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1035 Exchange
A rule under Section 1035 of the Internal Revenue Code that allows for a tax-free exchange of a life insurance or annuity policy for a different annuity contract that is better suited to the policyholder’s needs.
1099-R Distribution Codes
Codes listed on form 1099-R from the IRS that signify the different types of distributions that can be taken from a retirement account and how they should be taxed.
12B-1 Fee
A fee charged most often by mutual fund companies but also companies that sell variable annuities that covers costs related to marketing the fund or security.
401(a) Plan
A retirement plan that allows employees and employers to make cash or percentage-based contributions to the employee’s retirement account. Most commonly used by public institutions (government, educations & non-profits). 401(a) plans typically give more control to the employer over participation and funding decisions.
401(k)
An employer-sponsored retirement savings plan that allows employees to save pre-tax money from their paychecks, often with a partial match from their employers. Money deposited into 401(k) accounts is not taxed until it is withdrawn. Some 401(k) plans also allow for post-tax earnings to be saved, depending on the employer plan.
403(b) Plan
Similar to a 401(a) plan, but 403(b) plans are typically voluntary and not compulsory for the employee.
50/30/20 Rule
The 50/30/20 rule is a popular budgeting method that separates funds into three main buckets: needs, wants and savings.

A

Accrual
The accumulation or increase of a thing over time, specifically for annuities, the accumulation of interest earned.
Accrued Interest
Interest that has been earned on an annuity, bond or other investment but has not yet been paid out. Accrued interest on an annuity is tax-deferred until it is withdrawn.
Accumulation Phase
Period of time during which an annuity grows in value before payments are distributed.
Aleatory Contract
An agreement between multiple parties in which those involved do not have to perform a particular action until a future uncertain event occurs. An annuity contract is an example of an aleatory contract.
AM Best Rating
Insurance company ratings from AM Best, an independent credit rating agency. The ratings are based mainly on the assessed ability of an insurance carrier to pay out claims, the level of debt the carrier is holding and any other financial obligations that may indicate a likelihood of default.
Annual Reset Method
An interest crediting method In fixed or fixed indexed annuity contracts which serves to capture and lock in gains over the course of a year.
Annuitant
The person whose life expectancy is used to determine annuity income benefits.
Annuitization
The process of converting the premiums and interest earned on a deferred annuity to a stream of income through a series of periodic payments.
Annuity
An insurance product that earns interest and generates periodic payments over a specified period of time, typically with the purpose of providing income in retirement.
Annuity Arbitrage
A financial strategy in which an individual buys an annuity to finance the purchase of a life insurance policy.
Annuity Beneficiary
The person who receives benefits upon the death of the annuity owner.
Annuity Commencement Date
The point at which annuity contract payments are scheduled to begin for the annuitant.
Annuity Contract
A written legal agreement between an insurance company and the person or entity who purchases the annuity.
Annuity Fund
The investment options that generate the return on an annuity and determine guaranteed income payment amount. Bonds and other fixed-rate investments comprise the annuity fund for fixed annuities, whereas variable annuity funds consist of a selection of bonds and stock options.
Annuity Issuer
The insurance company that sells the annuity and pays the income benefits. The issuer assumes the financial risk in exchange for annuity premiums.
Annuity Owner
The person or entity that purchases the annuity and retains the rights to the contract. The annuity owner is not necessarily the annuitant.
Annuity Provider
See Annuity Issuer.
Annuity Rate
The rate of growth, expressed as a percentage, set by the insurance company at the start of the annuity contract term. Depending on the type of annuity, the insurance company may guarantee the interest rate for a year or longer, or the rate may fluctuate with a stock market index.
Annuity Statement
An update on the cash value, and investment value, if applicable, of an annuity that the annuitant receives at a given cadence.
Annuity Table
A tool for calculating the present value of an annuity. It is also referred to as a present value table.
Annuity Unit
In a variable annuity, annuity units represent the shares you own in subaccounts during the given time period.
Asset Protection Trust (APT)
An estate planning vehicle that protects a person’s assets from creditors.
Assumed Interest Rate (AIR)
The growth rate, or interest rate, of a variable annuity. Insurance companies use an assumed interest rate to calculate a variable annuity’s periodic payments and its overall value.

B

Bailout Provision
A contractual provision that allows the annuity owner the ability to surrender the annuity contract if cap rates or renewal rates on a fixed annuity fall below a specified level.
Balanced Allocation Value
A measurement associated with some fixed indexed annuities that show the potential interest they can earn.
Basis Point
A unit of measure equal to one hundredth of one percent used to express percentages in finance.
Better Business Bureau
A nonprofit organization devoted to assisting businesses and protecting consumers.
Bond
A debt security issued by borrowers to raise money from investors.
Bonus Rate
A higher-than-average interest rate provided at the beginning of the annuity contract.
Broker
The person or legal firm active in arranging a financial exchange between a buyer and seller.
Buyout
Immediate funds from selling an annuity.

C

Capital Gains
The profit realized when an investment is sold for more than the investor paid for it.
Career Agents
Insurance company employees.
Cash Advance
Money that is accessible before it is earned.
Cash Refund Annuity
A lump sum provided to an annuity beneficiary in the event the annuitant passes away prematurely before the number of payments received equals the number of payments made.
Cash Value
Also referred to as the “account value” or “accumulated value,” the sum of all premiums and interest minus any losses incurred from low-performing funds. The cash value is different from the surrender value, which is the cash value less any surrender charges.
Catastrophic Injury Case
Lawsuit filed for serious injuries to the spine, spinal cord, brain or skull that result in death or permanent neurologic damage.
CBC Settlement Company
Better Business Bureau “A”-rated structured settlement purchasing company and Annuity.org partner headquartered in Conshohocken, Pennsylvania.
Certificate Annuity
A fixed annuity contract meant to mimic a certificate of deposit (CD).
Certificates of Deposits (CDs)
A low-risk, low-return financial product that falls into the cash-equivalent category of investment options and is similar to a savings account. Unlike a savings account, however, the investor has little to no access to the principal or interest until the CD matures.
Charitable Gift Annuity
An alternative to a traditional cash donation, a charitable gift annuity is a type of annuity purchased on behalf of donors for the benefit of the donor. The donor receives payments until their passing, in which case the charity receives the remaining balance on the contract.
Claimant
The person in a lawsuit who is making a claim; plaintiff.
Commissioners Annuity Valuation Reserve Method
A method established by the National Association of Insurance Commissioners (NAIC) to measure the statutory cash reserves of an annuity provider.
Compensation
Court-ordered monetary payment, or any other remedy, from a negligent party who has caused injury to another party.
Compound
The process of adding the interest earned during the investing period to the principal, increasing the return over time.
Contingent Beneficiary
An alternate beneficiary for an annuity in the event that the primary beneficiary is unable to receive the benefit.
Contribution Limits
The maximum amount you can contribute to a retirement account.
Contributions
Deposits made to a retirement account.
Cost-of-Living Adjustment (COLA)
Increases in benefit amounts that the Social Security Administration makes to help recipients keep up with inflation.
Court Approval of Best Interest
A final order from a court in the county in which either the structured settlement holder lives or the structured settlement agreement was approved that confirms that the transfer of structured settlement payments in the best interest of the payee and the payee’s dependents.

D

Damages
Either compensatory or punitive, the sum of money the law imposes for a breach of some duty or violation of some right.
Death Benefit
An annuity contract provision that allows the owner can designate a beneficiary to inherit the remaining annuity payments upon his or her death.
Declared Rate
The rate set by the insurance company or annuity provider for traditional fixed annuities or MYGAs.
Defendant
The person or entity sued or accused in a court of law.
Deferred
Postponed; regarding taxes, to be paid at a later date.
Deferred Annuity
An annuity contract with an accumulation phase and a payout phase. Deferred annuities begin distributing income at a specified date in the future, typically 10 to 30 years.
Defined Contribution Plan
A type of retirement plan for employees where the participant contributes a set percentage of their income in the form of a payroll deduction.
Depleted
Emptied of funds.
Direct Funder
A company that uses its own assets to provide cash payments to annuity sellers, rather than funding through a third party.
Disability Advocate
A trained and certified professional who assists people with their Social Security disability benefits.
Discount Rate
A charge which a settlement purchasing company factors into their purchase offer which reflects an inherent risk associated with that money that they will receive in the future.
Distributions
Income payments from an annuity; withdrawals.
Diversification
An investment strategy that manages risk by allocating an investor’s assets in a mix of stocks, bonds and cash.
Dividend
Cash paid to shareholders by the company.

E

Early Withdrawal Penalty
A 10 percent penalty, or fee, that the IRS imposes on people who withdraw money from an annuity before they reach the age of 59 ½.
Emergency Fund
An emergency fund, also known as a rainy day fund, is money set aside for unplanned expenses or financial emergencies.
Employer-Sponsored Retirement Account
A retirement account that allows taxpayers to either defer income taxes on contributions and earnings or to contribute after-tax dollars and collect tax-free income earned from interest, dividends and/or capital gains.
Equity-Indexed Annuity
An annuity contract that credits interest based, in part, on the performance of a stock market index.
Exclusion Ratio
A percentage that represents the portion of an annuity payment that is excluded from gross income and is, therefore, not subject to ordinary income tax. The exclusion ratio is calculated by dividing the premium by the expected return.

F

Factoring Companies
An annuity and structured settlement purchasing company that offers a lump sum of cash in exchange for the rights to future income payments.
Factoring Transaction
The sale or transfer of all or a portion of annuity or structured settlement payments in exchange for a lump sum of cash.
Federal Annuity
An annuity product offered to some federal government employees as part of an employer-sponsored retirement plan.
Federal Deposit Insurance Corporation (FDIC)
The independent agency created by the Congress to ensure stability and public confidence in the U.S. financial system, by insuring deposits, supervising financial institutions, and backing large financial institutions in crisis conditions.
FIRE
Stands for financial independence, retire early. This financial strategy promotes aggressive saving and investing in exchange for the ability to retire early.
Fixed Annuity
An annuity contract under which the payment amount and time period of distribution are both fixed.
Fixed Index Annuity
Another name for an indexed annuity.
Flexible Premium
Following the first premium payment, both the amount and frequency of deposits in this annuity can change.
Flexible Premium Deferred Annuity
A type of deferred annuity that is funded with a series of payments as opposed to one lump sum payment.
Four Percent Rule
A guideline that helps retirees decide how much money to withdraw from their retirement account annually. The guideline states that a person could withdraw 4 percent of their retirement account annually.
Free Look Period
A provision in your annuity contract that allows you to cancel the contract and receive a full refund without having to pay surrender charges. While the free look period varies from state to state, it often lasts at least 10 days.

G

Generation-Skipping Trust
A type of trust that designates any person who is at least 37 ½ years younger than the settlor as the beneficiary of the trust. Generation-skipping trusts are not exclusive to grandparent-grandchild relationships. They can be set up for a variety of relationships, with the exception of spouses and ex-spouses.
Grantor Retained Annuity Trusts (GRAT)
A financial tool that very wealthy people use in estate planning to pass their assets to their children while avoiding estate and gift taxes.
Group Annuity Contract
A group annuity contract is when an employer uses an annuity to fund tax-qualified retirement benefits for a specified group of employees.
Guaranteed Income Security
An annuity benefit that guarantees the annuity owner a lifetime stream of income.
Guaranteed Minimum Income Benefit (GMIB)
An optional rider that can be added to an annuity contract that allows the annuitant to receive a minimum monthly payment regardless of market volatility, guaranteeing income in retirement.
Guaranteed Minimum Withdrawal Benefit (GMWB)
An optional rider that can be added to an annuity contract that ensures a steady stream of retirement income by allowing you to withdraw a specific percentage of funds each year, regardless of market conditions.

H

Hidden Fees
Costs that are not disclosed upfront.
High Water Mark Annuity
A crediting method used in fixed indexed annuities whereby the level of interest credited is indexed or linked to the performance of a stock market.
Hybrid Annuity
A term used by some in the industry to refer to an annuity that features characteristics of both fixed and variable rate components.

I

Immediate Annuity
Type of annuity that converts premiums to a stream of income immediately. Also known as an income annuity, single premium immediate annuity (SPIA), or deferred income annuity (DIA) an immediate annuity has no cash value and withdrawals are generally not allowed before income benefits begin.
Income Annuity
An annuity contract that converts all or part of a consumer’s savings into a guaranteed stream of income, either for the consumer’s lifetime or for a specified number of years. Income annuity payments can be immediate or deferred.
Income Tax
A government tax, the amount of which is contingent upon how much money a taxpayer earns annually.
Independent Broker Dealers
Firms responsible for trading securities.
Index
An index is a statistical market indicator. It tracks the performance of a group of assets or basket of securities.
Indexed Annuity
A fixed annuity that credits interest based, in part, on an outside stock market index; also referred to as a fixed index annuity and an equity indexed annuity.
Individual Retirement Accounts (IRA)
A type of savings account that offers tax benefits. As opposed to 401(k) plans, which are sponsored by employers, IRAs are individual accounts with a broad range of investment options.
Individual Retirement Annuity
A type of annuity similar to an IRA that provides the holder with guaranteed income. The difference being individual retirement annuities invest only in fixed or variable annuities.
Inflation
Economic term describing the increase in the cost of goods and services, also known as the loss of purchasing power.
Injured Party
The person or group of people suffering from an adverse circumstance in a lawsuit.
Installment Refund Annuity
An annuity contract that stipulates that if the annuitant dies before all income benefits are paid, a beneficiary will receive the difference.
Interest Rate
The proportion of a loan that is charged as interest — the payment for the use of the money — typically expressed as an annual percentage of the loan balance.
Interest Rate Cap
The growth limit set by the annuity provider on your return in an indexed annuity.
Interest Rate Floor
The minimum interest rate that is credited to an annuity’s underlying investment portfolio.
Internal Rate of Return
A metric showing the profitability of a given investment. In the case of an annuity, the IRR would be represented as the percentage of the premium that you get back in payments.
Investment Expense Ratio
A charge levied, oftentimes by a mutual fund, index fund or an exchange-traded fund provider, to the investor for the fund’s expenses.

J

Joint and Survivor Annuity
An annuity contract that guarantees payments for the remainder of two people’s lives. A joint and survivor annuity ensures that the secondary annuitant, often the spouse, will continue to receive payments after the contract holder’s death.

L

Laddering
A financial strategy that involves buying multiple financial products with different maturity dates. In the case of annuities, laddering refers to purchasing several annuities of lower value over a period of years.
Life Contingent Payment
A income benefit that is discontinued upon the death of the annuitant. There are no beneficiaries of annuities with life contingent payments.
Life Expectancy
The average length of time a person is expected to live. It is referred to as “actuarial age” in the insurance industry.
Life-with-Period Certain Annuity
Type of annuity that has smaller payments, but guarantees a specified number of fixed payments. If the annuitant dies before the period ends, payments will go to a beneficiary. If the annuitant outlives the payment period, he or she will continue to collect income until death.
Liquidity
The ability to easily access money.
Long-Term Care Annuity
A deferred annuity that includes a long-term care rider.
Lump-Sum Payment
A one-time payment, rather than a series of payments.

M

Managed Payout Funds
Also known as retirement income funds, a managed payout fund is a type of mutual fund that functions like an annuity and offers the investor a predictable stream of income.
Market Risk
The possibility that the funds you’ve invested in the stock market will lose value if the financial market is down.
Market Value Adjustment
A contractual stipulation most associated with fixed deferred annuities that helps protect an annuity issuer by limiting the conditions around early withdrawals.
Medicaid Annuity
A fixed immediate annuity that allows applicants to meet Medicaid’s asset criteria by reducing his or her non-exempt assets, thus making them eligible for Medicaid benefits, such as long-term care. They help spouses of Medicaid recipients continue to pay their bills in retirement.
Monetary Settlement
A lawsuit resolution resulting in a payment.
Money Market Account
A money market account is a federally insured savings account that allows you to add or remove funds up to six times per month with a debit card or check.
Money Market Accounts
A cash-equivalent investment with low risk and low returns that are based on current Treasury rates.
Mortality and Expense Fees
Fees designed to mitigate risks to the annuity issuer for covering some kind of guarantee, usually guaranteed death benefits.
Mortality Credits
The payments that remain when an annuitant whose premiums were pooled with the premiums paid by other annuitants dies prematurely. These payments, referred to as mortality credits, are distributed to the surviving annuitants in the pool.
Mutual Funds
A company that pools money from individuals and invests it in stocks, bonds or other assets. The company’s combined holdings of stocks, bonds or other assets are referred to as its portfolio.

N

National Association of Settlement Purchasers (NASP)
A professional trade organization for parties involved in secondary market structured settlement transactions, dedicated to the fair, competitive and transparent practices in the secondary market.
National Structured Settlement Trade Association
An organization that represents licensed consultants, attorneys, insurance companies, and other professionals who work with accident survivors and their dependents.
Non-Qualified Annuity
An annuity that is purchased with after-tax dollars, i.e., money not contributed to a tax-deferred retirement plan, such as an IRA or a 401(k). Non-qualified annuity premiums are not deductible from gross income.

O

Ordinary Annuity
An annuity in which you receive a fixed or variable payment at the end of each month or quarter from an insurance company based on the value of your annuity contract.

P

Partial Purchase
A transaction in which only a portion of annuity payments are transferred to the factoring company.
Participation Rate
A percentage by which the insurer multiplies the change in an index during the contract term to arrive at the amount of interest they will credit to an indexed annuity contract.
Passive Income
Revenue generated from an activity that requires little to no management or participation on the part of the investor. Annuities are among the most reliable financial strategies for generating passive income.
Payee
The person receiving annuity funds.
Payment Stream
A series of regular payments over time.
Payout Phase
The phase of an annuity contract that follows the accumulation phase. If the contract is converted into a fixed income stream, this may also be referred to as the annuitization phase, but payouts may also be lump-sum distributions.
Pension
An employment benefit by which employers provide workers with a guaranteed income stream in retirement.
Periodic Disbursement
Payments made at regular intervals.
Periodic Payment Settlement Act (PPSA)
Signed into law in 1982, this act promotes the use of structured settlement by providing certain tax benefits.
Personal Injury Lawsuit
Legal matter that may result in an agreement that is paid in a lump sum or structured settlement.
Plaintiff
The party who initiates a lawsuit.
Point to Point
An interest crediting method used in index annuities that credits interest based on a first and last day in a given time period.
Premium
A regular payment made to keep insurance coverage active.
Present Value
The current cash value of an annuity, as calculated using a specific discount rate.
Principal
The amount that is originally invested, not including subsequent interest.
Private Annuity
An estate planning tool whereby the annuitant can transfer property to the obliger in exchange for regular payments.
Private Credit
Private credit is debt that is negotiated in private markets. While similar to public credit, these investments are less liquid and carry higher risk. In return, they typically earn higher yields. Private credit investments also generally have higher requirements that the borrower must meet.
Probate
A statement adding to the specifications of a law or contract.
Prospectus
A financial disclosure document meant to describe a security offering.
Provision
A statement adding to the specifications of a law or contract.
Public Credit
Public credit is debt issued or traded in public markets. Examples include bank loans and investment grade corporate bonds.
Pure Life Annuity
An annuity that pays benefits to an annuitant until their death.
PVIFA
Acronym for Present Value Factor of an Annuity.

Q

Qualified Annuity
An annuity contract purchased with pre-tax dollars, such as funds from an IRA or a 401(k) plan. The money you use to purchase a qualified annuity is subtracted from your annual income in the year you make the purchase. It is taxed only when you begin to receive the funds from the annuity, usually in retirement.
Qualified Longevity Annuity Contract (QLAC)
A deferred annuity funded with assets from a qualified retirement plan or individual retirement account. Payments from QLACs are shielded from downturns in the stock market and continue until death.
Qualified Pre-Retirement Survivor Annuity (QPSA)
A lifetime annuity that provides regular income to the spouse of a plan participant who dies before retirement.

R

Rate Spread
The percentage the insurance company subtracts from the index change during the contract term to arrive at the amount of interest that is credited to a fixed indexed annuity.
Registered Index-Linked Annuity (RILA)
An annuity that uses a stock market index to determine gains and losses. With a RILA, previously referred to as a buffered annuity, you have the ability to set the maximum loss you are willing to tolerate.
Required Minimum Distribution (RMD)
The IRS-mandated minimum annual withdrawal amount from tax-deferred retirement accounts for participants aged 70½ or 72, depending on the year they were born. Annuities held inside tax-deferred retirement accounts, such as 401(k) plans or IRAs, are subject to RMDs.
Return of Premium Rider
A provision in an annuity contract that specifies that the insurance company will pay your beneficiaries a return of the remaining premium if you die before the contract is fully paid out.
Return of Principal
A non-income payment received from an investment, trust or other security.
Rider
A provision added to a contract.

S

Sanctioned
Approved by an official.
Secondary Market
The competitive industry where annuity payments are bought and sold.
Secondary Market Annuity (SMA)
An annuity purchased on the secondary market.
Securities
A tradeable financial instrument that companies use to raise capital.
Simplified Employee Pension Individual Retirement Account (SEP IRA)
A written plan that allows employers to make contributions toward their own retirement and their employees’ retirement.
Single Premium Annuity
An annuity that is purchased with a single lump-sum payment, instead of a series of payments.
Special Purpose Acquisition Company (SPAC)
A special purpose acquisition company is a shell corporation listed on the stock exchange with the purpose of acquiring a private company and taking it public, thereby bypassing the traditional initial public offering process.
Split-Funded Annuity
An annuity strategy that involves using a portion of your purchase price to fund an immediate annuity and the rest to fund a deferred annuity.
State Guaranty Associations
State-sanctioned, nonprofit organizations that insure consumers in the unlikely event that their insurance companies fail and default on their payments.
State Lottery Commission
State-run lottery regulatory agencies.
State Premium Tax
A sales tax assessed on insurance premiums. Because annuities are insurance products, they are regulated by the insurance commissions in each state.
Stock
A type of investment that represents a share, or partial ownership, in a company.
Straight Life Annuity
An annuity that pays a guaranteed stream of income but ceases payments upon the death of the annuity holder. Straight life annuities don’t include a death benefit, so payments can’t be made to a beneficiary.
Structured Settlement
A legal settlement, funded by an annuity or another qualified funding asset, such as a government obligation.
Structured Settlement Protection Act (SSPA)
Passed in 1997, these state-defined laws originated in Illinois and regulate the secondary market.
Surrender Charge
A fee for withdrawals made before the end of the surrender period.
Surrender Period
A period of time specified in your annuity contract in which your funds are not accessible.
Systematic Withdrawal
Method of annuity distribution by which deferred annuity payments are scheduled as regular withdrawals instead of disbursed as a guaranteed income stream.

T

Tax Exemption
The right for individuals and select organizations to exclude all or some of their income from federal or state income tax.
Tax-Deferred
Tax status that allows income to accumulate free of taxes.
Taxpayer Relief Act of 1997
A law that extended the protections of the Periodic Payment Settlement Act to workers’ compensation cases.
Temporary Annuity
An annuity that lasts for a pre-prescribed length of time.
Time Value of Money
The changing value of money based on earned interest and inflation over time.

V

Variable Annuity
An annuity contract whose value is based on the performance of an underlying investment portfolio.

W

Whole Life Annuity
Also known as a “life annuity,” a whole life annuity is a financial product designed to pay out monthly, quarterly, semi-annual or annual payments to a recipient for as long as that person is alive.
Wirehouses
Brokerage firms which buy and sell financial securities.
Withdrawals
The act of taking money out of an account; distributions.
Workers’ Compensation Claim
A lawsuit filed for work-related injuries or loss of income; may result in a structured settlement.
Wrongful Death Claim
A lawsuit filed for death liability; may result in a structured settlement.
Wrongful Termination
A lawsuit filed for illegal employment termination; may result in a structured settlement.

Y

Yield Curve
A visual depiction of the interest rates of fixed income instruments, namely bonds, of various maturities.
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 24, 2022