Federal Acts and Legislature - Extended Glossary


A B C D E F G H I J K L M N O P Q R S T U V W

A

401(k) Plan
This type of plan is a qualified profit sharing or stock bonus plan under which participants have the option to put money into the plan or receive the same amount of money as taxable cash compensation. Amounts contributed to the plan are not taxable to the participants until withdrawn from the plan. This type of plan is mostly funded entirely or in part through salary reductions chosen by employees. Salary reductions are restricted to an annual limit.

403(b) Plan
This type of plan is a tax-deferred annuity retirement plan only available to employees of public schools and certain nonprofit organizations.

Accelerated Benefits
This benefit is a provision in some life insurance policies that allows insured’s who are terminally ill to take part or all of their life insurance benefits before they die, mostly to pay for the care they need. When the insured dies, if there is a remainder the death benefit is paid to the beneficiary, just like 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.

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 are 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.

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.

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.

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.

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.

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.

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(Power of Attorney)
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.

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.

Binder
A temporary, binding agreement, secured by a payment to evidence good faith, used until a formal contract takes effect.

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.

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.

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 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.

COBRA
The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) is an amendment to ERISA that provides continuation of group health coverage that otherwise may be terminated.  It requires employers with 20 or more employees to offer terminated or retired employees the option to continue their health coverage for 18 months at the employee’s expense. Those qualified may be required to pay the entire premium for coverage up to 102% of the plan, although this is generally cheaper than individual coverage.  For employees, termination of employment under any circumstances aside from gross misconduct, or a reduction of hours, qualify you for COBRA.  For spouses, in addition to those terms, the covered employee becoming entitled to Medicare, legal separation or divorce of the insured employee, or the death of said employee entitles you to COBRA.  And for dependents, all prior reasons apply, with the addition of the loss of dependent status under the plan rules.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Dental EPO
An exclusive provider organization is a network of dentists that are united with the insurance company to provide care at a reduced cost. In return, the EPO pays most of the cost of the patron’s dental care needs. An EPO is a closed dental plan, so customers can only visit the dentists that are in the plan so it differs from the PPO in that regard. Generally, an EPO does not pay the dentists until services have been rendered for the customers.

Dental Indemnity Plan
An indemnity dental insurance plan is often called a traditional dental coverage plan or a fee for service plan. In this particular type of dental insurance plan, you have the choice to visit any dentist or dental care professional you wish. Generally, you do not need to select your dentist from a list of network providers or approved providers to qualify for benefits and coverage.

Normally, you will need to pay a deductible on your indemnity dental insurance. Once the deductible has been satisfied, the insurance carrier will cover a portion of “usual and customary” dental costs. How much your dental insurance will reimburse will differ according to the carrier. However, many insurance carriers offering this type of plan could possibly pay up to 100% of usual and customary dental costs.

Dental services will usually fall into one of four types.  Occasionally implantology will fall into a fifth category. Here is a list of the four types and some examples of what falls into their respective categories:

Type I (Diagnostic and Preventative)

• Oral Examinations
• Cleanings
• X-rays
• Topical Fluoride

Type II (Basic)

• Fillings
• Simple Extractions
• General Anesthesia
• Inlays, Bridges
• Repair Removable Dentures
• Periodontic Services

Type III (Major)

• Crowns
• Root Canals
• Inlays and Onlays
• Dentures
• Bridges
• Denture Adjustments/Relining

Type IV (Orthodontics)

Dental POS
A Dental point-of-service (POS) plan permits a member to use either a DHMO/DMO network dentist or to seek care from a dentist not in the DHMO/DMO network. Members decide in-network care or out-of-network care at the time they make their dental appointment and typically incur higher out-of-pocket costs for out-of-network care.  Out-of-network care can be subject to deductible, co-insurance, usual and customary fees, and benefit limitations.

Dental PPO
A preferred provider organization dental plan is dental coverage that is part of a network insurance system. Dentists sign up for the PPO network hoping to acquire more patients.  The dentists offer lower rates for the clients of a particular dental insurance carrier, in return for the referrals the insurance company provides. Patients have the choice of choosing from a network of specific dentists, or seek dental care out of the network.  However, choosing out-of-network care may result in higher fees or decreased benefits.

DHMO/DMO
A dental health maintenance organization is occasionally referred to as a capitation dental insurance plan. It is a type of insurance where a group of dentists, or a single dentist, joins in a contract with the DHMO/DMO to offer dental treatment for the patients who are a part of the DHMO/DMO. The organization pays the dentist a certain amount per patients per month who are enrolled in the group.  However, some carriers may implement a fee-for-service basis in which the dentist is paid for the services rendered, rather than a fixed amount per patient.  Sometimes, if the contract specifies, the patient pays a co-payment for certain treatments while paying nothing for standard treatments such as exams and cleanings.  In Addition, there are usually no claim forms.  In a DHMO/DMO, the patients must visit only dentists that are part of the DHMO network.

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.

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.

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 Security Life of Dever's alternative term products (single life alternative term or joint survivor alternative term).

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.

Employee Benefit Trust
A trust established to hold the assets of an employee benefit plan.

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.

EPO (Exclusive Provider Organization)
An EPO is an organization of providers which includes Physicians, Hospitals, Pharmacies, Labs, etc. that have agreed to charge a discounted rate in accordance to the allowable charges set by the insurance carrier.  The structure is similar to the HMO without the need of a primary care physician (PCP).  Since there is no PCP, there is no need for a referral. 

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 Employee Retirement Income Security Act of 1974 (ERISA) is a federal law covering all areas of employee retirement plans and providing protection for those in these plans.  ERISA requires the participants be provided with plan information that covers plan features and funding.  It also imparts fiduciary responsibilities for those managing and controlling plan assets, and if these duties are breached participants have the right to sue for benefits and courts may take actions against these fiduciaries.  Also, it mandates plans to establish a grievance and appeals for participants to get benefits from their 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.

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.

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.

Fiduciary
A person in the position of great trust and responsibility, such as the executor of a will or the trustee of a trust.

Fixed-Period Option
Life insurance settlement option in which the policy proceeds are paid out over a fixed period of time.

Future Interest
An ownership interest in property in which unlimited possession or enjoyment of property is delayed until some future time.

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.

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.

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.

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.

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.

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.

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.

HIPAA
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) is an amendment to ERISA that provides rights and protections for participants and beneficiaries in group health plans who may have preexisting medical conditions.  What it does is limit exclusions for these preexisting conditions, prohibit any discrimination of workers or beneficiaries based on health condition, and allow opportunities for employees in special situations to enroll in a new plan.  In addition to group coverage, HIPAA may also give you the privilege to obtain individual coverage if no group health plan is accessible.

HMO (Health Maintenance Organization)
An HMO is an organization that provides its members with comprehensive healthcare services through an established group of network providers including doctors, hospitals, pharmacies, labs, etc.  HMO's are proactive in their approach to promote wellness and preventative medicine by encouraging physicals and by offering discounts to services such as gyms and other wellness facilities.  In theory, early detection and prevention saves the carrier money before medical conditions worsen and costs escalate.   Generally a primary care physician (PCP) is selected to oversee the medical management of the member and act as the 'gatekeeper'.  The PCP may be the internist, pediatrician, or even a woman's gynecologist.  One of their roles as the gatekeeper is to authorize the services beyond their scope of their expertise by way of a referral.  The referral would often be required for specialist visits, scheduled surgeries, diagnostic tests, and hospitalizations.  However 'open access' HMO's are becoming very popular and now allow the participants to self refer.  With an HMO, your choice of doctors, hospitals, and other providers is restricted to a network except in the case of an emergency.  In most cases, preauthorization by the carrier it is still required for treatment outside of the network.  The network of providers is paid by the carrier on a predetermined basis for the services rendered.  The cost to the member is usually limited to a small co-payment which represents a percentage of the overall medical cost.  Due to the increasing costs of healthcare, cost sharing plans are becoming more common passing more of the financial burden to the member by way of in-network deductibles and/or coinsurance. 

Human Life Value
For purposes of life insurance, the present value of the family's share of the deceased breadwinner's future earnings.

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.

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).

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 insured’s 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.

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.

Interest Credit
The nonguaranteed amount credited to the policy's account value based upon a rate of interest specified by the insurance company.

Interest Option
Life insurance settlement option in which the principal is retained by the insurer and interest is paid periodically.

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.

J

Joint Tenancy
A form of ownership shared with an unlimited number of individuals. Each tenant owns an equal undivided share of the property.

K

Keogh Plan (HR-10 Plan)
Retirement plan individually adopted by self-employed persons.

L

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.

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.

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 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.

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.

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.

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.

N

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").

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.

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.

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. 

Personal Representative
An executor, administrator, or anyone else who is in charge of a decedent's property.

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.

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.

POS (Point-of-Service)
POS is a type of managed care plan that offers in-network benefits as well as out of network coverage.  The in-network coverage is very similar to the standard HMO and the plan designs can be customized in the same way.  Usually the only cost to the member is a small co-payment.  The out-of-network coverage's are similar to the traditional indemnity plans whereby the member is indemnified for the services rendered as opposed to a pre-arranged or contracted fee arrangement with the provider in an established network.  Point of Service plans allow the member to point to the service they desire. 

The out-of-network portion is generally subject to an annual deductible before any reimbursement to the user.  Once the deductible is reached, the member is usually responsible for their share of the coinsurance up to a stop-loss level.  The coinsurance percentage can be as high as 50% and the stop-loss level, which is the threshold as to when the coinsurance no longer applies, can be as high as $20,000 or more.  This coinsurance provision normally applies to each and every procedure as well as for each and every family member.  Provider payments are subject to a 'usual, customary, and reasonable', or UCR rate level which is based on the HIAA rates schedule.  This schedule generally represents the amount the insurance carrier will pay for a procedure in a given region.  The UCR level is a percentile that depicts a percentage of providers that charge within the schedule.  This percentile can be increased to encompass a greater number of providers, thus allowing a higher amount of covered charges.   

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.

PPO (Preferred Provider Organization)
Similar to an EPO, a PPO is an organization of providers which includes Physicians, Hospitals, Pharmacies, Labs, etc. that have agreed to charge a discounted rate in accordance to the allowable charges set by the insurance carrier.  Unlike an EPO, the PPO allows the member to receive services outside of this network subject to the conditions of the policy.  This structure is similar to the POS without the need of a primary care physician (PCP) for services received in network.  Since there is no PCP, there is no need for a referral. 

The out-of-network portion is generally subject to an annual deductible before any reimbursement to the user.  Once the deductible is reached, the member is usually responsible for their share of the coinsurance up to a stop-loss level.  The coinsurance percentage can be as high as 50% and the stop-loss level, which is the threshold as to when the coinsurance no longer applies, can be as high as $20,000 or more.  This coinsurance provision normally applies to each and every procedure as well as for each and every family member.  Provider payments are subject to a 'usual, customary, and reasonable’, or UCR rate level which is based on the HIAA rates schedule.  This schedule generally represents the amount the insurance carrier will pay for a procedure in a given region.  The UCR level is a percentile that depicts a percentage of providers that charge within the schedule.  This percentile can be increased to encompass a greater number of providers, thus allowing a higher amount of covered charges. 

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.

Q

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.

R

Rate
Price per unit of insurance.

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.

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.

S

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

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).

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

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.

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.

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.

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.

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.

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.

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.

V

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.

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 (An Individual’s) written declaration of desires for disposal of his or her property after death.