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Annuity Terms

*please always refer to the contract you are considering or consult an expert as terminology may differ by contract.



Accumulation Phase
The period of time when an annuity owner can add money and accumulate assets in a tax-deferred manner inside of their annuity.

Annuitant
The individual whose life expectancy is used to calculate the income payment amount on an annuity. While the annuitant is usually the owner, there maybe other options to name as the annuitant.

Annuity
A contract issued by a life insurance company that offers tax deferral of investment income. Gains are taxed at withdrawal from the contract with the ability to receive income in the form of lifetime payments or for a specified number of years.

Annuitization (Annuitize)
The surrender of annuity value to an insurance company in exchange for guaranteed payments for life or for a specified period of time.

Annuity Owner
The individual or individuals by contract with an insurance company that have all rights to the annuity.

Beneficiary
The individual designated to receive payments upon the death of the annuity owner or the annuitant.

Bonus Rate
A bonus rate is the "extra" or "additional" interest paid during the first year in addition to the standard base rate.

CD Type Annuity
Also referred to as MYGA (Multi-Year Guarantee Annuity). It is a fixed annuity with a declared interest rate for a set period of years that will not fluctuate.

Charitable Annuity (Gift Annuity)
A contract between a donor and a foundation, where the foundation guarantees payment of an annuity. An individual may specify whether he or she wants an immediate annuity, with payment to begin not later than one year from the date of the gift, or a deferred gift annuity, from which payments are not to begin until a specified future date.

Charitable Lead Trust
A trust providing income (either a percentage or a specified amount) to a Foundation for a specific number of years. At the termination of this period, the principal is returned to the donor or others whom the donor has designated.

Contingent Annuitant
The individual entitled to receive the benefits of an annuity contract based on other specified events.

Cost Basis
Your premium (payments) paid to an annuity. Basis is not taxed upon withdrawal as it is a return of premium. For contracts purchased after August 14, 1982, a "withdrawal" must come from earnings first and will be taxed as ordinary income (withdrawals prior to age 59 ½ may be subject to an additional 10 percent "federal income" tax penalty).

Current Interest Rate
The stated interest rate that an annuity contract is paying. The current interest rate may be composed of a base rate and a bonus rate. The current rate is established by the insurance company at the time of issue and is guaranteed for specific period of time.

Death benefits
The sum paid to beneficiaries or the contract owners' estate upon death prior to the maturity of the contract.

Deferred Annuities (Tax Deferred)
An annuity contract that allows savings on a tax deferred basis. Withdrawals may be taken at a future date or the owner may choose to annuitize the contract and receive payments for life or for a specified period of time.

Direct Rollover
The movement directly from a qualified retirement plan or Section 403(b) tax-deferred annuity to an IRA or to another qualified retirement plan or Section 403(b) tax-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. Companies may pay a first year bonus on their interest. The Effective Annual Yield (EAY) includes the bonus.
• Rate Bonus
A bonus upon 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
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.

Effective Interest Rate
The interest rate earned if compounded annually. If a person has $10,000 and leaves it in an annuity for one year at an effective rate of 10%, they will earn $1,000 of interest. The interest rate for one day when compounded daily is approximately 0.0261%. Note that 10% divided by 365 days is approximately 0.274%. Also referred to as the Annual Effective Rate or Annual Effective Yield

Equity Indexed Annuity
An annuity whose returns are based upon the performance of an equity market index. Commonly the S&P 500 is used, but other indices may be used depending upon contract. The principal investment is protected from losses in the equity market, while gains add to the annuity's returns. The methodology on gain calculation varies widely by contract

Exchange (1035)
An exchange of one non-qualified annuity contract for another. Internal Revenue Code (IRC) Section 1035 generally allows individuals to exchange life, endowment, or annuity contracts for similar contracts that are better suited to their needs, if eligibility requirements are met. For a 1035 exchange, the annuity contract owner and the insured or annuitant combination on the old and new contract must be the same. While life insurance may be exchanged to an annuity an annuity to life insurance exchange is not permitted.

Exclusion Ratio
This is the ratio of earnings vs premium. The portion consisting of earnings is taxable and determines what percentage of an annuitization payment is taxable.

Fixed Annuity (fixed rate annuity)
A contract offered by insurance companies that guarantees a stream of fixed payments over the life of the annuity. Investment risk is transferred from the insured to the insurer.

Fixed Deferred Annuity
A contract offered by an insurance company that guarantees an interest rate plus safety of your principal and earnings. Your interest rate will float, based on economic and other factors, but is guaranteed to never fall below a specified minimum rate.

Flexible Premium Annuity
A flexible premium annuity has a regular periodic payment that varies.

Free Withdrawal
The amount available for withdrawal during the surrender penalty that is not subject to penalty. The pre 59 ½ penalty still applies to withdrawals taken prior to age 59 ½.

Immediate Annuity
An annuity which begins to pay out right away or within twelve months typically after purchase with a single premium. Payments may be received monthly, quarterly, semiannually or annually. The owner may choose to receive payments for a specified period of time or for the life of the annuitant.

Indexed Annuity
An annuity whose returns are based upon the performance of an equity market index. Commonly the S&P 500 is used, but other indices may be used depending upon contract. The principal investment is protected from losses in the equity market, while gains add to the annuity's returns. The methodology on gain calculation varies widely by contract

Life Annuity
An annuity that continues to pay as long as the annuitant is living.

MYGA Annuity
Also referred to as CD-Type Annuity. It is a fixed annuity with a declared interest rate for a set period of years that will not fluctuate.

Market Value Adjustment
Adjustments or deductions to an annuity contract value made to charge off a loss. Typically in a declining interest rate environment MVA's will be positive and in an increasing interest rate environment MVA's will be negative.

Maximum Issue Age
The age at which an insurance company will issue an annuity up to and not beyond. Limits are put in place by insurance companies due to death claim risk and suitability standards.

Maximum Single Premium
The amount of premium the insurance company will contract up to, to limit specific owner risk.

Minimum Single Premium
The minimum amount of premium an insurance company will accept to establish a contract.

Nursing Home Care Rider
A rider attached to an annuity that has special provisions for withdrawals in the event the owner is confined to a nursing home and needs additional access to funds prior to the end of surrender schedule.

Premature Distribution
Withdrawals made from a non-qualified annuity may be subject to an additional 10% federal income tax if the withdrawal is made before the contract owner reaches age 59 ½. Certain exemptions do apply. The contract owner should seek legal and tax advice before making early withdrawals.

Premium bonus
Money credited to the accumulation account of an annuity policy under certain conditions.

Single Premium Immediate Annuity
An annuity which begins to pay out right away or within twelve months after purchase with a single premium. Payments may be received monthly, quarterly, semiannually or annually. The owner may choose to receive payments for a specified period of time or for the life of the annuitant.

Surrender Charges
The charge assessed for withdrawals above and beyond the free withdrawal amount before the date agreed upon by contract. Surrender charges typically are a percentage of the total contract value and the charge decreases to zero over time, as the annuity gets closer to the date it will mature.

Surrender Value
The amount available for cash withdrawal after all adjustments based upon contract provisions. Withdrawal from surrender value may reduce or terminate valuable benefits that your annuity may provide.

Tax Deferred Annuities
A contract that allows savings on a tax-deferred basis for many years, and then the ability to convert to a payout schedule at a future date.

Tax Sheltered Annuities
A type of retirement plan for employees of tax-exempt organizations or schools, also known as a Section 403(b) plan. The tax-sheltered annuities are funded by pre-tax contributions made via salary reduction agreements . Employers may also make direct contributions on behalf of employees.

Term certain annuity
An annuity with income payments over a specified number of years.

Terminal Illness Rider
A rider attached to an annuity that has special provisions for withdrawals in the event the owner is declared terminally ill and needs additional access to funds prior to the end of surrender schedule.

Yield To Surrender
The annualized yield of the annuity calculated over the time the surrender charge exists.

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