Plain-English definitions of the annuity terms you’ll see in quotes, contracts and our guides. Written by Kevin Edwards, California-licensed independent annuity agent (CA License #0D42517). 43 terms; jump to a letter below.
0–9 · A · B · C · D · E · F · G · I · J · L · M · N · P · Q · R · S · T · V
0–9
1035 Exchange
A tax-free swap of one annuity or life insurance contract for another under Section 1035 of the Internal Revenue Code. The money moves directly between insurers, so no tax is due at the time of the exchange. A new surrender period usually starts with the new contract. See how a 1035 exchange works.
A
Accumulation Phase
The period after you buy a deferred annuity and before income begins. Your money earns interest, tax-deferred, during this phase.
Annuitant
The person whose life expectancy is used to calculate annuity income payments. The annuitant is often, but not always, the contract owner.
Annuitization
Converting an annuity’s value into a stream of guaranteed income payments, for life or for a set period. Once annuitized, the decision generally can’t be reversed.
Annuity
A contract with an insurance company. You pay a premium, and the insurer promises interest growth, income payments, or both, according to the contract terms. See What is an annuity?
B
Beneficiary
The person or entity you name to receive the annuity’s death benefit when the owner (or annuitant, depending on the contract) dies.
Benefit Base
A value used only to calculate income from an income rider. It is not cash you can withdraw, and it is usually different from the account value.
Bonus Annuity
An annuity that adds a premium bonus, such as 5% to 10%, to your initial deposit. Bonus products often have longer surrender periods or lower rates to pay for the bonus. See bonus annuity pros and cons.
C
Cap Rate
The maximum interest a fixed index annuity can credit for a period, even if the index gains more. For example, with a 9% cap, a 15% index gain credits 9%. See this week’s California fixed index annuity caps.
Claims-Paying Ability
An insurance company’s financial capacity to meet its obligations to policyholders. Every annuity guarantee depends on the claims-paying ability of the insurer that issues it.
Contract Owner
The person or entity that buys the annuity and controls it: naming beneficiaries, taking withdrawals and making changes.
D
Death Benefit
The amount paid to beneficiaries if the owner dies before the annuity is fully paid out, usually the account value. See annuity death benefits.
Deferred Annuity
An annuity where income starts at a future date. The money grows tax-deferred in the meantime. See immediate vs. deferred annuities.
Deferred Income Annuity (DIA)
An annuity bought with a lump sum that starts guaranteed income at a set future date, often years later. Payments are typically higher than an immediate annuity bought with the same premium.
E
Exclusion Ratio
The portion of each payment from a non-qualified annuitized contract that is a tax-free return of your original premium. The rest is taxable as ordinary income.
F
Financial Strength Rating
A grade from an independent rating agency, such as A.M. Best, S&P or Moody’s, on an insurer’s ability to pay claims. Checking it is one of the most important steps before you buy.
Fixed Annuity
An annuity that credits a declared interest rate set by the insurer. Your principal isn’t exposed to market losses. See What is a fixed annuity?
Fixed Index Annuity (FIA)
An annuity that credits interest based on the performance of a market index, such as the S&P 500, within limits set by caps or participation rates. It protects your principal from index losses. See fixed index annuities.
Free Withdrawal Provision
The amount you can withdraw each year without a surrender charge, commonly 10% of the account value after the first contract year.
Free-Look Period
A window after you receive the contract during which you can cancel it for a refund. In California it is at least 30 days for buyers age 60 and older; other states and ages vary.
G
Guaranteed Minimum Interest Rate
The lowest interest rate a fixed annuity contract can ever credit, stated in the contract.
I
Immediate Annuity (SPIA)
A single premium immediate annuity turns a lump sum into guaranteed income that starts within a year, often within a month. See single premium immediate annuities and current California SPIA rates.
Income Rider
An optional add-on, usually for a fee, that guarantees a lifetime withdrawal amount even if the account value runs out. Also called a guaranteed lifetime withdrawal benefit (GLWB). See fixed annuity income riders.
Index Crediting Method
The formula a fixed index annuity uses to turn index movement into interest, such as annual point-to-point, monthly average or monthly sum.
J
Joint and Survivor Annuity
An annuity that pays income for as long as either of two people, usually spouses, is alive. Payments are lower than single-life income to cover the second life. See joint income annuities.
L
Life-Only Payout
A payout option that pays income for as long as the annuitant lives, with nothing left to heirs. It pays the highest income of the lifetime options.
M
Market Value Adjustment (MVA)
An adjustment to the amount you receive if you surrender a contract early. It can increase or decrease the payout depending on how interest rates have moved since you bought.
Mortality and Expense (M&E) Fee
An annual charge in variable annuities, often around 1% to 1.5% of account value, that pays for insurance guarantees and costs. Fixed annuities and MYGAs don’t carry this fee. See the M&E fee explained.
Multi-Year Guaranteed Annuity (MYGA)
A fixed annuity that locks in one interest rate for a set term, typically 2 to 10 years. See What is a MYGA? and this week’s California MYGA rates.
N
Non-Qualified Annuity
An annuity bought with after-tax money. Only the earnings are taxed when withdrawn.
P
Participation Rate
The percentage of an index’s gain that a fixed index annuity uses to calculate interest. With an 80% participation rate, a 10% index gain credits 8%.
Period Certain
A payout option that guarantees income for a set number of years, such as 10 or 20. If you die early, the remaining payments go to your beneficiary. See annuity payout options.
Premium
The money you pay into an annuity, either as a single lump sum or as a series of payments.
Q
Qualified Annuity
An annuity held inside a tax-advantaged retirement account, such as an IRA or 401(k), and funded with pre-tax money. Withdrawals are fully taxable and subject to required minimum distributions.
Qualified Longevity Annuity Contract (QLAC)
A deferred income annuity bought with IRA or 401(k) money that can start as late as age 85. The amount in a QLAC, up to an IRS dollar limit adjusted for inflation, is excluded from required minimum distribution calculations until payments begin. See QLACs explained.
R
Required Minimum Distribution (RMD)
The minimum amount the IRS requires you to withdraw each year from qualified retirement accounts once you reach RMD age, currently 73, or 75 if you were born in 1960 or later. See annuities and RMDs.
Rider
An optional feature added to an annuity contract, such as an income rider or enhanced death benefit, often for an annual fee.
Roll-Up Rate
The rate at which an income rider’s benefit base grows each year before income starts. It applies only to the benefit base, not to cash you can withdraw.
S
Spread
A fixed percentage some fixed index annuities subtract from the index gain before crediting interest. With a 2% spread, a 7% index gain credits 5%.
Surrender Charge
A fee for withdrawing more than the free withdrawal amount, or cancelling the contract, during the surrender period. It usually declines each year. See surrender charges explained.
Surrender Period
The number of years, often 3 to 10, during which surrender charges apply.
T
Tax Deferral
Interest earned inside an annuity isn’t taxed until you withdraw it. Withdrawals of earnings before age 59½ may also face a 10% federal penalty. See how annuities are taxed.
V
Variable Annuity
An annuity invested in market subaccounts, similar to mutual funds. Your account value rises and falls with the market, and fees are typically higher. See fixed vs. variable annuities.
This glossary is general educational information, not tax, legal or investment advice. Contract features, limits and fees vary by product and state; your contract and disclosure documents control.
Have a question about a term or a contract you’re reviewing? Request a free annuity quote or call (877) 854-7396.