Glossary

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

A deposit with a bank, thrift institution, or credit union that promises a fixed interest rate on funds deposited for a specified period of time. Bank savings accounts and CDs are FDIC insured up to $250,000 per depositor per institution and generally provide a fixed rate of return, whereas the value of money market mutual funds can fluctuate.

A trust established for the benefit of a charitable organization under which the charitable organization receives payment of a specified amount (at least annually) from the trust. On the death of the grantor, remainder interest in the trust passes to his or her heirs. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

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

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

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

An unsecured, short-term debt security issued by a corporation to finance short-term liabilities. These notes are normally backed only by the issuing corporation's promise to pay the face amount on the maturity date specified on the note, which is usually less than six months.

A security that represents partial ownership of a corporation. Those who hold common stock are entitled to participate in stockholder meetings, to vote for the board of directors, and may receive periodic dividends.

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

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

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

A debt security issued by a corporation under which the issuer promises to make periodic interest payments and to repay the investor's principal at maturity. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity, investors will receive the interest payments due plus their original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk.

A tax-advantaged investment account that allows accumulation of funds to cover future education expenses, subject to limitations. Coverdell ESAs allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution.

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

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

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

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

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

A contract with an insurance company that guarantees a future payment or series of payments in exchange for current premiums. The interest earned on an annuity contract is not taxable until the funds are paid out or withdrawn. The guarantees of an annuity contract depend on the issuing company's claims-paying ability. Annuities have fees and charges associated with the contract, and a surrender charge also may apply if the contract owner elects to give up the annuity before certain time-period conditions are satisfied.

A retirement plan under which the benefit to a retiring employee is defined. Defined benefit plans are normally funded by employer contributions.

A retirement plan under which the annual contributions made by the employer or employee are defined. Benefits may vary depending on the performance of the investments in the account.

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

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

The direct transfer of assets from the trustee or custodian of one qualified retirement plan or account to the trustee or custodian of another. Done correctly, direct rollovers do not trigger taxable events.

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

An investment strategy under which capital is divided among several assets or asset classes. Diversification operates under the assumption that different assets and/or asset classes are unlikely to move in the same direction, allowing gains in one investment to offset losses in another. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.

Taxable payments made by a company to its shareholders. Some dividends are paid quarterly and others are paid monthly. Companies can adjust common share dividends at any time, pending approval by the company's board of directors.

An investment strategy under which a fixed dollar amount of securities is purchased at regular intervals. Under dollar-cost averaging, more shares are purchased when prices are low and fewer shares when prices rise. Keep in mind that dollar-cost averaging does not protect against a loss in a declining market or guarantee a profit in a rising market. Investors should evaluate their financial ability to continue making purchases through periods of declining and rising prices.

An average calculated by summing the prices of 30 actively leading stocks on the New York Stock Exchange (NYSE) and dividing the sum by a divisor which has been adjusted to account for cases of stock splits, spinoffs, or similar structural changes. Individuals cannot invest directly in an index.

Withdrawal of funds from an investment before its maturity date or withdrawal of funds from a tax-deferred account before the legally imposed age requirements have been satisfied. Early withdrawals may be subject to penalties.