement agreement that says the proceeds of the policy will be free from attachment or seizure by the beneficiary’s creditors
Standard Nonforfeiture Law – a law requiring life insurance surrender values to be at least as large as those that would be produced by the method the law prescribes. Each policy must contain a statement of the method used to fund the surrender values and benefits provided under the policy at durations not specifically shown. This law does not require specific surrender values
Statement Savings Account – Whereby the consumer receives a quarterly or monthly statement showing deposits, withdrawals and interest activity.
Straight Life Annuity – an agreement that provides periodic (usually monthly) income payments that continue as long as the annuitant lives, but terminate at the person’s death; also referred to as a straight life annuity
Suicide Provision – a life insurance policy provision that specifies that if an insured, whether sane or insane, commits suicide during the first 1 or 2 years of the policy, the insurer will be liable only for the return of the premium
Surrender – refers to termination of a life insurance policy through nonpayment of premiums after surrender values are available
Surrender Options – a set of insurance contract provisions increasingly used to adapt policy coverage to changing circumstances and needs, also known as nonforfeiture options. Most policies stipulate that the surrender value may be taken in one of three forms: cash, a reduced amount of paid-up life insurance, or paid-up term insurance
Surrender Penalties or Charges – Used by the insurance company to recoup initial costs if an annuity is cashed in prematurely.
Survivorship Life (second-to-die) – a type of life insurance policy that covers two or more persons in which the proceeds are payable on the death of the last person to die
Tax Deferred – Delaying the payment of income taxes on interest earned until a future day allowing that interest that would have gone to the IRS to earn interest in the meantime.
Term Insurance – a contract that pays death benefits only if the insured does not survive the specified period
Universal Life – a variation of whole life insurance that offers truly flexible premiums and includes provisions similar to those contained in the adjustable life contract. The policy owner has the right to withdraw part of the cash value without having the withdrawal treated as a policy loan; the policy owner also has the choice of either a level-death benefit or an increasing-death benefit design
Variable Life Insurance (VLI) – a market driven life insurance policy that provides a guaranteed minimum death benefit, but the actual death benefit or cash value is dependent upon investment fluctuations of the funds selected by the policy owner
Variable Universal Life (VUL) – a variation of whole life insurance, this policy incorporates all of the premium flexibility and policy adjustment features of the universal life policy with the policy owner-directed investment aspects of variable life insurance. This policy eliminates the direct connection between investment performance above or below some stated target level and the corresponding formula-directed adjustment in death benefits. Then it adopts the death benefit designs applicable to universal life policies: either a level death benefit or an increasing death benefit design for which a constant amount at risk is paid in addition to the cash accumulation account
Viatical Settlement – refer to instances in which death is considered imminent, and the insured is terminally ill with a life expectancy of less than two years. The policy owner can receive cash in excess of the cash surrender value, or the fair market value of the policy in the secondary market.
Waiver-of-Premium – if the insured becomes totally disable as defined in the life insurance contract, the insurance company will waive payment of premiums on the policy during the continuance of the insured’s disability.
Whole Life – traditional whole life insurance policies have fixed and guaranteed premiums, cash values, and death benefits. Whole life is characterized by guarantees. Coverage can never be cancelled and premiums can never be increased. Premiums are to be paid throughout the insured’s lifetime.
Yield Curve – A comparison showing the relationship between yields and terms. Typically, long- term vehicles have a higher yield than shorter term. An inverted yield curve results when short-term rates are higher than long term rates.
Zero Coupon – a Bond or CD where interest is compounded and only paid out at maturity.
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