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A B
C D E F G
H I J K L
M N O P Q
R S T U V
W X Y Z
A
§401(k) Plan
A qualified profit sharing or stock bonus plan under which plan participants
have an option to put money into the plan or receive the same amount as taxable
cash compensation. Amounts contributed to the plan are not taxable to the
participants until withdrawn. Generally funded entirely or in part through
salary reductions elected by employees. Salary reductions are subject to an
annual limit.
§403(b) Plan
A tax-deferred annuity retirement plan available to employees of public schools
and certain nonprofit organizations.
Absolute Assignment
A policy assignment under which the assignee receives full control over the
policy and full rights to its benefits. As a general rule, when a policy is
assigned to secure a debt, the owner retains all rights in the policy in excess
of such debt, even though the assignment may be absolute in form. The insurance
company does not guarantee the validity of the assignment.
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Accelerated Benefits
A provision in some life insurance policies that allows insureds who are
terminally ill to collect part or all of their life insurance benefits before
they die, primarily to pay for the care they require. When the insured dies, the
remainder of the death benefit is paid to the beneficiary, just as under a
traditional life insurance policy.
Accrued Benefit
The amount of retirement benefit that has been accumulated on behalf of a
participating employee. In the case of a defined benefit plan, an employee's
accrued benefit would be expressed as the amount he or she could expect to
receive at normal retirement if no future funds were contributed to the plan. In
the case of a money-purchase plan or profit-sharing plan, a participant's
accrued benefit means the balance presently accrued in his or her individual
account.
Accrued Interest
Interest earned but not yet paid for a period of time that has elapsed since the
last interest payment.
Accrued Liability
The amount of money needed to offset a participant's accumulated benefits under
a retirement plan. A plan's accrued liability is equal to the difference between
the present value of future benefits promised and the present value of future
contributions. A plan is considered fully funded when the funds held under the
plan equal the plan's accrued liability. Conversely, when the assets of a plan
are less than its accrued liability, the plan is deemed to have an unfunded
accrued liability.
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Accumulated Benefit Obligation
An accounting term representing the value of retirement benefits already earned
by an employee through prior service.
Accumulated Earnings Tax
A penalty tax imposed on a corporation's accumulated earnings and profits in
excess of $250,000 or, if greater, the reasonable needs of the business. The
accumulated earnings and profits for certain personal service corporations is
limited to $150,000, unless the accumulated earnings and profits are for the
reasonable needs of the personal service corporation.
Accumulated Surplus
A surplus accumulated by a corporation from its profits.
Accumulation Period
In retirement and annuity plans, the period when funds are accumulated for later
disbursement. This is in contrast to the income period, when the accumulated
funds are disbursed in the form of annuity or pension benefits.
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Accumulation Trust
A trust in which the income is retained and not paid out to beneficiaries until
certain conditions are met.
Adjustable Term Insurance Rider (ATR)
An Adjustable Term Insurance Rider (ATR) is used to add death benefit coverage
to the base or primary policy. An Adjustable Term Insurance Rider allows the
policy owner to apply for the pattern of the death benefits appropriate for
anticipated needs.
Adjusted Gross Estate
The gross estate less debts, funeral costs, and administrative expenses. This is
the starting point for the federal estate tax computation.
Administration of An Estate
The court-supervised distribution of the probate estate of a deceased person. If
there is a will, the will names an executor (the person who manages the
distribution). If not, the court appoints someone, who is generally known as the
administrator.
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Administrator
An individual appointed by a probate court to handle the estate of a person who
died intestate. They have the same duties as an executor.
Adverse Selection
Tendency of persons with a higher-than-average chance of loss to seek insurance
at standard (average) rates, which, if not controlled by underwriting, results
in higher-than-expected loss levels.
After-Tax Retirement Income
The distributions in the form of loans or withdrawals taken from an insurance
policy as retirement income. The retirement income is adjusted by the policy
owner's tax bracket for taxable distributions.
Agent
An individual or firm authorized to act on behalf of another (called the
principal), such as by executing transactions or selling and servicing an
insurance policy. The agent does not assume any financial risk in the
transaction.
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Alternate Valuation Date
A date used by the administrator to value a decedent's estate. This date is not
to exceed six months after date of death. The value of the assets must be lower
and result in a reduction of the gross estate and reduction in the estate tax
liability to qualify for its use.
Alternative Minimum Tax (AMT)
An alternative tax computation that adds certain tax preference items back into
adjusted gross income. If the AMT is higher than the regular tax liability for
the year, the regular tax and the amount by which the AMT exceeds the regular
tax are paid. It is intended to ensure that high-income individuals,
corporations, trusts and estates pay at least some minimum amount of tax,
regardless of deductions, credits or exemptions.
Amount At Risk
The pure insurance element of a life insurance policy. The net amount at risk is
equal to the difference between the face value of the policy and its accrued
cash value at a given time. The net amount at risk decreases as the cash value
increases each year. If the cash value becomes the face value, the policy is
said to mature or endow. From the IRS perspective, a corridor of protection or
net amount of risk must be apparent in a life insurance policy if the policy is
to retain its tax advantaged treatment.
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Ancestor
One from whom a person is descended, whether through father or mother. Also can
mean one from whom an estate has descended.
Annual Gift Tax Exclusion
Every person is permitted to give away up to $10,000 per year (under 2001 law)
to any other person without incurring any gift tax liability. There is no limit
on the number of people who can receive these gifts in a year. To qualify for
this exclusion, the gift must be a gift of a present interest, meaning that the
recipient can enjoy the gift immediately and the donor must not have any control
over the asset after it is given away. This can present problems when gifts are
made to trusts. This exclusion can be doubled to $20,000 per person, per year,
if the donors are married and both spouses consent to join in making the gift.
This is called gift splitting. The $10,000 per year amount is indexed for
inflation.
Annuity
A contract sold by an insurance company designed to provide payments to the
holder at specified intervals, usually after retirement. Fixed annuities
guarantee a certain payment amount, while variable annuities do not, but may
have the potential for greater returns.
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Applicable Estate Tax Exemption Amount
An estate tax exemption amount used to reduce the tax on transfers of property
at death (estate tax). Created by the Economic Growth and Tax Relief
Reconciliation Act of 2001, the applicable estate tax exemption amount will
gradually increase to $3,500,000 in 2009 and is unlimited in 2010.
Articles of Organization
May also be called certificate of formation. This is the initial document filed
with the state to form or organize a Limited Liability Company (LLC). It
includes basic provisions concerning the life, nature, management, owners, etc.,
of the LLC and becomes a matter of public record.
Asset Protection
The process of taking steps to minimize the risk of creditors or other claimants
from being able to reach your assets. This can include setting up a different
entity, such as a family limited partnership or limited liability company for
each property, business, etc.
Assets
Things of value owned by a person, family, or business. Everything of economic
value that is owned, whether real or personal property.
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Assignment
Transfer of ownership or an asset to another person or party.
At-Risk
The at-risk rules limit the amount of tax losses that can be deducted from a
business or investment to the amount that is at-risk in that investment. The
amount at-risk includes the cash and the fair market value of any property
invested in the business. The amount at-risk (the deduction limit) also includes
debts for which the taxpayer is personally liable.
Attorney-in-fact
A person who holds a power of attorney, and therefore is legally designated to
transact business and execute documents on behalf of another person.
Automatic Premium Loan
Cash borrowed from a life insurance policy's cash value to pay an overdue
premium after the grace period for paying the premium has expired.
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B
Before-Tax Earnings
A taxpayer's gross income from salary, commissions, sales, fees, etc., before
deductions for federal, state or other income taxes.
Beneficial Interest
A financial or other valuable interest arising from an insurance policy
regardless of who formally owns the policy.
Beneficiary
An individual, institution, trustee or estate which receives, or may become
eligible to receive, benefits under a will, insurance policy, retirement plan,
annuity, trust, or other contract.
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Binder
A temporary, binding agreement, secured by a payment to evidence good faith,
used until a formal contract takes effect.
Book Value
An accounting term. The book value of a stock is determined from a company's
records, by adding all assets then deducting all debts and other liabilities,
plus the liquidation price of any preferred issues. The sum arrived at is
divided by the number of common shares outstanding and the result is book value
per common share. Book value of the assets of a company or a security may have
little relationship to fair market value.
Broker
An individual or firm which acts as an intermediary between a buyer and seller,
usually charging a commission. For securities and most other products, a license
is required.
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Buy-Sell Agreement
An agreement between the owners of a business that provides that the shares
owned by any one of them who dies or withdraws from the business shall be sold
to and will be purchased by the surviving co-owners or by the entity itself at a
value or formula previously agreed upon by the parties and stipulated in the
agreement. Also applies to buyout arrangements between owners and key employees.
Bypass Trust
An estate planning device (also called a credit shelter trust, family trust, or
B trust in "AB" plans where the A trust funds for the marital
deduction) used to minimize the combined estate taxes payable by spouses
whereby, at the death of the first spouse, the estate is divided into two parts
and one part is placed in trust usually to benefit the surviving spouse without
being taxed at the surviving spouse's death, while the other part passes
outright to the surviving spouse or is placed in a marital deduction trust. A
by-pass trust permits a maximum of $1.350,000 transfer to heirs of the spouses
on an estate tax free basis under the unified gift and estate tax credits as
they exist in 2001.
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C
Capital Gain or Capital Loss
The profit or loss from the sale of a capital asset.
Capitalization
The total amount of the various securities issued by a corporation.
Capitalization may include bonds, debentures, preferred and common stock, long
term debt and surplus. Bonds and debentures are usually carried on the books of
the issuing company in terms of their par or face value. Preferred and common
shares may be carried in terms of par or stated value. Stated value may be an
arbitrary figure decided upon by the board of directors or may represent the
amount received by the company from the sale of the securities at the time of
issuance.
Cash Basis Method
A method of determining when income must be reported and when expenses can be
deducted. It is used by most individual taxpayers. Certain partnerships,
corporations, and other taxpayers may not use the cash method. Under the cash
method, income is generally reported in the tax year money is received, and
expenses are usually deducted in the tax year they are paid.
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Cash Surrender Value
The equity amount available to the owner of a life insurance policy should he or
she decide it is no longer wanted. Calculated separately from the legal reserve.
Cash Value
The equity amount available to the policy owner when a life insurance policy is
surrendered to the company, or the amount upon which the total available for a
policy loan is determined. During the early policy years in a traditional whole
life policy, the cash value is the reserve less a surrender charge; in the later
policy years, the cash surrender value usually equals or closely approximates
the reserve value.
Certified Financial Planner (CFP)
Professional designation granted to someone who has attained a high degree of
technical competency in financial planning and has passed a series of
professional examinations by the College for Financial Planning.
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Charitable Gift Annuity
An arrangement whereby the donor makes a gift to charity and receives back a
guaranteed lifetime (or joint lifetime) income based on the age(s) of the
annuitant(s).
Charitable Lead Trust
An arrangement whereby the charity receives an income from a trust for a period
of years, then the remainder is paid to non-charitable beneficiaries (generally
either the donor or his or her heirs).
Charitable Remainder Annuity Trust
A charitable trust arrangement whereby the donor or other beneficiary is paid
annually an income of a fixed amount of at least 5% but not more than 50% of the
initial fair market value of property placed in the trust, for life or for a
period of up to 20 years; one or more qualified charitable organizations must be
named to receive the remainder interest upon the death of the donor or other
income beneficiaries, and the value of the charitable remainder interest must be
at least 10% of the net fair market value of all property transferred to the
trust, as determined at the time of the transfer.
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Charitable Remainder Trust
An arrangement wherein the remainder interest goes to a legal charity upon the
termination or failure of a prior interest.
Charitable Remainder Unitrust
A charitable trust arrangement whereby the donor or other beneficiary is paid
annually an income of a fixed percentage of at least 5% but not more than 50% of
the annually revalued trust assets, for life or for a period of up to 20 years;
one or more qualified charitable organizations must be named to receive the
remainder interest upon the death of the donor or other income beneficiaries,
and the value of the charitable remainder interest must be at least 10% of the
net fair market value of all property transferred to the trust, as determined at
the time of the transfer.
Chartered Financial Consultant (ChFC)
Professional designation granted to an individual who has attained a high degree
of technical competency in the fields of financial planning, investments, and
life and health insurance and has passed ten professional examinations
administered by The American College.
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Chartered Life Underwriter (CLU)
Professional designation granted to an individual who has attained a high degree
of technical competency in the fields of life and health insurance and who is
expected to abide by a code of ethics. Must have minimum of three years of
experience in life or health insurance sales and have passed ten professional
examinations administered by The American College.
Codicil
A legal document, which supplements and changes an existing will. Generally
utilized to make minor changes to the original will.
Collateral Assignment
When a life insurance contract is transferred to an individual or other party as
security for a debt. This usually temporary assignment does not transfer all
policy rights.
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Collateral Assignment Method (Split Dollar)
A policy ownership arrangement under a split-dollar arrangement using life
insurance where the employee (or a third party) owns the policy and names a
personal beneficiary but assigns part of the policy or death benefit to the
employer as collateral for the employer's premium advances under the policy.
Community Property
Ten states (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico,
Texas, Washington, and Wisconsin) use some form of the community property system
to determine the interest of a husband and wife in property acquired during
marriage.
Concealment
Deliberate failure of an applicant for insurance to reveal a material fact to
the insurer.
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Conditions
Provisions inserted in an insurance contract that qualify or place limitations
on the insurer's promise to perform.
Consideration
One of the elements of a binding contract; the exchange of values by the parties
to the contract. Such values may be money, promises, property, etc. In
insurance, the policy owner's consideration is the first premium payment and the
application; the insurance company's consideration is the contract itself.
Constructive Receipt Doctrine
A federal tax rule, which provides that when a taxpayer has an unrestricted
right to receive a pecuniary benefit, that is when it is made available without
a substantial risk of forfeiture, the benefit is considered to have been
received for income tax purposes whether or not it was actually received.
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Contingent Beneficiary
Beneficiary of a life insurance policy who is entitled to receive the policy
proceeds on the insured's death if the primary beneficiary dies before the
insured; or the beneficiary who receives the remaining payments if the primary
beneficiary dies before receiving the guaranteed number of payments.
Convertible
Term life insurance that can be exchanged for a cash value life insurance policy
without evidence of insurability.
Corporate Owned Life Insurance (COLI)
Life insurance owed by a corporation, insuring the lives of its employees.
Corpus of a Trust
The term used to designate the body of assets placed in a trust. The trust holds
title to all property included in the corpus.
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Cost of Insurance (COI)
The cost of insurance rate charged on the difference between the death benefit
and account value, also known as the net amount at risk. The cost of insurance
rate is set to cover more than the cost of providing the death benefit. The cost
of insurance rate helps cover administrative costs, taxes, and other expenses.
The cost is deducted from the account value monthly.
Credit Shelter Trust
An estate planning device (also called a bypass trust, family trust, or B trust
in "AB" plans where the A trust funds for the marital deduction) used
to minimize the combined estate taxes payable by spouses whereby, at the death
of the first spouse, the estate is divided into two parts and one part is placed
in trust usually to benefit the surviving spouse without being taxed at the
surviving spouse's death, while the other part passes outright to the surviving
spouse or is placed in a marital deduction trust. A credit shelter trust permits
a maximum of $1.350,000 transfer to heirs of the spouses on an estate tax free
basis under the unified gift and estate tax credits as they exist in 2001.
Cross Purchase Buy Sell Plan
In a cross purchase plan, the surviving owners (rather than the business itself)
agreed to buy the deceased or departing owner's business interests. That
purchase is made for an agreed-on price or according to an agreed-on formula.
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Crummy Trust
A trust established granting a beneficiary a limited power to withdraw income or
principal or both. This power is exercisable during a limited period of time
each year and is non-cumulative. The power of withdrawal is generally limited to
the amount excludable from gift tax liability under the annual gift tax
exclusion or to the greater of $5,000 or 5 percent of the trust property.
Cumulative Planned Premium
The total of the planned premiums scheduled to be paid to date by the policy
owner.
Cumulative Loan
The total of the annual loans and loan interest, if accrued, to date.
Cumulative Retirement Income
The total of the annual retirement income distributions projected to be taken to
date from an insurance policy whether by way of loans or withdrawals.
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Custodianship
An ownership arrangement in which property management rights are given to a
custodian for the benefit of a child beneficiary under the Uniform Gifts to
Minors Act or the Uniform Transfers to Minors Act; a custodian's duties resemble
those of a trustee, although the custodian does not take legal title to the
trust property and custodianship ends when the minor reaches the age of majority
as specified by state law. May also apply to property management rights of
individuals who are determined to be incompetent to handle their own affairs.
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D
Death Benefit Only Arrangement (DBO)
A type of deferred compensation arrangement in which an employer agrees to pay
only a death benefit to a deceased employee's heirs rather than the customary
retirement benefit (and perhaps ancillary benefits) associated with conventional
deferred compensation.
Decedent
The person who has died.
Declarations
Statements in an insurance contract that provide information about the property
or life to be insured and used for underwriting and rating purposes and
identification of the property or life to be insured.
Deferred Compensation Plan
A plan in which the executive elects to defer compensation into an account in
the expectation of receiving the deferrals plus earnings at retirement; may
involve company contributions.
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Defined Benefit Plan
A plan in which the company specifies the benefit the plan will deliver.
Typically involves only company contributions; company bears the investment
risk. (Examples: pension or cash balance plan).
Defined Contribution Plan
A plan in which the company defines the contribution it will make to the
employee's account in the plan rather than a fixed benefit the employee will
receive. Typically involves both company and employee contributions; employee
bears the investment risk.
Direct Skip
An outright generation-skipping transfer, either by gift or at death, to a
recipient, known as a "skip person," who is two or more generation
levels below the transferor. This type of property transfer prompts the
generation-skipping transfer tax.
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Direct Transfer
The movement of a tax-deferred retirement asset from one plan or custodian
directly to another. A direct transfer is not a withdrawal and does not incur
any taxes or penalties.
Donor
A person who makes a gift. The person setting up a trust can be called donor,
trustor, grantor, or settlor.
Dower
The life estate of a widow in the property of her husband. At common law a wife
had a life estate in one-third (in value) of the property of her husband who
died without leaving a valid will or from whose will she dissented. In many
states common law dower has been abolished by statute or never has been
recognized.
Durable Power of Attorney
A written legal document which allows one person (the principal) to authorize
another person (the attorney-in-fact or agent) to act on his or her behalf with
respect to specified types of property, and which may remain in effect during a
subsequent disability or incompetency of the principal.
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Durable Power of Attorney for Health Care
A written legal document which grants decision-making powers related to health
care to an agent; generally provides for removal of a physician, the right to
have the incompetent patient discharged against medical advice, the right to
medical records, and the right to have the patient moved or to engage other
treatment.
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E
Economic Benefit
The value of the death benefit protection provided to employee under a split
dollar plan, as defined by IRS revenue rulings and notices. The economic benefit
amount is equal to the employee death benefit multiplied by the economic benefit
rate, plus the cost of "other benefits" that are owned, controlled by
or otherwise provided to the employee under the policy. The economic benefit
rate is an age specific rate per thousand, which may be determined from
government tables (i.e., IRS Table 2001 for individual policies, or the rate
calculated by applying the Greenberg to Greenberg formula to IRS Table 2001
rates for joint survivor policies) or by using rates found in ING Security
Life's alternative term products (single life alternative term or joint survivor
alternative term).
Economic Benefit Doctrine
A federal tax rule, which provides that when an employer provides an economic
benefit to an employee, that benefit is includable in the employee's gross
income even if not received in cash or property.
Employee Benefit Plan
A plan established or maintained by an employer or employee organization, or
both, for the purpose of providing employees a certain benefit, such as pension,
profit-sharing, stock bonus, thrift medical, sickness accident, or disability
benefits.
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Employee Benefit Trust
A trust established to hold the assets of an employee benefit plan.
Employee Stock Ownership Plan
An Employee Stock Ownership Plan (ESOP) is essentially a stock bonus plan in
which employer stock is used for contributions. A "KSOP" plan also
includes §401(k) Plan features. Employer contributions are tax deductible and
are not currently taxed to the employee. Earnings accumulate income tax deferred
and distributions are generally taxed as ordinary income.
Endorsement
Written provision that adds to, deletes, or modifies the provisions in the
original contract.
Endorsement Method (Split Dollar)
A life insurance policy ownership arrangement under a split-dollar arrangement
in which the employer owns the policy and an endorsement to the policy spells
out the employee's rights.
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Equity Split-Dollar
An arrangement in which the employer's share of the cash value and death benefit
of life insurance on an employee's life is confined to its aggregate net premium
payments; any cash value in excess of the employer's premiums inures to the
benefit of the other party (employee or third party). The taxation of this
arrangement is addressed in IRS Notice 2001-10.
ERISA
The acronym for the Employee Retirement Income Security Act of 1974, a federal
law that established minimum standards for certain employee benefit plans,
especially qualified employer retirement plans.
Errors and Omissions Insurance
Liability insurance policy that provides protection against loss incurred by a
client because of some negligent act, error, or omission by the insured.
Escheat
Assignment of property to the state because there is no verifiable legal owner -
typically, where there is no heir to property.
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Estate
Everything of value (all property) that a person owns while living or at the
time of death.
Estate Planning
Process designed to conserve estate assets before and after death, distribute
property according to the individual's wishes, minimize federal estate and state
inheritance taxes, provide estate liquidity to meet costs of estate settlement,
and provide for the family's financial needs.
Estate Tax
A tax imposed on the transfer of property from a decedent to his or her heirs,
legatees or devisees.
Executor or Executrix
An individual or institution nominated in a will and appointed by a court to
settle the estate of a deceased.
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F
Fair Market Value
The price at which an item can be sold at the present time between two unrelated
people, neither under compulsion to buy or sell.
Family Attribution Rules
A federal tax rule that may cause the ownership of stock by one family member to
be attributed to another for purposes of determining the income tax consequences
of a distribution by the corporation in redemption of the stock.
Fee Simple Ownership
Outright ownership of property with absolute rights to dispose of or gift it to
anyone.
Fiduciary
A person in the position of great trust and responsibility, such as the executor
of a will or the trustee of a trust.
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Five and Five Power
A provision that allows a trust beneficiary to withdraw the greater of $5,000 or
five percent of the principal from a trust without causing the entire trust
property to be included in his or her estate for federal estate taxation.
Fixed-Period Option
Life insurance settlement option in which the policy proceeds are paid out over
a fixed period of time.
Funding Instrument
An insurance contract or trust agreement that states the terms under which the
funding agency will accumulate, administer, and disburse the pension funds.
Future Interest
An ownership interest in property in which unlimited possession or enjoyment of
property is delayed until some future time.
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G
General Partner
A general partner is a partner of a partnership who is personally liable for all
partnership debts and is permitted to participate in the management of the
partnership.
General Partnership
A partnership that has only general partners and no limited partners. Each
partner is liable for all partnership debts and there is no limited liability.
General Power of Appointment
A power of the donee (the one who is given the power) to pass on an interest in
property to whomever he pleases, including himself or his estate.
Generation Skipping Transfer (GST)
A transfer of property, usually in trust, that is designed to provide benefits
for beneficiaries who are two or more generations younger than the generation of
the grantor.
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Generation Skipping Transfer Tax (GST)
A transfer tax generally assessed on transfers to grandchildren, great
grandchildren and others who are at least two generations younger than the
donor.
Generation Skipping Transfer Tax Exemption
An exemption from generation-skipping tax for transfers by an individual either
during life or at death.
Generation Skipping Trust
Any trust having beneficiaries who belong to two or more generations younger
than the grantor.
Gift
A voluntary transfer of property for which nothing of value is received in
return. If the Internal Revenue Service is to recognize a transfer as a gift,
the donor(s) must unconditionally transfer all title and control of the property
to the recipient(s) at the time the gift is given.
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Gifting
A means of implementation of an estate plan through gifts to intended successors
in the ownership of assets owned by the person(s) making the gifts.
Grace Period
Period of time during which a policyowner may pay an overdue premium without
causing the policy to lapse.
Grantee
A person to whom property is transferred by deed or to whom property rights are
granted by means of a trust instrument or some other document.
Grantor
The person who establishes the trust. Also called the creator, settlor, donor or
trustor.
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Grantor Retained Annuity Trust
A trust in which the grantor retains the right to a set annual dollar amount
(the annuity) for a fixed term and gives the principal to others, such as the
grantor's children, at the end of that term. If the grantor survives until the
end of the annuity term, all of the trust principal will be excluded from the
grantor's estate for estate tax purposes. A grantor retained annuity trust is
sometimes referred to as a "GRAT."
Grantor Trust
For purposes of the income taxation of trusts, a trust in which the grantor or a
third party, because of certain rights to income or principal or certain powers
over the disposition of income and principal, is treated as the owner of the
trust and taxed on the income thereof. Consequently, a grantor trust is not
treated as a separate entity for income tax purposes.
Gross Estate
The total value of all property in which a deceased had an interest. This must
be included in his or her estate for federal tax purposes.
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Group "Carve Out" Life Insurance Plan
This plan is an alternative to group term insurance. It provides life insurance
coverage to selected employees by "carving out" all or a portion of
their coverage under an employer sponsored group term plan and then provides
them with individual policies. The plan can be designed as either a Bonus §162
Plan or a split dollar plan.
Group Life Insurance
Life insurance provided on a number of persons in a single master contract.
Physical examinations are not required, and certificates of insurance are issued
to members of the group as evidence of insurance.
Group-Term Life Insurance Program
An employer may provide employees with life insurance coverage through an IRC §79
group-term policy, the first $50,000 of which generally produces no taxable cost
to the employee.
Guaranteed Investment Contract (GIC)
A debt instrument issued by an insurance company, usually in a large
denomination, and often bought for retirement plans. The interest rate paid is
guaranteed, but the principal is not.
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Guaranteed Insurability
An insurance policy in which the insurer is required to renew the policy for a
specified amount of time regardless of changes to the health of the insured. The
agreement requires that premiums are paid on time and that the insurer makes no
changes except if a premium change is made for an entire class of policyholders.
Also called guaranteed renewable or conversion privilege or convertible term
insurance.
Guaranteed Net Surrender Value
The guaranteed surrender value which equals the guaranteed net policy value
minus the surrender charge, if any.
Guardian
A person legally entrusted with the care of, and managing the property and
rights of, another person, usually a minor child.
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H
Heir
A person entitled by law to inherit part or all of the estate of an ancestor who
died without leaving a valid will.
Holographic Will
A will written entirely in the testator's own handwriting
Human Life Value
For purposes of life insurance, the present value of the family's share of the
deceased breadwinner's future earnings.
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I
Incapacity
The lack of ability to act on your own behalf.
Incidents of Ownership
Includes a variety of rights and powers that an insured decedent may have held
over a life insurance policy; the possession of one or more of these incidents
of ownership within three years of death will bring the policy proceeds into the
insured's gross estate.
Income Beneficiary
The beneficiary of a trust who is entitled to receive the income from it.
Income in Respect of a Decedent (IRD)
Income earned by a decedent or income to which the decedent had a right prior to
death, but which was not properly includible in his or her gross income prior to
death
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Incontestable Clause
A provision in a life insurance policy that prevents the insurer from revoking
coverage because of alleged misstatements by the insured after a specified
period, usually about two years.
Individual Retirement Account (IRA)
A tax-deferred retirement account for an individual that can be established by a
person with earned income. Earnings accumulate tax-deferred until the funds are
withdrawn beginning at age 59 ½ or later (or earlier, with a 10% penalty).
Initial Reserve
In life insurance, the reserve at the beginning of any policy year.
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Installment Sale
A sale in which taxable gain is recognized over a number of years as the payment
for the property sold is received.
Insurable Interest
The expectation of a monetary loss that can be covered by insurance.
Insurance
Pooling of fortuitous losses by transfer of risks to insurers who agree to
indemnify insureds for such losses, to provide other pecuniary benefits on their
occurrence, or to render services connected with the risk.
Insurance Trust
An irrevocable trust established to own an insurance policy or policies and
thereby prevent them from being included in the insured's estate.
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Insuring Agreement
That part of an insurance contract that states the promises of the insurer.
Intangible Property
Property that cannot be touched and that represents real value such as bonds,
stock certificates, promissory notes, certificates of deposit, bank accounts,
contracts, leases, and other similar items.
Inter vivos Trust
A type of trust created during the settlor's lifetime.
Interest Credit
The nonguaranteed amount credited to the policy's account value based upon a
rate of interest specified by the insurance company.
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Interest Option
Life insurance settlement option in which the principal is retained by the
insurer and interest is paid periodically.
Intergenerational Succession
Succession in property ownership in which the property is transferred from one
generation to another; usually from members of an older generation to members of
a younger generation.
Intestate
A person who dies without having made and left a valid will.
Intestate Succession
The distribution of property to heirs according to the statutes of the state of
residency upon the death of a person who owned the property but did not leave a
valid will.
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Investment Gain/Loss
The total increase or decrease in account value as a result of investment
division performance during the policy year.
Irrevocable Beneficiary
Beneficiary designation allowing no change to be made in the beneficiary of an
insurance policy without the beneficiary's consent.
Irrevocable Trust
A trust that cannot be changed or terminated after it is established.
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J
Joint Tenancy
A form of ownership shared with an unlimited number of individuals. Each tenant
owns an equal undivided share of the property.
Joint Tenancy with Rights of Survivorship (JTWRS)
The holding of property by two or more individuals in a manner that upon the
death of one tenant, the survivor(s) succeed to full ownership by operation of
law.
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K
Keogh Plan (HR-10 Plan)
Retirement plan individually adopted by self-employed persons.
Kiddie Tax
Unearned income (dividends, rents, interest, etc) of a child under age 14 will
be taxed to the child at the parent's highest income tax rate.
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L
Lack of Marketability Discount
When the value of an asset is less than its initial or expected fair market
value due to unusual circumstances that make it not readily saleable. For
example, a limited partnership interest.
Lateral Succession
Succession in property ownership in which the property is transferred between
members of the same generation.
Law of Large Numbers
Concept that the greater the number of exposures, the more closely will actual
results approach the probable results expected from an infinite number of
exposures.
Legal Reserve
Liability item on a life insurer's balance sheet representing the redundant or
excessive premiums paid under the level-premium method during the early years.
Assets must be accumulated to offset the legal reserve liability. Purpose of the
legal reserve is to provide lifetime protection.
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Letters of Administration
Document issued by the probate court giving the administrator authority to
administer the estate.
Letters Testamentary
Document issued by the probate court giving the executor authority to administer
the estate under the provisions of the decedent's will.
Liability
A financial obligation, debt, claim, or potential loss.
Life Income Option
Life insurance settlement option in which the policy proceeds are paid during
the lifetime of the beneficiary. A certain number of guaranteed payments may
also be payable.
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Life Insurance Planning
Systematic method of determining the insured's financial goals, which are
translated into specific amounts of life insurance, then periodically reviewed
for possible changes.
Limited Liability Company (LLC)
An entity formed under state statute that has the legal characteristic of
limited liability similar to that of a corporation, while it may qualify to be
treated as a partnership for tax purposes.
Limited Partner
A partner in a partnership who can't participate in the management of the
partnership's business. A limited partner's liability is limited to loss of his
investment in the partnership.
Limited Partnership
Form of partnership composed of both a general partner(s) and a limited
partner(s); the limited partners have no control in the management of the
company and are usually financially liable only to the extent of their
investment in the partnership.
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Living Trust
A written legal document into which you place all of your property, with
instructions for its management and distribution upon your disability or death.
Loan
Money that is lent. In life insurance a loan can be taken against the cash value
of a life insurance policy. If the insured dies while there is an outstanding
loan balance, the amount of the loan and any unpaid interest due will be
deducted from the death proceeds.
Loan Interest Charge
The annual interest expense charged to the policy owner on the amount borrowed
from a policy's cash value. If loan interest is not paid in cash, it is added to
the outstanding loan balance. The unpaid loan interest will then increase the
amount borrowed.
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M
Marital Deduction
A deduction allowing for the unlimited transfer of any or all property from one
spouse to the other generally free of estate and gift tax.
Medical Information Bureau (MIB)
Bureau whose purpose is to supply underwriting information in life and health
insurance to member companies, which report any health impairments of an
applicant for insurance.
Minor Child
A person who has not yet reached the legal age of majority. This age can differ
with each state, but generally is between 16 and 21 years. The term does not
apply to an emancipated minor.
Minority Discount
A discount applied to the value of an interest in a corporation, limited
liability company or limited partnership that is not publicly marketable to
reflect the fact that a minority interest in the company has less value than a
controlling interest, since the holder of the former cannot control business
actions.
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N
National Association of Insurance Commissioners (NAIC)
Group founded in 1871 that meets periodically to discuss industry problems and
draft model laws in various areas and recommends adoption of these proposals by
state legislatures. The NAIC opposes federal regulation of insurance.
Needs Approach
Method for estimating amount of life insurance appropriate for a family by
analyzing various family needs that must be met if the family head should die
and converting them into specific amounts of life insurance. Financial assets
are considered in determining the amount of life insurance needed.
Net Amount at Risk
In life insurance, the difference between the face value of a life insurance
policy and its cash value (also known as "pure amount of protection").
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Nonforfeiture Law
State law requiring insurance companies to provide at least a minimum
nonforfeiture value to policyowners who surrender their cash value life
insurance policies.
Nonqualified Deferred Compensation Plan
A contractual arrangement that calls for paying an individual or group of
executives future benefits. It does not qualify for favorable tax treatment, but
has far fewer restrictions than qualified plans. Non-qualified plans are
unsecured and subject to risks; they must remain "unfunded" to avoid
current taxation.
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O
Ownership Clause
Provision in life insurance policies under which the policyowner possesses all
contractual rights in the policy while the insured is living. These rights can
generally be exercised without the beneficiary's consent.
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P
Partition
The judicial separation of the respective interests in property of joint owners
or tenants in common so each may take possession, enjoy, and control his or her
share of the property.
Partnership
A type of unincorporated business organization in which multiple individuals,
called general partners, manage the business and are equally liable for its
debts.
Paul v. Virginia
Landmark legal decision of 1869 establishing the right of the states, and not
the federal government, to regulate insurance. Ruled that insurance was not
interstate commerce.
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Per Stirpes
A way of distributing an estate so that the surviving descendants will receive
only what their immediate ancestor would have received if he or she had been
alive at the time of death. State law definitions can vary.
Personal Representative
An executor, administrator, or anyone else who is in charge of a decedent's
property.
Phantom Stock Plan
An incentive compensation arrangement where the employee is credited with a
hypothetical number of shares (phantom stock units) of the company. These units
are credited to the employee's account, which is dynamic in that it includes
future dividends and stock splits. Upon termination of employment, the employee
is entitled to a cash amount based on the per share equivalent value of each of
the phantom stock units credited to his or her account.
Planned Premium
The premium amount specified by the policy owner as the amounts intended to be
paid at fixed intervals over a specified period of time. Premiums may be paid on
a monthly, quarterly, semi-annual or annual basis. If policy values are
adequate, the specified premium need not be paid, and can be changed at any
time. Within limits, premium payments that are more or less than the specified
premium amount may be permitted.
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Policy Basis
The policy basis represents the policy owner's investment in the policy. Policy
basis is used in determining the taxable portion of a policy distributions when
a taxable event occurs. For example, the portion of the surrender proceeds or
withdrawal distribution that exceeds the policy basis is reported as taxable
income (gain).
Policy Loan
A loan made by an insurance company to a policyholder on the security of the
cash value of the policy.
Pooled Income Fund
A trust arrangement which accepts gifts of cash or certain properties from
persons who want to provide support for the charitable organization; gifts made
to the fund are commingled and invested by the trustee and units of
participation are awarded to the donor for his or her gift; income is then paid
to the donor proportionate to his or her share of fund earnings.
Pour Over Will
This is a Will used to transfer (pour over) into a trust any property that is
left in a person's estate after death.
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Power of Appointment
A right given to another in a written instrument, such as a will or trust that
allows the other to decide how to distribute your property. The power of
appointment is "general" if it places no restrictions on who the
distributees may be. A power is "limited" or "special" if it
limits the eventual distributee.
Power of Attorney
A written legal document that gives an individual the authority to act for
another. If the authority is to act for the principal in all matters, it is a
general power of attorney. If the authority granted is limited to certain
specified things, it is a special power of attorney. If the authority granted
survives the disability of the principal it is a durable power of attorney.
Primary Beneficiary
Beneficiary of a life insurance policy who is first entitled to receive the
policy proceeds on the insured's death.
Probate
A court procedure for settling the personal affairs of a decedent by formally
proving the validity of a will and establishing the legal transfer of property
to beneficiaries, or appointing an administrator and supervising the legal
transfer to property to heirs if there is no valid will.
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Projected Benefit Obligation (PBO)
An accounting term representing the anticipated value of retirement benefits to
be earned by an employee by his/her retirement date.
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Q
Qualified Domestic Trust
A trust arrangement which allows property transferred to a surviving spouse who
is not a U.S. citizen to qualify for a special exclusion in lieu of the regular
marital deduction; and which ensures that, at the death of the surviving spouse
who is not a United States citizen, the assets placed in such a trust will incur
federal estate taxation since the tax was avoided at the first spouse's death
Qualified Plan
Plans that qualify for favorable tax treatment under the Internal Revenue Code,
and are subject to restrictive rules and extensive regulations. Qualified plans
are secured by a trust, as opposed to a nonqualified plan.
Qualified Stock Option Plan
A tax favored plan for compensating executives by granting incentive stock
options (ISOs) to buy company stock. If the plan meets the requirements of IRC
§422, the executive is not taxed at the time of the grant or the time of the
exercise of the option. Taxation occurs when the stock purchased under the
option is sold by the executive. Corporation granting the option does not
ordinarily receive a tax deduction.
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Qualified Terminable Interest Property (QTIP)
Property qualifying for the marital deduction at the election of the donor or
the decedent's personal representative. The spouse retains a qualified income
interest in the property for life, with the income payable at least annually.
The corpus ultimately passes to a specified remainderman, under a special power
of appointment given to the spouse
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R
Rabbi Trust
A trust, owned by the company, that holds assets to help meet non-qualified
benefit payments. Rabbi trusts are taxable trusts, and trust assets must be
available to corporate creditors in the event of a bankruptcy.
Rate
Price per unit of insurance.
Ratio Percentage Test
A test that a qualified pension plan must meet to receive favorable income tax
treatment. The pension plan must benefit a percentage of employees that is at
least 70 percent of the highly compensated employees covered by the plan.
Rebating
A practice-illegal in virtually all states-of giving a premium reduction or some
other financial advantage to an individual as an inducement to purchase the
policy.
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Representative
Someone who is authorized to act on your behalf, such as an executor or a
trustee.
Revocable Beneficiary
Beneficiary designation allowing the policyowner the right to change the
beneficiary without consent of the beneficiary.
Revocable Trust
A trust that can be changed after it is established. Assets can be added or
removed from the corpus of the trust, the beneficiary(ies) can be changed, and
other changes including termination of the trust, are allowed.
Rider
Term used in insurance contracts to describe a document that amends or changes
the original policy.
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Rule Against Perpetuities
A rule of common law that makes void any estate or interest in property so
limited that it will not take effect or vest within a period measured by a life
or lives in being at the time of the creation of the estate plus 21 years and
the period of gestation. In many states the rule has been modified by statute.
Sometimes it is known as the rule against remoteness of vesting.
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S
S Corporation
A corporation whose income is generally taxed to its shareholders, thus avoiding
a corporate level tax. An election available to a corporation to be treated as a
partnership for income tax purposes. To be eligible to make the election, a
corporation must meet certain requirements as to kind and number of
shareholders, classes of stock, and sources of income.
Section 2503(c) Trust for Minors
A trust designed to comply with Section 2503(c) of the Internal Revenue Code so
that a gift placed in such a trust for the benefit of a minor will qualify for
the gift tax annual exclusion although they are not gifts of a present interest.
Section 303 Stock Redemption
When certain requirements are met, this section of the Internal Revenue Code
allows a shareholder's estate or heirs to sell to the deceased's closely held
corporation enough stock to pay federal and state death taxes, costs of estate
administration, and funeral expenses without the corporation's distribution
being treated as a dividend for income tax purposes
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Section 401(k) Plan
A qualified profit sharing or thrift plan that allows participants the option of
putting money into the plan or receiving funds as cash. The employee can
voluntarily elect to have his or her salary reduced up to some maximum limit,
which is then invested in the employer's Section 401(k) plan.
Section 457 Plan
A plan which provides an exclusion from gross income for a certain portion of
salary deferred by a participant under the plan of a state or local government,
a tax-exempt organization (excluding churches), or of an independent contractor
of such government or organization (e.g., a physician providing independent
services to a hospital).
Section 6166
A section of the Internal Revenue Code that allows for a 14-year spreadout of
the estate tax for estates that qualify (generally estates that include closely
held businesses or farms).
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Secular Trust
An irrevocable trust which is a separate tax-paying entity from the company.
Assets contributed to a secular trust are currently taxable to the trust
beneficiary. In contrast to a rabbi trust, a secular trust is beyond reach of
corporate creditors in the event of bankruptcy.
Settlement Option
Ways in which life insurance policy proceeds can be paid other than in a lump
sum, including interest, fixed period, fixed amount, and life income options.
Simplified Employee Pension (SEP) IRA
A retirement program for self-employed people or owners of small companies
allowing them to defer taxes on investments intended for retirement
Sinking Fund Approach
A benefit funding technique wherein assets are set aside in order to accumulate
the necessary funds to pay future benefit expenses.
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Sound Mind
The testator possesses sound mind for the purposes of making a will if he or
she: (1) understands the nature of the act of making a will or codicil thereto,
(2) knows the extent and character of the property subject to the will, (3)
knows and understands the proposed disposition of that property, and (4) knows
the natural objects of his or her bounty (i.e. his or her heirs). Whether the
testator was of sound mind is tested (determined) by the state of the testator's
mind at the time the will or codicil is executed (written and signed) and varies
by state.
Split Dollar Plans
A method of purchasing life insurance in which the premium payments and policy
benefits are divided, usually between an employer and employee. Many types of
split dollar designs are possible. It can be a valuable executive benefit that
provides life insurance protection for an executive's survivors at a minimal
cost (the economic benefit cost) to the employee.
State Death or Inheritance Taxes
The tax imposed by the state in which you live and/or where your property is
located, if different, on the transfer of that property to another at your
death.
Statute of Limitations
A statute, which bars lawsuits upon valid claims after the expiration of a
specified period of time. The period varies by state law and for different kinds
of claims.
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Step Up In Basis
A decedent's capital gains property that passes to others escaping capital gains
tax when sold by the person who inherits the property. Persons inheriting
capital gains property receive the property at date-of-death fair market value.
In effect, the basis in this property is deemed to be "stepped up" and
does not reflect the decedent's original cost basis for determining applicable
capital gains tax on the sale of the property.
Stock Appreciation Rights Plan (SAR)
A right granted to an employee to receive cash and/or stock equal to the
increase in value of the company's stock after the date the stock appreciation
right (SAR) is granted. Generally no tax consequences to the employer or
employee upon the grant of the right. It is treated as an unfunded, unsecured
promise to pay money in the future. The employee is ordinarily given the right
to decide when the SAR will be exercised and will recognize ordinary income upon
exercise in an amount equal to the cash and/or fair market value of the other
assets received.
Stock Bonus Plan
A method of compensating selected executives by issuing company stock in lieu of
or in addition to cash bonus compensation. The executive is taxed on the value
of the stock as ordinary income and any increase in value of the stock is owned
by the executive. The bonus is deductible by the employer if it is reasonable
compensation for services rendered.
Stock Company
Company owned by stockholders who share in the profits of the company.
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Stock Redemption Plan
In a stock redemption or entity purchase plan, the business agrees to purchase a
deceased or departing owner's interest. The purchase is made for an agreed-on
price or according to an agreed-on formula.
Succession
A term used to describe transfers of asset ownership through inheritance,
gifting, preferential sale, or other means that fulfill the wishes of the
person(s) with present ownership of the assets.
Suicide Clause
Contractual provision in a life insurance policy stating that if the insured
commits suicide within two years after the policy is issued, the face amount of
insurance will not be paid; only premiums paid will be refunded.
Supplemental Executive Retirement Plan
A type of non-qualified deferred compensation plan often used to attract and
retain executives. Generally, the promised benefits are paid from the employer's
general assets, and no amounts are specifically earmarked for future benefit
payments. Usually the employee has no option to receive the funds as current
compensation.
Surrender Charge
The fee charged to a policy owner when a life insurance policy or annuity is
surrendered for its cash value.
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T
Tangible Property
Property that is capable of being perceived by the senses - generally refers to
real estate, personal property, and moveable property that has value of its own
and is not merely a representation of real value. Land, machinery, buildings,
crops, and livestock are examples of tangible property.
Tax Basis
The owner's cost of an asset for income and estate tax purposes as determined
under the Internal Revenue Code and IRS regulations.
Tenants In Common
A form of asset ownership in which two or more persons have an undivided
interest in the asset and the ownership shares are not required to be equal.
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Term Insurance
Type of life insurance that provides temporary protection for a specified number
of years.
Testamentary Trust
A trust established after the death of the grantor under the provisions of the
grantor's will.
Testator
One who writes or has written and signs a will.
Transfer for Value Rule
A federal income tax rule which states that if ownership of a life insurance
policy was transferred for a valuable consideration, a portion of the death
proceeds may be includible in gross income rather than qualifying for the usual
income tax exemption of death proceeds. Five "safe harbor" exceptions
to this rule exist. They include: a transfer to the insured, to a partner of the
insured, to a partnership in which the insured is a partner, to a corporation in
which the insured is a shareholder or officer, and to a corporation from another
corporation in a tax-free reorganization.
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Trust
A legal arrangement in which an individual (the trustor) gives fiduciary control
of property to a person or institution (the trustee) for the benefit of
beneficiaries.
Trust Declaration or Trust Instrument
A document defining the nature and duration of the trust, the powers of the
trustee, and identifying the trust's beneficiary(ies).
Trustee
An individual or organization which holds or manages and invests assets for the
benefit of another.
Trusteed Cross-Purchase Buy-Sell Agreement
The use of a third party ("trustee") to hold the life insurance
policies that fund a cross-purchase agreement, and to see that the terms of the
agreement are fulfilled at an owner's death; may be used to avoid a multiplicity
of policies when several owners are involved.
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Twisting
Excessive trading in a client's account by a broker seeking to maximize
commissions regardless of the client's best interests, in violation of NASD
rules, also called churning or overtrading.
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U
Underwriting
The selection and classification of applicants for insurance through a clearly
stated company policy consistent with company objectives.
Undivided Interest
The interest or right in property owned by each joint tenant or tenant in
common. Each tenant has equal right to use and enjoy the entire property. Unless
an agreement to the contrary exists, each tenant is entitled to an income share
proportional to his or her ownership interest. If the property is sold, the sale
proceeds are shared among tenants in proportion to the ownership shares held by
each tenant.
Unified Tax Credit
Tax credit that can be used to reduce the amount of the federal estate or gift
tax.
Uniform Gifts (Transfers) To Minors Act (UGMA or UTMA)
A method to hold property for the benefit of a minor, which is similar to a
trust but the rules are governed by state law.
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Universal Life Insurance
Life insurance which combines the low-cost protection of term insurance with a
savings component that is invested in a tax-deferred account, the cash value of
which may be available for a loan to the policy holder.
Unrelated Business Taxable Income (Ubti)
Income earned by an otherwise tax-exempt organization from activities unrelated
to their tax-exempt purpose can be subject to taxation.
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V
Vest
To confer an immediate, fixed right of immediate or future possession and
enjoyment of property.
Vesting
An ERISA guideline stipulating that employees must be entitled to their entire
retirement benefits within a certain period of time even if they are no longer
with the employer.
Voting Right
The right of a common stockholder to vote for members of the board of directors
and on matters of corporate policy - particularly the issuance of senior
securities, stock splits and substantial changes in the corporation's business.
A variation of this right is extended to variable annuity contract holders and
mutual fund shareholders, who may vote on material policy issues.
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W
Wait-and-See Buy-Sell Agreement
A special type of buy-sell agreement between the owners of a business and the
business itself, in which, typically, the business entity has a first option to
purchase a deceased owner's interest; the surviving owners then have a second
option to purchase any portion of the interest not already acquired by the
business; and finally, the business entity is required to purchase any remaining
interest not already sold under the two options.
Waiver-of-Premium Provision
Benefit that can be added to a life insurance policy providing for waiver of all
premiums coming due during a period of total disability of the insured.
Will
A person's written declaration of desires for disposal of his or her property
after death.
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Glossary of
life insurance and annuity industry terms
for agents