Annuity Terms
Accumulation Phase
Annuitant
Annuitization
Annuity
A financial product designed to help with retirement planning by offering tax-deferred savings and customizable income distribution options as a lump sum, lifetime income or payments for a set number of years.
Deferred Annuity
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 3.00% and there is a 1.00% first-year bonus, the EAY for year one will be 4.00%.
- Premium Bonus – Some annuities pay an upfront premium bonus. For example, if the base rate is 3.00% with a 1.00% premium bonus, due to compounding interest, 4.03% will be shown as the Effective Annual Yield.
Equity-Indexed Annuity
An equity-indexed annuity, now more commonly referred to as a fixed indexed annuity, is a type of annuity that credits interest based on the performance of a specified market index, such as the S&P 500®, while providing a guaranteed* minimum interest rate. This allows for potential market-linked growth without the risk of loss of principal.
*Annuity Guarantees rely on the financial strength and claims-paying ability of the issuing insurer.
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 growth every month.
*Annuity Guarantees rely on the financial strength and claims-paying ability of the issuing insurer.
Flexible-Premium Deferred Annuity
This annuity type allows for multiple premium payments over time. Interest grows tax-deferred, with withdrawals typically beginning during retirement.
Illustration
A projection that shows how an annuity might perform over time based on past data and current assumptions. However, past performance is not an indicator of how it will perform in the future.
Immediate Annuity
An annuity that starts making regular payments almost immediately after a lump-sum investment—typically within 12 months. Payment intervals may be monthly, quarterly, or annually.
Initial Interest Rate
The initial interest rate is determined by prevailing fixed rates. After the specified period, the insurance company may change the interest rate to match current rates, but it would never be below a minimum rate specified in the contract.
Loads, Sales & Maintenance Fees
There are no front-end sales charges with most annuities. If $10,000 is contributed to an annuity, the full $10,000 will be earning interest. Be sure to ask your financial professional about any fees associated with your annuity purchase.
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 to the cash value. Therefore, if rates go up after the purchase date, the surrender penalty will be higher than shown.
Minimum Guaranteed Interest Rate
This minimum rate guarantee* serves two purposes:
- It provides a minimum interest rate an insurance company may credit to an annuity after the initial rate period.
- It is also the rate that insurance company actuaries use to calculate reserve obligations in order to meet state insurance law requirements.
*Annuity Guarantees rely on the financial strength and claims-paying ability of the issuing insurer.
Payout Period
The time during which you start receiving income from your annuity. Payments can be structured to meet your needs with options like lifetime income, fixed duration, or lump sum.
Principal
Rate Hold (on Rollovers)
When rolling over funds from one annuity to another, the new provider may guarantee the interest rate for a short period. If the funds arrive within that time, the original rate applies; otherwise, the rate in effect at the time of receipt is used.
Surrender Penalty
Penalty applies 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 specified 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 to the cash value. Therefore, if rates go up after the purchase date, the surrender penalty will be higher than shown.
Death Benefit Penalty Waiver
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.
Waiver of Surrender Charges
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.
Variable Annuity
A variable annuity3 is a type of annuity contract where the returns are based on the performance of investment options. The value of the annuity can fluctuate, offering the potential for higher returns than some financial products while also carrying more risk.
Life Insurance Terms
Beneficiary
The person or entity you name to receive the death benefit from your life insurance policy when you pass away.
Death Benefit
Premium
The amount you pay (monthly, quarterly, or annually) to keep your life insurance policy active.
Policyholder
The person who owns the life insurance policy and is responsible for paying the premiums.
Insured
The person whose life is covered by the life insurance policy. This may or may not be the policyholder.
Term Life Insurance
A type of life insurance that provides coverage for a set period (e.g., 10, 20, or 30 years). It pays a death benefit only if the insured dies during the term.
Whole Life Insurance
Universal Life Insurance
A flexible form of permanent life insurance that includes both a death benefit and a cash value component, with adjustable premiums.
Cash Value
A savings or investment component in permanent life insurance policies that grows over time and can be borrowed against or withdrawn.
Underwriting
The process insurers use to assess risk and determine your eligibility, coverage amount, and premium cost. It often includes a health questionnaire and medical exam.
Rider
Contestability Period
A limited time (usually two years) after the policy starts during which the insurer can investigate and deny a claim due to misrepresentation or fraud.
Lapse
Surrender Value
The amount you receive if you cancel a permanent life insurance policy before death. It’s typically the cash value minus fees.
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