Glossary A to E Wenco Financial Planning Certified Senior Advisor

1035 exchange
The 1035 exchange provisions are only available for a limited type of asset which includes cash value life insurance policies and annuity contracts. The exchange of similar insurance related assets without any tax consequence upon the conversion. If the exchange qualifies for like-kind exchange consideration, income taxes are deferred until the new property or asset is sold.

10K
SEC required annual report filed by corporations each year. It must be filed within 90 days after the end of the fiscal year, and provides a comprehensive overview of a company's business practices and financial stability.

401(k) plan
A tax-deferred defined contribution retirement plan that gives eligible employees the opportunity to defer a portion of their current compensation into the plan. Amounts that are deferred are excluded from the participant's gross income for the year of the deferral. The plan may provide for employer matching contributions and discretionary profit-sharing contributions.

403(b) plan
Tax deferred annuity retirement plan available to employees of public schools and colleges, and certain non-profit hospitals, charitable, religious, scientific and educational organizations.

457 plan
Non-qualified deferred compensation plans available to employees of state and local governments and tax-exempt organizations.

accelerated death benefits (ADB's)
Some life insurance policies make a portion of the death benefit available prior to the death of the insured. Such benefits are usually available only due to terminal illness or for long-term care situations.

accidental death benefit
A rider, often called "double indemnity, added to an insurance policy which provides that an additional death benefit will be paid in the event death is caused by and accident.

accounts payable
An accounting balance sheet item representing the amount of money a company owes to its creditors.

accounts receivable
An accounting sheet item representing the amount of money a company is owed by its customers for goods and services it has provided.

accrual basis
One of several methods of accounting. Requires that all interest and income be included as it is earned and that all expenses are included as incurred.

adjustable rate mortgage (ARM)
A mortgage offering an initial interest rate that is usually lower than a fixed rate, but that adjusts periodically according to market conditions and financial indices. The rate may go up and/or down, depending on economic conditions. To limit the borrower's risk, the ARM will almost always have a maximum interest rate allowed, called a "rate cap."

adjusted gross income (AGI)
An interim calculation in the computation of income tax liability. It is computed by subtracting certain allowable adjustments from gross income.

administrator
A person appointed by the court to settle an estate when there is no will.

after-tax return
The return from an investment after the effects of taxes have been taken into account.

aggressive growth fund
A mutual fund whose primary investment objective is substantial capital gains.

alternative minimum tax
A method of calculating income tax that disallows certain deductions, credits, and exclusions. This was intended to ensure that individuals, trusts, and estates that benefit from tax preferences do not escape all federal income tax liability. People must calculate their taxes both ways and pay the greater of the two.

amortization
The amortization of a debt is its systematic repayment through installments of principal and interest. An amortization schedule is a periodic table illustrating payments, principal, interest, and outstanding balance.

annual percentage rate (APR)
The cost of credit expressed as a yearly rate. The means of comparing loans offered by various lenders on equal terms, taking into account interest rates, points, and other finance charges. The federal Truth-in-Lending Act require its disclosure.

annuitant
An individual who receives payments from an annuity. The person whose life the annuity payments are measured on or determined by.

annuity
A contract between an insurance company and an individual which generally guarantees lifetime income to the individual or whose life the contract is based in return for either a lump sum or periodic payment to the insurance company. Interest earned inside an annuity is income tax-deferred until it is paid out or withdrawn.

appraisal
An estimate of a property's value, usually real estate, at a specific point in time and as determined by a qualified professional appraiser.

appreciation
The increase in value of an asset. The term "appreciation" may be applied to real estate, stocks, bonds, etc.

arm's length
Acting at arm's length predicates that two parties negotiate with opposing economic interests.

asking price
The price that a seller is willing to sell a security or commodity for.

asset
Anything owned that has monetary value.

asset allocation
The process of repositioning assets within a portfolio to maximize return for a given level of risk. This process is usually done using the historical performance of the asset classes within sophisticated mathematical models.

asset class
A category of investments with similar characteristics.

audit
The examination of the accounting and financial documents of a firm by an objective professional. The audit is done to determine the records' accuracy, consistency, and conformity to legal and accounting principles.

balanced mutual fund
A fund whose objective is a balance of stocks and bonds. Such funds tend to be less volatile than stock-only funds.

balance sheet
A financial statement that is divided into three major parts: assets, liabilities and shareholders' equity.

balloon mortgage
A mortgage whose terms are insufficient to completely amortize the loan. The balloon, or lump sum payment, is required at the maturity of the loan to completely pay off the remaining principal. They often contain a contractual opportunity to refinance when the balloon payment is due at prevailing rates.

bank reserves
The amounts that are required by banks to keep on deposit at a Federal Reserve Bank, as determined by reserve ratios. Funds in excess of these reserves are loaned out or invested by the banks.

bankruptcy
A federal court proceeding in which a debtor who is unable to continue to meet his/her financial obligations may be relieved from the payment of certain debts. This action seriously affects the borrower's credit worthiness.

basis
An amount usually representing the actual cost of an investment to the buyer. The basis amount of an investment is important in calculating capital gains and losses, depreciation, and other income tax calculations.

basis points
A term used by investment professionals to describe yields of bonds. One basis point equals one 100th of 1%, or .01%. A bond yield increase from 10.0% to 10.1% represents an increase of 10 basis points.

bear market
A prolonged decline in overall stock prices occurring over a period of months or even years.

beneficiary
The person who is designated to receive the benefits of a contract. A person named in a life insurance policy, annuity, will, trust, or other agreement to receive a financial benefit upon the death of the owner. A beneficiary can be an individual, company, organization, etc.

beta
A statistically generated number that is used to measure the volatility of a security or mutual fund in comparison to the market as a whole.

bid price
The price that a buyer is willing to pay for a security or commodity.

blue-chip stocks
The equity issues of financially stable, well-established companies that usually have a history of being able to pay dividends in bear and bull markets.

bond
A certificate of indebtedness issued by a government entity or a corporation, which pays a fixed cash coupon at regular intervals. The coupon payment is normally a fixed percentage of the initial investment. The face value of the bond is repaid to the investor upon maturity. Bonds are usually issued in multiples of $1,000.

bonding requirement
The individual(s) that are appointed to run the day-to-day operations of a qualified plan, as well as the trustee(s) and investment managers must be bonded. The bond is required to provide protection to the plan against loss due to fraud, theft, forgery or dishonesty.

book value
The value that belongs to a company's owners or shareholders after total liabilities have been subtracted from total assets. Also called shareholders equity. The net value of a company's assets, less its liabilities and the liquidation price of its preferred issues. The net asset value divided by the number of shares of common stock outstanding equals the book value per share, which may be higher or lower than the stock's market value.

bull market
A prolonged increase in overall stock prices-usually occurring over a period of months or even years.

buy-down
The payment of additional discount points in return for a below market interest rate, and is used to lower monthly payment on a home mortgage.

buy-sell agreement
An agreement between shareholders or business partners to purchase each others' shares in specified circumstances.

capital gain / loss
The difference between the sales price and the purchase price of a capital asset. When that difference is positive, the difference is referred to as a capital gain. When the difference is negative, it is a capital loss.

capital markets
A general term encompassing all markets for financial instruments with more than one year to maturity.

capital stock
All ownership shares of a company, both common and preferred listed at par value.

cash equivalents
Assets that can be quickly converted to cash. These include receivables, treasury bills, short-term commercial paper, short-term municipal and corporate bonds and notes.

cash value
Permanent life insurance policies provide both a death benefit and in an investment component called a cash value. The cash value earns interest and often appreciates. The policyholder may accumulate significant cash value over the years and, in some circumstances, "borrow" the appreciated funds without paying taxes on the borrowed gains. As long as the policy stays in force the borrowed funds do not need to be repaid, but interest may be charged to your cash value account.

certificate of deposit (CD)
A low risk, often federally guaranteed investment offered by banks. A CD pays interest to investors for as long as five years. The interest rate on a CD is fixed for the duration of the CD term.

charitable lead trust
A trust established for the benefit of a charitable organization under which the charitable organization receives income from an asset for a set number of years or for the trustor's lifetime. Upon the termination of the trust, the asset reverts to the trustor or to his or her designated heirs. This type of trust can reduce estate taxes and allows the trustor's heirs to retain control of the assets.

charitable remainder trust (CRT)
An irrevocable trust with both charitable and non-charitable beneficiaries. The donor transfers highly appreciated assets into the trust and retains an income interest. Upon expiration of the income interest, the remainder in the trust passes to a qualified charity of the donor's choice. If properly structured, the CRT permits the donor to receive income, estate, and/or gift tax advantages. These advantages often provide for a much greater income stream to the income beneficiary than would be available outside the trust.

closed-end fund
A fund whose value is held within a fixed number of shares. Until the fund is wound up, shares can be bought and sold on the stock exchange or the over-the-counter market.

co-borrower
An individually or jointly obligated to repay a loan entered into with a third party. The co-borrower may or may not share in ownership of loan collateral.

COBRA - Consolidated Omnibus Budget Reconciliation Act
A federal law requiring employers with more than 20 employees to offer terminated or retired employees the opportunity to continue their health insurance coverage for 18 months at the employee's expense. Coverage may be extended to the employee's dependents for 36 months in the case of divorce or death of the employee.

codicil
An instrument in writing executed by a testator for adding to, altering, explaining or confirming a will previously made by the testator; executed with the same formalities as a will; and having the effect of bringing the date of the will forward to the date of codicil.

coinsurance or co-payment
The amount an insured person must pay for a covered medical and/or dental expense if his or her insurance doesn't provide 100 percent coverage.

collateral
Assets pledged as security for a loan. If the borrower defaults on payment, the lender may dispose of the property pledged as security to raise money to repay the loan.

commission
The fee a broker or insurance agent collects for administering a trade or policy.

commodity
A term for goods such as grains, foodstuffs, livestock, oils, and metals which are traded on national exchanges. These exchanges deal in both "spot" trading for current delivery and "futures" trading for delivery in future months.

common stock
A security that represents ownership in a corporation. Common stockholders participate in the corporation's profits or losses by receiving dividends and by capital gains or losses in the stock's share price.

community property
State laws vary, but generally all property acquired during a marriage - excluding property one spouse receives from a will, inheritance, or gift - is considered community property, and each partner is entitled to one half. This includes debt accumulated. There are currently nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

compound interest
The computation of interest paid using the principal plus the previously earned interest. Compound interest may be computed continuously, daily, monthly, quarterly, semiannually, or annually

conduit IRA
An individual who rolled over a total distribution from a qualified plan into an IRA can later roll over those assets into a new employer's plan. In this case the IRA has been used as a holding account, a conduit.

conforming loan
A mortgage loan that conforms to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. Currently, conforming first mortgages are under $275,000 ($413,000 in Alaska and Hawaii).

construction loan
A construction loan is a short term loan applied to the construction of a new home. The builder gradually withdraws the loan proceeds and the home serves as collateral on the loan.

consumer debt
Debt incurred for consumable or depreciating non-investment assets. Items include credit card debt, store-financed consumer purchases, car loans, and family loans that will be repaid.

consumer price index
The U.S. Department of Labor's main indicator of inflation. It is calculated each month from the cost of some 400 retail items in urban areas throughout the United States.

contrarian
An individual whose opinion is the opposite of the majority.

conventional mortgage
A mortgage that is not insured, guaranteed or funded by the Veterans Administration, the Federal Housing Administration, or Rural Economic Community Development.

convertible mortgage
An adjustable mortgage (ARM) that allows the borrower to convert to a fixed rate mortgage during a specified period of time.

convertible term insurance
Term life insurance that can be converted to a permanent or whole life policy without evidence of insurability, subject to time limitations.

corporation
A legal business entity created under state law. Because the corporation is a separate entity from its owners, shareholders have no legal liability for its debts.

correction
A sudden decline in stock or bond prices after a period of market strength.

co-signer
An individual or party who agrees to assume a debt obligation of a third party in the event the principal borrower defaults on the terms of the loan.

coupon rate
The rate of interest paid on a bond, expressed as a percentage of the bond's par value.

credit cards
Cards such as Discover, Visa, and MasterCard allow the holder to charge purchases rather than pay cash.

credit bureau repositories
A credit bureau repository is an organization that compiles credit history information directly from lenders and creditors into credit summaries and reports. These reports are made available to lenders and creditors to assist them in gauging an individual's credit worthiness.

critical illness insurance
Insurance designed to provide a lump-sum payment equal to the full value of the policy or a percentage of the policy depending upon the product design, to the insured/policy owner upon the diagnosis of a covered critical illness. Typical illnesses covered include heart attack, stroke, cancer, paralysis, renal failure and Alzheimer's disease. Many policies offer a partial payment for certain medical procedures such as coronary bypass surgery or angioplasty. Some policies offer a return of all premiums in the event of death of the insured, others pay the full benefit upon the insured's death.

currency risk
The level of risk when investing in international markets, due to the fluctuations in exchange rates of the various world currencies. Investing in any foreign country should be preceded by a careful estimation of how well its currency is likely to do against the dollar.

custodian
A financial institution, usually a bank or trust company, that holds a person or company's cash and or securities in safekeeping.

cyclical companies
Companies that report strong earnings when the overall economy is doing well and weaker earnings when the economy is in recession.

debit cards
Cards allow the cost of a purchase to be automatically deducted from the customer's bank account and credited to the merchant.

debt markets
The fixed income sector of the capital markets devoted to trading debt securities issued by corporations and governments.

debt to income ratio
The ratio of a person's total monthly debt obligations compared to their total monthly resources is called their debt to income ratio. This ratio is used to evaluate a borrower's capacity to repay debts.

decedent
The term decedent refers to a person who has died.

decreasing term
A term life insurance featuring a decreasing death benefit. Decreasing term is well suited to provide for an obligation that decreases over the years such as a mortgage.

deduction
An amount that can be subtracted from gross income, from a gross estate, or from a gift, thereby lowering the amount on which tax is assessed.

deed of trust
A document used to convey title (ownership) to a property used as collateral for a loan to a trustee pending the repayment of the loan. The equivalent of a mortgage.

deferral
A form of tax sheltering in which all earnings are allowed to compound tax-free until they are withdrawn at a future date. Placing funds in a qualified plan, for example, triggers deductions not all qualified plans provide for tax deductions; contributions may, however, be excluded from gross income, i.e. 401(k) plans for the current tax year and postpones capital gains or other income taxes until the funds are withdrawn from the plan.

deferred compensation
Income withheld by an employer and paid at some future time, usually upon retirement or termination of employment.

defined benefit plan
A qualified retirement plan under which a retiring employee will receive a guaranteed retirement fund, usually payable in installments. Annual contributions may be made to the plan by the employer at the level needed to fund the benefit. The annual contributions are limited to a specified amount, indexed for inflation.

defined contribution plan
A plan where contributions are allocated to individual accounts according to a pre-determined contribution allocation. This type of plan does not promise any specific dollar benefit to a participant at retirement. Benefits received are based on amounts contributed, investment performance and vesting. The most common type of defined contribution plan is the 401(k) profit-sharing plan.

deflation
A period in which the general price level of goods and services is declining.

depreciation
Charges made against earnings to write off the cost of a fixed asset over its estimated useful life. Depreciation does not represent a cash outlay. It is a bookkeeping entry representing the decline in value of an asset over time.

direct deposit
A means of authorizing payment made by governments or companies to be deposited directly into a recipient's account. Used mainly for the deposit of salary, pension and interest checks.

disability insurance
A policy designed to replace a percentage of earned income if accident or illness prevents the beneficiary from pursuing his or her livelihood.

disposable income
After-tax income available for spending, saving or investing.

diversification
Investing in different companies, industries, or asset classes. Diversification may also mean the participation of a large corporation in a wide range of business activities.

dividend reinvestment plan (DRIP)
An investment plan that allows shareholders to receive stock in lieu of cash dividends.

dividends
A distribution of the earnings of a company to it's shareholders. Dividends are "declared" by the company based on profitability and can change from time to time. There is a direct relationship between dividends paid and share value growth. The most aggressive growth companies do not pay a dividend, and the highest dividend paying companies may not experience dramatic growth.

dollar cost averaging
A system of investing in which the investor buys a fixed dollar amount of securities at regular intervals. The investor thus buys more shares when the price is low and fewer shares when it rises, and the average cost per share is lower than the average price per share. This strategy does not protect against loss in declining markets and involves continuous investments, regardless of fluctuating price levels.

down payment
The amount of cash applied to the purchase, with the remainder of the purchase accomplished through a mortgage or other debt.

earnest money
Similar to a deposit, earnest money is the money given by the buyer to the seller of a property as an assurance of their intentions to purchase the property.

earnings per share (EPS)
Total net profits divided by the number of outstanding common shares of a company.

economic cycle
Economic events are often felt to repeat a regular pattern over a period of anywhere from two to eight years. This pattern of events ends to be slightly different each time, but usually has a large number of similarities to previous cycles.

effective tax rate
The percentage of total income paid in federal and state income taxes.

efficient market
The market in which all the available information has been analyzed and is reflected in the current stock price.

employer-sponsored retirement plan
A tax-favored retirement plan that is sponsored by an employer. Among the more common employer-sponsored retirement plans are 401(k) plans, 403(b) plans, simplified employee pension plans, and profit-sharing plans.

employee stock ownership plans (ESOP)
A plan that allows employees to purchase stock, usually at a discount, that they can hold or sell. ESOPs offer a tax advantage for both employer and employee. The employer earns a tax deduction for contributions of stock or cash used to purchase stock for the employee. The employee pays no tax on these contributions until they are distributed.

equity
The value of a person's ownership in real property or securities; the market value of a property or business, less all claims and liens upon it.

ERISA - Employee Retirement Income Security Act
A federal law covering all aspects of employee retirement plans. If employers provide plans, they must be adequately funded and provide for vesting, survivor's rights, and disclosures.

escrow funds
Funds accumulated and held in an account for the periodic payment of property taxes and insurance.

estate
A decedent's total value of assets as of their date of death, including all funds, personal effects, interest in business enterprises, titles to property, real estate, stocks, bonds and notes receivable.

estate conservation
Activities coordinated to provide for the orderly and cost-effective distribution of an individual's assets at the time of his or her death. Estate conservation often includes wills and trusts.

estate planning
The orderly arrangement of one's financial affairs to maximize the value transferred at death to the people and institutions favored by the deceased, with minimum loss of value because of taxes and forced liquidation of assets.

estate tax
Upon the death of a decedent, federal and state governments impose taxes on the value of the estate left to others (with limitations).

excess distributions
An individual may have to pay a 15% tax on distributions received from qualified plans in excess of $150,000 during a single year. The tax, however, does not apply to distributions due to death, distributions that are rolled over, and distributions of after-tax contributions.

executor
The person named in a will to manage the estate of the deceased according to the terms of the will. A person named by the probate courts or the will to carry out the directions and requests of the decedent.

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