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Glossary of Financial Services Terms

 We have compiled a helpful guide to commonly used financial services terms, and hope you find it useful.


Defined contribution plan offered by an employer to its employees, allowing them to defer income for retirement purposes. Some employers match employee contributions. Distribution of the funds before a certain specified age will trigger a penalty tax.

529 Savings Plan

State-sponsored program designed to help parents and others finance a child's college expenses. Subject to contribution limitations and investment guidelines. Anyone can contribute, regardless of income level, and the money is generally invested in a portfolio of stocks, bonds or mutual funds. Withdrawals are federal income tax free if used for qualified higher education expenses; withdrawals for non-educational purposes will trigger federal income taxes and a 10 percent tax penalty.

Annual Percentage Rate (APR)

Percentage relationship of the total finance charge to the amount of the loan. Reflects the cost of the mortgage loan as a yearly rate. May be higher than the interest rate stated on the note because it also includes loan discount points, miscellaneous fees and mortgage insurance.

Annual Percentage Yield (APY)

Reflects the total interest to be earned based on the interest rate and an institution's compounding method, assuming funds remain in the account for a 365-day year.

Annuity (Fixed)

Contract under which a series of payments are promised in exchange for a single payment or series of payments.

Deferred Annuity

Allows for the accumulation of money over time on a tax-deferred basis, with a choice of payout options.

Immediate Annuity

Allows for the conversion of a sum of money into a guaranteed series of payments for a period equal to the greater of a person's life or a specified number of years.


Items of economic value, such as cash, securities, accounts receivable, inventory, office equipment, a house, a car or other property. On a balance sheet, assets are equal to the sum of liabilities and owner's equity.

Asset Class

Type of investment, such as stocks, bonds, real estate or cash.
Balanced Investment Strategy

A method of portfolio allocation designed to provide both income and capital appreciation while avoiding excessive risk.


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 upon the death of an individual.


Debt obligation issued by a government or business firm with a term typically exceeding five years. Generally, a promise to repay the principal along with interest on a specified date. Often secured and has priority over shareholders if the company becomes insolvent and its assets are distributed.

Certificate of Deposit (CD)

Short- or medium-term, interest-bearing, FDIC-insured savings instrument. Offer higher rates of return than most other bank deposit products, in exchange for tying up invested money for the duration of the certificate's term. Money removed before maturity may be subject to an early withdrawal penalty. Low risk, low return investments known as time deposits because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to five years.

Compound Interest

Determined by adding the interest earned in the current period to the principal and computing the next period's interest on this compounded total amount.

Coverdell Education Savings Account (ESA)

Investment vehicle designed to help parents or others fund a child's education. Contributions aren't tax deductible, but distributions for qualified educational expenses aren't taxable. Generally, transferable among family members. Several restrictions: Entire account must be disbursed by the beneficiary's 30th birthday; withdrawals after this date or for expenses that are not qualified education expenses are subject to federal income taxes and a tax penalty.

Custodial Account

Account administered by one person or entity (custodian) for the benefit of another person, usually at a bank, mutual fund or brokerage firm.

Debt Financing

Financing by selling bonds, bills or notes to individuals or institutions.


Portfolio strategy designed to reduce exposure to risk by combining a variety of investments unlikely to have the same volatility, such as stocks, bonds and real estate. Not all asset classes or industries or individual companies move up and down in value at the same time or at the same rate, which may limit volatility. Diversification helps reduce the upside and downside potential and allows for more consistent performance under a wide range of economic conditions, but does not assure a profit or protect against loss in a declining market.

Equity Financing

Financing by selling ownership interests to investors.


Person's assets and liabilities.

Estate Planning

Preparation of a plan of administration and disposition of one's estate using a will, trusts, gifts, power of attorney or other vehicles.

Homeowners Insurance

Provides coverage for loss or damage to a home, usually a single-family dwelling, and is required by most mortgage lenders. Coverage is also provided for loss or damage to the insured's personal property such as furnishings, clothing and other goods and for personal liability arising from bodily injury or property damage to another person.


Overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index. As the cost of goods and services increases over time, the value of a dollar falls because a person isn't able to purchase as much with that dollar as he or she previously could.

Individual Retirement Account (IRA)

Tax-deferred retirement account for an individual that permits individuals to set aside up to $5,500 per year (for tax year 2013 and an additional $1,000 for those 50 or older), with earnings tax-deferred until withdrawals begin at age 59½ or later (or earlier, with a 10% tax penalty). Only those who do not participate in a pension plan at work or who do participate and meet certain income guidelines can make deductible contributions to a Traditional IRA. Such contributions are deductible from income in that year and any growth accumulates tax-deferred until the funds are withdrawn. All others can make contributions to a Traditional IRA on a non-deductible basis.


A legal obligation, debt, claim or potential loss.


Easily convertible to cash.

Life Insurance

Provides for the payment of a stipulated amount to a designated beneficiary upon the death of the insured.

Long-term Care Insurance

Provides coverage for necessary medical or personal care services outside of a hospital setting, such as in anursing home or the insured's home.


Program funded by the federal and state governments that pays for medical care for those unable to afford it.


Federal Health Insurance for the Aged program, provided under the Social Security Act.

Money Market Account

Savings account insured by the federal government that offers many of the same services as checking accounts although transactions are somewhat more limited. Can be convenient for storing money to be used for upcoming investments or received from the sale of recent investments. Although very safe and highly liquid, may offer a lower interest rate than other investments.

Mutual Fund

Combines money from many people and invests it in stocks, bonds or other assets, known as the fund's portfolio. Investors own shares, which represent a part of these holdings. Market risk is involved when investing in mutual funds, including possible loss of principal.

Net Worth

Total assets minus total liabilities.


Post-retirement benefits an employee receives from an employer's retirement plan.

Permanent Life Insurance

Provides continuing coverage for the insured's entire life, rather than a set number of years. May accrue values that the owner can withdraw or use to increase the death benefit.


As used in this glossary, a natural person (human being) or legal entity, such as a corporation, partnership or trust.


Collection of investments owned by an individual or organization. Often includes stocks, bonds and mutual funds.


Amount borrowed, or part of the amount borrowed, which remains unpaid, excluding interest. Also considered the original amount invested or deposited.

Private Mortgage Insurance (PMI)

Insurance against loss by a lender in the event of default by a borrower (mortgagor). Issued by a private insurance company. The premium is paid by the borrower and included in the mortgage payment.

Rate of Return

Annual rate of return on an investment, calculated as a percentage of the total amount invested.

Renters Insurance

Provides coverage to an individual living in a rented dwelling, apartment or other location owned by someone else. Coverage is provided for loss or damage to the insured's personal property such as furnishings, clothing and other goods and for personal liability arising from bodily injury or property damage to another person.


Tax-free movement of funds from a qualified retirement plan into an IRA or other qualified plan within a specific time frame (60 days). Or, a movement of funds from one tax qualified account to another.

Roth IRA

Type of IRA allowing taxpayers, subject to certain income limits, to save for retirement. Savings grow tax-free. Contributions are not tax-deductible but withdrawals, subject to certain rules, are not taxed at the federal level.

Social Security

Disability and retirement program established under the federal Social Security Act of the Railroad Retirement Act.


Security signifying an ownership interest (equity) in a corporation, and representing a claim on its proportional share in the corporation's dividends and net assets.


Deferral of taxes on income until a later date. Tax-deferred vehicles include IRAs, 401(k) plans, Keogh plans, annuities and employee stock ownership plans.

Term Life Insurance

Life insurance providing coverage for a fixed number of years.

Treasury Note

Negotiable debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of between two and 10 years.


A means for a trustee to own and control property for the benefit of himself or herself or for a beneficiary.

Living Trust

Established during the lifetime of the person who created it.

Testamentary Trust

Created by a will; therefore, comes into existence after a person's death.

Uniform Transfers to Minors Act

Law enacted in most states that permits an adult (the custodian) to own property for the exclusive benefit of a minor. At the direction of the custodian, control over money in an UGMA/UTMA account is transferred automatically to the beneficiary when he or she reaches the age specified in the state's UGMA/UTMA statute.

Variable Annuity

Life insurance annuity contract that provides future payments to the holder, usually at retirement. Payment size depends on the performance of the portfolio's securities.


Legally enforceable declaration directing the disposal of a deceased person's probate property.

Variable Annuity

Life insurance annuity contract that provides future payments to the holder, usually at retirement. Payment size depends on the performance of the portfolio's securities.


Legally enforceable declaration directing the disposal of a deceased person's probate property.

- See more at:


Article submitted by Brennan Purdy of State Farm Insurance

My vision is to be an insurance professional whose actions are driven by keeping the customer's best interest as my primary goal. My staff will treat all my customers in a caring, friendly, and professional manner. My office will provide warm, efficient, and seamless services to our customers at all times. I expect my business to be comprised of knowledgeable, multiple-line customers who see my office as their first and best choice for all their insurance and financial service needs

For more information on these and other home safety tips, stop by my office or visit My office is conveniently located in downtown Bethel. 203-798-7300.                   211 Greenwood Avenue , Bethel, CT 06801


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