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Glossary of Financial Terms
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A
Accumulation Years: Working years when you build wealth through savings and investing.
Annuities: Insurance contracts converting savings into guaranteed income, sometimes for life.
Asset Allocation: The strategy of dividing investments among various asset categories to optimize risk and reward.
B
Bear Market: A market condition characterized by declining prices, typically 20% or more from recent highs.
Bull Market: A period in which the prices of securities are rising or expected to rise.
Bond: A fixed-income investment representing a loan made by an investor to a borrower, typically corporate or governmental.
C
C-Corporation (C-Corp): Standard corporation type with liability protection and unlimited shareholders. Can issue multiple stock classes and attract investors, but profits face double taxation (corporate + dividends).
Capital Gains: The profit realized from the sale of assets such as stocks or property.
Certificate of Deposit (CD): A savings certificate with a fixed maturity date and specified interest rate.
Credit Score: A numerical representation of a person's creditworthiness based on their credit history.
Cross Purchase Agreement: Owners buy each other’s shares if one exits. Each owner personally owns life insurance on the others.
D
Debt Payoff Strategies: Planning for how a business will repay loans if an owner dies or leaves unexpectedly. Often funded with life insurance to provide immediate liquidity.
Debt-to-Income Ratio: A personal finance measure comparing monthly debt payments to gross income.
Deferred Compensation: Part of an executive’s pay is delayed until retirement.
Deflation: A decrease in the general price level of goods and services, often associated with reduced consumer spending.
DIME Method: Life insurance guideline: cover Debt, Income (10–12× annual income), Mortgage, and Education costs for dependents.
Diversification: The practice of spreading investments across different assets to reduce risk.
Dividend: A portion of a company's earnings distributed to shareholders.
E
Economic Benefit Regime: Company owns policy, pays premiums, and reports the insurance benefit as taxable income to the executive.
Entity Purchase (Stock Redemption): Business buys out the departing owner’s share directly. Funded often through insurance.
Equity: The value of ownership interest in an asset or company, calculated as assets minus liabilities.
Estate Planning: Preparing for the transfer of assets after death, including wills and trusts.
Exchange Traded Funds (ETF's): Baskets of securities that trade like stocks.
Executive Benefits: Perks beyond salary, designed to recruit, reward, and retain executives. Often called “golden handcuffs” because they encourage loyalty.
Executive Bonus (162 Bonus): Company pays for an executive’s life insurance. The benefit goes to the executive’s family; business deducts the cost.
F
Fiduciary: An individual or organization legally obligated to act in the best interest of another party.
Financial Advisor: A professional who provides financial guidance and investment advice.
Fixed Annuity: An insurance product that provides a guaranteed rate of return and periodic payments to the investor.
H
Health Savings Account (HSA): Triple tax advantage: tax-deductible contributions, tax-deferred growth, tax-free withdrawals for healthcare expenses.
Hedge Fund: A private investment fund that engages in diverse and complex strategies to earn active returns for its investors.
I
Incentive Stock Options (ISOs): Right to buy company stock at a fixed, often discounted price, rewarding executives if the company grows.
Index Fund: A mutual fund or ETF designed to replicate the performance of a specific market index.
Indexed Universal Life (IUL): Cash value linked to market indexes with a growth cap and protection floor (no market loss).
Individual Retirement Account (IRA): A tax-advantaged account designed to help individuals save for retirement.
Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.
Interest Rate: The percentage charged on borrowed money or paid on savings and investments.
Investment Risk: The potential for losing money on an investment.
J
Joint & Survivor Pension: Reduced monthly payout, but payments continue to a spouse after retiree’s death.
K
Key Person Insurance: Life insurance on a crucial owner, executive, or specialist. Business owns and benefits, providing liquidity if the key individual dies unexpectedly.
L
Leverage: The use of borrowed capital to increase potential returns on an investment.
Liability: A financial obligation or debt owed by an individual or organization.
Liquidity: The ease with which an asset can be converted into cash without affecting its market price.
Loan Regime: Executive owns policy, company pays premiums as a loan to be repaid later (with interest).
Long-Term Care Rider: Allows part of the death benefit to be used for nursing home or assisted living costs.
M
Maximum Pension: Largest monthly payout during retiree’s life, but ends at death. No survivor benefits.
Mutual Fund: An investment vehicle that pools money from many investors to purchase a diversified portfolio of securities.
Market Capitalization: The total market value of a company's outstanding shares of stock.
Municipal Bond: A bond issued by local government entities to finance public projects, often offering tax advantages.
N
Net Worth: The total value of an individual’s assets minus liabilities.
O
One-Way Buyout: Key employee or third party commits to buying owner’s share, often using life insurance funding.
P
Portfolio: A collection of financial investments like stocks, bonds, and cash equivalents.
Power of Compounding: Earnings grow on both the original investment and accumulated returns.
Pension Plan: A retirement plan that provides a fixed sum of money periodically to employees after retirement.
Principal: The original sum of money invested or loaned, excluding any interest or profits earned.
R
Recession: A significant decline in economic activity across the economy, lasting more than a few months.
Reduced by Design Pension: Variation where survivor receives the full pension if retiree dies early, but retiree’s checks are smaller.
Restricted Endorsement Bonus Arrangement (REBA): Company funds life insurance premiums but restricts access to cash value until conditions are met.
Retirement Planning: The process of determining retirement income goals and the actions necessary to achieve them.
Return of Premium Rider: Refunds premiums if you outlive a term policy.
Roth IRA: A type of IRA where contributions are made with after-tax dollars, and qualified withdrawals are tax-free.
Real Estate Investment Trust (REIT): A company owning or financing income-producing real estate, allowing investors to buy shares in commercial properties.
Risk Tolerance: An investor’s ability or willingness to endure market volatility and potential losses.
S
Salary Reduction Plan: Executive defers part of salary into retirement savings, lowering current taxable income.
S-Corporation (S-Corp): Small business corporation with liability protection and pass-through taxation. Avoids double taxation, but limited to 100 U.S. shareholders and one class of stock.
Secured Loan: A loan backed by collateral, reducing the risk for the lender.
Sinking Fund: Dedicated savings set aside over time for large future expenses like debt repayment or asset replacement.
Speculation: Investing in assets with high risk, hoping for substantial gains.
Split-Dollar Life Insurance: Company and executive share premium costs/benefits. Can be structured as economic benefit (company owns policy) or loan regime (executive owns, company loans premiums).
Stock: A share representing ownership in a company and a claim on part of its assets and earnings.
Supplemental Executive Retirement Plan (SERP): Company promises extra retirement income beyond standard benefits.
T
Tax-Deferred: Investments where taxes on earnings are postponed until withdrawals are made.
Taxable Income: The portion of income subject to taxation after deductions and exemptions.
Treasury Bond: A government debt security with a fixed interest rate and maturity of more than 10 years.
U
Unsecured Loan: A loan not backed by collateral, relying solely on the borrower’s creditworthiness.
V
Vesting Schedule: Timeline dictating when executives fully “own” benefits.
Volatility: The degree of variation in investment prices over time, indicating risk.
W
Wait and See Agreement: Hybrid buy-sell method. Business has first option to buy, then co-owners may purchase if declined.
Waiver of Premium Rider: Waives premiums if the insured becomes disabled, keeping coverage active.
Whole Life Insurance (WL): Lifetime coverage with fixed premiums, guaranteed death benefit, and cash value growth.
Withdrawal Risks (Sequence-of-Returns): The gains and losses risked in retirement withdrawals.
Y
Yield: The income return on an investment, expressed as a percentage of its cost or market value.
Z
Zero-Coupon Bond: A bond sold at a discount and paying no interest, with the full face value paid at maturity.
Zoning: Government regulations determining the use of land in different areas, affecting property values and development potential.
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401(k) Plan: A retirement savings plan offered by employers that allows employees to save and invest part of their paycheck before taxes.
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