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Glossary of Terms

Glossary Overview

Sometimes annuity terminology isn’t the easiest to understand, we get that. In an effort to help you decipher some of our industries jargon, and better understand the content found throughout our site, we’ve put together this glossary of common annuity terms for your review.

Terms

1

  • 1035 Exchange

    1035 is a section of the tax code that allows for the tax free exchange of non-qualified funds from one annuity contract to another.

A

  • Accumulated Interest

    Interest earnings that have accumulated inside an annuity contract and have not yet been withdrawn.

  • Accumulation Value

    The total current value of a fixed annuity which includes all of the premium payments made plus accumulated interest earnings to date, less any fees or previous withdrawals, but before the application of any surrender charges.

  • Agent

    An individual who is licensed by a state and contracted with one or more insurance companies, to sell their annuity products.

  • AM Best

    An insurance company rating agency that assigns one of 15 letter based grades (from A++ to F) indicating their opinion with regard to the insurers financial strength and ability to pay claims.

  • Annual Point-to-Point

    An index annuity crediting method that measures the percentage change in the underlying index value between two dates, the beginning and the end of the annuity contract year.

  • Annual Reset

    An indexing method used with fixed indexed annuities where the index value is reset and interest earnings, if any, are credited at the end of each contract year, creating a new index value starting point for the coming year. Interest earnings are locked in and future decreases in the index value will not affect the… Read more

  • Annuitant

    The person whose life the annuity policy is based upon and also receives the benefits of the contract.

  • Annuitization

    The process of converting an annuity contract’s value into a guaranteed income stream represented by periodic payments made over a specified period of time, commonly for life.

  • Averaging

    An index annuity crediting method that uses the average (usually monthly or daily) of an index’s value to determine interest credits rather than a point-to-point method that records the index value change between two specified dates.

B

  • Basis Point

    A unit of measure for interest rates where one basis point is equal to 1/100th of 1%, or 0.01%.

  • Beneficiary

    The individual(s) or legal entity named to receive the benefits of an annuity policy upon the death of the Annuitant, typically a spouse or children.

  • Bonus Annuity

    A type of annuity where the insurance company adds a bonus amount to your annuity, usually a set percentage of the amount you put in when you buy or add money to your contract.

C

  • Cap

    An upper limit, used with some indexed annuity crediting methodologies, on the index-linked interest rate that is applied to the annuity. The cap is the maximum rate of interest the annuity can earn during the index term.

  • Cash Refund

    A type of immediate annuity payout option where the insurance company guarantees that the total payout will not be less than the amount paid to purchase the annuity. If the annuitant dies before receiving payments that equal the purchase price, the difference is paid to the named beneficiaries in a lump sum.

  • CD-type Annuity

    Also referred to as a multi-year guarantee annuity, it is a type of fixed annuity where the interest rate is guaranteed in advance for a set number of years.

  • Certificate of Deposit (CD)

    A savings certificate issued by a bank or credit union that guarantees a set interest rate for a predefined period of time, typically three months to five years.

  • Comdex Rating

    A ranking composite of all of the ratings that an insurance company has received from A.M. Best, Standard & Poor’s, Moody’s and Fitch. It gives the company’s standing, on a scale of 1-100, in relation to all other companies that have been rated by the rating services. A company needs to be rated by at… Read more

  • Contract Anniversary

    The annual anniversary of the annuity contract issue date.

  • Contract Owner

    The person or legal entity that applies for and buys an annuity contract. This is the party that owns the annuity and whose funds were used to purchase the policy.

  • Cost Basis

    The collective total of your initial premium deposit, and any subsequent premium deposits, paid to purchase a nonqualified annuity.

D

  • Daily Averaging

    An index annuity interest crediting method that is calculated by comparing the underlying index value on the first day of the contract year to the daily average (usually 252 trading days) of that same index at the end of the year. The daily average index value equals the sum of the daily index values recorded… Read more

  • Death Benefit

    The benefit paid to the designated beneficiary(s) when the annuity contract’s annuitant dies.

  • Deferred Annuity

    Any annuity that has not yet begun to make income payments. Deferred annuities are purchased with the intent of letting the money grow inside the contract for a period of time, before annuitizing the policy and activating an income stream. A deferred annuity can be either fixed or variable.

  • Deferred Income Annuity

    Also referred to as a Longevity Annuity, it is a product designed to provide a guaranteed lifetime income stream beginning at a predetermined future date, from a few years and up to 40 years in some cases. Usually, the income payout will be significantly higher than with an immediate annuity.

E

  • Equity Indexed Annuity

    Also referred to as a fixed indexed annuity, it is a type of fixed annuity that uses a stock market index as the basis for determining what the interest credits will be.

  • Exclusion Ratio

    It is that portion of an annuity income payment, represented as a percentage, which is considered a return of premium (cost basis) and therefore not taxed.

F

  • FDIC

    The Federal Deposit Insurance Corporation (FDIC) is a federal government corporation that provides deposit insurance guaranteeing the safety of a depositor’s accounts in member banks up to certain dollar limits.

  • Fixed Annuity

    A type of annuity where your money earns interest at rates set by the insurance company or as spelled out in the annuity contract. The insurance company guarantees both interest earnings and principal.

  • Fixed Indexed Annuity

    A type of fixed annuity that uses a stock market index as the basis for determining what the interest credits will be.

  • Flexible Premium

    A kind of annuity contract that allows periodic additional premium deposits. After establishing the annuity with an initial deposit, further premium can be added to the policy at later dates.

  • Free Look Provision

    The provision in an annuity contract that allows the owner an opportunity to review the policy for a set period of time, typically 10 days or longer, after contract delivery to determine if they want to keep or return the policy for a full refund. Free look provisions are mandated by state insurance regulations.

G

  • Guarantee Period

    The period of time for which the declared interest rate is guaranteed.

  • Guaranteed Minimum Surrender Value

    The minimum amount defined in the policy that the contract owner is guaranteed to receive upon surrender of the annuity after the application of surrender charges and market value adjustments (MVA), if any.

  • Guaranty Association

    Each state, by statute, has a Guaranty Association that backs fixed annuity products up to certain dollar limits, to protect policyholders from financial loss due to the insolvency of an insurance company. To find out the coverage in your state, visit our State Guaranty Associations page.

H

  • Hybrid Annuity

    An industry coined term to describe a fixed indexed annuity that has an optional income rider attached.

I

  • Immediate Annuity

    A type of annuity that is designed to provide a guaranteed income stream, most typically for an individual or joint lifetime, with payments beginning in less than one year. They can also be structured to provide guaranteed income for a specified period of time.

  • Income Account Value

    The value used to determine the amount of guaranteed lifetime income that you will receive once activating that feature on an annuity with an attached income rider.

  • Income Rider

    An optional benefit that can be added to some annuity contracts, usually for a fee, that is designed to help generate a higher level of guaranteed lifetime income at a future date.

  • Individual Retirement Account (IRA)

    A tax-deferred retirement plan that is established by individuals who have earned income. Optional contributions can be made annually, up to a set maximum amount, and may be tax deductible depending on the individuals income, tax filing status and coverage by an employer sponsored retirement plan.

  • Installment Refund

    A type of immediate annuity payout option where the insurance company guarantees that the total payout will not be less than the amount paid to purchase the annuity. If the annuitant dies before receiving payments that equal the purchase price, the difference is paid to the named beneficiaries in installments.

J

  • Joint Annuitant

    A person whose life, jointly with the primary annuitant, the annuity policy is based upon and also receives the benefits of the contract.

  • Joint Life Annuity

    An annuity payment option that provides guaranteed income payments for as long as either the annuitant or joint annuitant is living.

  • Joint Owner

    A person or legal entity that, jointly with another person or legal entity, applies for and buys an annuity contract. These are the parties that co-own the annuity and whose funds were used to purchase the policy.

L

  • Life Annuity

    An annuity payment option that provides guaranteed income payments for as long as the annuitant is living.

  • Longevity Annuity

    Also referred to as a Deferred Income Annuity (DIA), it is a product designed to provide a guaranteed lifetime income stream beginning at a predetermined future date, from a few years and up to 40 years in some cases. Usually, the income payout will be significantly higher than with an immediate annuity.

M

  • Margin or Spread

    A specified percentage used in certain calculation methods with fixed indexed annuities to determine the amount of index-linked interest that is credited to the annuity. The margin or spread percentage is deducted from the total calculated change in the index value, however, the annual interest credit will never be less than zero.

  • Market Value Adjustment (MVA)

    An adjustment formula applied to withdrawals made in excess of penalty free amounts, or full contract surrenders, during the time in which the annuity is still subject to the surrender period. The adjustment may decrease or increase the amount of your withdrawal, depending on the change in interest rates during the period since you first… Read more

  • Maturity Date

    The date specified within an annuity contract at which time the owner must elect a settlement option and begin receiving payments by way of annuitizing the contract.

  • Monthly Averaging

    An index annuity interest crediting method that is calculated by comparing the underlying index value on the first day of the contract year to the monthly average of that same index at the end of the year. The monthly average index value equals the sum of the monthly index values recorded each month over the… Read more

  • Monthly Point-to-Point

    An index annuity crediting method that measures the percentage change in the underlying index value each month. Usually, each monthly change is limited by a cap for positive changes, but not for negative changes. At the end of each index term, typically every contract year, all of the monthly percentage changes are added together to… Read more

  • Multi-Year Guarantee Annuities

    A type of fixed annuity where the interest rate is guaranteed in advance for a set number of years.

N

  • Non-Qualified

    Non-qualified encompasses every type of funds, except those held within a tax qualified account, such as an IRA or 401k.

P

  • Participation Rate

    The participation rate determines what percentage of the increase in an index will be used to calculate index-linked interest credits to a fixed indexed annuity.

  • Penalty Free Withdrawals

    The amounts specified in an annuity contract that can be withdrawn on a penalty free basis, even during the time in which the annuity is subject to the surrender period.

  • Period Certain

    An immediate annuity payment term where income payments are made by the insurance company for a predetermined set period of time only.

  • Point-to-Point

    An index annuity crediting method that measures the percentage change in the underlying index value between two dates to determine the amount of interest credit applied to the contract.

  • Policy

    The legally binding contract issued by the insurance company that defines the terms, conditions and benefits of the annuity.

  • Premium

    The collective total of the initial payment, and any subsequent payments, made to purchase an annuity, excluding earned interest.

  • Premium Bonus

    The amount added by the insurance company to your bonus annuity value, usually a set percentage of the premium you put in when you buy or add money to your contract.

  • Premium Tax

    A tax imposed by some states on certain annuity products. The amount of tax can vary depending on the type of funds (qualified or non-qualified) used to purchase the annuity. Most insurance companies factor the tax, if any, into the pricing of their products, so the annuity purchaser is rarely even aware of its existence.

  • Principal

    The collective total of the initial premium deposit, and any subsequent premium deposits, paid to purchase an annuity, excluding earned interest.

  • Prospectus

    A legal document that must be delivered, under Securities and Exchange Commission (SEC) regulations, to the prospective buyer of a variable annuity before the actual sale, providing details about the variable annuity offering.

Q

  • Qualified

    Qualified funds are those contained within a tax qualified account, such as an IRA or 401k.

R

  • Renewal Rate

    The interest rate offered by an insurance company on an inforce fixed annuity after the initial guarantee period is over.

  • Required Minimum Distribution (RMD)

    The amount that IRA owners and qualified plan participants must begin withdrawing from their retirement accounts by April 1 following the year in which they reach age 70.5. RMD withdrawals must then be taken each subsequent year.

  • Rollover

    Refers to the moving of tax qualified monies from one retirement plan or IRA to another in such a way so as not to incur or suffer any tax consequences, maintaining the tax-deferred status of the funds.

S

  • Single Life Annuity

    An annuity payment option that provides guaranteed income payments for as long as the sole named annuitant is living.

  • Single Premium

    A kind of annuity contract that is established with a single lump-sum premium payment. Additional funds cannot be added to this type of annuity after it is issued.

  • Single Premium Immediate Annuity (SPIA)

    A type of annuity that is designed to provide a guaranteed income stream, most typically for an individual or joint lifetime, with payments beginning in less than one year. They can also be structured to provide guaranteed income for a specified time period.

  • Split Funded Annuity

    An annuity concept where the initial premium is divided between two separate annuity contracts, structured in such a way as to produce immediate tax-advantaged income for a guaranteed period of time and to restore the original principal at the end of that time period. A multi-year guarantee annuity is used to restore the original principal… Read more

  • Spread or Margin

    A specified percentage used in certain calculation methods with fixed indexed annuities to determine the amount of index-linked interest that is credited to the annuity. The spread or margin percentage is deducted from the total calculated change in the index value, however, the annual interest credit will never be less than zero.

  • Surrender Charge

    A penalty imposed by the insurance company for terminating, or exceeding the penalty free withdrawal provisions of, an annuity contract during the surrender period.

  • Surrender Period

    The period of time for which an annuity contract is subject to early surrender charges or penalties.

U

  • Upfront Bonus

    The amount added by the insurance company to your bonus annuity value, usually a set percentage of the premium you put in when you buy or add money to your contract.

V

  • Variable Annuity

    A type of annuity contract where premium deposits can be allocated among several different investment sub-accounts. The earnings, if any, are determined by the performance of the underlying accounts. Unlike fixed annuities, funds in a variable annuity are subject to market risk.

W

  • Withdrawal Charge

    A penalty imposed by the insurance company to withdrawals made in excess of specified penalty free amounts, or full contract surrenders, during the time in which the annuity is still subject to the surrender period.

  • Withdrawal Window

    The period of time, typically 30 days, at the end of an annuity guarantee period when the contract owner has the option to withdraw or transfer funds, or surrender their contract without any surrender charges or market value adjustment fees. Usually, if no action is taken, the annuity will renew for an additional guarantee period… Read more

Y

  • Yield

    The total average annual interest rate percentage earned with a fixed annuity over a specified time period, including any premium bonus or interest rate enhancements.