Annuity Glossary
Accumulation period
The time prior to an annuity’s payout period when money
builds up in the annuity contract.
Annuitant
The person whose life expectancy is used to determine the
payout of an annuity.
Annuitize
Converting the value of an annuity contract into a stream of
income payouts.
Annuity
A retirement product that allows you to save for your future
on an income tax-deferred basis and then allows you to choose
a payout option that best meets your need for income when you retire—lump
sum, income for life, or income for a certain period of time.
Annuity Due
A contract in which annuity
payments are made at the beginning of each payment period.
The first payment is applied on the contract effective date.
Days Rate Held on Rollovers
If you rollover an existing annuity to a new annuity with a
different insurance company, the new company will normally
hold the rate for a period of time. If the money is not
received from the old company within that period, the new
annuity will receive the rate in effect on the date the
money is received.
Deferred Annuity
A contract in which annuity payouts begin at a future date.
Effective Annual Yield
Most companies compound and credit interest daily. The rate
shown is the effective annual yield after compounding the
daily nominal rate. Some companies pay a first year bonus on
their interest to encourage new business. The Effective
Annual Yield (EAY) includes the bonus.
- Rate Bonus
- Some annuities pay a
bonus on the base rate. For example, if the base
rate is 6.00% and there is a 1.00% first year bonus,
the EAY will be 7.00%.
- Premium Bonus
- Some annuities pay an
upfront premium bonus. For example, if the base rate
is 6.00% with a 1.00% premium bonus, 7.06% will be
shown as the Effective Annual Yield.
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Equity-Indexed Annuity
A variation of the fixed annuity. With this type of annuity,
your account accumulates at a minimum fixed rate of return.
Your account also may earn additional interest based on the performance
of an equity index. Generally, the indices used are widely reported common
stock indices, the most prevalent being the Standard & Poor’s 500 Composite
Stock Price Index.
Fixed Annuity
An annuity contract in which the premiums you pay are
credited with a fixed rate of return by the life insurance
company, and the company guarantees a fixed payout every
month.
Flexible-Premium Deferred
Annuity
An annuity contract that permits varying the amount
and frequency of premium payments from year to year for
payouts that will occur in the future.
Immediate Annuity
A contract in which annuity payments are made at the
end of each payment period. Payment periods may be monthly,
quarterly, semi-annually, or annually.
Initial Rate Period
The period of time, usually listed in years, that the
company agrees to pay the initial crediting rate.
Load
Any sales fees or charges you pay in purchasing an
annuity contract.
Minimum Rate Guarantee After
Initial Period
This minimum rate guarantee serves two purposes:
-
It provides a minimum
interest rate a company may credit to an annuity
after the initial rate period.
-
It is also the rate that
insurance company actuaries use to calculate reserve
requirements in order to meet state insurance laws.
Payout Period
The period during which you receive the income from
your annuity contract.
Principal
The amount you pay into your annuity contract as
distinguished from the earnings that are credited to it. May
also be referred to as purchase payments or contributions.
Surrender Penalty
Penalty applied to any amount exceeding the Free
Annual Withdrawal Amount or to multiple withdrawals within
the same contract year if they are not allowed by the terms
included in the contract. In some cases, if the entire
annuity is surrendered, the penalty will be applied to the
full value of the annuity.
Some
annuities include a Market Value Adjustment (“MVA”) if surrendered.
-
If the contract rate is
higher than current rates on new money, a positive
MVA adjustment may be made in the cash value.
Therefore, if rates go down after the purchase date,
the penalty will be less than shown.
-
If the contract rate is
lower than current rates on new money, a negative
adjustment is made in the cash value. Therefore, if
rates go up after the purchase date, the surrender
penalty will be higher than shown.
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Penalty Waived with Payout Over
Most companies waive the surrender penalty if the cash value
is paid out over a period of time or annuitized, usually
five years or longer.
--- Penalty Waived @ Death Of
Some annuities waive all surrender penalties in the event of
death of the annuitant or some waive penalties at death of
the owner. Some waive penalties at the death of owner or
annuitant. Some annuities do not waive penalties at death of
the owner or annuitant, unless a payout of five years or
longer is elected.
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Medical Waiver Bail-Out
In certain circumstances, such as total disability or
nursing home confinement, part or all of the surrender
penalty may be waived on some annuities.
--- Sales and Maintenance Fees
There are no front-end sales charges with most annuities. If
$10,000 is deposited into an annuity, the full $10,000 will
be earning interest.
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Variable Annuity
A contract in which the premiums you pay are invested
in bond and stock funds. Your selection of funds depends on
the level of risk you want to assume. The account value
reflects the performance of the funds you select. Over the
long-term, variable annuities invested in equities generally
reflect the growth and performance of the economy and can
serve as a hedge against inflation.
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