Glossary of Terms…
The amount calculated as a normal form of benefit due to a participant, available at Normal Retirement Date, usually in a defined benefit pension plan.
Interest that is earned but not yet paid.
A benefit of equal value computed at a specified rate and mortality assumption, both of which are prescribed by a plan.
Tables developed by actuarial professionals for use by life insurance companies that project survival and death rates for a group or a population.
A concept that implies that liberal pricing or underwriting might lead to major portions of insurance risk being issued to the least desirable customers.
Insurance: A business relationship between a representative or Agent who represents an insurer or several insurers in dealing with insurance transactions with customers.
Banking: A relationship for certain types of accounts in trusts where trust officers act on behalf of customers. These services may include custody and safekeeping of securities or securities purchases and sales.
Investment: A relationship between a securities broker dealer which acts to execute orders to buy or sell securities for a client’s account.
An individual who is authorized to act on behalf of the institution, the principal, in executing transactions for a customer. An Agent capacity does not include having title to property. The allegiance of an Agent is to the principal-not the client.
Rate of return differential expected to be earned when compared to an index such as a Treasury Bill Rate. Positive ALPHA indicates a return above that expected for the level of market variability. Negative ALPHA indicates a return lower than that expected for the level of market variability. Can be used as performance indicator or for selectivity.
AM BEST COMPANY:
An insurance ratings service that assigns ratings to insurance companies based upon financial stability and claims paying ability. Ratings are assigned from A++ to C and are reviewed and assigned at least annually and on an as needed basis.
1) Repayment of a loan by installments; 2) allowance for depreciation.
The change in value of an investment on an annual basis expressed as a percentage.
Formal annual financial statement issued by a corporation which states assets, liabilities, earnings, company standing at close of business year, profitability and other information of interest to the stockholders.
Mathematical technique that converts figures representing an investment time frame of less than a year to a 12 month period.
A person on whose life an annuity contract is written.
In insurance, a contract that provides payments either for life or for a specified period of time.
Fixed annuity: An annuity payment for life or for a specified period of time that does not fluctuate.
Variable annuity: See definition
Deferred annuity: An annuity contract that accepts deposits and credits interest to an account. Earnings are generally deferred from taxation until withdrawn, the contract is annuitized or surrendered.
Increase in the value of an asset such as real estate, stocks, bonds, or commodities.
The theory that diversification of assets among many types of investments (Real Estate, stocks, bonds, cash, or Fixed Income) will provide a more stable, conservative overall portfolio performance.
ASSET ALLOCATION DECISION:
Process of collection of data on investment attitudes, goals, and objectives that, coupled with an evaluation of historical investment performance will provide an optimum probability of achieving investment objectives within specified levels of risk.
Any thing or any property with commercial or exchange value that is owned by an individual, business, or institution.
Investment: An investment analysis technique used to determine how closely investments provide cash or capital when it is need to pay obligations or liabilities when due in the future.
Borrowing: An analysis of how an appropriate loan structure matches the results from operations or business to generate future revenue.
AT A DISCOUNT:
Below par value. When the market value is less than the par value or stated value of a security. A $100 par value bond selling for $92 is selling at an 8% or $8 discount.
A market price which equals the stated value or face value of a security.
AT A PREMIUM:
Above par value. When the market value is above the par value or stated value of a security. A $100 par value bond selling for $105 is selling at a $5 premium.
AT THE MARKET:
An order executed at the market price, or best obtainable price when the order is received on the floor of the exchange.
System of trading securities through brokers or agents on an exchange. Buyers and sellers compete for the most advantageous price.
Method of measuring the trend of all securities prices of a given type.
AVERAGING UP OR DOWN:
Also referred to as dollar cost averaging. the discipline of purchasing the same security or investment vehicle at various price levels or at specific intervals of time in order to arrive at higher or lower average costs. Generally used as part of a longer term investment strategy.
A financial statement showing company’s assets, liabilities, and stockholder equity as of a given date.
Large final payment (e.g., when a loan is repaid in installments).
BANK INVESTMENT CONTRACT (“BIC”):
A contract issued by a bank on a negotiated basis. These contracts also specify terms for yield, payment of interest, and total length of commitment. These contracts are guaranteed by the issuing bank and potentially by the FDIC, and are carried at book value.
A measurement of yield equal to 1/100 of 1%. Common term used to discuss commissions and interest rates. May be expressed as: 20 basis points, which is equal to .20%, or two tenths of 1%.
A belief that a particular market will decline in value.
Security for which primary evidence of ownership is possession of the certificate (cf. registered security).
Recipient of the proceeds of a life insurance policy or annuity contract who has an insurable interest in the insured.
A contract provision that allows the holder to make withdrawals at book value for benefit payments as described under the terms of the plan document (death, retirement, termination, and participant directed transfers).
Measure of relative volatility. The beta is the co-variance of an investment in relation to a particular index. A higher beta indicates more volatility of a given investment than the overall marketplace. A low beta can be expected to fluctuate more slowly than the market.
The highest price a prospective buyer is prepared to pay at a particular time.
State laws covering the registration of securities.
A certificate of debt issued by corporations, governments, or municipalities which represent a loan to the issuer. A bond bears a stated interest rate and matures on a stated future date.
BOND QUALITY RATINGS:
A system for measuring the relative investment qualities of bonds by the use of ratings symbols. Standard & Poor, Moody’s Investors Service, and Fitch’s Investors Service analyze the financial strength of the issuers of such bonds. Ratings range from AAA ( highly unlikely to default) to D (in default).
Analysis of the level of sales at which a project would just break even.
A Social Security supplement benefit that is intended to provide benefits for a short period of time, until Social Security benefits become payable to an individual.
Insurance: An individual acting on behalf of a customer by finding the most appropriate insurance product from several suppliers to fulfill that person’s objectives.
Securities: Person who acts as intermediary between a buyer and seller, usually charging a commission.
A belief that a particular market will increase in value.
BULLET GIC CONTRACT:
A single deposit GIC which pays a stated rate of interest, either simple or compound, and is held to maturity.
Single final payment, e.g., of a loan (in contrast to payment in installments).
Widespread rise in security prices(cf. bear market).
Option to buy an asset as a specified exercise price on or before a specified exercise date (cf. put option).
(1) Difference between the price at which a company can call its bonds and their face value; (2) price of an option.
An upper limit on the interest rate on a floating-rate note.
Financial ability of a life insurance carrier to issue new business. Usually limited by available investments and capital position in larger transactions.
The investment and financial markets which provide access to various forms of securities.
Mixture of different securities issued by a firm.
Long-term debt, preferred stock, plus net worth.
CAREER AVERAGE PLAN:
Pension plan offering a pension that depends on the employee’s average compensation during his or her years of membership (cf. final average plan).
CASH BALANCE PLAN:
A hybrid defined benefit and defined contribution plan. A cash balance plan provides for specified employer contributions and credited earnings to hypothetical individual accounts. These individual accounts are hypothetical, as the contributions are pooled into a single fund, and the employer bears all investment risk. Retirement benefits are generally paid in a lump sum, however, they are determined by using a formula and are not dependent on investment performance of plan assets.
CASH DEFICIENCY ARRANGEMENT:
Arrangement whereby a project’s shareholders agree to provide the operating company with sufficient net working capital.
As it pertains to an annuitant, an income stream expected from the purchase of an annuity. As it pertains to a 401-K Pension plan, the amount of deposits flowing into the plan for investment.
An annuity payment option. Upon the annuitants death, the difference in premiums paid and the income received is returned to the beneficiary in a lump sum.
CASH SURRENDER VALUE:
The value of proceeds of a life insurance policy or annuity that are returned to the policyholder before the contract expires or matures.
CERTAIN AND CONTINUOUS:
An annuity payment option. Payments are guaranteed for the life of the annuitants. If the annuitant dies before the period specified, then payments continue to the beneficiary for the remainder of this period.
Issued by an insurance company under a single premium group or terminal funding annuity. While the insurer issues the group contract to the plan sponsor, individual certificates are issued to the participants of the plan. The certificate outlines all of benefit provisions for which the participant is eligible.
CERTIFICATE OF DEPOSIT (“CD”):
A certificate providing evidence of a bank time deposit.
This is a contract provision where the issuer is required to issue a like contract in the case of a spin-off or sale of a company division. However, if there are significant differences in the new plan or more perceived risk, an issuer will price the new contract accordingly.
CLOSED GROUP ANNUITY:
A group annuity contract. The benefits due to retired participants and terminated participants with vested benefits may be insured by the purchase of a group annuity contract. The contract becomes an asset of the plan. The insurer assumes total responsibility for benefits of the group.
An upper and lower limit on the interest rate on a floating-rate note.
Assets that are given as security for a loan.
COLLECTIVE GIC TRUST:
A trust formed by a corporate trustee to hold various GIC’s. Ownership units issued to participating trust.
COLLECTIVE TRUST FUND:
A bank investment fund which allows the commingling of assets of a number of pension funds into a single investment pool. This collective purchasing power permits economies of scale to work in favor of smaller pension funds.
COLLECTIVE TRUST UNITS:
Evidence of ownership in an undivided interest in a collective trust held by a participating trust. No physical certificates or other written documents may be issued to represent these units.
The date on which a payment is to begin, usually in reference to an immediate annuity contract.
Unsecured notes issued by companies and maturing within 9 months.
A pooling of investment funds of individual accounts with each customer owning an interest in the total fund. Similar to a mutual fund.
A fee paid to a broker for assisting with the purchase or sale of an insurance, annuity or securities product as an agent.
An agreement between parties to do a transaction as proposed.
COMMON TRUST FUND:
A trust fund in which the assets of a number of trusts are commingled. Each participating trust owns an individual interest in property held for its benefit by the trust.
Non-interest-bearing demand deposit to compensate banks for bank loans or services.
An option in a pension plan such as a money market or bond fund which may have similar characteristics. The ability to transfer account balances between these funds creates an undesirable investment risk to the issuers.
Means by which public utility holding companies are required to choose their underwriter (cf. Negotiated underwriting).
Interest earned on principal plus interest that was earned previously. Earned interest is added to the original principal and interest is earned on this new balance. Contrasted to simple interest.
A person or company that provides services on a fee basis as opposed to commissions.
In a deferred annuity, a person on whose life annuity payments will be based if annuitant is deceased.
Interest compounded continuously rather than at fixed intervals.
An agreement between two or more parties that creates, modifies or discontinues a legal relation. To be valid a contract must be entered into by competent parties, cover a legal and moral transaction, possess mutuality, and represent a meeting of minds.
Group Annuity: The group or entity to whom a Group Annuity Contract or policy is issued.
Individual Annuity: The individual or entity holding title and ownership to an individual annuity contract.
A state or federally chartered company, usually a bank or savings and loan empowered with the authority to act in a fiduciary capacity.
Measure of the closeness of the relationship between two variables.
COST OF LIVING ADJUSTMENT (COLA):
Adjustment of wages or income designed to offset changes in the cost of living, usually as measured by the Consumer Price Index (CPI) or they may be fixed at a certain rate or amount. COLA’s can be important factors in insurance, disability, pension and annuity decisions.
(1) Specifically, a coupon attached to the certificate of bearer bond that must be surrendered to collect interest payment. (2) More generally, interest payment on debt.
Refers to a contract of Group Insurance or Group Annuity. The members or participants of a plans for whom insurance, annuities, or other benefits are being provided.
Assessment of the soundness of a company through analysis of financial information and relevant economic factors.
A procedure for assigning scores to companies on the basis of the risk of default.
Asset that will normally be turned into cash within a year.
Liability that will normally be repaid within a year.
Current assets divided by current liabilities – a measure of liquidity.
A rate determined by dividing the stated interest rate by the market value of the investment.
Bank or other financial institution empowered to keep custody and possession of assets, certificates, and other property of an individual or corporate client.
Allows participating trust daily access to funds held in a collective trust.
An individual or firm in the securities business acting as a principal rather than an agent. Typically a dealer buys for his own account and sells to a customer from his own inventory.
Amount stated on a contract payable upon death. Provision usually found in life insurance and annuity policies.
Reduction of debt by regular payments of interest and principal sufficient to liquidate an obligation at maturity.
DECLARATION OF TRUST:
A written document outlining all provisions of a trust.
Method of representing alternative sequential decisions and the possible outcomes from these decisions.
Bond portfolio that provides the cash flows to meet a series of fixed pension obligations at a minimum cost
Borrower sets aside cash or bonds sufficient to service the burrower’s debt. Both the borrower’s debt and the offsetting cash or bonds are removed from the balance sheet.
Not performing a duty. Failure to meet an obligation when due.
A single premium or flexible premium deposit arrangement in which income in the form of annuity payments is due to start generally later than one year from the date of purchase.
DEFERRED COMPENSATION PLAN:
Any plan or program between an employer and employees under which an arrangement is made for consideration to be paid in the future, usually at retirement, for work which is done today. Deferred compensation plans may be “qualified” in the case of tax qualified pension and profit sharing plans. They may also be “non-qualified” meaning that they are not subject to IRS qualification or determination. Non-qualified deferred compensation plans are typically reserved for highly paid key executives.
DEFINED BENEFIT PLAN:
An employer-sponsored pension plan that guarantees a specific benefit payable at retirement. The amount of benefit is based on a participant’s salary and years of service. Benefits paid from a qualified defined benefit plan are guaranteed by the employer and by the Pension Benefit Guaranty Corporation (PBGC), and are not subject to investment performance of plan assets.
DEFINED CONTRIBUTION PLAN:
A pension plan in which contributions are made to individual participants’ accounts. The retirement benefit is based on the value of the account at retirement. Generally, the plan pays the account balance in a lump sum, the amount of which is based on the total contributions paid into the plan and credited investment earnings and losses.
Period of declining prices of goods and services. Not a direct opposite of inflation: (1) some prices that increase with inflation do not necessarily decrease with deflation, (2) while inflation may or may not stimulate output and employment, marked deflation has always caused unemployment to rise and output to fall.
The transfer of possession or title from an individual, partnership, corporation or other entity to another of securities, agreements, or other property in fulfillment of contracts made on an exchange which meet all necessary requirements of that exchange.
DEPOSIT ADMINISTRATION CONTRACT:
Generally an annual premium funding contract with an insurance company in which an non-allocated account is maintained for participants of a plan. Annuities are then purchased for participants of the plan as they retire.
Method of amortizing the cost of fixed assets over their depreciable life.
A product which purports to simulate worth based upon the implied or inherent value of the risk/reward proposition.
Trust in which the trustee has less than full managerial authority. ERISA contemplates three different kinds of directed trusts. A plan may require a shift of authority over assets to (1) plan participants or beneficiaries with respect to their own accounts (2) a Fiduciary who is not a trustee, or (3) to an investment manager.
Debt sold for less than its principal value. If a discount bond pays no interest, it is call a “pure” discount bond.
Present value of $1 received at stated future date.
Rate used to calculate the present value of future cash flows.
DISCOUNTED CASH FLOW:
Future cash flows multiplied by discount factors to obtain present value.
An account where the broker or investment advisor has discretion to buy and sell securities without the client’s prior knowledge or consent. Most clients generally have investment guidelines for the broker to follow, such as types of investments or stop loss measures to maintain some degree of control over the disposition of the assets.
Withdrawal of funds from a financial institution in order to invest them directly (cf. intermediation).
Also referred to as involuntary termination. Cessation of a plan that terminates without sufficient assets to pay its obligations to participants.
In mutual insurers and stock insurers issuing participating contracts, the refund due as a result of an overcharge on premiums to the policyholder.
DIVIDEND: ( Investments)
Payment by a company to its stockholders.
Annual dividend divided by share price.
DOLLAR-WEIGHTED RATE OF RETURN:
Internal rate of return (cf. time-weighted rate of return).
The average time to an asset’s discounted cash flows.
The time at which an employee has the opportunity to retire before reaching their normal retirement date. Generally, in defined benefit plans, the employee must meet service and age requirements to be eligible for this benefit, although some plans may prescribe a service requirement only. With respect to defined contribution plans, participants are generally eligible for early retirement when they become fully vested, no matter the number of years of service.
Earnings before interest and taxes.
Cash flow plus change in present value.
Portfolio that offers the lowest risk (standard deviation) for its expected return and the highest expected return for its level of risk.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP):
Companies contribute to a trust fund that buys stock on behalf of employees.
In 401-K plans, the concept that in order for a Guaranteed Interest Contract to exist side by side with any other fixed account or money market account, any election by a participant to transfer from the GIC account must first pass through another non-fixed account such as an equity account. Insurers perceive a lower risk since all accounting is at book value in the GIC account.
(1) Common stock and preferred stock. Often used to refer to common stock only. (2) Net worth.
EQUIVALENT ANNUAL CASH FLOW:
Annuity with the same net present value as the company’s proposed investment.
ERISA (EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974):
Governs the administration, supervision, and management or pension and benefit plans, their provisions, limitations. The law eased pension eligibility rules, and also provided for the establishment of the Pension Benefit Guaranty Corporation (PBGC). Significant changes in traditional investment practice were mandated: (1) the prudent man rule has now been suspended by the notion of a prudent expert, and (2) Prudent investment has been replaced by the concept of a prudent portfolio.
The property and assets that a person owns at the time of death; securities, real estate, business interests, insurance, annuities, personal property, possessions, and cash.
The currency of the European Common Market now accepted as a common currency medium for those countries.
The amount of annuity income that is excluded from gross income. The percentage of the original principal that is returned with each payment.
EXERCISE PRICE (striking price):
Price at which a call option or put option may be exercised.
Average of possible returns weighted by their probabilities.
Regarding Insurance Contracts: Insurance company administrative expenses, risk charges, commissions.
In a pension plan, losses resulting from any difference between expectations and experience (e.g., a decline in the value of the pension fund’s securities).
EXPONENTIAL INTEREST COMPUTATION:
An interest method used by insurance carriers to calculate interest to be credited to compound GIC contracts.
Financial Accounting Standards Board.
Foreign Credit Insurance Association.
Federal Deposit Insurance Corporation
Non-interest-bearing deposits by banks at the Federal Reserve. Excess reserves are lent by banks to each other.
FEDERAL FUNDS RATE:
Interest rate charged by banks with excess reserves at a Federal Reserve District Bank to commercial banks needing overnight loans to meet reserve requirements. This rate is the most sensitive indicator of the direction of interest rates, because it is set daily by the market.
FEDERAL RESERVE SYSTEM (FED):
A system established by the Federal Reserve Act of 1913 to regulate the U.S. monetary and banking system. The Fed consists of 12 regional Federal Reserve Banks: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco, their branches, and all national and state banks that are part of the system. The member banks own the Federal Reserve Bank in their region. The FED implements the national monetary policy.
Person, company or association holding assets in trust. The fiduciary is charged with the responsibility of investing money wisely and managing the affairs of a qualified plan properly. Under ERISA, any person who (1) exercises any discretionary authority or control over the management of a plan or the disposition of its assets; (2) gives investment advice for a fee with respect to the funds of a plan or;(3) has any discretionary authority or responsibility in the administration of a plan.
Pension plan offering a pension that depends on the employee’s average compensation in his or her final years of service (cf. career-average plan).
Stated price which the maker is obligated to meet if accepted within a specified time.
An accounting year that is not a calendar year.
Government strategy on taxes, spending and borrowing with the intent of influencing economic activity.
Constant, non-fluctuating income such as income derived from GIC’s, BIC’s, annuities, bonds, or preferred stocks.
FLEXIBLE PREMIUM (DEFERRED ANNUITY “FPDA”):
An individual annuity contract which allows for a periodic inflow of principal deposits over time.
FLOATING RATE GIC:
A Guaranteed Investment Contract whose interest payment varies with a short-term interest rate index or some other indices.
An agreement between parties to the terms of a contract in advance of the transfer of any monies or consideration. Generally, a settlement date longer than one week. Commitments of this type can be locked in months in advance and usually require a written agreement specifying the terms of the agreement and damages in event of non-performance.
Purchase or sale of a specific contract at a price specified now, with delivery and settlement at a specified future date.
FORWARD INTEREST RATE:
Interest rate fixed today on a loan to be made at some future date (cf. spot interest rate).
A qualified profit sharing or stock bonus plan that allows participants to select underlying investments within their individual accounts and make tax-deferred contributions.
Investment: Analysis of a company’s income statement and balance sheet in order to forecast their viability and prospects for future price movements. Fundamental analysis includes past records of assets, earnings, sales, products, management, and markets to predict future trends in these indicators of a company’s success or failure. Compared with the other major school of stock market analysis, Technical Analysis, which relies on price and volume movements of stocks and does not concern itself with financial statistics.
Economics: Research of interest rates, gross national product, inflation, unemployment, and inventories as tools to predict the direction of the economy.
FUNDING AGREEMENT (“FA”):
A type of contract issued by an insurance company. This contract is an agreement to make specific payments to or on behalf of the owner. The contract is written in a manner to provide payments as “dollars on dates”. The payments are fixed and known and the contract is not generally breakable.
A contract to buy a commodity or security on a future date at a price that is fixed today. Unlike forward contracts futures are generally traded on organized exchanges and are marked-to-market daily.
FUTURE SERVICE COSTS:
Value of the pensions that are expected to accrue from employees’ future service.
A large termination payment due to a company’s management if they lose their job as a result of a merger.
The total premium including expenses and commissions that is required in order to provide benefits under a contract of insurance.
GROUP ANNUITY CONTRACT (“GAC”):
A contract issued by an insurance company. GAC’s may be used to fund benefits from a pension plan.
Stocks of companies that have an opportunity to invest money to earn more than the opportunity cost of capital (cf. income stocks).
GUARANTEED INTEREST CONTRACT (GIC):
A contract issued by an insurance company on a negotiated basis to qualified investors. These contracts specify terms for yield, how and when interest is paid, and total length of commitment. Each contract is guaranteed by the issuing insurance company and is carried at book value.
The theory of buying one security and selling another in order to reduce risk. A perfect hedge produces a riskless portfolio.
Company whose sole function is to hold stock in other companies or subsidiaries.
Minimum acceptance rate of return on a project.
An immediate annuity that provides for periodic income payments that commence within one year from the date of purchase.
The construction of an asset and a liability that are subject to offsetting changes in value.
Bonds on which interest is payable only if earned.
Stocks with high dividend yields (cf. growth stocks).
Bonds whose payments are linked to an index, e.g., a consumer price index.
INDIVIDUAL RETIREMENT ACCOUNT (IRA):
Personal retirement account an individual may contribute $2000 per year ($4000 for a couple both of whom work, or $2250 for a couple with one working spouse). Interest and capital gains grow tax deferred until the funds are withdrawn at age 59 ½ or later. TRA 1986 now stipulates contributions are deductible under specific circumstances:
An immediate annuity option form that pays installments to a beneficiary until total premium is paid back in the event of death of annuitant.
Protection against a loss or hazard. Premiums are charged for a stated benefit protecting against loss of life, disability, property damage, liability or malpractice. In a broad sense, individual risk is transferred to a group or class, which is better able to absorb the losses in the event of a claim. Insurance companies profit from accurate actuarial studies, good investment performance on the premiums invested, strict underwriting practices and cost effective management of its operations.
An organization that makes its own decisions as to how to invest its own assets or assets of those held in trust for others. Includes universities, other non-profit organizations, investment companies, banks, pension funds, mutual funds, endowments, and foundations.
A concept, generally in the life insurance business which requires that an evaluation of economic loss must exist in order for a contract of insurance to be issued on the life of an individual, partnership, or corporation.
INSURANCE COST COMPONENTS:
Mortality: The probability that an individual of a certain age will survive for a number of years.
Interest: The expected return realized on invested premiums in return for assumption of a risk.
Expenses: Marketing, sales, administrative and operating costs of issuing a policy and running a business of insurance.
Nonmaterial assets such as technical expertise, trademarks, and patents (cf. tangible assets).
INTEREST RATE RISK:
Risk that investments made at certain interest rates will decline in market value as interest rates increase. The risk of these fluctuations are known as interest rate risk.
Investment through a financial institution (cf. disintermediation).
Finance generated within a firm by retained earnings and depreciation (cf. external finance).
INTERNAL RATE OF RETURN (DOLLAR-WEIGHTED RATE OF RETURN, IRR):
Discount rate at which investment has zero net present value.
The use of capital or resources to create a desired outcome. Investment can be in the form of financial, such as stock or bonds, or investment can be made in time and effort on the part of an individual in the pursuit of reaping profits from the success of capital or labor.
An adviser for investments who is registered with the Security & Exchange Commission under The Investment Adviser Act of 1940.
Bonds rated Baa or above
JOINT & SURVIVOR:
An immediate annuity payout option. When the annuitant dies, the survivor continues to receive annuity payments. When the survivor dies, annuity payments cease. The survivors benefit is generally expressed as a percentage of the annuitants’ original income. Common survivorship percentages are 100%, 75%, 66.7%, or 50%.
JOINT TENANTS WITH RIGHT OF SURVIVORSHIP:
Ownership of property by two or more persons in equal shares with the rights of survivorship. Upon the death of one of the owners, this share is divided equally among remaining owners. This transfer of assets can bypass probate, however, depending on the amount of assets transferred estate taxes may be due.
LAST IN FIRST OUT (LIFO):
In pension terminology, method of paying retirement, disability and termination benefits from pension plans. Last money’s invested by the plan in a GIC contract would be the first used to pay benefits.
LEVEL COST METHOD:
(projected-benefit cost method) Method for estimating the normal costs of a pension plan. Its principle is that the company should contribute each year an equal amount per employee or an equal proportion of its wage bill (cf. accrued-benefit cost method).
The amount that is owed to others. Includes insurance claims, future contracts to be paid out, leases, mortgages, salaries, taxes and other debts.
LIBOR (LONDON INTERBANK OFFERED RATE):
The interest rate at which major international banks in London lend to each other. (LIBID is London Interbank Bid Rate; LIMEAN is mean of bid and offered rate).
Privilege to conduct a business or perform some service within the acknowledged jurisdiction.
The number of years a person is expected to survive after living to be a given age. Projections of benefit payout for life insurance or annuities are based on such factors as sex, heredity, and health habits.
An annuity option in which an income is payable for a person’s lifetime, ceasing at death.
Assets that are easily and cheaply turned into cash – notably cash itself and short-term securities.
In pensions, the availability of cash or cash like securities that can be liquidated to make funds available for payment of benefits for death, retirement, disability or termination of service.
(1) Additional return for investing in a security that cannot easily be turned into cash. (2) Difference between the forward rate and the expected spot rate of interest.
LONDON INTERBANK OFFERED RATE (LIBOR):
Analogous to the Federal Funds within the US Rate that the most creditworthy international banks dealing in Eurodollars charge each other for large loans. It is also analogous to the prime rate charged by US banks to their most creditworthy customers. The LIBOR rate is usually the base for other large Eurodollar loans to less creditworthy corporate and government borrowers.
LUMP SUM DISTRIBUTION:
From a qualified plan, a single-sum distribution. To qualify for lump sum treatment, the distribution(s) (1) must be made within one tax year; (2) must represent the entire account balance due to the participant; (3) must be made at either the participant’s death, separation from service, disability, or attainment of age 59½; and (4) except in the event of death, the individual must have been a participant of the plan for five or more years.
MARK TO MARKET:
An process whereby fixed maturity or fixed terms are adjusted to reflect changes in investment conditions.
The theory of determining the exact moment to buy or sell an investment or to be invested more or less in stocks or bonds in an effort to achieve optimum returns.
MARKET VALUE ADJUSTMENT:
The amount by which fixed rate contract (i.e. GIC or CD) is adjusted the actual value upon a premature termination.
MASTER TERMINAL FUNDING:
A group annuity contract that permits periodic purchases of immediate annuities from various plans. The annuity purchase rates are based upon group mortality interest, and expense factors.
The date on which the principal amount of a security, bond, GIC, BIC, or other debt or fixed income instrument becomes due and is to be paid off.
Middle point between two extremes. Average.
Acquisition in which all assets and liabilities are absorbed by the buyer (cf. exchange of assets, exchange of stock). More generally, any combination of two companies.
MONEY CENTER BANK:
A major bank in the United States that undertakes a wide range of banking activities.
MONEY MARKET FUND:
Mutual fund which invests solely in short-term safe securities.
MONTE CARLO SIMULATION:
Method for calculating the probability distribution of possible outcomes, e.g., from a project.
MOODY’S INVESTORS SERVICE:
A Dun & Bradstreet company, Moody’s is one of the best known ratings agencies for bonds, commercial paper, stocks, and more recently, banks and insurance companies. Moody’s evaluates according to a MIG (Moody’s Investment Guide)-1,2,3,4 system (best, high, favorable and adequate quality, respectively) and considers an analysis of the company’s financial background, statistics for the past decade, recent financial developments, and the future outlook.
Rate of deaths that are expected to occur at each given age.
Bond secured by an interest in property such as plant and equipment.
MUTUAL INSURANCE COMPANY:
An insurance company formed in a manner to be owned by the policyholders themselves.
Managed investment fund whose shares are sold to investors.
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONS (NAIC):
A national association of insurance commissions of each state and District of Columbia. Set rules relating to the regulation of insurance companies i.e. statutory statements.
NATIONAL ASSOCIATION OF SECURITIES DEALERS (NASD):
A nonprofit organization of brokers and dealers in the over-the-counter securities business organized to adopt, administer, and enforce rules of fair practice and rules to prevent fraudulent and manipulative acts and practices. The NASD also promotes just and equitable principles of trade for the protection of investors.
NET PRESENT VALUE:
A project’s net contribution to wealth – present value minus initial investment.
Amount applied toward investment after deductions for commissions and expenses.
Book value of a company’s common stock, surplus, and retained earnings.
Specialization within a specific market segment. Often the market will be small enough that the specialty firm will not attract very much attention.
NOMINAL INTEREST RATE:
Interest rate expressed in money items (cf. real interest rate).
Monies not covered by “qualified tax code references” (401a, 403b, 501(c)3, etc.) Non-qualified is used to distinguish the tax deductibility, non-deductibility, or tax deferral status of funds invested in various types of plans.
NONPARTICIPATING GROUP ANNUITY CONTRACT:
A contract with an insurance company providing income to participants for which the insurance company alone assumes the mortality, investment and expense risks. A contract that does not provide for dividends which in insurance is actually considered a refund of an overcharge of a premium.
A policy or contract issued by a life insurance company which does not provide for refunds to the policy folder for actual insurer expenses for mortality, interest, and expenses.
Stream of contributions to a pension plan that is required to cover future employee service.
Symmetric bell-shaped distribution that can be completely defined by its mean and standard deviation.
A reference to the Norris Court decision which requires that the same benefit be provided from the same amount of proceeds when an annuity benefit is calculated from a tax qualified employee benefit plan. A male or female annuitant is required to receive the same amount under the same annuity option.
The time a participant reaches the normal retirement age defined within the Plan.
OPTIONAL FORM OF BENEFIT:
Generally, an alternative to the normal form of benefit available from a plan, including the normal form itself, for distribution of an accrued benefit.
A policy or contract issued by a life insurance company which provides for referrals based upon actual insurer experience for mortality, interest, and expenses.
A trust that purchases units of collective trust(s).
PAR VALUE (FACE VALUE):
Value of security shown on certificate.
Time taken for a project to recover its initial investment.
(See Single Premium Immediate Annuity).
Similar to “annuity option”. Refers to the method of payment of an annuity income.
PENSION BENEFIT GUARANTY CORPORATION (PBGC):
Federal corporation established under the Employee Retirement Income Security Act of 1974 (ERISA) to guarantee basic pension benefits in covered plans by administering terminated plans and placing liens on corporate assets for certain pension liabilities that were not funded. To be covered a plan must promise clearly defined benefits to more than 25 employees and pay the required premiums.
Plan adopted by a corporation, labor union, government entity or other organization to provide benefits for retired workers. Actuarial assumptions are made to determine the amount to be contributed to the plan in order to ensure that sufficient funds are available within the portfolio to equal or exceed anticipated payout needs over time.
An annuity option that provides payments for a specific period, usually 5, 10, 15, or 20 years. If the annuitant dies during the payment period, income continues to a beneficiary until the end of the term.
Investment offering a level stream of cash flows in perpetuity (cf. consol).
The corporation, union, or other employer that establishes a plan and maintains the plan in accordance with its terms and conditions.
Corporate objectives, financial restructuring, or a change in philosophy in delivering contemporary employee plans may cause a plan to be terminated by its sponsor. Much planning and decision making is involved in this complicated procedure. Asset vs. liability studies must be done internally to determine funding capacity. The sponsor must satisfy to the PBGC that all promised pension benefits will be satisfied. The PBGC will then issue a “Notice of Sufficiency” that the plan is adequately funded. Quotes for terminal funding annuities need to be obtained in order to determine the cost of providing the guaranteed benefits.
An issue of securities that is convertible in the event of a merger into the shares of the acquiring firm or must be repurchased by acquiring firm.
POOLING OF INTEREST:
Method of accounting for mergers. The consolidation balance sheet of the merged firm is obtained by combining the balance sheets of the separate firms.
Stock that takes priority over common stock in regard to dividends. Dividends may not be paid on common stock unless the dividend is paid on all preferred stock (cf. cumulative preferred stock). The dividend rate on preferred is usually fixed at time of issue.
Discounted value of future cash flows.
Rate at which banks lend to their most favored customers.
Amount of debt that must be repaid.
The theory of proportionate sharing in a risk. A method of allocating risk. A distribution is pro rata if monies are taken from each fund within the plan according to the amount invested, the earnings accrued, and the market or book value at liquidation.
Judicial process whereby the will of a deceased person is presented to a court and an executor or administrator is appointed to carry out the will’s instructions.
Vote cast by one person on behalf of another.
Date on which contract is made between parties.
Collective GIC Trust: A qualified employee benefit plan or trust exemption from taxation by the Internal Revenue Service and subject to the rules and regulation of ERISA.
QUALIFIED DOMESTIC RELATIONS ORDER (QDRO):
An exception to the alienation and non-assignment rules under ERISA and the Internal Revenue Code. A QDRO may assign a participant’s full or partial pension benefit to a spouse, former spouse or child to satisfy support arrangements or marital property obligations.
QUALIFIED JOINT AND SURVIVOR ANNUITY (QJSA):
Under a defined benefit plan, as required by the Retirement Equity Act of 1984, an automatic form of benefit that generally requires a married participant’s annuity benefit be paid for their lifetime, as well as for the life of their surviving spouse. This automatic form of benefit can be waived by the spouse.
A plan set up by an employer for the benefit of employees that permit tax deductible contributions by the employer and tax deferred earnings growth on invested funds. Such a plan allows employees to build savings which are paid out at retirement or upon termination of employment. Taxation occurs when the money is disbursed; funds accumulate tax deferred while inside the plan.
QUALIFIED PRERETIREMENT SURVIVOR ANNUITY (QPSA):
Under a defined benefit plan, as required by the Retirement Equity Act of 1984, the automatic form of benefit payable to the surviving spouse of a vested participant who has died prior to their retirement date. This automatic form of benefit can be waived by the surviving spouse.
Statistical group of four equal sections. Performance measurement results are commonly grouped into quartiles; a rank from 1 to 25 out of 100 would be the first quartile.
Highest bid to buy and lowest offer to sell an investment at a given time. A quote.
Ratio of interest earned to the principal invested during a specific period of time, usually annually. Rate is used to compute interest and is generally expressed as a percentage.
RATE OF INTEREST:
Charge made by a borrower to a lender for use of the latter’s money, usually expressed as a percentage of principal and usually in terms of one year. Gross Rate: Actual earnings rate for insurance company with no deduction for expenses.
Net Rate: Gross rate minus administrative expenses, risk charges, and commissions.
Equivalent to the term Money Market. Short term assets held in Trust and generally available for liquidation within 24 hours.
REAL INTEREST RATE:
Interest rate expressed in terms of real goods, i.e., nominal interest rate adjusted for inflation.
Employee of a firm associated with a major stock exchange who has met the requirements of the exchange as to background and knowledge of the securities industry. Also known as account executive or broker.
Security whose ownership is recorded by the company’s registrar (cf. bearer security).
Financial institution appointed to record issue and ownership of company securities.
Dividend that the company expects to maintain in the future.
Earnings not paid out as dividends.
RETIREMENT EQUITY ACT OF 1984 (REA):
The Retirement Equity Act of 1984 addressed issues concerning spouses of ERISA plan participants. Before REA 1984, participants’ spouses had very few rights to pension benefits. After its enactment, REA 1984 introduced (under certain qualified plans) mandatory spousal rights in choosing the form of benefit payable.
RETURN ON EQUITY:
Usually, equity earnings as a proportion of the book value of equity.
RETURN ON INVESTMENT (ROI):
Generally, book income as a Portion of Net Book Value.
Measurable possibility of losing or not gaining value. Among the common types of risk: Actuarial risk: less that an insurance carrier covers in exchange for premiums, such as disability or death.
Inflation risk: chance that the value of assets or income will be eroded as inflation shrinks the value of currency.
Interest rate risk: possibility that a fixed rate debt instrument will decline in value as a result of a rise in interest rates of similar quality investments.
Liquidity risk: chance an investor will not be able to buy or sell a commodity quickly enough because buying or selling opportunities are limited.
Repayment risk: possibility that a borrower will not repay a promised obligation.
Principal risk: chance that invested capital will decline in value.
Expected additional return for making a risky investment rather than a safe one.
RULE OF “72”:
Convenient technique for estimation of compound interest rates-derived from the fact that a 7.2% return per year is the interest rate that will double the value of an investment in 10 years. To arrive at the number of years for an investment to double, divide the rate of return into 72. (If the investments annual rate of return is 6%, IRA value will double in approximately 12 years) Similarly the rate of return needed to double an investment in a given number of years can be estimated by dividing the number of years to double into 72. (The value of an investment will double in 6 years if the annual rate of return is approximately 12%)
A plan that encourages employees to contribute with the possibility that the employer will match a certain percentage.
Market in which one can buy or sell seasoned issues of securities.
Debt which, in the event of default, has first claim on specified assets.
SECURITIES & EXCHANGE COMMISSION (SEC):
Federal agency created by the Securities Exchange Act of 1934. The SEC is an independent quasi-judicial agency of the U.S. government. The laws administered by the Commission seek to provide protection for investors and the public in their securities transactions.
SECURITIES EXCHANGE ACT OF 1934:
Law governing the securities industry. The act outlaws misrepresentation, manipulation of the markets, and other abusive practices in the issuance of securities. The SEC was created to enforce the rules and regulations set forth by this act.
Substituting tradeable securities for privately negotiated instruments.
Consequence of a contract that induces only one group (e.g., the low-risk individuals) to participate.
Debt which, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.
Date by which an executed order or negotiated contract must be completed by exchange of consideration or property.
An arrangement between parties for the payment or receipt of cash, securities, or other consideration in return for other property or benefits.
Interest calculated only on the initial investment (cf. compound interest).
SINGLE PREMIUM (DEFERRED ANNUITY “SPDA”):
A tax deferred savings plan issued by a life insurance company. An customer makes a premium payment to an insurance company. Proceeds are taxed when distributions are taken, presumably later in life when the customer is in a lower tax bracket.
SINGLE PREMIUM IMMEDIATE ANNUITY (“SPIA”):
An annuity that provides guaranteed income for a fixed term, for a person’s lifetime, or for the lifetime of an individual and another person as joint annuitant.
SINGLE PREMIUM GROUP ANNUITY CONTRACT (“SPGA”):
An annuity arrangement for a group of participants in a plan which provides annuities for the participants of the plan. Immediate annuities are provided for present pensioners and deferred annuities for those who have not yet reached retirement age.
SPOT INTEREST RATE:
Interest rate fixed today on a loan that is made today (cf. forward interest rate).
The difference between the two prices, usually one being a bench mark, such as treasury bonds.
STANDARD & POORS (S&P):
Subsidiary of McGraw-Hill, Inc. that provides many investment services, including the rating of stocks, bonds and commercial paper; compilation of several S&P Indexes; publication of a wide variety of statistical materials, investment advisory reports, and other financial information.
STANDARD & POOR’S RATING:
Classification of stocks and bonds according to risk as assessed by Standard & Poor’s Corporation. The top four grades-Investment Grade AAA, AA, A, and BBB-indicate a minimal risk that a corporate or municipal bond issue will default in its interest and principal payments. The same ratings scale also applies to stocks. Stocks or bonds rated BB or below by S&P are considered speculative, and fiduciaries are generally not allowed to invest in them.
In a rights issue, agreement that the underwriter will purchase any stock that is not purchased by investors.
STATE OF RESIDENCE:
State in which a person resides. Important for insurance company residency requirements for licensing purposes. The state of residency is generally the state under which the license of the agent is issued.
STOCK INSURANCE COMPANY:
A from of insurance company whereby the policyholders do not have an ownership stake in the company. Policy holders are separate from stock holders.
Exercise price of an option.
A bond that can be subdivided into a series of zero coupon bonds.
Court awarded damages in a liability case whereby periodic cash payments or life annuity payments are made by an insurer to the plaintiff. This negotiated from a settlement is deemed to be a more prudent method of compensating losses.
Additional liability to a pension plan that results from an increase in promised benefits.
An arrangement whereby two companies agree to exchange with each other on different terms, e.g., in different currencies, or one at a fixed rate and the other at a floating rate.
Physical assets such as plant, machinery, and offices.
TAXABLE EQUIVALENT CASH FLOW:
The equivalent taxable yield from an investment when a portion of the return is not subject to tax.
Research into the supply and demand for investments based on trading volume and price statistics. Technical analysts usually incorporates extensive charting and time line graphs of past price movement relationships in order to identify future market trends. This analysis is done for the short term without regard to fundamental factors such as earnings or the balance sheet.
TEMPORARY LIFE ANNUITY:
An annuity option that pays a benefit during the life of the annuitant but not longer than a stated time frame. If the annuitant dies during the stated time frame, the annuity stops. If the annuitant lives until the end of the stated time frame, the payments also stop.
A final dividend payable on a participating (“with profits”) insurance policy at maturity, surrender, or death.
TERMINAL FUNDING ANNUITY:
A group annuity arrangement under which periodic purchases of immediate annuities are made and which are based upon group mortality, investments, and expenses. An annuity arrangement whereby immediate annuities are provided as each participant retires under a plan.
see PLAN TERMINATION
see PLAN TERMINATION
Charge deducted from a contract to recover the administrative and organizational expenses incurred with the issuance of a group annuity contract. Normally, if an annuity, life insurance contract, GIC, or BIC os redeemed before a stated date, the issuing institution hasn’t had time to recoup its costs at issue.
A U.S. Treasury bond reissued by Merrill Lynch as a series of zero coupon bonds.
Demand for payment at a stated future date (cf. sight draft).
TIME-WEIGHTED RATE OF RETURN:
Rate of return that gives equal weight to each time period; used in investment performance measurements (cf. dollar-weighted rate of return).
Delivery of funds, contracts or certificates; the change of ownership as recorded on the books; the exchange of documents or monies between parties.
Short-term discount debt maturing in less than 1 year, issued regularly by the government.
U.S. Government negotiable debt obligations. The income from treasuries is exempt from state and local, but not federal taxes. BILL: Maturities 1 year or less.
NOTE: Maturities of 1 to 10 years.
BOND: Maturities of 10 years or longer.
A state or nationally chartered company that provides trust, custodial, and safekeeping services for a fee. Trust companies are regulated by state in the case of state charters; they are regulated by the comptroller of the currency in the case of nationally chartered companies.
A fund comprised of a diversified portfolio of investments pursuant to a written investment policy or statement.
A written document setting forth the terms and conditions under which the trustee will perform services and functions as agreed.
A fiduciary. Also, with ERISA, a prudent expert. One who is charge with the responsibility of knowing and administering in accordance with the law.
Insurance: An individual who assesses risk for an insurance company.
Securities: An investment bank or firm which agrees to make a market in securities of a new issue stock or bond.
The stated value for Each unit of a collective trust.
The date on which a Plan or collective GIC Trust is valued.
An annuity payment for life or for a period of time which will vary based upon the earnings of a separate account.
VARIABLE RATE CONTRACT:
A type of contract that guarantees a fixed rate that changes according to an index or specific pricing model.
Employee’s entitlement to a part or all of a pension if he or she leaves before retirement.
A friendly potential acquirer sought out by a target company threatened by a less welcome suitor.
A term or time period during which contributions are made to a GIC. Typically window GIC contracts accept deposits for a period such as 12 months. The deposits are then held until a maturity which is usually 1-6 years. Plan trustees usually negotiate new windows for new cash inflows.
Transforms merge from the institution through the Federal Reserve system between computered accounts.
Return on invested capital. The dividend or the bond interest coupon received from a financial investment.
Graphic representation of investment yields for various maturities. A normal yield curve shows higher interest rates for successively longer maturities. An inverted yield curve shows a point at which yields are lower for successively longer maturities.
YIELD TO MATURITY:
Internal rate of return on a bond.
ZERO COUPON BOND:
Discount bond making no coupon payments.