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Glossary of Annunity Terms
Glossary of Annunity Terms

Glossary of Annuity Terms

Please refer to your own specific contract for the use and definitions of the terms given below. These definitions are of a general nature and may vary some with your specific contract. 

Annuity: A contract between you and an insurance company that allows your earnings to grow and compound tax-deferred. This is a powerful benefit that you can use to help you accumulate wealth for your retirement or other long-term financial goals. The word "annuity" literally means "annual payments". When you buy an annuity, the insurance company agrees to pay you an income for a specified period of time. Whether these income payments start right away, or at some future date, determines what type of annuity you have; either deferred or immediate. 

Annuity structure: In general, there are three parties to an annuity (plus the insurance company): the owner, the annuitant and the beneficiary. The owner controls incidents of ownership in an annuity. They have the right to the cash surrender value. They can also name the beneficiary, assign the policy and make withdrawals. Oftentimes, the owner is also the annuitant. The owner may be an individual or a trust. Most importantly, the owner is the person (or trust) who receives the tax benefit of the annuity during the accumulation phase of the contract. (The accumulation phase is the period of time that the annuity is growing; the income phase is the period of time when you are taking money out of your annuity.) The owner does not pay taxes on the income earned (the tax-deferral) during the accumulation phase; however, owners do pay the taxes on withdrawals or income when received during the income payout phase. The owner is normally the person who receives the payments during the income phase, but they can also assign these payments to the annuitant. The annuitant is the person on whose life the terms (depending on the particular annuity, it could be their age, gender or state of residence) of the annuity are measured. Again, the annuitant may also be the owner. As in other life insurance policies, the beneficiary is the recipient of the death benefit, should it be paid out.  

Annuity tax-deferral: The ability to shelter your earnings from the impact of taxes is one of the most powerful tools available for helping you to build and preserve wealth for retirement or other long-term goals. Without the continuous drag of taxes, your money grows faster. Faster growth means a larger nest egg. These are the principles that make it work. First, your principal earns interest each year. Then, your accumulating interest earns interest. Finally, the money you would have ordinarily paid to the IRS in taxes (and possibly to state and/or local agencies) remains in your annuity to earn even more interest for you. Over time, the additional interest earnings on these tax savings can really add up. Depending on your tax-bracket, tax-deferral can mean as much as 30% to 40% faster growth of your money compared to a taxable account paying the same rate. 

Annuitant: The individual upon whom the contract’s life is based. This individual has no rights to direct or alter the contract in any way. Should the annuitant pass away, the contract must be paid out to the annuitant’s beneficiary as a death claim, or continued by the annuitant’s spouse if listed as the annuitant’s beneficiary.

Annuitization: This is the process of converting an annuity into a guaranteed income stream for an annuitant's life or a specific period of time.

Annuity payout: The systematic liquidation of principal and interest over time. It is a contract issued by an insurance company that accomplishes this purpose.

Back-end Load: See "Surrender Charge".

Beneficiary: The person or persons named by the owner to receive the death benefit in an annuity or other life insurance product.

Contingent Annuitant: The individual who assumes the policy should the primary annuitant pass away. This is required for annuitants over the age of 85.

Contingent Beneficiary: The person who replaces the listed beneficiary, should that individual be deceased at the time of the owner's or annuitant’s death, for subsequent payout or transfer of ownership.

Deferred Annuity: An annuity purchased with either periodic premiums or a single premium that defers payment for a period of time.

Deferred Variable Annuity: A variable annuity that has an accumulation period before a payout begins.

Equity Indexed Annuity: The hot new product of choice by today's investors. This new product can be used to fund your 403b, 401k, SEP, IRA, Roths, and other plans, both qualified and non-qualified. What makes this new product so unique, even though it looks and operates much like a mutual, is the fact that it offers a base guarantee so that your principle and earned interest are secure from loss. The normal mutual fund has no guarantee, thus, your principle and earned interest are always at risk for loss. Our two most popular plans currently follow. One offers 13% plus guaranteed the first year with a yearly growth ceiling cap of up to 14%, depending on your choices thereafter. Another offers a first year guarantee of  about 9% but has no ceiling cap for yearly growth. There is a variety of  terms so that you are assured of the right one to meet your investment expectations.

Expected Return: Amount is based on the periodic payment and the annuitant’s life expectancy when benefits begin.

Fixed-Amount Payments: Periodic payments made in a specified amount, which will completely exhaust a principal sum.

Fixed Annuity: An annuity that provides a payout expressed as a fixed dollar amount, has very little risk, and usually offers a guaranteed rate of return for the term of the contract. 

Fixed-Period Payments: Refers to periodic payments made over a specified period that will completely exhaust a principal sum.

Flexible-Premium Deferred Annuity: An annuity purchased with periodic premiums which may vary in future payout amounts.

Front-End Load: An expense charge made at the inception of some, but not all, annuity contracts; we will let you know if the plan we are discussing with you has one.

Guaranteed Interest Rate: In a fixed annuity, the minimum interest rate (e.g., 3%) that is guaranteed by the insurance company to be credited each year to the cash value.

Immediate Annuity: An annuity purchased with a single premium with benefits to begin one payment interval (month, year) after the premium is paid.

Installment Refund Annuity: An annuity in which the un-recovered purchase price is refunded at the annuitant’s death by continuing the regular annuity payments to a beneficiary.

 Interest-Out-First Rule: A federal tax rule that treats a premature withdrawal from an annuity contract as taxable interest rather than nontaxable principal.

Investment in the Contact: A tax term that means the net amount (cost) that the owner has invested in the annuity contract.

Joint Life Annuity: An annuity that terminates benefit payments at the first death of two or more annuitants.

Joint Owner: A joint owner allows for more freedom in the direction of the contract, but requires both owners to sign and approve all documents.

Joint-and-Survivor Annuity: An annuity that covers two or more annuitants and that pays benefits until the last annuitant dies.

Life Annuity: An annuity in which the payout is based on life contingencies or life expectancy.

Life Annuity with Period Certain: A life annuity with a guarantee that specifies a minimum number of payments will be made, even if the annuitant dies prematurely.

Loads: The expenses charged against an annuity contract that offset part of the premium or cash value; not all annuities have one. We will let you know if the one we are discussing with you does.

Premature Withdrawal: A withdrawal of cash value before age 59 1/2 (with certain exceptions).

Refund Annuity: An annuity that returns all or part of the purchase price at the annuitant’s death.

Separate Account: In a variable annuity, the account maintained separately from the insurer’s general (investment) account, which allows investment results to be reflected directly in variable annuity contracts.

Single-Premium Deferred Annuity: An annuity purchased with a single, lump-sum premium payment which earns interest for a period of years before the payout period begins.

Single-Premium Immediate Annuity: An annuity purchased with a single, lump-sum premium payments which begins to pay out benefits one payment interval (month, year) after this premium is paid.

Straight Life Annuity: An annuity that terminates at the annuitant’s death.

Surrender Charge: A charge made for a partial or full withdrawal from an annuity contract before the annuity starting date; often scales down over time. There are exceptions to this: 10% each year, and the interest only option. The conversion to income option for your annuity usually avoids the surrender charge.

Variable Annuity: An annuity that provides a payout that may vary in value.

Last updated on Thu, 11/29/2001 - 21:42.
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