Glossary

A

Accumulation Phase #

The period of time when money is growing inside the annuity contract, before any income payments begin. During this phase, growth is tax-deferred — you don't pay taxes on gains until you take them out.

Annuitization #

The point at which you exchange the lump sum value of your annuity for a guaranteed stream of income payments. Once you annuitize, the lump sum is gone — you've traded it for the income. This is irreversible.

Annuitant #

The person whose life the annuity contract is measured against. The annuitant is usually (but not always) the same person as the contract owner.

B

Bailout Provision #

A clause in some fixed indexed annuities that allows you to surrender the contract without surrender charges if the cap rate or participation rate drops below a stated level. Less common today than it used to be.

Beneficiary #

The person who receives the contract value if the owner or annuitant dies before the contract is fully paid out. Beneficiaries are designated when the contract is issued and can be changed later.

Benefit Base #

A separate accounting value used to calculate income rider payments. The benefit base is not the same as the actual contract value — it's a number used to determine your guaranteed income, not money you can withdraw as a lump sum.

Bonus #

An upfront credit added to your premium when the contract is issued. A 10% bonus on a $200,000 deposit means the contract starts at $220,000. Bonuses usually come with strings attached — longer surrender periods, lower cap rates, or vesting schedules.

C

Cap Rate #

The maximum interest rate an indexed annuity will credit in a given period, regardless of how well the underlying index performs. If the cap is 6% and the S&P 500 returns 20%, you get 6%. Cap rates can change at the insurance company's discretion.

Cash Value #

The amount of money you would receive if you surrendered the contract today, after any surrender charges and adjustments. This is different from the account value (which is the gross balance) and the benefit base (which is used only for income calculations).

Contract Value #

The gross balance of the annuity, before any surrender charges. Sometimes called account value.

D

Death Benefit #

The amount paid to your beneficiary when you die. In most annuities, the death benefit is the contract value at the time of death. Some contracts include enhanced death benefit riders for an additional fee.

Deferred Annuity #

An annuity where income payments are delayed to a future date. Most annuities sold today are deferred. The opposite is an immediate annuity, where payments begin within a year of purchase.

E

Exclusion Ratio #

The portion of each annuity income payment that is not taxed, because it's considered a return of your original premium. Used in non-qualified annuities to determine the taxable portion of payments.

F

Fixed Annuity #

An annuity that pays a stated, guaranteed interest rate for a stated period. The simplest type of annuity. Returns are predictable; there's no participation in market gains.

Fixed Indexed Annuity (FIA) #

An annuity that credits interest based on the performance of a market index (like the S&P 500), but with a floor of zero — you can't lose money to market declines. Gains are typically capped or limited by a participation rate.

Free Withdrawal #

The amount you can withdraw from a deferred annuity each year without triggering surrender charges. Most contracts allow 10% per year. Withdrawals beyond the free amount are subject to surrender charges during the surrender period.

G

Guaranteed Lifetime Withdrawal Benefit (GLWB) #

A type of income rider that lets you withdraw a guaranteed percentage of your benefit base every year for life, even if your actual contract value runs out. The withdrawal percentage typically depends on your age when you start.

Guaranteed Minimum Income Benefit (GMIB) #

An older type of income rider that guarantees a minimum income amount at annuitization. Largely replaced by GLWB riders in newer contracts.

I

Immediate Annuity #

An annuity where income payments begin within a year of purchase. Also called a SPIA — Single Premium Immediate Annuity. You give the insurance company a lump sum, they send you a monthly check for life (or for a stated period).

Income Rider #

An optional add-on to a deferred annuity that guarantees a future income stream, calculated off a separate benefit base rather than the actual contract value. Income riders carry an annual fee, usually 0.95% to 1.50% of the benefit base.

Index Crediting Method #

The formula used to calculate how much interest gets credited to a fixed indexed annuity based on index performance. Common methods include annual point-to-point, monthly sum, and monthly average. Different methods produce dramatically different results.

L

Liquidity #

How easily you can access the money in your annuity without penalty. Annuities are generally not liquid investments — most have surrender charges for the first 5 to 10 years, and partial withdrawals are limited.

M

Market Value Adjustment (MVA) #

A formula that adjusts the surrender value of certain fixed annuities based on changes in interest rates since the contract was issued. If rates have risen, the MVA reduces your surrender value. If rates have fallen, it increases it. Usually only applies if you surrender early.

Mortality and Expense Charge (M&E) #

An annual fee charged inside variable annuities to cover the insurance company's mortality risk and administrative costs. Typically 1.00% to 1.40% per year, on top of fund expenses.

MYGA (Multi-Year Guaranteed Annuity) #

A fixed annuity that guarantees a single interest rate for a multi-year period, typically 3 to 10 years. The annuity equivalent of a CD, but tax-deferred.

N

Non-Qualified Annuity #

An annuity funded with after-tax money — money that has already been taxed once. Only the gains are taxed when withdrawn, not the original premium.

P

Participation Rate #

The percentage of an index's gain that gets credited to a fixed indexed annuity. A 70% participation rate on a 10% index gain credits 7%. Like cap rates, participation rates can change at the insurance company's discretion.

Premium #

The money you put into the annuity. Some contracts accept a single premium; others accept ongoing premiums.

Q

Qualified Annuity #

An annuity funded with pre-tax money — typically through an IRA or 401(k) rollover. The entire withdrawal is taxable, not just the gains.

R

Rider #

An optional feature added to an annuity contract for an additional fee. Common riders include income riders, death benefit riders, and long-term care riders.

Rollup Rate #

The annual rate at which the benefit base of an income rider grows during the deferral period. A 7% rollup means the benefit base grows by 7% per year — but this is the calculation base for income, not the actual cash value of the contract.

S

SPIA (Single Premium Immediate Annuity) #

See Immediate Annuity.

Step-Up #

A feature in some income riders that locks in market gains by resetting the benefit base to a higher value on a stated anniversary, if the contract value has grown above the prior benefit base.

Surrender Charge #

A penalty fee charged if you withdraw money beyond the free withdrawal amount during the surrender period. Surrender charges typically start at 7-10% in year one and decline to zero over 5 to 10 years.

Surrender Period #

The number of years during which surrender charges apply. After the surrender period ends, you can withdraw any amount without penalty.

T

Tax-Deferred Growth #

Money inside an annuity grows without being taxed each year. Taxes are due only when funds are withdrawn. This is the primary tax advantage of annuities.

V

Variable Annuity #

An annuity where the contract value rises and falls with the performance of underlying investment subaccounts (similar to mutual funds). Returns are not guaranteed; you can lose principal. Typically the most expensive type of annuity due to mortality and expense charges plus fund expenses.

W

Withdrawal Percentage #

The percentage of the benefit base that can be withdrawn each year under a lifetime income rider. Withdrawal percentages are tied to the age when income starts — usually 4% in your 50s, 5% in your 60s, 6% in your 70s. Once locked in, the percentage doesn't change.

A