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Glossary

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A 
Accumulation fund
The fund that collects a permanent life insurance policy's premium payments. The fund invests the premiums and builds up cash value. A life insurance policy's death benefit is funded by the investments.

Accumulation period
The period of time that elapses between buying an annuity contract and receiving payments. The longer the accumulation period, the longer the purchase premium can benefit from compounded growth.

Aggregation service
An auto insurance quote service that allows comparison of coverages and premiums, such as Progressive, Quotesmith, or InsWeb.

Annuity
A series of payments. For example, a monthly payment of $1,000 for the next 120 months is a 10-year monthly annuity. Annuities are frequently used in retirement planning because of tax advantages that they offer. Insurance companies sell annuities contracts. A fixed annuity pays a constant amount. A variable annuity pays a variable amount that fluctuates with the investment performance of the underlying investments. Those underlying investments are called sub accounts.

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B
Beneficiary
A beneficiary is a person or entity that is named as the legal recipient of the proceeds from a retirement account, insurance policy, trust, will or other fiduciary arrangement.

Back-end load
A fee one pays when selling shares of a mutual fund. The load is calculated as a percentage of the dollar amount sold. Back-end loads are also called deferred sales charges. For example, for a back-end load of 3% on a $10,000 sale, the load is $300. Back-end loads often phase out over time. For example, a fund may charge a 3% back-end load for shares redeemed the first year. If the load reduces by one percentage point each year, the load disappears after three years. A fund's prospectus shows the loads, expenses, and other fees for a mutual fund.

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C
CEA
The California Earthquake Authority (CEA) issues policies for California residents, who buy most of the earthquake insurance in the U.S.

Cash inflow
Dollars (or relevant currency) received on an investment. Cash inflows are a payback, or source of cash, on an investment. Cash outflows, on the other hand, are dollars (or relevant currency) spent or invested to earn a rate of return. Cash outflows are uses of cash. The internal rate of return reports the overall performance of cash outflows and inflows for a project, even one extending many years.

Cash outflow
Dollars (or relevant currency) spent or invested to earn a rate of return. Cash outflows are uses of cash. Cash inflows, on the other hand, are dollars (or relevant currency) received on an investment. Cash inflows are a payback, or source of cash, on an investment. The internal rate of return reports the overall performance of cash outflows and inflows for a project, even one extending many years.

Cash value
Cash value is a dollar value that is returned to an insurance policyholder if the policy is canceled. Cash value is also called cash surrender value (CSV). Cash value is a feature of permanent life insurance, including whole, variable, and universal life. Cash value fluctuates with the investment performance of a life insurance contract. In some cases, it is guaranteed. Cash value may be a source of borrowed money for a policyholder. CSV is treated as a tax-deferred investment.

Certificate of insurability
An insurance company's verification that an individual is eligible to receive insurance coverage. For life insurance, a certificate may be contingent upon the individual completing a health condition questionnaire and passing a physical exam.

Claim
A request that the policyholder makes to the insurance company asking for payment for a loss that is covered by the policy.

Compounding
Compounding invests interest earned on an investment for another period. If one invests $10,000 at 10% for one year with no compounding, one receives $1,000 in interest at the end of the year. But if the bank compounded interest every three months, it earns $250 after the first three months, which is added to the original deposit of $10,000 and invested for another three months. After three more months, the $10,250 investment would earn $256.25 in interest. The process is repeated so that at the end of the year the investment gains $1,038 in interest. This is $38 more than if there were no compounding. Compounding value is partially determined by the frequency with which the interest rolls over. For example, a bank may offer 10% on a one-year $10,000 CD. If there is no compounding, there is $1,000 in interest at the end of the term. If interest is compounded every three months, the rate is 10.38%. If compounded monthly, the rate is 10.47%. If compounded daily, the rate is 10.52%. For a $10,000 deposit, an extra 52 basis points in the interest rate is equal to an extra $52 in interest.

COLA
The U.S. government pays a cost-of-living adjustment (COLA) to qualified federal employees and to all Social Security beneficiaries. The purpose of COLAs is to equalize cost-of-living differences over time and to protect against inflation. COLAs are based on change in a widely-used price index. In 2004, for example, Social Security beneficiaries received a COLA of 2.1% for their benefits. This increase in benefits is based on the change in the consumer price index in the year ended September, 2003. Federal workers in Hawaii, Alaska, and the U.S. territory of Guam receive a salary COLA to compensate for the higher-than-average cost of living in those places.

Collateral
An asset used to secure the repayment of a loan. Also called security. For example, if a borrower defaults on an auto loan, the lender has the right to sell the collateral to collect on the loan. The same principle works on most mortgage loans, which are collateralized by the homes that the loans are buying.

Collision insurance
Pays for damage to the policyholder's auto that sustained a collision or rolled over. Because of high repair costs, collision insurance is a good idea for newer autos.

Comprehensive insurance
Insurance that pays for damage a car sustains in an event other than a collision, for example, theft or vandalism.

Condo
A type of real estate. The homeowner owns title to the living space and shares ownership of the title to the land the condo sits on, as well as any common areas. The owner's share of the land and common area is proportional to the number of other condos and the sizes of the living units. A condominium association is often formed to manage the day-to-day operations of a condo, such as providing maintenance, collecting dues, and paying real estate taxes.

Contract value
The contract value of an annuity depends, in part, on whether it is a fixed or variable annuity. A fixed annuity's contract value usually equals the amount of purchase payments minus any withdrawals. A variable annuity's contract value usually equals the amount of purchase payments minus any withdrawals, then adjusted for the current value of subaccount investments.

Coupon rate
The interest rate on a bond, stated as a percentage of the bond's face value. For example, a $1,000 bond that pays $60 in interest annually has a coupon rate of 6%.

Coverage
The financial protection that is in place for the beneficiary in the event the insured dies.

Coverage period
The interval of time that an insurance policy provides protection. If the policy lapses, the coverage period is considered to have ended.

Credit insurance
Insurance that guarantees payments of accounts receivable, despite insolvency or a customer's inability to pay.

Credit life insurance
Insurance that protects a bank against a debtor's failure to repay a loan because of the debtor's death.

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D
Death benefit
The amount of money that is paid to the beneficiary of a life insurance policy when the policyholder dies. The amount may be a lump sum or an annuity. The IRS usually considers a death benefit nontaxable income. For variable annuities, a death benefit is paid to the beneficiary if the contract owner dies before annuity payments begin.

Deductible
The amount of out-of-pocket money that the policyholder must pay for a loss before an insurance policy benefit kicks in on a claim.

Dividend
Money an entity pays an investor periodically, for the use of the investor's money. Companies in the U.S. usually pay dividends on a quarterly basis since they report earnings four times a year. Companies in the U.K. and Japan usually pay dividends on a semi-annual basis since they report earnings twice a year. Average quarterly dividends are dividends earned on a lot of shares, on average during a quarter. For example, if you buy 100 shares and total dividends are $10 in a quarter, the average quarterly dividend is 10 cents a share. If the company increases its dividend to 30 cents a share in the next quarter, the average quarterly dividend for the two quarters increases to 20 cents.

Double indemnity rider
A life insurance policy addendum that causes the policy to pay out twice the stated policy amount if the policyholder dies from an accident.

Due diligence
The process of ensuring that the financial-services company one is buying a financial product from is properly licensed and has the financial resources to protect one's assets.

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F
Fixed annuity
An annuity that pays a fixed amount. The interest rate paid on the annuity investment is fixed. Some annuity investors prefer the certainty of a fixed payment over one that changes.

Flexible premium
A periodic payment for insurance coverage that is allowed to fluctuate, based upon the investment performance of previously paid premiums. If the investments do well, they are able to fund future premiums for awhile. A level premium is a fixed periodic payment for insurance coverage; it does not fluctuate.

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H
Homeowners insurance
Also called property insurance, homeowners insurance protects the homeowner from weather-related damage, as well as from liability for events that occur on the property. Lenders require homeowners insurance coverage to protect the collateral that secures the loan. Some homeowners insurance policies do not cover catastrophic events such as tornadoes, hurricanes, or floods. These kinds of events generally require a separate insurance policy.

Hybrid product
A financial product that combines features of more than one basic product. Annuities, for example, combine features of mutual funds with a life insurance benefit. Exchange-traded funds, or ETFs, combine features of mutual funds with stocks.

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I
Inflation
Inflation is a general increase in prices for goods and services, stated as a yearly rate. If the inflation rate is 4%, it means that prices increase at a yearly rate of 4%. For example, the same basket of goods and services that one can buy today at $1,000 will cost $1,040 next year. Inflation cuts into purchasing power even further for longer periods.

Initial purchase payment
The first payment made to buy an annuity. The payment represents to the life-insurance company the investor's desire to receive a series of payments from the insurer based on the size of the initial payment.

Insurance
Purchased protection for individuals and companies who pay premiums to an insurance company, and receive reimbursement for a loss.

Insurance claim
A request by an insured person or company for payment from an insurance company, following a loss.

Insurance Information Institute
The Insurance Information Institute (III).

Insurance Institute for Highway Safety, and its Highway Loss Data Institute
The Insurance Institute for Highway Safety (IIHS/HLDI) maintains theft loss and accident statistics by auto make and model. Learn what models have better loss records and thus, lower insurance premiums.

Insurance policy
The actual contract between an insurer and insured that outlines specific coverages, defines terms and conditions, and states the premiums to be paid to keep the contract in effect.

Insurance premium
The payment the insured makes to maintain protection through an insurance policy.

Insured
The insured is the party that typically buys a policy from an insurer in exchange for paying premiums.

Insurer
The insurer is the party that sells a policy to an insured in exchange for premium income. Typically, the insurer is the insurance company.

Internal rate of return
The annual interest rate that states the overall performance of the cash outflows and inflows of a project. It is the rate of return earned on the cash flows of the project.

Investment performance
Investment performance is a report card of the rate of return of a mutual fund or other investment. Rates of return are often shown for several periods of time. Investment performance can show for a period of up to 10 years. For example, investment performance of Mutual Fund XYZ may show that the fund earned an annualized rate of return of 3% for a three-month period, 5% for a six-month period, and 10% for a 12-month period.

Investment return
The gain or loss on an investment, stated as an annual percentage rate. Investment returns for periods of more or less than a year are annualized. Annualizing is the process of converting returns to a one-year period. Investment returns for multiple-year periods are usually average annual returns.

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L
Level premium
A fixed periodic payment for insurance coverage; it does not fluctuate.

Liability insurance
Liability insurance for an auto insurance policy protects the policyholder, if the policyholder or someone authorized to drive the vehicle kills or injures someone or inflicts property damage. Liability coverage is usually stated in the policy as a dollar limit. This is the maximum amount the insurer will pay to cover a loss.

Lump sum
A single payment distribution made to a beneficiary of a life insurance policy or retirement account, usually upon the death of the policyholder. A lump sum differs from an annuity, which is a series of periodic payments. In some cases, receiving a lump sum distribution has more severe tax consequences than receiving an annuity.

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M
Money market account (MMA)
A bank account that invests in the safest of short-term securities. A money market account usually requires a larger initial deposit than a checking account, since it pays a higher interest rate than demand deposits. The FDIC (Federal Deposit Insurance Corporation) insures money market accounts for up to $250,000 per institution per depositor (this amount is temporary through December 31, 2009).

Mortality
Mortality is the statistical probability that an insured will die, causing the insurer to pay a death benefit to an insurance policy beneficiary.

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N
NAIC
The National Association of Insurance Commissioners (NAIC) maintains a directory of state offices.

National Flood Insurance Program
The National Flood Insurance Program (NFIP) was created in 1968 to find a cheaper alternative to mounting disaster-relief payments associated with river and coastal area flooding.

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P
Payout period
Payout period is the period of time over which an annuitant receives annuity payments. Payout period is synonymous with payout phase or income phase.

Pension
A traditional pension plan is an employer-sponsored retirement plan that pays retirees a fixed amount that is based on number of years of service and salary history. The employer is liable for the full amount of the plan. Traditional pensions are defined-benefit plans guaranteed by the Pension Benefit Guarantee Corporation (PBGC). Employer-sponsored retirement plans such as 401(k), 403(b), and 457 plans are called defined-contribution plans. Defined-contribution plans are funded, in large part, by employee contributions. As a result, the PBGC does not guarantee these plans.

Permanent life insurance
A life insurance policy that is not term insurance, issued for the remainder of the policyholder's life. Permanent life insurance policies may have either fixed or flexible premiums and has a cash value that the policyholder can borrow against.

Personal asset
Personal assets are those assets that belong to an individual. An asset is property that has value. It can be sold or used up over a period of time. The value of an asset is stated in dollars (or the appropriate currency). Personal assets include checking and savings accounts, investments, personal property, real estate, collectibles, and the value of life insurance policies. To place a value on personal assets, one relies on either market value or appraisal value. For assets that are liquid (i.e., there are many current buyers and sellers of the asset), market value is a reliable indicator. For assets that are illiquid (such as a collectible), appraisal value is a more reliable indicator.

Personal net worth
An amount equal to personal assets minus personal liabilities. Personal net worth is measured as of a given date (for example, "Your personal net worth is worth X, as of Dec. 31, 2004."). For example, if you have $100,000 in personal assets and $75,000 in personal liabilities, you have $25,000 in personal net worth. Since the value of assets fluctuates, personal net worth fluctuates. For example, six months later on June 30, the personal assets may have risen in value to $110,000. In this case, personal net worth also has increased by $10,000 to $35,000. Married people can compute a combined or household net worth. A person with more assets than liabilities has a positive personal net worth. Personal net worth is also called personal equity.

Policyholder
In life insurance, the insured person who buys an insurance policy for the benefit of a beneficiary. Also called the insured.

Policy rider
An addendum to an insurance policy providing additional coverage. A rider modifies the original terms and conditions of covered services. For example, a rider on a homeowners policy might cover specific jewelry items.

Premium
The amount an insurance policyholder pays periodically to maintain insurance coverage.

Present value
Present value is the value of a future payment, or series of payments, stated in today's dollars. Given the choice of $100 today or a year from now, one would choose to take it now. If invested at 10%, the money would be worth $110 in a year. In other words, the present value of $110 a year from today is $100 if the discount rate is 10%.

Property insurance
Also called homeowners insurance, property insurance protects the homeowner from weather-related damage, as well as from liability for events that occur on the property. Lenders require homeowners insurance coverage to protect the collateral that secures the loan. Some homeowners insurance policies do not cover catastrophic events such as tornadoes, hurricanes, or floods. These kinds of events generally require a separate insurance policy.

Prospectus
The document that a mutual fund, annuity, or company selling shares to the public is required to file with the Securities and Exchange Commission (SEC). The prospectus spells out details of a mutual fund or stock offering to the investing public. Mutual fund companies must send potential investors a copy of the fund prospectus.

Purchase payment
The money that buys an annuity contract from a life insurance company. A single purchase payment is a lump sum amount. A multiple purchase payment has additional purchase payments.

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R
Rating
Rating agencies issue a letter-grade rating that reflects the financial health of the rated company. Agencies analyze financial statements and other data before assigning a rating. Agencies also rate individual bond issues based on how the issue will affect the financial health of the issuing company. Industry ratings are extremely important to lenders when they determine borrowing costs. A rating of single-A or higher indicates that the company has the financial resources to meet all claims by an adequate margin or to repay a bond issue. Investment-grade companies have at least a triple-B rating.

Rating agency
A company that independently assigns its proprietary rating to companies within an industry, based on analysis of the rated company's financial health, such as its ability to repay debt.
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S
SEC
The Security and Exchange Commission.
Social Security
Social Security is the federal retirement income security program in the U.S. The program is financed with Social Security taxes that workers pay during their working years. If one is eligible to receive Social Security benefits, one can start receiving them at age 62. The minimum age for receiving full benefits is gradually increasing.

Subaccount
An investment account of variable-annuities owners. It shares the investment objective and fund manager of the mutual fund it is modeled after. Fees of a subaccount differ from the fees of the underlying mutual fund. Thus its investment performance also differs slightly. An annuity contract often consists of several subaccounts.

Surrender charge
A surrender charge is a fee that one pays to cancel a life insurance policy or annuity contract. A surrender charge is also called a deferred sales charge or back-end load. Annuity contracts have a surrender charge as high as 9% of the purchase payment in the early years of the contract. The charge is slowly phased out, often at a rate of 1 percentage point every year. High surrender charges hurt the investment performance of variable-annuity contracts, which invest in mutual fund-like accounts called subaccounts.

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T
Taxable income
The amount of income on which one owes income taxes, calculated by subtracting any deductions or exemptions from your adjustable gross income. On a federal tax return, taxable income is on Line 39 of IRS Form 1040. Taxable income can include amounts from IRA distributions and other sources, as well as wage or salary income.

Tax-deferred investment
An investment that allows the owner to postpone, or defer, paying income and capital gains taxes until withdrawing money from the account. IRAs, 401(k) plans, and variable annuities are examples of tax-deferred investments.

Term life insurance
An insurance policy that provides a death benefit for a specific amount of time, generally measured in years. Unlike permanent life, it does not build up cash value. When the coverage term expires, the policyholder buys a new term policy that matches his insurance needs. The older policyholder will pay a larger premium to reflect the shorter life expectancy.

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U
Umbrella policy
Insurance coverage that extends the terms of a regular insurance policy once coverage limits for the regular policy have been reached. Specifically, umbrella coverage is for people who want protection against a large jury award that is not covered by their standard policy.

Underwriting
For insurers, the process of determining whether to accept a prospective insured's application for insurance. Also the name of the function and the insurer company department that carries out the process.

Universal life insurance
A type of permanent insurance that allows the insured to change premium and death benefit amounts based on needs and income. Cash value buildup is generally guaranteed a minimum rate of return based on money market yields. Policyholders cannot select investments the way they can with a variable life insurance policy.

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V
Variable annuity
An annuity that pays a variable amount. The payment is determined by the investment performance of mutual fund-like subaccounts that underlay the annuity. A variable annuity is taxed the way an IRA is: contributions are tax-deferred until the owner withdraws money from the account. If the owner withdraws money before turning age 59-1/2, a 10% early-withdrawal penalty applies to the transaction amount. Unlike IRAs, however, variable annuities do not have a yearly contribution limit.

Variable life insurance
A type of permanent insurance that allows the policyholder to invest a portion of the cash value of the policy in a portfolio of stock, bond, and money market investments. Premiums are fixed and a portion of premiums is allocated to the investment portfolio. The policyholder bears the risk from these investments in the form of a cash value and death benefit that fluctuates with the performance of the investment portfolio.

Variable universal life insurance

A type of permanent insurance that combines features of variable and universal life insurance. Specifically, the policy allows the policyholder to change the premium amount based on income and needs (which is characteristic of a universal life policy), and gives the policyholder the flexibility of investing a share of the premium in a portfolio of stock, bond, and money market investments (which is characteristic of a variable life policy).

 

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W
Waiver of premium rider
A life insurance policy addendum that causes coverage to continue on a term life insurance policy if the policyholder becomes disabled before reaching age 60 or 65.

Whole life insurance
A dual-purpose life insurance policy that makes payment to beneficiaries upon the death of the insured and also builds up cash value while it is in effect. A type of permanent insurance that calculates premiums based on the remainder of the insured's life expectancy. Premiums and the death benefit are fixed.
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