Annuity Basics

The Annuity Glossary – A to Z

Annuity: A contract that makes payments to the investor at regular intervals based on tax-deferred contributions to a retirement savings account.

Annuitization: The process of converting the accrued retirement assets into a series of intervallic payments made for a lifetime or for a specified period of time, in accordance with the provisions of the annuity contract.

Annuitant: The individual upon whose life expectancy the term of income payments is made, under an annuity contract.

Accumulated Interest: Interest earnings accumulated within an annuity contract and have not hitherto withdrawn.

Beneficiary: An individual, estate, or institution, designated to receive benefits from the annuity after the death of the annuitant.

Bonus Annuity: Additional interest accumulated in the first year of a deferred annuity, also termed as first-year bonus rate.

Basis Point: A unit to quantify, with 100 basis points equivalent to one percentage point.

Contract Owner: An entity or individual who applies for as well as pays for the annuity and is responsible for funding the annuity contract.

Contract Termination: The enforced end to the annuity contract due to death of the annuitant.

Charitable Gift Annuity: A type of annuity in which the benefactor provides property to a charity in exchange for an income.

Death Benefit: The annuity contract benefit paid to a chosen beneficiary/named survivor on the death of the annuity contract owner.

Deferred Annuity: A type of annuity that provides tax-deferred investments for long-term goals, including retirement.

Defined Contribution Plan: A pension plan wherein an employer deposits yearly payment for each of the plan’s partakers, with retirement income depending on the contributed sum.

Enhanced Death Benefit: Annuity benefit that goes beyond the guaranteed minimum death benefit by intermittently locking in investment gains or paying a minimum avowed interest rate on purchase payments.

Endowment: A policy that pays the face amount to the contract owner, if living on the maturity date or to a beneficiary if the annuitant dies before the contract date.

Effective Rate of Interest: Actual interest rate accumulated, that consists of compounding results over a certain time period.

Fixed Annuity: An annuity contract providing a certain amount of interest paid on the amount invested during a deferred annuity’s accrual phase and a specified payment amount during the annuitization phase.

Flexible Premium: A kind of annuity wherein further investment can be made into the same annuity after depositing the initial premium.

Forced Annuitization: The obligatory insolvency of an annuity and dispersal of funds, caused by the annuitant’s death, or if the annuitant attains certain maximum age.

Guaranteed Interest Rate: The minimum interest rate that the issuing company agrees to pay during an annuity contract’s accumulation phase.

Guarantee Period: The period during which the interest attributed under a fixed annuity is guaranteed.

Guaranteed Annual Yield: The certain annual yield, for the preliminary guarantee period up to the first penalty-free full withdrawal window.

Holding Period: The period of time during which an annuitant/investor has ownership of a capital asset.

Immediate Annuity: An annuity contract that initiates its disbursement immediately or within a year.

Income or Payout Options: Methods by which an annuitant can receive income from the annuity.

Initial Interest Rate: The rate of interest applied to the initial deposit made to a fixed deferred annuity, with the length of time for this guaranteed rate specified in the annuity contract.

Joint Annuitant: An individual, also known as the survivor annuitant, named in an annuity contract besides the annuitant/owner of the contract who receives regular income for life, after the death of the annuitant or as per the terms of the contract.

Joint Life Annuity: An annuity payment option that provide lifetime payments to the annuitant and joint annuitant. For the joint annuitant, payments may continue for lifetime or in a predetermined reduced sum.

Life Annuity: An annuity payment option that agrees to pay a certain amount on a periodic basis, during the living of the annuitant.

Longevity Annuity: A type of annuity that provides a definite income stream with slightly higher payouts for lifetime beginning at a preset future date, from a few years to 40 years in some cases.

Load: The sales fee charged from the owner who purchases an annuity contract.

Multiple Premium Annuity: An annuity program requiring more than one premium payment.

Market Value Adjustment: A type of fixed annuity providing a guaranteed rate unless the annuitant withdraws the sum that exceeds a specific free-withdrawal amount, or if the annuitant terminates the contract before maturity.

Maturity Date: The date on which an annuity starts to make income payouts as per the annuity payment option.

Non-Qualified Annuity: A tax-deferred annuity in which purchase payments are made with after-tax dollars and earnings accrue on a tax-deferred basis until withdrawn.

Non-Natural Owner: The holder of an annuity contract that is not an individual but is an entity such as a corporation, a trust, or a partnership.

Owner-Driven: A type of annuity whose terms trigger upon the death or reaching of a certain age of the contract owner, unlike other annuities, which choose an annuitant that may or may not be the contract owner.

O-Share Variable Annuity: A type of variable annuity, wherein the owner of the contract pays a premium-based charge or sales charge over a period of time, which equals to a fixed percentage of the amount invested in the contract.

Payout Period: The period of time during which an annuitant is provided income from an instantaneous annuity plan.

Premium: A payment made into an annuity on a regular basis that can be a single contribution or multiple contributions.

Premature Distributions: Any distribution taken from tax-deferred annuity or a qualified plan and is paid to the annuitant or beneficiary under 59.5 years of age.

Qualified Annuity: A kind of annuity bought with the purpose of funding or distributing the capital from a tax-qualified plan, usually with paid premiums, thus reducing the income tax as well as the use of tax-deferred accumulations.

Renewal Rate: The interest-rate attributed to an annuity after the current interest-rate period is over. The new rate may be higher or lower than the previous rate, depending on the economic scenario and the investments used by the annuitant.

Rider: An annuity income rider is an attached benefit to a deferred annuity policy that copes up the longevity risk by providing a lifetime income stream.

Rate Effective Date: The current date of the rates that the cover company uses in calculating annuity income.

Single Life Annuity: A type of annuity payment option in which the periodic payments are made to the annuitant for life, but end after the owner dies.

Surrender Charge: A type of penalty imposed by the issuing company for withdrawing funds prematurely from the annuity.

Sub-Account: With the purpose of allocating the premiums, these investment portfolios are offered in variable annuity contracts.

Tax-Deferral: A term used to explain that earnings from an annuity are not taxed until they are withdrawn from the plan.

Tax-Free Transfers: An activity wherein the variable annuity contract owner can move benefits from one sub-account to another without the imposition of tax liability on these finances.

Term Certain Annuity: A type of annuity payment option in which preset income earnings are provided to the owner of the contract until the termination of the annuity contract.

Upfront Bonus: The sum added by the issuing company to the bonus annuity value, generally a set percentage of the premium provided by the annuitant while buying or adding money to the contract.

Unit Value: A measurement of the performance of underlying funds in a variable annuity, with each investment sub-account having a separate unit value.

Unbundled Contracts: Annuity contracts that allow the buyers to opt and pay for certain elective features they want in their contracts.

Variable Annuity: A type of annuity contract wherein the account balance may vary based on the value of underlying investments. The annuitant has the ability to distribute the premium amount among several investments or sub-accounts.

Variable Immediate Annuity: A type of annuity that starts providing income payments immediately, or soon after the purchase of annuity contract.

Withdrawals: The sum of money that the contract owner withdraws from their annuity.

Withdrawal Charge: A penalty charged by the annuity issuer for withdrawals made in excess of the specified penalty free amounts.

Withdrawal Window: A time period, usually 30 days, at the end of annuity guarantee period when the annuitant has the option of withdrawing/transferring funds or conceding their contract without any charges or market value adjustment fees.

Yield: The average interest rate earned with a fixed annuity over a certain time period, including any premium bonus or interest rate enhancements.

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