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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 The amount withdrawn may be subject at least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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Equity Index Annuity
An equity-indexed annuity is a fixed annuity, either immediate or deferred, that earns interest or provides benefits
that are linked to an external equity reference or an equity index. The value of the index might be tied to a stock or
other equity index. One of the most commonly used indices is Standard & Poor's 500 Composite Stock Price Index, which
is an equity index. The value of any 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
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