Financial lingo isn’t the easiest to understand, especially when it comes to the annuity industry. We’ll help you along with this glossary of common terms found throughout our site. Hopefully, it will give you a better understanding of the process.
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.
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.
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.
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.
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 Money deposited into 401(k) accounts is not taxed until it is withdrawn.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.
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 Accrued interest on an annuity is tax-deferred until it is withdrawn.
Period of time during which an annuity grows in value before payments are distributed.
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.
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.
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.
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.
A fixed annuity contract meant to mimic a certificate of deposit (CD).
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.
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.
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.
Court-ordered monetary payment, or any other remedy, from a negligent party who has caused injury to another party.
The process of adding the interest earned during the investing period to the principal, increasing the return over time.
An alternate beneficiary for an annuity in the event that the primary beneficiary is unable to receive the benefit.
The maximum amount you can contribute to a retirement account.
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.
Either compensatory or punitive, the sum of money the law imposes for a breach of some duty or violation of some right.
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.
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.
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.
An annuity and structured settlement purchasing company that offers a lump sum of cash in exchange for the rights to future income payments.
The sale or transfer of all or a portion of annuity or structured settlement payments in exchange for a lump sum of cash.
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.
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.
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.
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.
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.
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.
A term used by some in the industry to refer to an annuity that features characteristics of both fixed and variable rate components.
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.
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.
A government tax, the amount of which is contingent upon how much money a taxpayer earns annually.
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.
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.
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.
The ability to easily access money.
Long-Term Care Annuity
A deferred annuity that includes a long-term care rider.
A one-time payment, rather than a series of payments.
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.
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.
A lawsuit resolution resulting in a payment.
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.
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.
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.
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.
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.
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.
The current cash value of an annuity, as calculated using a specific discount rate.
The amount that is originally invested, not including subsequent interest.
An estate planning tool whereby the annuitant can transfer property to the obliger in exchange for regular payments.
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.
A statement adding to the specifications of a law or contract.
A financial disclosure document meant to describe a security offering.
A statement adding to the specifications of a law or contract.
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.
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.
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.
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.
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.