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.
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.
Annual Cap Rate is the upper limit of index-linked interest that could be credited to an annuity each year. Annual Participation Rate determines what percentage of the increase in an index will be used to calculate index-linked interest credits each year.
Interest earnings that have accumulated inside an annuity contract and have not yet been withdrawn.
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.
An individual who is licensed by a state and contracted with one or more insurance companies, to sell their annuity products.
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.
A letter grade (from A++ to F) assigned by globally recognized A.M. Best Rating Services to indicate their opinion with regard to the issuing insurance company’s financial strength and ability to pay claims.
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.
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 interest already earned.
The person whose life the annuity policy is based upon and also receives the benefits of the contract.
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.
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.
A unit of measure for interest rates where one basis point is equal to 1/100th of 1%, or 0.01%.
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.
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.
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.
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.
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.
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.
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 least two rating services to receive a COMDEX.
The annual anniversary of the annuity contract issue date.
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.
The collective total of your initial premium deposit, and any subsequent premium deposits, paid to purchase a nonqualified annuity.
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 each trading day over the course of the preceding contract year, divided by the number of trading days. At the end of each annual index term, the percentage change between the index starting value and the index daily average value is used in determining the amount of interest that is credited to the annuity, if any.
The benefit paid to the designated beneficiary(s) when the annuity contract’s annuitant dies.
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.
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.
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.
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.
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.
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.
The guaranteed first year yield, including bonuses if applicable.
Fixed Account First Year Yield is the guaranteed first year yield, including bonuses if applicable, assuming 100% of the premium deposit is allocated to the Fixed Account.
The current interest rate applied to premium that is allocated to the fixed account. Typically this interest rate is adjusted annually by the insurance company after contract issue.
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.
A type of fixed annuity that uses a stock market index as the basis for determining what the interest credits will be.
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.
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.
The period of time for which the declared interest rate is guaranteed.
The guaranteed annual yield, including bonuses if applicable, for the initial guarantee period term, up to the first penalty free full withdrawal window.
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.
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.
An industry coined term to describe a fixed indexed annuity that has an optional income rider attached.
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.
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.
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.
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.
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.
A person whose life, jointly with the primary annuitant, the annuity policy is based upon and also receives the benefits of the contract.
An annuity payment option that provides guaranteed income payments for as long as either the annuitant or joint annuitant is living.
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.
An annuity payment option that provides guaranteed income payments for as long as the annuitant is living.
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.
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.
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 purchased your annuity.
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.
The minimum initial payment required to purchase an annuity or to qualify for a particular rate band. These amounts can vary by product design and tax status of funds.
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 course of the preceding contract year, divided by twelve. At the end of each annual index term, the percentage change between the index starting value and the index monthly average value is used in determining the amount of interest that is credited to the annuity, if any.
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 determine the amount of interest that is credited to the annuity, if any.
A type of fixed annuity where the interest rate is guaranteed in advance for a set number of years.
Non-qualified encompasses every type of funds, except those held within a tax qualified account, such as an IRA or 401k.
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.
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 early surrender charges.
An immediate annuity payment term where income payments are made by the insurance company for a predetermined set period of time only.
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.
The legally binding contract issued by the insurance company that defines the terms, conditions and benefits of the annuity.
The collective total of the initial payment, and any subsequent payments, made to purchase an annuity, excluding earned interest.
The percentage added by the insurance company to premium payments made by the annuity owner. Bonuses are frequently subject to a vesting schedule.
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.
The collective total of the initial premium deposit, and any subsequent premium deposits, paid to purchase an annuity, excluding earned interest.
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.
Qualified funds are those contained within a tax qualified account, such as an IRA or 401k.
The interest rate offered by an insurance company on an inforce fixed annuity after the initial guarantee period is over.
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 73. RMD withdrawals must then be taken each subsequent year.
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.
An annuity payment option that provides guaranteed income payments for as long as the sole named annuitant is living.
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.
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.
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 at the end of the guarantee period, while an immediate annuity provides the monthly income.
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.
A penalty imposed by the insurance company for terminating, or exceeding the penalty free withdrawal provisions of, an annuity contract during the surrender period.
The period of time for which an annuity contract is subject to early surrender charges or penalties.
The annual yield, including bonuses if applicable, up to the first penalty free full withdrawal window, assuming the current base interest rate remains unchanged for the duration of the term.
The annual yield, including bonuses if applicable, up to the first penalty free full withdrawal window, assuming the interest rate is reduced to the contractually guaranteed minimum at the first available opportunity, for the duration of the term.
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.
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.
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.
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 equal to the one just completed.
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.
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