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Basics of Investing

Annuities

Fixed Annuities
A fixed deferred annuity offers safety of principal and earns guaranteed interest rates for specified periods of time. Underlying the contract for its life is a minimum rate of return. For their fixed annuities, insurers apply interest earnings by "declaring" a specific rate of return (based on a certain interest-crediting methodology) payable for a set period of time (one year, three years, five years, etc.).

Equity Indexed Annuities (EIA’s)
An Equity Indexed Annuity (EIA) is a deferred annuity that earns interest on the upward movement of an equity index (most commonly the Standard and Poor’s 500 index), but still maintains a minimum guaranteed interest rate offered by a fixed annuity.

Immediate Annuity
An immediate annuity pays you an income stream immediately. People often purchase immediate annuities with a single deposit or convert their deferred annuities during their retirement years when a consistent stream of income is desired.

Variable Annuity
A variable deferred annuity allows the owner to invest in a range of investment funds, which exposes the owner to greater risk, but offers the potential for greater growth. With a variable annuity, premiums are invested in the insurer's subaccounts - stock, bond and money-market funds and the annuity's growth is based on the investment performance of those funds. The separate account is so called because it is not part of the insurance company's general account assets. Within the separate account are the investment fund options or subaccounts that compose the variable annuity.

Direct Investments

Direct Participation Programs
Direct participation programs (public and private limited partnership offerings) involve direct investment in the operating profits, losses, and capital growth of a business venture. You should consider carefully the inherent risks of longer-term illiquidity, leverage, lack of diversification, and tax complexity. While your potential loss is limited to the amount you invest, such a loss is possible. Real Estate Investment Trusts Real estate investment trusts are a common way of pooling investor capital in diversified portfolios of real property. Shares of many REITs are listed on national exchanges and trade much like common stock. A REIT may invest as an equity owner, a mortgage lender, or both, according to its prospectus. Income is taxed only at the shareholder level, so REITs may offer an attractive level of after-tax income as well as appreciation potential.

1031 Exchange
A section of the U.S. Internal Revenue Service Code that allows investors to defer capital gains taxes on any exchange of like-kind properties for business or investment purposes. Taxes on capital gains are not charged on the sale of a property if the money is being used to purchase another property - the payment of tax is deferred until property is sold with no re-investment. Insurance

Insurance

Term Insurance
Term life insurance covers you for a specific length of time, or term, and pays a death benefit to your beneficiary if you die while the policy is in effect. At the end of the term, the policy expires without any value. For this reason, term insurance is sometimes referred to as temporary insurance. Term policies are often most appropriate when the objective is to establish protection with the minimum current premium commitment.

Permanent Insurance
Permanent life insurance is often referred to as cash value insurance because part of the premium you pay goes toward building equity (cash value). The cash value increases over the years until it reaches the policy’s full face amount. Most policies have a loan feature that allows you to borrow against your policy’s cash value. You can also “surrender” your cash value policy once your need for protection diminishes and receive the equity that has built up. There are several types of cash value life insurance including, Whole Life, Universal Life and Variable Life.

Whole Life Insurance
With a traditional whole life policy, you pay a fixed annual premium and earn interest on the cash value that your policy builds. If you die while the policy is in force, your beneficiary receives a fixed sum of money – the death benefit.

Universal Life Insurance
Universal life offers more flexibility than traditional whole life by allowing you to change the amount, date, and frequency of your premium payments. You may also increase or decrease the amount of death benefit. Typically, you can choose from among several death benefit options, which may include a fixed benefit plus an additional benefit equal to the policy’s cash value or premiums paid.

Variable Life Insurance
Variable life insurance combines insurance benefits and attractive investment features. The term “variable” refers to those investment choices and the fact that their capital value and returns do fluctuate. These underlying investments provide long-term growth potential, tax-deferred or tax-free earning, and the ability to make nontaxable transfers among the portfolios as your financial needs or market conditions change.

Mutual, Money Market & ETF Funds

Mutual Funds
Mutual funds are professionally managed investment companies that offer a degree of diversification, liquidity, and flexibility that few investors can achieve on their own. A “family” of funds may cover a wide spectrum of securities, financial markets, and investment objectives. Mutual fund share prices reflect the value of underlying portfolio holdings, net of the fund’s internal fees and expenses, including payments to the fund’s advisor and transfer agent. Distribution costs are covered in various ways, including front-end or deferred sales charges and/or distribution and service fees. Such expenses are detailed in the fund’s prospectus. Despite the emphasis often placed on a fund’s track record, past performance is not an indication of future results.

Money Market Funds
Money market funds hold short-term debt instruments (taxable and tax-exempt) and offer a relatively high degree of safety and stability of principal. Dividends change with short-term interest rates. Money market funds are a popular alternative to bank checking and savings accounts, but they do not offer deposit insurance protection.

Exchange Traded Funds (ETF)
An exchange-traded fund, or ETF, is an investment product representing a basket of securities that track an index such as the Standard & Poor's 500 Index. ETFs trade like stocks on an exchange.

Individual Equities

Corporate Stocks
Corporate stocks are ways to invest in individual corporations. Stock represents ownership of a company, and its market value changes with earnings expectations for that business and the industry in which it operates.

Options
Options are contracts giving the holder a right to buy or sell a specified amount of the underlying security at a stated price before a certain date. Option strategies range from conservative to highly speculative. You should understand the strategy as well as the risks and commission charges before trading in options.

The Use of “Margin”
The use of margin in a brokerage account is like any credit facility - a valuable tool if used prudently and in keeping with your investment objectives and financial wherewithal. However, the extension of credit for buying and holding securities is subject to strict federal regulations. It is important to remember that holding investments on margin increases the potential for loss as well as gain.

Bonds & Fixed Income Products

Corporate Bonds
Corporate bonds are ways to invest in individual corporations. A bond represents a debt obligation of a company. Interest paid on a bond may be constant, but its price reacts to changes in the issuer’s financial prospects and the outlook for interest rates

Municipal (“Tax-Exempt”) Bonds Municipal bonds, also known as tax-exempt bonds, represent the debt of municipalities and states, often incurred to finance capital projects. Interest from such bonds generally is not subject to federal income tax. Municipal bond prices fluctuate with changes in interest rates, tax rates, or the creditworthiness of the issuer.

Zero-Coupon Bonds
Zero-coupon bonds are debt instruments that pay no current interest. Their stated yield to maturity is a function of the discounted purchase price, face amount, and maturity. However, zero-coupon bondholders are deemed to have received interest each year for tax purposes. Also, since the reinvestment rate is locked in, market value tends to be more volatile in response to changes in interest rates.

U.S. Treasury Obligations
U.S. Treasury obligations are bonds or certificates for which principal and interest are secured by the “full faith and credit of the U.S. Government.” Market values of Government securities adjust to factors affecting fixed-income instruments; namely inflation and interest rate trends.

Certificates Of Deposit (CD)
Certificates of deposit from savings institutions around the country offer competitive rates and a range of maturities. Timely payment of principal and interest is federally insured, but premature redemption can incur interest penalties or secondary market risk.

Unit Investment Trusts
Unit investment trusts are fixed portfolios of securities that are professionally selected but not actively traded during the life of the trust. Secondary markets are maintained in many trust units, but most are designed to be held for income and/or appreciation until maturity.

Individual Retirement Plans

Traditional IRA
An individual retirement account (IRA) that allows individuals to direct pre-tax income, up to specific annual limits, toward investments that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Traditional IRA. Contributions to the Traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status and other factors.

Other variants of the IRA include the Roth IRA, SIMPLE IRA, and SEP IRA.

Roth IRA
An individual retirement plan that bears many similarities to the traditional IRA, but contributions are not tax deductible and qualified distributions are tax free. Similar to other retirement plan accounts, non-qualified distributions from a Roth IRA may be subject to a penalty upon withdrawal.

Required Minimum Distribution (RMD)
The amount that Traditional, SEP and SIMPLE IRA owners and qualified plan participants must begin distributing from their retirement accounts by April 1 following the year they reach age 70 1/2. RMD amounts must then be distributed each subsequent year.

Qualified Retirement Plans

Defined Benefit Plan
A company retirement plan in which a retired employee receives a specific amount based on salary history and years of service, and in which the employer bears the investment risk. Contributions may be made by the employee, employer, or both.

Defined Contribution Plan
A company retirement plan, such as a 401k or 403b, in which the employee elects to defer some amount of his/her salary into the plan and bears the investment risk.

401(k) Plan
A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

403(b) Plan
A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations and certain ministers.

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