Glossary
0-9
1035 Exchange
In the U.S., a "1035 Exchange" refers to a tax-free replacement of an insurance policy for another insurance contract that covers the same person.
72t Rule
72t is a rule from the IRS that allows for penalty-free, early withdrawals from a retirement savings account. According to the IRS, withdrawals are based on the account owner's life expectancy.
A
Accumulation Period
An accumulation period is the time between the first payment and when the payout begins. During this time, your principal "accumulates" interest.
Annuitant
The annuitant's lifetime is used to measure the life of an annuity. The owner of the annuity controls the payments and is often the same person as the annuitant.
Attained Age
The age the insured has reached since original policy issue is the attained age.
B
Base Rate
This is the anticipated rate that's credited in the second year of an annuity contract. The base rate is not a guaranteed rate, and it may differ from the actual interest that is credited at the time the contract reaches its second year.
Basis Points
A basis point is a unit of measurement used when discussing interest rates; one hundred basis points equals 1%.
Beneficiary
The person, persons or organization designated to receive the death benefit of an annuity. A primary beneficiary is your first choice to receive proceeds from the policy. Contingent beneficiaries receive proceeds in case the primary beneficiary(ies) dies before the annuitant.
C
Cash Surrender Value
The sum of money in an annuity that is, with some limitations, available to the contract holder in the form of withdrawals, loans, collateral or upon surrendering the policy.
Cap
For an indexed annuity contract, the cap is an upper limit on the amount of an index's gain in value that will be credited to the annuity value.
Clause
A clause is defined as the words in a policy that describe some certain coverage, limitation or revision.
Compounding Interest
Compounding interest is the type of interest that is earned on both the original principal amount and on the interest accumulated from earlier periods.
D
Deferred Annuity
A deferred annuity is an annuity contract where periodic payments do not begin until some future date elected by the annuity owner.
Direct Rollover
A rollover is a direct transfer of retirement funds from one qualified plan to another plan. Because funds do not pass through the hands of the owner, they do not incur any tax liability for the owner. Also known as a direct transfer.
E
Exclusion Ratio
The percentage of each annuity payment that is excluded from taxes. IRS guidelines for life expectancies are used by the insurance company to calculate this ratio.
Endorsement
There are many circumstances that require that a policy be changed: e.g., change of name, change in coverage. An endorsement is a form that is attached to the policy to record the change.
F
Fixed Annuity
Under the terms of a fixed annuity, the insurance company agrees to credit a guaranteed minimum interest rate to the annuity. There is no market risk to your principal.
Fixed Indexed or Index-Linked Annuities
These annuities offer the same type of minimum interest rate guaranteed as a traditional fixed annuity but have the potential to credit additional interest based in part on the performance of a market index.
I
Immediate Annuity
An annuity that begins to provide you with an income right after paying a principal.
Indexed or Index-Linked
An interest crediting strategy where the credited interest rate is calculated based partly on the upward movement of a major stock market index.
Interest-Out-First Rule
The interest-out-first rule works like this: If a withdrawal is taken from an annuity contract, the withdrawal must be treated as interest (and taxed accordingly) if the cash value of the contract exceeds the amount paid into the contract at that time.
J
Joint-Life Annuity
A policy that covers two or more lives and makes annuity payments to two or more annuitants is called a joint-life annuity. Sometimes payments cease at the first death and sometimes at the last death.
L
Legacy Transfer
The sum of money paid to the beneficiary(ies) of an annuity.
Life Only
"Life only" refers to an annuity settlement option or immediate annuity in which regularly scheduled payments are made from the time distribution is initiated. These payments then continue through the end of the annuitant's life. No payments will be made after the annuitant is deceased.
Life with Period Certain
"Life with period certain" refers to an annuity settlement option or immediate annuity in which lifetime annuity payments are made. However, there is a guaranteed minimum number of payments that will be made to the beneficiary if the annuitant dies within a specified period of time.
Lump Sum Payment
The entire payment of an annuity policy to the annuitant at one time, rather than in installment payments, is a lump sum payment.
N
Non-Qualified
Funds are designated as non-qualified if they have already been taxed (post-tax dollars), except Roth IRA funds.
O
Old Money Rate/Renewal Rate
The interest rate that applies to the portion of the insured's account balance that is no longer in the new money period, as defined in the insurance contract, is the old money rate or renewal rate.
P
Participation Rate
For an indexed annuity the participation rate is the amount of an index's gain that will be credited to the policy value.
Principal
The total amount paid to an annuity. Paid as a lump sum or as installments.
Q
Qualified
Annuity funds are designated as qualified if they have not yet been taxed (pre-tax dollars), except Roth IRA funds.
R
Required Minimum Distribution (RMD)
A required minimum distribution (RMD) is the minimum amount of money an annuitant must receive per year from a qualified account (for example, an Individual Retirement Account) beginning by April 1st of the year following the year they attain the required beginning age established by federal tax law. The contract owner must continue to take out the calculated RMD amount by December 31st of each calendar year thereafter. Historically, federal tax law has set the required beginning age for RMDs at age 70 ½. However, recently enacted federal legislation increases the required beginning age for those born on or after July 1, 1949, to age 72. If you were born before July 1, 1949, your required beginning age for taking RMDs remains age 70 ½.
Rider
Rider is another name for an addition to a base policy contract that adds further benefits or agreements to an insurance policy.
Registered Index-Linked Annuity
Gives you the potential to grow your assets by crediting interest based in part on the performance of a market index. Registered index-linked annuities also offer a level of protection from market risk.
S
Settlement Options
A settlement option is a provision in an annuity policy that, when exercised, provides for optional methods of settlement in place of a lump-sum cash payment. These are usually in the form on a stream of periodic payments, made for a fixed number of years or made during the lifetime of the annuitant.
Surrender Charge
A surrender charge means an amount charged to an annuity contract owner when they prematurely withdraw a portion or the entire contract's accumulated value.
Surrender Value
The surrender value is the amount in cash a contract owner is entitled to collect upon terminating the annuity contract prior to maturity or death.
T
Tax Deferred
Interest credited to an annuity that is not taxed as earned income until it is withdrawn.
Tax Sheltered Annuity (TSA)
A tax sheltered annuity (TSA) is an annuity issued by an insurance company under Section 403 (b) of the Internal Revenue Code designed to help the annuitant accumulate funds for retirement. Eligibility is limited to specific occupations such as teachers and people who work for non-profit organizations.
V
Variable Annuity
A variable annuity is an insurance contract where the cash value of the policy fluctuates in response to the performance of the policy's underlying investments. There is generally a minimum guaranteed death benefit under variable annuities.