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Glossary and Terms


Note: Not all of these terms may be used on this site, but in order to provide you with the most useful of the terms and phrases used in the annuity business, those below are the most common. Note also this list is not exhaustive. If you think a term or phrase should be included please let us know.

Annuitant: A person who receives the benefits of an annuity or pension. The owner of the annuity contract decides who the annuitant will be. For most purposes, the contract owner and the annuitant are the same person.

Annuitize: The process of converting an annuity investment into a series of periodic income payments. Annuities may be annuitized regularly, over a long or short time period, or in some cases, in one single payment

Annuity: A financial product sold by a financial institution that is designed to accept and then grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later time. Annuities are most often used as a means of securing a steady cash flow for an individual during retirement years.

Beneficiary: Anybody who gains an advantage and/or profits from something. The person who benefits from something else. In the financial world, the beneficiary typically refers to someone who is eligible to receive distributions from a trust, will or life insurance policy. Beneficiaries are either named specifically or they have met the requirements that make them eligible for whatever distribution is specified under the legal instrument.

Bonus Credit or Bonus Rate: Some fixed annuity contracts offer a higher interest crediting rate in the first year of the annuity contract. After the first year, the rate drops back to a rate consistent with the current market. Some variable annuities offer an additional credit to the annuity account when the annuity is purchased.

Deferred Annuity: Deferred annuities are annuities that do not make payments until later. You put money into a deferred annuity expecting to let it grow inside the contract for several years (or more).

Equity Indexed Annuity: A special class of annuities that yields returns on your contributions based on a specified equity-based index. These annuities can be purchased from an insurance company, and similar to other types of annuities, the terms and conditions associated with payouts will depend on what is stated in the original annuity contract.

Free Look Period: A period of up to one month during which the purchaser of an annuity can cancel the contract with no penalty. Rules vary by state

Free Withdrawal: A stipulation in most deferred annuities that allows for early withdrawal without an insurance company-imposed penalty. The maximum withdrawal is usually up to 10 percent of the annuity value. Tax penalties may apply if you withdraw assets before reaching age 59 1/2.

Immediate Annuity: An immediate annuity makes income payments immediately, or very soon after purchase. You use an immediate annuity when you want to start taking income as soon as possible.

Income for Life Annuity: Commonly referred to as a ‘Life Annuity’. A ‘Life Annuity’ guarantees income for the life of the annuitant, no matter how long he/she lives. The amount of the payment is calculated based on the annuitant’s age, life expectancy, and value of contract at point of annuitization.

Premium: A contribution or payment into an annuity. Some annuities allow you to make a single payment, and some allow you to make multiple contributions on a regular basis, or anytime you like.

Principal: In the financial sense, it means capital as distinct from income (interest) derived from it.

Prospectus: A formal written offer to sell securities (filed with the SEC) that sets forth a plan for a (proposed) business enterprise; “a prospectus should contain the facts that an investor needs to make an informed decision”

Qualified Annuity: A financial product that accepts and grows funds, and is funded with pre-tax dollars. “Qualified” is a descriptor given by the Internal Revenue Service (IRS) to indicate that the qualified annuity may be eligible for tax deduction. When a distribution is made it, it is subject to income tax.

Renewal Rate: The new, declared interest rate for money that has completed the initial guaranteed interest rate period. In a fixed deferred annuity, for example, the interest rate on your contract may be renewed periodically, usually every year, to reflect current market conditions. Rate at time of annuity renewal, usually set annually at the end of each policy year. Also known as Renewal Rate Interest or Current Declared Rate.

Rider: An amendment to an insurance policy that has the effect of either expanding or restricting the policy’s benefits or excludes certain conditions from coverage.

Surrender Charge: A penalty charge one owes if one make a premature withdrawal from an annuity, an insurance contract, or some other investment vehicle.

Tax-Deferred: Income whose taxes can be postponed until a later date. Examples would include IRA, 401(k), Keogh Plan, annuity, Savings Bond, and Employee Stock Ownership Plan.

Tax-Free “1035” Exchanges: The tax exempt exchange of two annuities or life insurance policies. The annuities exchanged are not assessed capital gains or any other taxes. Section 1035 exchanges allow an annuitant to avoid taxes that would have been levied on the first annuity or policy as long as the second is of equal or greater value. The IRS only recognizes a Section 1035 exchange as such if the annuities or polices are directly exchanged. Selling one and buying another, for example, does not count.

Tax-Free Transfers: This relates specifically to variable annuities. Tax-free transfers is the ability to move money between the investment choices and fixed account within a variable annuity without incurring current taxes. Normally these exchanges are free but other restrictions may apply.

Term Certain Annuity: A term annuity that includes a guarantee that the payments will be made for the full term, even if the annuitant dies before the term expires.

Variable Annuity: A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.

Variable Immediate Annuity: A contract sold by insurance companies that is bought by means of a single lump sum payment usually providing a monthly income payment for the annuitant ’s life. The amount of the monthly income payment varies according to the performance of the underlying portfolio of investments.

Withdrawal Charge: A charge to annuity contract owners who withdraw funds during the “surrender charge period” or the first several years of the contract. Early withdrawal fees are also referred to as surrender charges and surrender fees. The specific terms will vary among insurance companies and contracts, but early withdrawal fees are typically assessed as a percentage of the contract value for withdrawals that exceed a certain percentage of the contract value.

Withdrawals: Money that you withdraw from your annuity. In a deferred annuity, you can generally make full or partial withdrawals, although a withdrawal charge may be imposed, as well as ordinary income taxes.

Sources:
The Free Dictionary by Farlex. 2012. Farlex, Inc. http://www.thefreedictionary.com.
“Variable Annuities: What You Should Know.” U.S. Securities and Exchange Commission. http://www.sec.gov.
Business Dictionary. 2012. WebFinance, Inc. http://www.businessdictionary.com.
Logan, Ann H. “Internal Revenue Bulletin: 2003-33.” Internal Revenue Service. 18 August 2003. http://irs.gov/irb/2003-33_IRB/ar11.html.