Annuity Glossary Index

transfer an annuity

Financial lingo can easily fly over your head. And, this is especially when it comes to the annuity industry. With that in mind, here’s a glossary of common annuity terms that you can refer to so that you have a better understanding of annuities.

1035 Exchange

Want to switch insurance companies in order to secure a higher return rate? If so, you can use a 1035 Exchange which is simply a tax-free transfer of an annuity contract from one insurer to another. Just be aware that you may have to pay a surrender fee.

Accrued Interest

The amount of interest that has been earned on an annuity. Accrued interest is tax-deferred until it’s withdrawn.

Accumulation Phase

The time period during which an annuity grows in cash value before payments are distributed.

Actuary

A professional who relies on statistical mathematics to calculate the premiums, dividends, reserves, and pension, insurance, and annuity rates for an insurance company.

Anniversary Date

The calendar date when an annuity starts — or becomes effective. For index annuities, the annual yield is calculated by taking the difference in the S&P 500 between anniversary dates.

Annual Reset

An annual reset, as the name implies, is a reset period of one year. You have the opportunity to earn or not earn interest. For a standard 10 year contract, you would have 10 opportunities for this.

Annuitant

The individual who receives payments from an annuity plan.

Annuitant-Driven

A contract that pays out a death benefit following the death of the primary annuitant.

Annuitization

The process of converting annuity benefits into a series of periodic payments.

Annuity

An annuity is a contract with an insurance company that lets individuals make tax-deferred contributions to a retirement savings account and later receive set regular payments.

Annuity Beneficiary

A person who receives benefits if the annuity owner dies.

Annuity Certain

An immediate annuity income plan where payments are made for a defined period of time, regardless if the annuitant lives or dies.

Annuity Contract

A legally binding contract where an insurer promises to make recurring payments to the annuitant over a specific timeframe. In exchange, the individual will make payment of premiums to the insurer.

Annuity Issuer/Provider

The insurance company that sells the annuity, offers certain guarantees, and pays its benefits towards retirement income.

Annuity Period

The length of time, monthly, quarterly, semi-annually, or annually, between income payments made under an annuity income plan.

Annuity Products

Investment options that may be used as retirement plans or personal injury settlements.

Bailout Provision

A provision in an annuity contract that permits the owner to surrender the contract. Usually, this is without charge as long as the renewal interest rates on a fixed annuity drop below the predetermined amount.

Bonus Annuity

“A Bonus Annuity is a type of annuity product that offers either an upfront premium bonus or a first-year interest rate bonus,” explains AnnuityAdvantage. “When available, upfront premium bonuses are typically found with fixed indexed annuity products, while first-year interest rate bonuses are usually attached to traditional fixed annuities.”

Buyout

Immediate access to the funds received from selling an annuity.

Capital Gains

When you sell an asset, such as an annuity, this is the difference in profit or loss.

Cash Value

The amount of money that can be withdrawn from an annuity after surrender charges have been subtracted from the total value of the annuity.

Certificate Annuity

A type of annuity in which the interest rate guarantee period is also equal to the surrender charge period.

Charitable Gift Annuity

A charitable gift annuity, according to Fidelity “is a contract between a donor and a charity with the following terms: As a donor, you make a sizable gift to charity using cash, securities, or possibly other assets. In return, you become eligible to take a partial tax deduction for your donation, plus you receive a fixed stream of income from the charity for the rest of your life.”

Contingent Annuitant

An individual designated by the annuitant to receive their payments after they pass away. Payments will not cease until the annuitant and contingent annuitant have both passed away. If there isn’t a contingent, then payments will stop when the annuitant passes.

Combination Annuity

Comprising two different annuities. The first is one that’s paid out immediately, while the other is paid out later in the future.

Contract Owner

The person who applies for and purchases an annuity contract. This individual is responsible for funding the annuity and as all rights to the contract. An owner can either be an individual, couple, partnership, corporation, or trust.

Contract Termination

The end of to an annuity due to the death of the annuitant.

Contract Value

The total value of the contract, including the total of paid premiums and earnings minus any applicable charges, withdrawals, or fees.

Contribution Limits

The maximum amount that you allowed to contribute to a retirement fund.

Court Approval of Best Interest

When annuity payments are sold, a necessary judgment is required.

Death Benefit

“With respect to annuities, this provision typically states that if you die before the annuity payments start, the contract value will be paid to your beneficiary,” explains the Great American Insurance Group. “With respect to life insurance, it is the amount payable to the beneficiary under the policy upon the death of the insured.

Deferred Annuity

Delayed annuity payments until when the owner decides to receive them, usually in retirement. Once received, this guarantees an income for life. Deferred annuities can be either fixed or variable.

Direct Funder

An entity that provides annuitants money directly instead of negotiating between parties.

Disposition

The ability to distribute funds pending the termination of an annuity.

Distributions

Payments made from an annuity.

Diversification

Instead of placing all of your eggs into one basket, diversification is where you allocate assets to several different types of investments. As a result, it will reduce financial risks so losses in one area gain by offset by gains in another.

Duration

The timeframe of an annuity contract, such as 1, 2, 3, 5, 7, or 10 years. The longer the duration, the better the return rate on fixed annuities will be.

Early Withdrawal Penalty

The IRS fee, which is 10%, for withdrawals that are made by those under the age of 59 ½.

Endorsement

Also known as a rider, this is an addition written into an insurance policy which can include provisions that supersede those of the original policy.

Equity-Indexed Annuity

Simply known as EIAs, this annuity has characteristics of both a fixed and variable annuity. However, their returns vary more than a fixed, but not as a variable annuity. Additionally, EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index like the S&P 500, the Nasdaq, or the Russell 2000.

Exclusion Ratio

“The exclusion ratio is the percentage of the annuity payment classified as non-taxable income,” explains Tim Plaehn for Zack’s. “The amount of payment excluded is calculated by dividing the after-tax money used to buy the annuity by the life expectancy of the person receiving the annuity payments.”

Fixed Annuity

A fixed annuity is a type of insurance contract similar to CDs that guarantee the annuitant a set amount of income at regular intervals. These payments, which can be either immediate or deferred, are stable since they will never drop below a minimum interest rate.

Flexible-Premium

A type of annuity that allows you to make periodic contributions over a period of time. After making the initial premium, further investments can be made into the same annuity. For those familiar with a money market account, this should sound familiar.

Flexible-Premium Deferred Annuity (FPDA)

Like a flexible premium annuity, this kind of annuity permits owners to invest more money in the future. However, it forgoes periodic payouts with compounding interest.

Forced Annuitization

If an annuitant passes away or reaches the maximum age, this will trigger a mandatory liquidation of an annuity. When this occurs, it will deactivate accrued death benefits.

Free Look Period

A period of time after an annuity contract is delivered. Usually, this takes place between 10 and 30 days. During this time, the owner can cancel the contract and receive either their initial payment or the current value of the annuity contract. Just note that this varies by state.

Free Withdrawal

For most deferred annuities there’s a stipulation that allows for early withdrawal without an insurance company-imposed penalty. Typically, the maximum withdrawal is up to 10% of the annuity value. Keep in mind that tax penalties may apply if assets are withdrawn prior to reaching age 59 1/2.

Guaranteed Income Security

If receiving lifetime disbursements of payments, this is a perk of choosing this type of annuity. In a nutshell, it guarantees savings that will last the entirety of a client’s life.

Guaranteed Interest Rate

The minimum interest rate that an insurer will credit during the accumulation phase of an annuity’s contract. Usually, this is between 3 and 4%.

Guaranteed Minimum Surrender Value

Because index annuities are regulated by the National Association of Insurance Commissioners, investors are required to at least receive 90% principle + 3% for every year that the contract was held.

Guaranteed Payments

These are annuity contracts that specify that payments must be made regardless if the annuitant is living or deceased.

Hidden Fees

These are additional costs that were not disclosed upfront.

Immediate Annuity

An annuity contract where the annuitant purchased it with a single payment. In return, you’ll begin receiving income payments. In most cases, this is within a short period and is always within 12 months. An immediate annuity can be either fixed or variable. And, this will liquidate the principal over time.

Income for Life Annuity

An annuity income option that will guarantee income for the life of the annuitant regardless of how long he/she lives. The amount of the payment will depend on factors like the value of the account value and the annuitant’s life expectancy. The payment amounts can be fixed or variable. It just depends on the annuity that you select.

Income for Two Lives Annuity

An annuity income option, which is also called a Joint or Survivor annuity, that will guarantee income for the lives of two annuitants. In this case, when one of the annuitants dies, the payments will continue to the living annuitant. Payments will cease once both annuitants are no longer living. Payments after the first annuitant’s death could be the same or lower. It depends on what was selected at the time of purchase. You also have the option to select a fixed or variable payment. depending on the annuity.

Income or Payout Options

Various ways in which a contract owner can receive payment income from an annuity. These include a lump-sum payment, systematic withdrawals, living benefits, and annuitization.

Indexed Rate Annuity

A fixed annuity that comes with the option of selecting a declared interest rate or one that’s based on an outside stock index.

Inflation

A common economic term that describes the increase in the cost of goods and services as time goes on.

Initial Interest Rate

The applied rate of interest when making the first deposit to either a fixed or deferred annuity. The length of time with this rate is guaranteed and is specified within the annuity contract

Installment Refund Annuity

If the contract stipulates, then a beneficiary will receive the difference of all or part of the income benefits if the annuitant dies before all of the income benefits have been paid.

Life-with-Period Certain Annuity

With this type of annuity, you will receive smaller payments. On this bright side, it guarantees a specified amount of payments, which will make it easier to budget. Like many other types of annuities, if the annuitant dies before the period ends, then payments will go to their beneficiary. Another advantage is that the annuitant will receive payments until their passing even if they outlive the payment period.

Liquidity

The ability to quickly and easily access money by converting assets into cash without having to incur significant losses of value.

Load

The sales fee that’s placed on the individual who buys an annuity contract.

Lump-Sum Payment

As opposed to receiving a series of payments, a one-time payment is dispersed (referred to as a Lump-Sum payment). Experts recommend that you do not do this as you will have to pay income taxes on all of the earnings from the annuity. Usually, this is higher than your original investment.

Market Value Adjustment (MVA)

A type of fixed annuity where there isn’t a guaranteed rate. The exception is if the contract owner withdraws amounts that happen to exceed a specific free-withdrawal amount. Or, if the owner terminates the annuity contract before it has a chance to mature.

Maturity Date

The date on which an annuity begins to make income payouts.

Mortality Credits

The money that an annuity has accumulated which can be transferred from the annuitant to a beneficiary. The amount is based on how long the annuitant lives.

Multiple Premium Annuity

An annuity program that requires more than just one premium payment.

Non-Prescribed Annuity

Here a portion of the non-prescribed annuity plan is not subject to taxation because it’s attributed to the return of capital. But, the interest portion is taxable.

Non-Qualified Annuity

Typically, this a tax-deferred annuity that was purchased by an individual with after-tax dollars, instead of being a part of a tax-qualified retirement plan such as an IRA.

Partial Purchase

Choosing to sell off just a portion of your annuity payments.

Payee

The person who is receiving the annuity funds.

Payment Stream

The annuity income that is paid out through a series of recurring payments.

Payout Period

The timeframe in which an annuitant will receive payments from an immediate annuity plan.

Payout Phase

The second phase of the life of an annuity where the money accumulated is paid out in regular payments.

Pension Annuities

An annuity that’s been incorporated into a pension — or other qualified retirement plans. These are often set up by a corporation, labor union, government, or other organization for its employees.

They also normally include profit-sharing plans, stock bonus and employee stock ownership plans, thrift plans, target benefit plans, money purchase plans, and defined benefit plans.

Point-to-Point

A simple way of calculating index annuity yield. You can do this by finding the difference in index value from the day that the annuity was purchased to the day that it expires.

Premature Distributions

The withdrawal of earnings amounts from an annuity program before the annuity contract’s owner reaches the age of 59 ½ years old. As a consequence, you will be responsible for an additional 10% federal income tax.

Premium

A contribution or payment that’s put towards an annuity. With some annuities, you’re allowed to make a single contribution, while others let you make multiple contributions on a regular basis if you prefer.

Premium Bonus

Additional funds are credited by an insurer to an annuity under certain conditions. It’s generally expressed as a percentage of the deposited amount.

Premium Tax

A separate tax that’s imposed on premiums for life insurance or an annuity plan that’s set by state governments. Just note that not all states enforce this tax. And, the states that do will have different regulations for qualified and non-qualified programs.

Prescribed Annuity

Prescribed Annuity Contracts (PACs) grant non-taxable returns on investment. Additionally, the annuitant’s interest income is included at a steady rate throughout the entire term of the annuity. The amount taxed is typically lower than that in a non-prescribed annuity in the beginning, but will rise over time.

Present Value

The current cash value of an annuity that is calculated by using an explicit discount rate.

Principal

The total amount of money that an annuity contract owner has placed into the annuity. It does not include earned interest, however.

Private Annuity

A private annuity refers to a contract in which two people agree to exchange a valuable asset, in this the annuity, for payment of income for the duration of life.

Prospectus

A legal document that contains detailed information about the variable annuity contract that you agreed to, such as the fund’s objectives, history, investment goals, financial statements, and fees. Under government regulations, this must be provided before the sale of the annuity.

Provision

A statement that adds to the specifications of an annuity contract. Also known as riders, the more you add, the more expensive your annuity will become. Examples would be leaving your annuity contract to a beneficiary or having your payout increase with inflation.

Qualified Annuity

An annuity that is funded or distributed with pre-tax dollars. As a part of a tax-qualified retirement plan, this can reduce the current income tax.

Renewal Rate

The new rate of interest that is credited to an annuity. It takes place after the current interest-rate period is over which is most likely on the anniversary of the contract. Depending on current economic conditions and insurer investments.

Rider

Another term for provisions where an amendment to an insurance policy is made in order to expand or restrict the benefits of the policy.

Single-Premium

Unlike a premium annuity, this type does not allow you to make deposits following the initial investment. In other words, the annuity is purchased with a lump-sum payment. The most common example of this would be fixed-rate annuities. If you want to invest more funds into an annuity, you may have to buy a second one.

Single-Premium Deferred Annuity (SPDA)

A variation of a single premium annuity in which that is’ bought into with one payment. However, payouts are withheld to compound interest.

Single-Premium Immediate Annuity (SPIA)

Another version of a single premium annuity. Again, it’s purchased with one payment, but will yield payouts either monthly, quarterly or annually at the cost of compound interest.

Split-Funded Annuity

A type of annuity contract where the owner has the option to divide the initial premium into two separate contracts. In this case, the first portion of the premium deposit is put towards a fixed deferred annuity. The other portion, however, goes to an immediate annuity. As a result, one annuity will continue to grow on a fixed interest basis, while you can also begin receiving payments.

Sub-Account

All investment funds offered in a variable annuity are known as subcontracts. Here a portion is allocated to a money market account, the S&P 500, mutual funds, or stocks.

Substandard Health Annuity

A type of straight-life annuity. It’s designed for those who have serious health problems. Because the insurer has less of a chance to profit from the investor’s funds, these can be expensive. However, periodic payouts are often higher.

Surrender Charge

A fee imposed by the insurer for withdrawing funds when you cash-in, sell or cancel a tax-deferred investment such as an annuity or a Traditional IRA. While this fee can be high initially, it does decrease over time.

Surrender Value

The amount of money a contract owner will receive if they surrender or cash out their annuity.

Systematic Withdrawal

A way to distribute annuity payments by scheduling regular withdrawals rather than taking a guaranteed income stream.

Tax-Deferred

Tax-deferred investments like an annuity or Traditional IRA means that any income earned can grow free of taxes. Taxes are expected to be paid, however, as soon as you make the withdrawal.

Tax-Sheltered Annuity (TSA)

A type of retirement annuity that is only available for purchase for public educators, hospitals, and other entities, like colleges, that provide qualified retirement programs under Internal Revenue Code Section 403(b).

Temporary Annuity

A type of life annuity will expire after a pre-established period of time passes. It’s often used by individuals looking to offset the expenses of retirement, like paying off a home mortgage.

Term Certain Annuity

A plan associated with fixed-indexed annuities. Here there’s the option to receive predefined monthly income payments until the annuity product’s expiration date. If the expiry date takes place prior to the passing of the annuitant, that individual will no longer receive this recurring income stream.

Two-Tier Annuity

An annuity that is specifically designed to have a high-interest rate during its first year. The rate is compared to the market and it’s offered to incentivize the annuity owner to see through the entirety of the annuitization period.

Variable Annuity

A type of annuity contract that permits the owner to allocate the premium amount among several different smaller investment choices such as stocks and bonds. Also known as sub-accounts, the contract value will fluctuate depending on the value and performance of investments. of such a plan may vary according to the performance of these investments.

Variable Immediate Annuity

A slight variation of a variable annuity. The main difference is that the annuity begins providing income payments right away, or at least soon after its purchase.

Wirehouses

Large brokerage firms that buy and sell financial securities like annuities.

Withdrawals

Money that you take out of your annuity. With a deferred annuity, you can opt to make either full or partial withdrawals. Regardless of how much you cash out, a penalty will still be imposed. Typically, it’s based on the following schedule; 10% before 3 years, 5% after 4 years, 0% after 5 years. However, these charges may be waived in the event of illness or death.