Annuities Glossary

Annuitization:

The process of converting the assets invested in an annuity into a stream of income payments. Annuitization can be for a specific period of time or for the life of the Annuitant.

Annuity:

An insurance contract offered by an insurance company that is intended to transfer one or more financial risks from the annuity owner to the insurance company, typically to assist with retirement planning. Annuities offer tax deferred growth^^ and the ability to convert assets into income through annuitization.

Beneficiary:

The person or persons designated by the owner of an annuity contract to receive the death benefit when the owner passes away.

Carrier rating:

A forward-looking, independent opinion on an insurance company’s ability to meet ongoing policyholder claims and contract obligations.

Death benefit:

The amount paid to the beneficiary if the owner passes away.

Deferred Income Annuity (DIA):

A type of income annuity that allows the owner to convert a single lump sum purchase payment into a guaranteed stream of income at some point in the future, at least 13 months from the time of purchase. Some DIAs may allow for additional purchase payments.

Fee-based annuity:

An annuity that does not pay a commission to an insurance agent, and is therefore designed to fit into the general RIA model and fee structure.

Fixed annuity:

A simple, secure, tax-deferred savings tool^{^^} offered by insurance companies that provides steady, guaranteed growth.^†† Though a different type of product, Fixed Annuities are conceptually similar to a CD in the role they play in an investment portfolio, in that they provide a guaranteed interest rate over a guaranteed, multi-year period, known as a term. This type of annuity may also be known as MYGA, Fixed Deferred Annuity, or Fixed Rate Annuity.

Fixed Indexed Annuity (FIA):

An annuity type that uses the performance of some external market index, like the S&P 500®, to determine the interest credited to an owner’s account. The index performance is typically capped on the upside through a cap rate in exchange for complete downside protection in the form of a 0% floor.

Free-look period:

The period of time following the owner’s receipt of the annuity contract in which they can cancel the contract and receive a full return of the purchase payment, less any withdrawals. The free-look period, also known as the right to examine, is provided for in the contract and can vary by insurance carrier, product type, and funding source.

Guaranteed Lifetime Withdrawal Benefit (GLWB):

A type of optional rider that can be added to eligible annuity contracts for an additional fee to provide lifetime income through a series of guaranteed withdrawals from the annuity contract value. Different from annuitization, the owner does not lose access to the contract value until all of the funds are withdrawn.

Guaranteed period:

The time period (typically measured in years) for which the interest rate is guaranteed on a MYGA. Also known as the term.

Income annuity:

A category of annuities designed to provide a stream of income payments for life or some period of time with income payments starting immediately or at some point in the future. Income annuities are what often come to mind when people hear the word “annuity.”

Income rider:

A reference to a set of riders that can be added to the annuity contract and are generally designed to provide income to the owner on non-income annuities without annuitization of the contract.

Market Value Adjustment (MVA):

A positive or negative adjustment made to the amount being withdrawn from an annuity when an owner requests a withdrawal above the penalty free withdrawal amount during the guarantee period. The adjustment may be positive, neutral or negative, and is dependent on how the interest rate environment has changed since the MYGA was purchased.

Multi-Year Guaranteed Annuity (MYGA):

A simple, secure, tax-deferred savings tool^^«« offered by insurance companies that provides steady, guaranteed growth.†† Though a different type of product, MYGAs are conceptually similar to a CD in the role they play in an investment portfolio, in that they provide a guaranteed interest rate over a guaranteed, multi-year period, known as a term. This type of annuity may also be known as Fixed Annuity, Fixed Deferred Annuity, or Fixed Rate Annuity.

Nursing home waiver:

A benefit available with some annuity contracts that waives any withdrawal charges and Market Value Adjustment if the owner is confined to an eligible nursing home. Eligibility requirements may vary by insurance company.

Outsourced Insurance Desk (OID):

A licensed insurance agency that works in conjunction with an investment advisor to handle all obligations related to the sale of annuities, including product and carrier selection, product recommendations, suitability review, day-to-day operational support, and customer service eliminating the need for the advisor to hold insurance licenses.

Owner:

The person or entity who owns the annuity contract and has all rights to the contract, including selecting annuitants and beneficiaries and making any future changes.

Penalty-free withdrawal:

The maximum amount the owner of annuity can withdraw from the contract without a withdrawal charge or Market Value Adjustment. The penalty-free withdrawal amount may differ by insurance company, but is often 10% of the contract value per year. Note: The IRS imposes a 10% early withdrawal tax on withdrawals made before an investor reaches age 59 ½, in addition to ordinary federal and state income taxes, even if the withdrawal is considered penalty free from the insurance company. Annuity owners should seek legal and tax advice before making withdrawals prior to age 59 ½.

Premium:

The money the owner pays to purchase the annuity. Premium may be in the form of a single lump sum or a series of multiple payments over time. Premium may also be referred to as a purchase payment.

Registered Index Linked Annuity (RILA):

An annuity type that uses the performance of some external market index, like the S&P 500®, to determine the gains and losses in an annuity owner’s account value. The index performance is typically capped on the upside through a cap rate or participation rate in exchange for some limited downside protection, typically in the form of a buffer or floor. A RILA is considered a security by the U.S. Securities and Exchange Commission (SEC). May also be known as an Indexed Variable Annuity or Structured Annuity.

Replacement:

A transaction in which a new annuity contract is purchased using all or a portion of the proceeds of an existing annuity contract. Replacements most commonly happen at the end of the term, and can be completed without incurring any tax consequences. May also be referred to as an exchange or a 1035 exchange.

Riders:

Additional benefits that may be added to an annuity contract to provide new or enhanced features that are not available in the base contract. Riders may include living benefits, that provide for income or inflation protection, or enhanced death benefits, among other things.

Single Premium Income Annuity (SPIA):

A type of income annuity that allows the owner to convert a single lump sum purchase payment into a guaranteed stream of income starting immediately. May also be referred to as Single Premium Immediate Annuity.

Suitability review:

The process by which the insurance company and/or insurance agency reviews the owner’s information and financial goals to ensure the recommended annuity meets their financial needs.

Surrender charge:

A charge assessed by the insurance company on the amount being withdrawn from the annuity contract above the penalty-free withdrawal amount. Surrender charges follow a decreasing withdrawal charge schedule, which varies by term and insurance company. May also be referred to as a withdrawal charge or early withdrawal charge.

Tax deferred:

Taxes are not paid until earnings are withdrawn from the contract. Money can typically be rolled into another annuity, continuing tax deferral. The taxable portion of any withdrawal or income from an annuity is taxed as ordinary income.^{^^}

Term:

For a MYGA, the period for which the interest rate is guaranteed. Also known as the guaranteed period.^††

Terminal illness waiver:

A benefit available with some annuity contracts that waives any withdrawal charges and MVA if the owner is diagnosed with a terminal illness. Eligibility requirements may vary by insurance company.

Variable Annuity (VA):

A type of annuity that allows the owner to invest their money in various underlying investment options, called subaccounts, typically made up of different asset classes and investment styles. The value of the owner’s account fluctuates based on the performance of those underlying investment options. A Variable Annuity is considered a security by the U.S. Securities and Exchange Commission (SEC).

Withdrawal charge:

A charge assessed by the insurance company on the amount being withdrawn above the penalty-free withdrawal amount. Withdrawal charges follow a decreasing withdrawal charge schedule, which varies by term and insurance company. May also be referred to as an early withdrawal charge or surrender charge.^‡‡