Your Money Bible: 25 Financial Terms Everyone Should Know


Handy Career Terms

13. Defined-benefit plans Employer-sponsored retirement plans, such as pensions, in which the employer promises a specified retirement benefit based on a formula that may include an employee’s earnings history, length of employment and age. The employee may or may not be required to contribute anything to the plan. Because of their high costs, many companies no longer offer this type of benefit.

14. Defined-contribution plans A retirement plan companies may offer as a benefit to their workers in which the employer, the employee or both make contributions on a regular basis. The 401(k) and 403(b) are the most common forms of defined-contribution plans. The money that goes into these accounts comes out of earnings pre-tax, so you don’t pay taxes on the amount you put away every year.

Qualified withdrawals (usually those you make at age 59½ or older) are taxed as ordinary income. The value of the retirement benefit is determined by its investment performance. Unlike with defined-benefit plans, the employee, rather than the employer, shoulders the investment risk in the account.

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15. Executive compensation The pay and benefits package provided to senior executives, which is usually different from what’s offered to the typical employee. Executive compensation often includes a base salary, bonuses, incentives based on the company’s earnings (such as stock options), income guarantees in the event of a sale or public stock offering, and a guaranteed severance package. These packages are typically negotiated individually and spelled out in employment contracts.

Companies often use stock options as management incentives. For example, if managers help boost the value of the company’s stock, they can buy the stock at the lower price and pocket the gain if they sell.

16. Stock options An employee benefit that gives the owners of the option the right, but not the obligation, to buy their employer’s stock at a preset price and within a specified period or on a specific date. Companies often use these as management incentives.

For example, if a manager helps boost the value of the company’s stock above the price of his or her option, the manager can buy the stock at the lower price and pocket the gain if they sell. But all shareholders benefit from the increased value of the stock.

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Handy Insurance Terms

17. Permanent life insurance A type of policy that provides coverage over the lifetime of the insured and also offers an investment component called cash value. You can withdraw or borrow against that cash value after a surrender period. Premiums for permanent life insurance are typically more expensive than for term life insurance.

18. Premium The payments you make to an insurance company in return for protection from financial losses within the scope of your policy. You can pay premiums monthly, quarterly, semiannually or annually.

19. Private mortgage insurance A type of policy that mortgage lenders require when home buyers provide a down payment of less than 20%. Also called PMI, this protects lenders against loss if borrowers default on their payments, and the premiums increase the amount homeowners pay each month. For some mortgages, once your loan-to-home-value ratio reaches 80%, you no longer have to pay PMI, but in some cases, it is permanent for the life of the loan.

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