Financial terms Flashcards
liquid asset
A cash asset or an asset that is easily converted to cash.
What is an annuity ?
Considered an insurance product. A contract by which an insurance company promises to make periodic payments to the annuitant over a predetermined time, based on the assets in the annuity.
What are the 2 main types of annuities?
- Immediate annuity 2. Deferred annuity
What is an immediate annuity?
An annuity with no accumulation phase. It’s purchased with a lump sum of money and starts making payments right after you purchase the annuity. You decide in advance whether you prefer receiving a fixed amount for the life of the annuity or a fluctuating amount (“variable”) based on the performance of the investments in your annuity. There are some inflation-related risks to this option.
What is a deferred annuity ?
A deferred annuity delays payments during the accumulation stage , where your asset have a chance to grow tax-deferred; and distributes payments in the income phase as a lump-sum payout, periodic payments or through annuitization.
What is a fixed annuity ?
A type of deferred annuity that guarantees a specific rate of return and a fixed payment, either for the annuitant’s lifetime (the surviving spouse’s, in the case of a married couple’s joint annuity) or for a specified period. (Guarantee depends on the claims-paying ability of the issuing insurance company and does not apply to the investment return or principal value of the separate account.)
What is a variable annuity ?
A type of deferred annuity that allows for the investment of assets in various portfolios of stocks, bonds and cash. The return on assets is not guaranteed as in a fixed annuity, but will fluctuate in value over time, reflecting the performance of the investment portfolios chosen.
What is an equity-indexed annuity ?
A type of deferred annuity in which returns on invested assets are linked to one or more equity indexes, such as the S&P 500 or the NASDAQ 100. Typically, holders of this type of annuity have the opportunity to limit the risk of loss by also agreeing to limit gains. This is done by selecting “participation” and “cap” rates that offer the combination of risk protection and potential reward that fits the annuity holder’s needs.
What kind of companies sell annuities?
Only insurance companies can issue annuities. However, although an annuity must be issued by an insurance company, not all annuities contracts are sold to the public directly via the issuing company’s own agents.
What are the 4 basic types of annuity?
- immediate 2. deferred 3. fixed 4. variable
Who can sell annuities?
Although an annuity must be issued by an insurance company, not all annuities contracts are sold to the public directly via the issuing company’s own agents. In fact, the majority of annuities in America are purchased from: - distributes such as large brokerage firsm - independent broker-dealers - large banks - mutual fund companies (e.g. Vanguard, T. Rowe Price) - independent agents
Who guarantees annuities?
Unlike the checking, savings and money market accounts at your bank or credit union, annuities are not guaranteed by the federal government. Instead, they’re backed by the insurance company that issues them.
How does an annuity work?
An annuity is a financial product, between you and an insurance company, that carries a money-back guarantee. In return for the premium you pay into it over time, the insurance company agrees to repay you the principal, plus interest, at regular intervals or in a lump-sum payment.
What are 2 tax benefits of emplorer-sponsored retirement plans like 401(k) and 403(b)?
- Contributions are made pre-tax, which lowers your taxable income. 2. Contributions grow tax deferred until you make withdrawals
How do annuities differ from corporate pension plans?
At one time, annuities were simple investment products that worked like old-fashioned corporate pension plans. The annuity paid out a regular amount of money to a retiree based on how much was put into the account over the years by its owner, an employer, or both, providing a guaranteed stream of income for a lifetime, regardless of amount invested. Annuities were later tailored to individual investor needs and desires, offering variations of payment and liquidity options, survivor benefits, investment models, guarantees against loss, plus many other choices.
Where does the money for an annuity come from?
You pay premiums into it over time.
Can you withdraw money from an annuity plan before retirement?
Yes, but surrender charges and IRS penalties apply.
What is the form of a death benefit for an annuity?
It means if you die, a person you select as beneficiary will receive the greater of (i) all the money in the account or (ii) some guaranteed minimum.
Besides death benefits, what are 2 optional features sometimes offered by variable annuities?
- guaranteed minimum income benefit 2. long-term care insurance
What are some reasons to choose an immediate annuity?
• You are near retirement age; • You haven’t saved enough in your retirement plans to provide sufficient income; • You need steady retirement income in addition to social security payments and your other investments; • You worry about outliving your savings; • You have no family to support you if your savings run out; • You want your spouse to receive a steady income if you precede him or her in death.
What are some reasons to consider a deferred annuity?
• You are under age 40. Investments in these securities historically require 15 to 20 years to achieve a rate of return that exceeds other low-risk investments. • You are a likely target for litigation by former clients, creditors or a divorcing spouse. • You want to swap out of a lousy annuity or poorly performing universal life insurance policy. Through what’s known as a “1035 exchange,” the IRS allows you to transfer the cash value of one insurance product to another without triggering tax penalties.
What is a required minimum distribution ?
The amount required by the IRS to be withdrawn each year from traditional IRAs and employer-sponsored retirement plans, starting generally, but not always, in the year following the year in which the owner turns age 70 1⁄2. Different rules apply for required distributions at the death of the owner.
What is asset allocation ?
a strategy to manage short-term risk by combining investments from different asset classes (stocks, bonds, cash) that tend to move in opposite directions during market ups and downs. This combination of different asset classes is designed to reduce the risk of loss during brief downturns in any single class.
What is capital gains taxes ?
Taxes on the sale of an investment are incurred on the amount by which the investment’s selling price exceeds its initial purchase price. A capital gain may be short-term (one year or less) or long-term (more than one year). Long-term capital gains are generally taxed at a lower rate in order to encourage investment in the economy.
What is a certificate of deposit ?
An FDIC-insured bank product for which a specified amount of money is deposited for a specified period of time (anywhere from a few months to several years) at a set interest rate. CDs typically offer higher rates of interest (return) than regular savings accounts, in exchange for tying up the deposited money for the duration of the certificate’s maturity. Money removed before the maturity date is subject to a penalty.
What is an IRA ?
Individual retirement account. An account that permits individuals to set aside money for retirement, with earnings tax-deferred until withdrawals begin at age 59½ or later. (Required min. distributions from an IRA begin at age 70½; withdrawals prior to age 59½ may incur a 10% penalty.) Contributions may be tax-deductible for individuals who do not participate in a pension plan at work or who do participate and meet certain income guidelines. Other individuals can make contributions to an IRA on a non-deductible basis and still enjoy tax-deferred earnings.
What is a money market savings account ?
An interest-bearing, FDIC-insured bank account that offers many of the same services as checking accounts, although transactions may be somewhat limited. Very safe and highly liquid, money market accounts can be used to establish an emergency savings fund and are a convenient place to store money for a planned major purchase or investment. (Not to be confused with “money market fund,” a type of mutual fund that invests in short-term securities and is not FDIC-insured.)
What is a mutual fund ?
A pool of money invested by a company on behalf of individuals and institutions who share common financial goals. The fund’s managers may invest in stocks, bonds, cash or some combination to meet the fund’s stated objectives. Generally recommended as long-term investments, mutual funds offer a convenient way to gain access to professional investment management, diversify one’s portfolio and enjoy the wealth-building potential of compound earnings on one’s investment.
What is a secured loan ?
A loan for which the borrower pledges a tangible asset (collateral), such as a home, vehicle or other personal property. If the borrower defaults (does not make payments according to terms of the loan), the lender may claim and sell the asset to recoup its money. Mortgage loans, which are secured by the real property, and auto loans, which are secured by the vehicle, are two common types of secured loan. (See also Unsecured loan.)
What is a trust ?
A legally binding arrangement by which the grantor transfers ownership of property to a trustee, who manages it for the benefit of the grantor and designated beneficiaries (people and/or organizations). An attorney prepares the trust document, which establishes the rules the trustee must follow when managing the trust. The grantor may name as trustee any capable adult or an entity, such as a bank or trust company.
What is adjusted basis ?
The basis of an asset adjusted for such things as improvements, additions, capital contributions, depreciation, stock splits, or returns of capital to calculate the gain or loss on the sale of the asset for tax purposes. See also basis.
What is adjusted gross income ?
Gross income less certain deductions, such as IRA and Keogh contributions, and 1⁄2 self-employment tax.
What are some of the administrative expenses for estate planning?
Fees for attorney, executor, court filing, real estate transfer and registration, brokerage and title transfer incurred in settling an estate. These costs are in addition to funeral expenses, debts, and death taxes.
What is after-tax rate of return ?
The earnings from an investment after subtracting any income taxes attributable to those earnings and adding to the earnings any tax credits created by the investment. Simply, it is calculated by multiplying the yield on the investment by 1 minus the marginal tax rate.
What is a basis ?
The original cost of an asset. See also adjusted basis.
What is a bond ?
Evidence of debt, usually issued in multiples of $1,000, on which the issuer promises to pay the holder a specified interest and to repay the principal at maturity.
