1035 Exchange

A method of exchanging insurance-related assets without triggering a taxable event. Cash-value life insurance policies and annuity contracts are two products that may qualify for a 1035 exchange.

401(k) Plan

A qualified retirement plan available to eligible employees of companies. 401(k) plans allow eligible employees to defer taxation on a specific percentage of their income that is to be put toward retirement savings; taxes on this deferred income and on any earnings the account generates are deferred until the funds are withdrawn—normally in retirement. Employers may match part or all of an employee’s contributions. Employees may be responsible for investment selections and enjoy the direct tax savings.

401(k) Loan

A loan taken from the assets within a 401(k) account. 401(k) loans charge interest and are normally paid back through payroll deductions. If the borrower leaves an employer before a 401(k) loan has been repaid, the full amount of the loan is generally due. If the borrower fails to repay the loan, it is considered a distribution, and ordinary income taxes may be due, along with any applicable tax penalties.

403(b) Plan

A 403(b) plan is similar to a 401(k). A 403(b) is a qualified retirement plan available to employees of non-profit and government organizations.

    • Capital Gain or Loss
    • Cash Alternatives
    • Cash Surrender Value
    • Certificate of Deposit (CD)
    • Charitable Lead Trust
    • Charitable Remainder Trust
    • Claim
    • COBRA
    • Coinsurance or Co-Payment
    • Commercial Paper
    • Common Stock
    • Community Property
    • Compound Interest
    • Consumer Price Index (CPI)
    • Convertible Term Insurance
    • Corporate Bond
    • Corporation
    • Coverdell Education Savings Account (Coverdell ESA)
    • Credit Score
    The difference between the price at which an asset was purchased and the price for which it was sold. When the sale price is higher than the purchase price, the difference is a capital gain; when the sale price is lower than the purchase price, the difference is a capital loss.
    Assets that are most easily converted into cash and which have a very low risk of price fluctuation. For example, money market funds may be considered a cash alternative. Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund.
    The amount a policyholder would receive when voluntarily terminating a cash-value life insurance policy before the insured event occurs or when cashing out an annuity contract before its maturity. Computation of cash surrender value is stated in the life insurance or annuity contract.
    A deposit with a bank, thrift institution, or credit union that promises a fixed interest rate on funds deposited for a specified period of time. Bank savings accounts and CDs are FDIC insured up to $250,000 per depositor per institution and generally provide a fixed rate of return, whereas the value of money market mutual funds can fluctuate.
    A trust established for the benefit of a charitable organization under which the charitable organization receives payment of a specified amount (at least annually) from the trust. On the death of the grantor, remainder interest in the trust passes to his or her heirs. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
    A trust established for the benefit of a charitable organization under which the grantor can designate an income beneficiary to receive payment of a specified amount—at least annually—from the trust. The grantor may also be the income beneficiary. On the death of the grantor, remainder interest in the trust passes to the charitable organization. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
    A request for payment under the terms of an insurance policy.
    A federal law that requires group health plans sponsored by employers with more than 20 employees to offer terminated or retired employees the opportunity to continue their health insurance coverage for a specified period at the employees’ expense.
    A policy provision under which an insurance company and the insured party share the total cost of covered medical services after the policy’s deductible has been met.
    An unsecured, short-term debt security issued by a corporation to finance short-term liabilities. These notes are normally backed only by the issuing corporation’s promise to pay the face amount on the maturity date specified on the note, which is usually less than six months.
    A security that represents partial ownership of a corporation. Those who hold common stock are entitled to participate in stockholder meetings, to vote for the board of directors, and may receive periodic dividends.
    State laws under which most property and debts acquired during a marriage—except for gifts or inheritances—are owned jointly by both spouses and are divided upon divorce or annulment. In the United States, nine states have community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
    A process under which interest is computed both on an account’s principal and on any gains reinvested in prior periods. This is contrasted with simple interest, in which interest is calculated only on the principal amount.
    The U.S. government’s main measure of inflation, calculated monthly by the Department of Labor.
    A term life insurance policy under which the policyholder has the right to convert the policy to permanent life insurance, subject to limitations. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
    A debt security issued by a corporation under which the issuer promises to make periodic interest payments and to repay the investor’s principal at maturity. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity, investors will receive the interest payments due plus their original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk.
    A legal organization created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. Corporations are taxable entities—they are taxed separately from their members or shareholders. Corporations are able to borrow money and to make a profit separately from their members or shareholders.
    A tax-advantaged investment account that allows accumulation of funds to cover future education expenses, subject to limitations. Coverdell ESAs allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution.
    A statistical estimation of how likely a potential borrower is to pay his or her debts and, by extension, how much credit he or she should have.