Glossary of Annuity Terms

Sometimes it’s hard to remember all of the terms that come with annuities and other insurance products. We made this glossary of common annuity terms to help you better understand annuities.

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1035 Exchange

1035 is a section of the federal tax code that allows for the tax-free exchange of non-qualified funds from one annuity contract to another.

401(k)

A retirement savings plan offered by many employers that has tax advantages. The employee who signs up for a 401(k) agrees to have a percentage of each paycheck paid directly into an investment account. The employer may match part or all of that contribution. The employee gets to choose among a number of investment options, usually mutual funds.

A

Accumulated Interest

Interest earnings (over and above the initial premium deposit) that have accumulated inside an annuity and have not yet been withdrawn.

Accumulation Phase

During the accumulation phase, an annuity earns interest. If it is a flexible premium annuity, the annuity owner can add money in the form of additional premium payments. In either case, during this accumulation phase, the value of the annuity contract grows.

Accumulation Value

The total current value of a fixed annuity. This includes all premium payments made plus accumulated interest earnings, minus any fees or withdrawals, but before applying any surrender charges (when or if applicable).

Why is this important? People who are trying to understand the current value of the annuity need to take into consideration the impact of any withdrawal (surrender) penalties to truly understand how much actual cash they would get if they decided to surrender. If they have no intention of surrendering, then the accumulated value includes premium payments plus any accumulated earnings.

Agent

An individual licensed by a state and contracted with one or more insurance companies to sell annuity products. Agents almost always earn commissions, which impacts your interest rate return.

AM Best

An insurance company rating agency that assigns a letter-based grade (from A++ to F) indicating the insurer’s financial strength and ability to pay claims. This rating should be one of the factors in choosing a company’s product.

Annual Reset

An indexing method used with fixed indexed annuities. At the end of each contract year, the index value resets and interest earnings are credited to the account. This creates a new index value starting point for the coming year.

Annuitant

The person who receives the annuity income payments. The annuity policy is based upon this person’s life.

Annuitization

The process of converting a deferred annuity contract’s value into a guaranteed income stream represented by periodic payments made over a specified period of time, commonly for life.

Assets

Assets can be anything of value owned by individuals or organizations, and are categorized in different ways such as cash, investments, real estate and land, and personal property such as cars, boats, and jewelry.

B

Basis Point

A unit of measure for interest rates where one basis point is equal to 1/100th of 1%, or 0.01%.

Beneficiary

The individual(s) or legal entity named to receive the benefits of an annuity policy upon the death of the annuitant. The beneficiary is typically a spouse or children.

C

Cap

The maximum rate of interest the annuity can earn during the index term.

Cash Refund

A type of immediate annuity payout option where the insurance company guarantees that the total payout will not be less than the amount paid to purchase the annuity. If the annuitant dies before receiving payments that equal the purchase price, the named beneficiary(ies) receive the difference in a lump sum.

Cash Surrender Value

The amount of money that you can withdraw from an annuity contract after subtracting any surrender charges. The cash surrender value (CSV) can be calculated as the value of the contract premiums and earnings minus contract charges and the surrender charge.

CD-type Annuity

Also referred to as a multi-year guarantee annuity or MYGA, it is a type of fixed annuity that guarantees a set interest rate for a specified number of years.

Certificate of Deposit (CD)

A savings certificate issued by a bank or credit union that guarantees a set interest rate for a predefined period of time, typically three months to five years. CDs are sometimes compared to annuities, but they do not offer two important annuity features, namely tax deferral and lifetime income potential.

Contract Anniversary

The annual anniversary of the annuity contract issuing date.

Annuity Contract Owner

The person or legal entity that applies for and buys an annuity contract. This is the party that owns the annuity and funds the policy.

Cost Basis

The total cost of your initial premium deposit and any subsequent premium deposits that were paid to purchase a non-qualified annuity.

D

Daily Averaging

An indexed annuity interest crediting method that is calculated by comparing the underlying index value on the first day of the contract year to the daily average of that same index at the end of the year. At the end of each annual index term, the percentage change between the index starting value and the index daily average value determines the amount of interest that is credited to the annuity, if any.

Death Benefit

The benefit paid to the designated beneficiary(ies) when the annuitant dies.

Deferred Annuity

Any annuity that has not yet begun to pay income payments. Deferred annuities are purchased and money grows tax-deferred inside the contract for a period of time, before annuitizing the policy and creating an income stream.

Deferred Income Annuity

This is also called a longevity annuity. It is a product designed to provide a guaranteed lifetime income stream beginning at a specified future date. Usually, the income payout is significantly higher than with an immediate annuity.

E

Equity Indexed Annuity

Also referred to as a fixed indexed annuity, this is a type of fixed annuity that uses a stock market index to determine the interest crediting rate on your account.

Exclusion Ratio

The portion of an annuity income payment that is considered a return of premium (cost basis) and therefore is not taxed. The exclusion ratio is represented as a percentage.

F

Federal Deposit Insurance Corporation (FDIC)

The FDIC is a federal government agency that insures deposits in member banks up to a certain dollar limit in crisis situations. Annuities are not protected under the FDIC because annuity products are issued by insurance companies.

First Year Yield

Some companies offer first year bonus rates, which change the yield in the first year only.

Fixed Annuity

A type of annuity where your money earns interest at rates set by the insurance company or as spelled out in the annuity contract. The insurance company guarantees both interest earnings and principal. It is also known as a multi-year guarantee annuity, or MYGA.

Fixed Indexed Annuity

A type of fixed annuity that uses a stock market index as the basis for determining the interest crediting rate.

Flexible Premium

A kind of annuity contract that allows you to make multiple, periodic premium deposits as opposed to a single premium deposit. After establishing the annuity with an initial deposit, further premium can be added to the policy later.

Free Look Period

A provision in your annuity contract that allows you a set period of time to determine if you want to keep or return the policy for a full refund. Free look provisions are mandated by state insurance regulations and typically last 10 days or longer.

G

Guaranty Association

Each state has a Guaranty Association that backs fixed annuity products up to certain dollar limits. State Guaranty Associations work to protect policyholders from financial loss due to the insolvency of an insurance company but should not be considered the same as the FDIC. You can look up your state’s State Guaranty Association here.

Guarantee Period

The period of time that the insurance company guarantees the declared interest rate.

Guaranteed Minimum Surrender Value

The minimum amount that the contract owner is guaranteed to receive upon surrendering the annuity after the application of surrender charges and market value adjustments (MVA) if any.

I

Immediate Annuity

A type of annuity designed to provide a guaranteed income stream for life with payments beginning in less than one year after purchase. They can also be structured to provide guaranteed income for a specified period of time.

Income Account Value

This value determines the amount of guaranteed lifetime income you will receive. You must activate the feature with an attached income rider.

Income Rider

An optional benefit that you can add to some annuity contracts, usually for a fee. It’s designed to help generate a higher level of guaranteed lifetime income at a future date.

Individual Retirement Account (IRA)

A tax-deferred retirement plan. Individuals establish IRAs, as opposed to 401(k)s, which are employer-sponsored. A set amount may be contributed annually.

Installment Refund

A type of immediate annuity payout option where the insurance company guarantees that the total payout will not be less than the amount paid to purchase the annuity. If the annuitant dies before receiving enough payments that equal the purchase price, beneficiaries receive the difference in installments.

J

Joint Annuitant

The annuity policy is jointly based on this person's life and the primary annuitant's life. The joint annuitant also receives the benefits of the contract.

Joint Life Annuity

An annuity payment option that provides guaranteed income payments for as long as the annuitant or joint annuitant lives.

Joint Owner

A person or legal entity that, jointly with another person or legal entity, applies for and buys an annuity contract. These parties co-own the annuity.

L

Life Annuity

An annuity payment option that provides guaranteed income payments for as long as the annuitant lives.

Longevity Annuity

Also referred to as a deferred income annuity (DIA), it is a product designed to provide a guaranteed lifetime income stream beginning at a predetermined future date. Usually, the income payout is significantly higher than an immediate annuity.

M

Market Value Adjustment (MVA)

A monetary adjustment that insurance companies impose on early withdrawals. MVA is a formula dependent on market rates when you want to withdraw. If you don’t make withdrawals, the MVA does not apply.

Maturity Date

The date when the owner must annuitize and begin receiving payments.

Minimum Premium

The minimum initial payment required to purchase an annuity or to qualify for a particular rate band. These amounts can vary by product design and tax status of funds.

Monthly Averaging

An indexed annuity interest crediting method is calculated by comparing the underlying index value on the first day of the contract year to the monthly average of that same index at the end of the year.

Monthly Point-to-Point

An indexed annuity crediting method that measures the percentage change in the underlying index value each month. Usually, there’s a cap for positive monthly changes but not for negative changes.

Multi-Year Guarantee Annuities (MYGAs)

A type of fixed annuity where the interest rate is guaranteed in advance for a set number of years. Canvas Annuities are MYGAs and can be purchased 100% online.

N

Non-Qualified Funds

Non-qualified funds encompass money that has already been taxed.

Non-Qualified Retirement Plan

Nonqualified retirement plans (as opposed to Qualified Retirement Plans) are not subject to the Employee Retirement Income Security Act of 1974 (ERISA). Most nonqualified retirement plans are deferred compensation programs. This means that they are an agreement by an employer to pay an employee in the future. Because a nonqualified plan can promise significant future benefits, they can be especially helpful in attracting and retaining key employees.

P

Penalty-Free Withdrawals

The amount of money you can withdraw early without having to pay a fee. The penalty-free withdrawal amount is specified in the annuity contract. Canvas Annuities offer a 10% free withdrawal each year of your contract.

Period Certain

An immediate annuity payment term where the insurance company only makes income payments for a predetermined set period of time.

Policy

The legally binding contract issued by the insurance company that defines the terms, conditions, and benefits of the annuity.

Premium

The collective total of the initial payment and any subsequent payments made to purchase an annuity. This does not include interest earned.

Premium Bonus

The percentage added by the insurance company to premium payments made by the annuity owner. Bonuses are often subject to a vesting schedule.

Principal

The collective total of the initial premium deposit and any subsequent premium deposits paid to purchase an annuity. Principal excludes earned interest. The terms “principal” and “premium” may be used interchangeably

Prospectus

A legal document that provides details about the variable annuity product. Under Securities and Exchange Commission (SEC) regulations, the insurance company must deliver it to the prospective buyer of a variable annuity before the actual sale.

Q

Qualified Funds

Qualified funds are pre-tax dollars contained within a tax-qualified account, such as an IRA or 401(k).

Qualified Retirement Plan

A retirement plan recognized by the IRS that features tax-deferred investment income. Examples include individual retirement accounts (IRAs), 401(k)s and pension plans. Most retirement plans offered through your company are qualified plans.

R

Renewal Rate

The interest rate offered by an insurance company on an active fixed annuity after the initial guarantee period is over.

Required Minimum Distribution (RMD)

The amount that IRA owners and qualified plan participants must begin withdrawing from their retirement accounts once they reach age 72. RMD withdrawals must then be taken each subsequent year.

Rollover

Refers to the moving of tax-qualified monies from one retirement plan to another in a way that does not incur any tax consequences, maintaining the tax-deferred status of the funds.

S

Single Life Annuity

An annuity payment option that provides guaranteed income payments for as long as the sole annuitant lives.

Single Premium Annuity

A kind of annuity contract funded with a single lump-sum premium payment. You may not add more funds to this type of annuity after purchase.

Single Premium Immediate Annuity (SPIA)

An annuity designed to provide an immediate guaranteed income stream. You pay one single lump sum and income payments begin in less than one year. They can also be structured to provide guaranteed income for a specified time period.

Spread

The percentage that is subtracted from the index change before interest is calculated. For example, if the applicable index increases by 5% and there is a 2% Annual Spread, the interest credited would be 3%. But the annual interest credit will never be less than zero. Spreads are also known as margins.

Surrender Charge

A fee the insurance company charges for early withdrawals exceeding the penalty-free withdrawal amount.

Surrender Period

The period of time that an annuity contract is subject to surrender charges.

U

Upfront Bonus

The amount the insurance company adds to your annuity account value when you add more money to your contract. The upfront bonus is usually a set percentage of the initial premium.

V

Variable Annuity

A type of annuity contract where premium deposits are allocated among several different investment sub-accounts. The earnings, if any, are determined by the performance of the underlying accounts. Unlike fixed annuities, funds in a variable annuity are subject to market risk.

W

Withdrawal Charge

A fee the insurance company charges on early withdrawals that exceed the specified penalty-free withdrawal amount. The terms withdrawal charge and surrender charge may be used interchangeably.

Withdrawal Window

The period of time, typically 30 days, at the end of an annuity guarantee period when the contract owner has the option to withdraw or transfer funds without penalty. If no action is taken, the annuity will usually renew for an additional guarantee period equal to the one just completed.

Y

Yield The income earned on an annuity. It’s usually expressed as an annual percentage rate. The yield includes any premium bonuses and interest rate enhancements.