Frequently used terms:
Annuitization involves converting your accumulated retirement assets into a series of periodic payments that last for a period of time of your choosing, in accordance with the provisions of the annuity contract.
Deferred Annuities are annuities that can be funded through a single premium or through flexible payments over time. Can potentially help you to accumulate money for retirement, especially over an extended period of time. Your money grows tax deferred, which means you pay no taxes on earnings until you withdraw your money.
Distribution Period is the period of time, either a specified number of years or lifetime, over which distribution payments are made to the annuitant. Earnings become taxable when the annuitant begins to receive payments. The payout during the distribution period can either be fixed or variable.
Fixed Annuities are annuities that guarantees you a specified rate of interest for a specified amount of time. Offers preservation of your assets and protection from market volatility.
Flexible Premium Annuities are funded over a period of time, generally years. Allows you to pay premiums of differing amounts (within a stated minimum and maximum) on a set schedule or randomly. Your assets accumulate on a tax-deferred basis and can fund either fixed or variable deferred annuities.
Immediate Annuities These begin payments for life or for a specified amount of time in exchange for your one-time contribution. Regular payments can be received on a monthly, quarterly, semiannual or annual basis. A portion of each payment represents taxable interest, and the other portion is a tax-free return of your principal.
Premature/Early Withdrawals (Distributions): Withdrawals are reported as income and are subject to ordinary income tax treatment (as opposed to capital gains or dividend income), and if made prior to age 59½, may be subject to an additional 10% federal income tax penalty. In addition, company imposed surrender charges may apply to certain withdrawals.
Single Premium Annuities They provide you with a way to turn a large sum of cash into guaranteed income. For those who have cash from an inheritance, legal settlement, business sale, etc., can fund an immediate or a deferred annuity. For those nearing retirement, who have assets accumulated in a retirement plan or other savings vehicle, can fund an immediate or a deferred annuity.
Return of Premium Rider guarantees that you will always get AT LEAST 100% of what you paid in premium. For many people, their only concern about making an annuity purchase is the possible pain upon surrender. Not all insurance companies offer this valuable feature and most annuity salespeople don’t offer it because they are paid less and the lower commission received is vulnerable for several years.
Systematic Withdrawals allow you to withdraw money from the accumulated value of your contract on a regular schedule – making it an effective way to supplement income either before or after retirement. Systematic withdrawals are also flexible.
Variable Annuities offer greater opportunity for asset growth through a variety of investment choices. With their greater opportunity for growth, comes greater risk. Variable annuities are subject to market risk including loss of principal.
Withdrawal Charges, Surrender Charges, Surrender Penalties are charges that typically decreases annually until the year specified in the contract, when it reaches zero, and all future withdrawals are without charge.
Fixed Indexed Annuity With Income Rider create guaranteed income for life. The income level grows until you activate the rider and begin taking lifetime income. There are contracts with inflation riders and long term care riders that increase the income payments.
The amount of money in an annuity, working for the owner, before possible surrender charges.
Simpler term: Account balance or Contract value
The time frame during which the account value has the potential to grow. (Some annuities allow new money to be added over time. Others are single premium only).
Simpler term: Growth phase or Growth period
A qualified person who can help annuity buyers understand their options and make financial decisions pertaining to their financial goals and objectives.
Simpler term: Financial professional, Financial advisor, Financial consultant
A person who will receive the income payments from an annuity. (They could be the direct owner of the annuity or another person chosen by the direct owner, and they are the person whose lifetime income the payments are based on).
Simpler term: Annuity owner
When the annuity leaves the accumulation phase, turning the current account balance into a series of periodic income payments, either for a set period of time or for life.
A financial product that offers guaranteed lifetime income with the potential of growing the principal.
The level of market risk that is acceptable to annuity owners.
Simpler terms: Risk comfort level, Risk tolerance, Degree of certainty, Risk appropriateness, Investor confidence
The person designated to receive any remaining account balance or income payments once the owner is deceased.
A feature that can provide added value or protection to the policyholder and/or beneficiaries, sometimes at an additional cost.
Simpler terms: Optional benefit, Rider, Waiver, Option
Benefit to heirs
The balance that is paid to a beneficiary, typically the remaining account balance or income upon the annuitant’s death.
Simpler term: Beneficiary benefit, Death benefit, Legacy benefit, Legacy, Legacy protection benefit, Family protection
The maximum interest credited to an annuity at the end of a selected time period. The annuity owner will choose the time period that’s best from available options.
The amounts deducted from the contract, which may include setting up the annuity, adding optional benefits, etc.
Simpler term: Fee or Cost
The payment paid into a contract. For most annuities, this is the paid in money.
Simpler term: Premium, purchase payments
Co-owner or Joint income option
An optional benefit that offers guaranteed withdrawals for life for both you and a loved one.
Related terms: Joint option, Spousal option, Income for two, Joint guaranteed lifetime withdrawal benefit, Joint protected lifetime withdrawal benefit
The amount of compensation paid by insurance companies for the sale of annuity products. The compensation is paid by the insurance companies, from its balance sheets, not the assets of the policyholders.
Contract value, account value or account balance
The amount of money in the annuity.
A benefit paid to beneficiaries, typically the remaining account balance or income upon death.
Simpler term: Beneficiary benefit, Legacy benefit, Benefit to your heirs, Legacy, Legacy protection benefit, Family protection
The point you when an annuity ends the accumulation phase and begins to make income payments.
Simpler term: Spending Phase, Income or Distribution Stage
A bonus amount that may be added to an annuity for each year income is deferred. Typically, this bonus is added each year, up to a certain age.
A type of annuity that delays payments until the policy owner chooses to receive them, while providing an opportunity for growth during the deferral period.
The point you start receiving income from your annuity.
Simpler term: Income stage, Spending Phase
Strategically spreading the account value among different types of investments to help reduce the impact of market downturns. Diversification does not guarantee a profit or protection against a loss.
Earnings sensitive adjustment
Additional income received on top of the guaranteed amount, or on top of any other permanent income increase. This additional income is based on the market performance rate, and allows for additional earnings of otherwise permissible withdrawals.
Simpler term: Bonus income increase
A benefit that pays the beneficiary the remaining account balance or income upon death.
Simpler term: Beneficiary benefit, legacy benefit
The amounts associated with owning an annuity, which may include setting up the annuity, adding optional benefits, etc.
Simpler terms: Annual fees or costs
A qualified financial professional who is required to help consumers make financial decisions in their best interest. (A fiduciary is not the only type of financial professional required to make financial decisions in the best interest of their clients. Certain non-fiduciaries should also comply with best-interest requirements, as a matter of good practice.)
A qualified person to help consumers understand their options and make financial decisions to work toward their financial goals.
Simpler term: Financial professional, advisor, financial consultant
A qualified person who does not earn commissions by helping consumers understand their options and make financial decisions to work toward their financial goals.
An account that earns a guaranteed interest rate and is not invested in or tied to the market.
Simpler term: Fixed rate account
An annuity that delivers 100% protection from market downturns with the potential for earned interest. Note that for a deferred fixed annuity, there is the benefit of a guaranteed interest rate, in addition to downside protection and the potential for earned interest.
Fixed indexed annuity
An annuity that guarantees principal protection from market downturns with the potential for growth tied to a market index by guaranteeing no principal loss and limited returns.
The period when annuity principal has the potential to grow. (Some annuities allow for additional contributions over time.)
Simpler term: Growth stage, accumulation phase
Guaranteed lifetime income
The payments from an annuity that can for life. Unused principal can be paid to the contract beneficiaries.
An annuity that begins paying out guaranteed income within one year of the purchase date, either for life or for a selected time period.
The point when the annuity owner begins receiving income from the annuity.
Related terms: Distribution phase, decumulation phase, spending phase
Index participation rate
For some indexed annuities, when the underlying index value increases, the contract is credited with a portion of that increase based on the participation rate. For example, if the market went up 10% and the annuity’s participation rate was 80%, the annuity would be credited with an 8% return, or 80% of the gain.
Joint option or guaranteed lifetime withdrawal benefit
An optional benefit that offers guaranteed withdrawals for life for two people.
Simpler term: Joint income option, joint option, spousal option, income for two, co-owner option, joint protected lifetime withdrawal benefit
A benefit that pays the contract beneficiary the remaining account balance or income upon death.
Simpler term: Beneficiary benefit, death benefit, legacy benefit, benefit for heirs, legacy protection benefit, family protection
The risk that annuity principal may need to be accessed sooner than anticipated, which could result in penalties or impact performance.
Optional benefits available for an additional cost that can offer guarantees, such as a minimum level of income for life or guaranteed income benefits
The chance of outliving one’s wealth and not having enough money to live.
Like most investments, this is the chance of losing money due to unforeseen market downturns.
Market value adjustment
Allows for permanent increases to be withdrawn from the income base when the account balance, or total amount of money in the annuity, exceeds a certain level. This may occur on an annual or daily basis, depending on the annuity.
Related terms: Market value increase, permanent income base increase
Market value increase
Allows for a permanent increase from the annuity income base when the account balance, or total amount of money in the annuity, exceeds a certain level. This may occur on an annual or daily basis, depending on the annuity.
Rate at which markets change price. The way stocks, bonds and other market investments change in value. This market movement may affect the value of an annuity or other investments. Some annuities protect against volatility even when the markets go down.
Amount of income paid from an annuity with a set frequency.
Simpler term: Income payments, contract payout
A payout option that allows annuity owners to choose when and how long to receive payments, including beneficiaries.
For most annuity types, this is the money paid into the annuity.
The amounts associated with owning an annuity, which may include setting up the annuity, adding optional benefits, etc.
They type of annuity used to pursue specific goals.
A feature that can provide additional benefits or protection to the contract for the owner or their beneficiaries, often at an additional cost.
The level of market risk that is acceptable for each annuity owner.
The strategy that is used to pursue specific financial goals.
Simpler terms: Strategy, vehicle or product
The point when the annuity starts making distributions, the decumulation phase
An option to transfer ownership or continuation of the guaranteed income to a spouse upon death.
An optional benefit that offers guaranteed withdrawals for life for a spouse. The joint income option
The underlying investment choices available in a variable annuity. These typically include stock, bond and money market funds. The annuity investment options.
A penalty that is paid to withdraw a certain amount of money from an annuity before the end of a set time period. For example, the annuity may allow for a withdraw up to 10% of the income base within a period of time. If a withdrawal of more than 10% is taken during this time, there will be a fee imposed.
Simpler term: Early withdrawal fee, surrender charge, withdrawal penalty
A financial product that offers the potential to grow money through various market investment options and that can provide income during retirement. Some variable annuities offer optional benefits, available at an additional annual cost, that can protect the lifetime income from market downturns.
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