Frequently Used Annuity Terms

Please note that the exact definitions of these terms can vary depending on the company, state, and annuity contract. Always consult your actual contract for the meaning of the terms applicable to your situation.

Accumulation Period

This is the period of time between when you purchase a deferred annuity and when you start to receive payout benefits (sometimes referred to as the growth period).

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Annuitant

The person whose life expectancy is used to determine the payout benefits of an annuity. The annuitant is usually also the annuity contract owner.

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Annuity

A contract between an individual (the contract owner) and an insurance company. The owner makes a single premium payment or a series of payments, and later receives a payout on a regular basis in return for the premiums paid. Depending on the type of annuity, the payout may start immediately (immediate annuity) or at a later date (deferred annuity).

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Bail-Out Option

Some annuity contracts allow the owner to withdraw funds without a withdrawal charge if the interest rate falls below a certain level. This is referred to as a "bail-out" option. The amount withdrawn may be subject at least in part to income tax and a 10% IRS penalty.

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Deferred Annuity

A contract in which the annuity payout begins at a future date.

Deferred annuities are often used for retirement planning since they allow you to accumulate savings on a tax-deferred basis, and then provide a variety of payout options, including an income stream for life.

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Fixed Indexed Annuity

A fixed indexed annuity is a fixed deferred annuity that earns interest or provides benefits that are linked to an interest rate or index. The value of the most commonly used index, the Standard & Poor's 500 (registered mark)Composite Stock Price Index, or any other index varies from day to day and is not predictable.

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Fixed Annuity

A contract in which the insurance company applies a fixed rate of return to the annuity premium. Rates are typically determined by prevailing market rates. The contract specifies a guaranteed minimum interest rate, and the insurance company assumes the investment risk.

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Flexible Premium Deferred Annuity (FPDA)

An FPDA allows you to vary the amount and frequency of premium payments (within limits specified by the contract). For example, if you are saving for retirement you might start by contributing $100/month to an FPDA, and adjust the amount and/or timing later, depending on your needs. Or you may opt to make a lump-sum contribution at any time. The interest earned accumulates on a tax-deferred basis, until benefit payouts begin.

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Growth Period

Also referred to as the Accumulation Period, it is the time between when you purchase a deferred annuity and the time you begin receiving payout benefits.

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Guaranteed Interest Rate

Fixed annuities have a guaranteed minimum interest rate, which is the minimum rate an insurance company agrees to pay on a fixed annuity. In addition to the guaranteed minimum rate, companies often set initial interest rates that are guaranteed to not change for a specified period of time, typically the first year.

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Immediate Annuity

A contract in which the annuity payouts begin immediately.

An immediate annuity is typically more appealing for older persons who want to convert accumulated wealth into a guaranteed income that begins right away.

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Initial Interest Rate

The rate of interest set by the insurance company for initial premiums. It is typically based on the prevailing market rates.

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Partial Withdrawals

The removal of some, but not the entire value of the annuity, by the owner. Most annuities allow up to 10% of the annuity value to be withdrawn in a given year with no withdrawal charges. The amount withdrawn is usually taxable. Tax penalties will apply if the withdrawal is made before the owner is 59 and 1/2 years of age (unless an exception applies).

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Payout Period

The period of time, either a specified number of years or lifetime, over which distribution payments are made. When your annuity's accumulation period ends and its payout period begins, your annuity has "matured" or "annuitized." The date the insurer begins to make benefit payments is called the maturity date or annuity date.

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Premature/Early Withdrawal

When a contract owner who has not reached the age of 59-1/2 withdraws cash from an annuity, the money withdrawn may be subject to a 10% federal tax penalty in addition to any income tax that may be due. There may also be a surrender charge imposed by the insurance company. See Surrender Charge.

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Settlement Options

When you are ready to start receiving payouts from an annuity, you will need to select a settlement/payout option. The annuity contract outlines the available payout options. Some common ones include: Straight Life Annuity, Period Certain, Life Income With Period Certain, and Joint and Survivor.

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Single Premium Annuity

An annuity contract purchased with a lump sum single premium payment that distributes a series of payments beginning either immediately or at some future date.

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Surrender

Termination of the annuity contract by the owner. Most contracts impose surrender charges during the early years of the policy. All accumulated interest will usually be taxable to the owner at time of surrender, and tax penalties (10%) will apply if the owner is not yet 59 and 1/2 years of age (unless an exception applies).

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Surrender/Withdrawal Charge

If you withdraw all or part of your deferred annuity during the accumulation period you may be assessed a withdrawal charge. This charge is usually a percentage of the amount being withdrawn. The percentage may be reduced or eliminated after the annuity has been in force for a certain number of years.

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Tax Disclosure