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Glossary
Annuity
Beneficiary
Bonds
Diversification
GICs
Locked-In Retirement Account (LIRA)
Mutual & Segregated Funds
Premium
Stocks
| Annuity | An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a guaranteed minimum amount, such as your total purchase payments.
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| | Beneficiary |
Designation by the owner of a life insurance policy indicating to whom the proceeds are to be paid upon the insured's death or when an endowment matures. Anyone can be named a beneficiary (relative, non-relative, pet, charity, corporation, trustee, partnership). A primary beneficiary is the first-named beneficiary, who must survive the death of the insured in order to collect the proceeds. A contingent or secondary beneficiary will receive the proceeds if the primary beneficiary does not survive the insured. A revocable beneficiary (primary or secondary) can be changed by the policyowner at any time. An irrevocable beneficiary (primary or secondary) can be changed by the policyowner only with the written permission of that beneficiary. Naming an irrevocable beneficiary removes the policy from the estate of the insured, who thereby gives up incidences of ownership for estate tax purposes.
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| | Bonds |
Bonds are basically a chance for you to lend your money to the government or a company. You can receive interest and your principle back over predetermined amounts of time. Bonds are the most common lending investment traded on the market.
There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds.
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| | Diversification |
Diversification is the idea of spreading out your money across many different types of investments. When one investment is down another might be up. Choosing to diversify your investment holdings reduces your risk tremendously.
The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks (even hundreds or thousands). Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, low-grade corporate bonds, international small companies). On the next page, I clearly explain how diversification works using a "Wheel of Fortune" concept.
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| | GICs |
GICs play an important role in a balanced portfolio because of the security they offer. GICs provide a secure way to save for short-term goals, like a vacation, or for longer-term plans, like buying a house or retirement. Either way, a GIC is a sound investment option. When you buy a GIC, you invest a sum of money for a specific term, or period of time. At the end of that term, you are guaranteed to receive your full principal - your initial investment - plus interest income on your money.
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| | Locked-In Retirement Account (LIRA) |
The Locked-in Retirement Account or "LIRA" is a special RRSP contract designed specifically to hold locked-in pension funds (which means the funds are not available as a cash refund) for a former plan member, former spouse or common-law partner, or surviving spouse or partner, as the case may be, and provides an alternative to leaving the funds in the pension plan.
Upon termination of membership in a pension plan, the breakup of the marriage or common-law relationship, or death before retirement, the LIRA may be chosen, at any age, to receive, and hold until retirement, locked-in pension funds transferred from a pension plan.
Pension funds transferred to a LIRA can not be cashed out, but must be used to purchase a life annuity from an insurance company, transferred to a Life Income Fund (LIF) or to a Locked-In Retirement Income Fund (LRIF). The Life Annuity, LIF and the LRIF provide a pension income for life, as required by pension law.
The LIRA owner may purchase a life annuity at any age, or transfer their pension funds to a LIF or to a LRIF at any time prior to the end of the year in which she/he turns the age specified in the Income Tax Act.
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| | Mutual & Segregated Funds |
Segregated funds are similar to mutual funds. Both offer investors an opportunity to ‘grow’ their investment capital (the money they invest), and provide access to professional fund management. Usually, both allow investors to diversify with different fund managers and fund types. Segregated funds offer many of the same investment opportunities and mandates provided by mutual funds but have one important difference -- segregated funds are insurance contracts known as individual variable annuities and are, therefore, governed by the Insurance Act. It is the insurance contract that provides a number of additional features and benefits that are not available with mutual funds.
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| | Premium |
A premium is a sum of money paid at regular intervals (monthly, semi-annually, annually) to an insurance provider as payment for an insurance contract.
The premium paid is calculated based on a set of criteria including, but not limited to: age, smoker status, gender.
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| | Stocks |
Stocks represent shares of ownership in a public company. Examples of public companies include IBM, Microsoft, Ford, Coca-Cola, and General Mills. Stocks are the most common ownership investment traded on the market.
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