ExpertGlossary

A paid-up policy is a whole life insurance policy for which no additional premium payments are required to keep in force.

Generally, a standard paid-up policy lasts the rest of your lifetime or until you reach a specific age, such as 100. Some policies are designed to be fully paid up at an age specified in the contract, such as whole life policies for which you pay no more premiums after age 65.

Short-term, unsecured debt securities that a corporation issues are often referred to as paper - for short-term commercial paper. The term is sometimes used to refer to any corporate bonds, whether secured or unsecured, short or long term.

If you own an asset that increases in value, any increase in value is a paper profit, or unrealized gain. If you sell the asset for more than you paid to buy it, your paper profit becomes an actual profit, or realized gain.

The same relationship applies if the asset has lost value. You have a paper loss until you sell, when it becomes a realized loss.

You owe no capital gains tax on a paper profit, though you use the paper value when calculating gains or losses in your investment portfolio, for example. The risk with a paper profit is that it may disappear before you realize it. On the other hand, you may postpone selling because you expect the value to increase further.

When policyholders have what is called a participating policy from a mutual insurance company, they are eligible to receive dividends based on the company's financial performance.

When claims are low and the company's investments perform well, dividends tend to rise. On the other hand, when claims are high and investment returns slump, dividends are likely to fall.

The dividends on a participating policy aren't guaranteed, so they may not be paid every year. Unlike the dividends paid to a company's shareholders, participating policy dividends are considered a return of premium. As a result, the dividends are not taxed as income.

Dividends may typically be paid out as cash, as additional insurance coverage, or may be used to reduce policyholders' premiums or repay policy loans. Rules vary from company to company.

Par value is the face value, or named value, of a stock or bond.

With stocks, the par value, which is frequently set at $1, is used as an accounting device but has no relationship to the actual market value of the stock.

But with bonds, par value, usually $1,000, is the amount you pay to purchase at issue and the amount you receive when the bond is redeemed at maturity.

Par is also the basis on which the interest you earn on a bond is figured. For example, if you are earning 6% annual interest on a bond with a par value of $1,000, that means you receive 6% of $1,000, or $60.

While the par value of a bond typically remains constant for its term, its market value does not. That is, a bond may trade at a premium, or more than par, or at a discount, which is less than par, in the secondary market.

The market price is based on changes in the interest rate, the bond's rating, or other factors.

You collect passive income from certain businesses in which you aren't an active participant.

They may include limited partnerships where you're a limited partner, rental real estate that you own but don't manage, and other operations in which you're an investor but have a hands-off relationship.

For example, if you invest as a limited partner, you realize passive income or passive losses because you don't participate in operating the partnership and have no voice in the decisions the general partner makes.

In some cases, income from renting real estate is also considered passive income. On the other hand, any money you earn or realize on your investment portfolio of stocks, bonds, and mutual funds is considered active income. That includes dividends, interest, annuity payments, capital gains, and royalties.

Any losses you realize from selling investments in your portfolio are similarly active losses.

Internal Revenue Service (IRS) regulations differentiate between passive and active income (and losses) and allow you to offset passive income only with passive losses and active income with active losses.

You have passive losses from businesses in which you aren't an active participant. These include limited partnerships, such as real estate limited partnerships, and other types of activities that you don't help manage.

You can deduct losses from passive investments against income you earn on similar ventures. For example, you can use your losses from rental real estate to reduce gains from other limited partnerships.

Or you can deduct those losses from any profits you realize from selling a passive investment. However, you can't use passive losses to offset earned income, income from your actively managed businesses, or investment income.

An index mutual fund or exchange traded fund is described as passively managed because the securities in its portfolio change only when the make-up of the index it tracks is changed.

For example, a mutual fund that tracks the Standard & Poor's 500 Index buys and sells only when the S&P index committee announces which companies have been added to and dropped from the index.

In contrast, when mutual funds are actively managed, their managers select investments with an eye to enabling the fund to achieve its investment objective and outperform its benchmark index. Their portfolios tend to change more frequently as a result. They also tend to have higher fees.

The performance of passively managed indexed investments and their risk profiles tend to correspond closely to the asset class or subclass that the index tracks. They tend to be more popular in bull markets when their returns reflect the market strength and less popular in bear markets when active managers may provide stronger returns.

When a corporation or government agency buys loans from lenders to pool and package as securities for resale to investors, the products may be pass-through securities.

That means regular payments of interest and return of principal that borrowers make on the original loans are funneled, or passed through, to the investors.

Unlike standard bonds, whose principal is repaid at maturity, the principal of a pass-through security is repaid over the life of the debt.

The best known pass-throughs are the mortgage-backed bonds offered by Fannie Mae, Freddie Mac, and Ginnie Mae. However, you can also buy pass-through securities backed by car loans, credit card debt, and other types of borrowing. Those are known as asset-backed securities.

A bank account titled payable-on-death (POD) lets you name one or more beneficiaries to whom the assets are paid when you die.

POD accounts can be useful estate planning tools in the states where they are available, since the assets in the account can pass to your beneficiaries directly, outside the probate process.

A similar type of registration is available in some states for securities and brokerage accounts, known as transferable-on-death, or TOD, accounts.

A payout ratio, expressed as a percentage, is the rate at which a company distributes earnings to its shareholders in the form of dividends.

For example, a company that earns $5 a share and pays out $2 a share has a payout ratio of 2 to 5, or 40%.

A normal range for companies that do pay dividends is 25% to 50% of earnings. But the percentage may vary if a company keeps the amount of its dividend consistent with past dividends regardless of a drop in its earnings.

Stocks that trade for less than $1 a share are often described as penny stocks.

Penny stocks change hands over-the-counter (OTC) and tend to be extremely volatile. Their prices may spike up one day and drop dramatically the next.

The fluctuations reflect the unsettled nature of the companies that issue them and the relatively small number of shares in the marketplace. While some penny stocks may produce big returns over the long term, many turn out to be worthless.

Institutional investors tend to avoid penny stocks, and brokerage firms typically warn individual investors of the risks involved before handling transactions in these stocks.

However, penny stocks are sometimes marketed aggressively to unsuspecting investors.

A pension is an employer plan that's designed to provide retirement income to employees who have vested - or worked enough years to qualify for the income.

These defined benefit plans promise a fixed income, usually paid for the employee's lifetime or the combined lifetimes of the employee and his or her spouse.

The employer contributes to the plan, invests the assets, and pays out the benefit, which is typically based on a formula that includes final salary and years on the job.

You pay federal income tax on your pension at your regular rate, so a percentage is withheld from each check. If the state where you live taxes income, those taxes are withheld too. However, you're not subject to Social Security or Medicare withholding on pension income.

In contrast, the retirement income you receive from a defined contribution plan depends on the amounts that were added to the plan, the way the assets were invested, and their investment performance.

The way a particular plan is structured determines if you, your employer, or both you and your employer contribute and what the ceiling on that contribution is.

The PBGC was created to ensure that participants in defined benefit pension plans under its jurisdiction will receive at least a basic pension if the plans are terminated because they're underfunded and so unable to meet their obligations.

The maximum benefit is adjusted each year for plans terminated in that year to reflect increases in Social Security.

Covered plans, which include those with 25 or more participants, must pay annual premiums to the PBGC to help fund this federal corporation.

The PBGC also tries to find people who participated in, and are due benefits from, plans that are no longer operating.

Pension maximization is a strategy that begins with selecting a single life annuity for income to be paid from your retirement plan, rather than a joint and survivor annuity.

The next step involves using some of your annuity income to buy a life insurance policy. At your death, the annuity income ends and the life insurance death benefit is paid to your beneficiary, often your surviving spouse.

You do receive more income from a single life annuity than from a joint and survivor annuity, which translates to a larger pension while you're alive.

However, pension max, as this approach is sometimes called, has some potentially serious drawbacks. These include the cost of the insurance premiums, including sales charges, and an increased burden on your beneficiary for turning the death benefit into a source of lifetime income.

Per capita is the legal term for one of the ways that assets being transferred by your will can be distributed to the beneficiaries of your estate.

Under a per capita distribution, each person named as beneficiary receives an equal share. However, the way your will is drawn up and the laws of the state where the will is probated may produce different results if one of those beneficiaries has died.

For example, if you specify that your children inherit your estate per capita, in some states only those children who survive you would inherit. In other states your surviving children and the surviving descendents of your deceased children would receive equal shares. That could result in your estate being split among more heirs than if all of your children outlive you.