1035 Exchange— A tax-free method of exchanging an existing life insurance or annuity policy for a new policy with a different company. This procedure is often exercised when it is beneficial for the policy owner to move to a more favorable contract that offers rates or features they don’t currently have in their existing plan (1035 refers to the U.S. tax code number).
Account Value— This is the gross value of an annuity, prior to adjustments from any applicable loans, market Value adjustments, premium taxes, or surrender charges.
Annual Step-Up— A common feature on optional guaranteed lifetime withdrawal benefit (GLWB) riders, which raises the benefit Base to the greater of the benefit Base or the account value each year.
Annuitant— This is the individual or entity that receives the benefits of an annuity.
Annuitization Bonus— A feature offered on some fixed, indexed, and variable Annuities where the insurance company issuing the annuity credits the account value of the contract with a stated percentage of additional money, in the event that the contract is annuitized.
Annuitize— To change all or a portion of the annuity contract from a cash accumulation period to the periodic distribution of funds.
Annuity— This is a contract in which an individual agrees to pay premiums to an insurance company and receives, in exchange, a regular stream of income payments from the issuer either now or at some time in the future.
Bailout Provision— This is a provision that enables the contract owner to surrender the annuity contract, usually without an applied surrender charge, if renewal interest rates or caps fall below a pre-established level.
Beneficiary— The person or legal entity that receives the death benefit of an annuity upon death of the contract owner or annuitant.
Benefit Base— This is the secondary “shadow fund” value on an annuity’s optional guaranteed lifetime withdrawal benefit (GLWB) rider; the value from which the annuitant’s guaranteed withdrawal payments are based upon. This is a separate value from the annuity’s account value and is only available by taking guaranteed withdrawal payments.
Benefit Base Bonus— A feature which credits a premium bonus directly to the benefit base of the optional guaranteed lifetime withdrawal benefit (GLWB) rider. This bonus cannot be accessed in the event of cash surrender; it solely increases the “shadow fund” value, upon which guaranteed withdrawal payments are calculated.
Cap Rate— The maximum interest rate used in the crediting calculation on an indexed annuity. Other indexed crediting methods may also include a participation rate or a spread rate.
Commission Override— The amount of commission that is paid to a marketing organization for any independently-contracted salesperson’s fixed or indexed annuity sales production.
Compound Interest— A type of interest crediting whereby interest is credited on the principal payment, in addition to the interest itself.
Contract Owner— The individual or entity that applies for and purchases an annuity contract, and is responsible for funding the annuity.
Crediting Method— This is a premium allocation option on an indexed annuity, which determines the formula for crediting interest on the annuity contract.
Death Benefit— The annuity benefits that are paid to the beneficiary upon the death of the contract owner or annuitant.
Deferred Annuity— A retirement income product where payments will begin at least one year or more after the original lump sum or regular premiums have been paid.
Due Diligence— This is the research process conducted by insurance salespeople and other financial advisors on the legal and economic soundness of an investment or product.
Enhanced Death Benefit— A provision or rider that provides an annuity death benefit that is greater than the full account value on the contract.
Exclusion Ratio— This ratio determines the taxable and nontaxable portions of each payment from an immediate annuity or annuitization. Each payment an annuitant receives is considered to be a return of principal, which is not taxed.
Executor— The person named in a will to carry out the decedent’s wishes for the distribution of his or her assets. The executor fulfills his or her duties under court supervision.
Fixed Account Rate— The interest rate declared by the insurance company for an optional crediting method on a fixed, indexed, or variable Annuity.
Fixed Annuity— This is a contract issued by an insurance company that guarantees a minimum interest rate with a stated rate of excess interest to be credited, which is determined by the performance of the insurer’s general account. A fixed annuity is considered a low risk/low return annuity product.
Flexible Premium Deferred Annuity (FPDA)— An annuity contract which is acquired through a premium payment, in which an individual receives, in exchange, a regular stream of income payments from the insurance company at some predetermined time in the future, while maintaining the ability to continue making additional payments into the contract until that time.
Floor— The minimum amount of interest that is credited to an annuity each year.
Forced Asset Allocation Model— When an insurance company forces an indexed or variable annuity purchaser to allocate their premiums among the available crediting methods, according to criteria that are pre-determined by the issuing insurance company.
Free Look Period— An annuity contract provision that varies by state and dictates that the contract owner has approximately 10 to 20 days to examine the annuity contract immediately after purchase, with the option of returning it to the insurer for a full refund.
Free Withdrawal Provision— An annuity contract provision that grants the annuity owner the right to withdraw a portion of the annuity’s account value (typically 10%) during the accumulation period without incurring a surrender charge.
Guaranteed Lifetime Withdrawal Benefit (GLWB)— This is a rider, endorsement, or additional feature that can be included in a fixed or indexed annuity, guaranteeing annual withdrawals at a specified level (based on the annuitant’s age), regardless if the contract’s account value falls to zero.
Guaranteed Minimum Accumulation Benefit (GMAB)— This is a rider, endorsement, or additional feature that can be included in a fixed or indexed annuity, guaranteeing that the account value of the annuity will grow by a minimum specified percentage over a period of time.
Guaranteed Minimum Death Benefit (GMDB)— This is a rider, endorsement, or additional feature that can be included in a fixed or indexed annuity, guaranteeing that the annuity death benefit payable will be no less than a specified amount.
Guaranteed Withdrawal Payments— These are the lifetime income payments that the annuitant or contract owner receives under any optional guaranteed lifetime withdrawal benefit (GLWB) rider on their fixed or indexed annuity.
Guarantee Period— The number of years that the interest rate is guaranteed on a multi-year guaranteed annuity.
Heaped Commissions— How fixed or indexed annuity compensation is paid upfront to the salesperson in a lump sum. This commission is typically paid at the time the annuity contract is issued to the annuitant, based on the amount of premium paid into the contract. Generally, heaped commissions will pay a greater percentage commission than other commission structures.
Immediate Annuity— A retirement income product whereby an initial lump sum premium is paid and the annuity is transitioned into stream of income through annuitization immediately or within one year from the date of purchase. Immediate annuities can be fixed, indexed, or variable.
Independent Marketing Organization (IMO)— A common organizational structure that serves as distributor of many carriers’ insurance and annuity products, and may perform many of the functions traditionally provided by an insurance carrier (recruiting/licensing of agents, marketing, and sales support). Typically, these services are provided to independently contracted agents in exchange for a percentage of their commission.
Index— This is a statistical composite that measures changes in the economy or in financial markets, often expressed in percentage changes from a base period or from the previous month. Examples of an index are the Standard and Poor’s 500 or the Dow Jones Industrials.
Indexed Annuity— A retirement income contract issued by an insurance company that has a minimum guarantee where crediting of any excess interest is determined by the performance of an external index, such as the Standard and Poor’s 500® index. An indexed annuity is considered a moderate risk/moderate return annuity product.
Indices— The plural form of the word ‘index’.
Individual Retirement Account (IRA)— A retirement savings arrangement that allows people with earned income to deposit a portion of that income in a tax-deferred savings plan. An IRA can be established and funded at any time between January 1 of the current year, up to no later than when an individual’s income tax return is due the following year (generally, April 15 ), not including extensions. Annuity products can be rolled over into IRAs.
Insolvency— When an insurance company does not have the assets to pay the claims made against it by their policyholders.
Interest Rate Bonus— This is a feature offered on fixed and multi-year guaranteed annuities where the insurance company issuing the annuity offers a higher introductory credited interest rate, in addition to the base annuity’s regular credited interest rate.
Joint Annuitant— This is an individual who is named in the contract with the annuitant, whose age and life expectancy are also used in the calculations to determine what the annuity payments will be.
Joint Owner— This is a person who shares ownership of an annuity contract and would have the same right as the contract owner to approve any decisions made about the contract.
Levelized Commissions— A commission structure where fixed or indexed annuity compensation is paid to the salesperson over a period of years as opposed to all (heaped) up-front. This commission is typically paid at the time the annuity contract is issued as well as on a limited number of subsequent policy anniversaries. Generally, levelized commissions will pay a lesser percentage commission than a heaped commission structure, but over a longer period of time.
Long Term Care (LTC) Kicker— This is a feature on some optional guaranteed lifetime withdrawal benefit (GLWB) riders, which enhances the guaranteed withdrawal payment amount, in the event that the annuitant meets the insurance company’s criteria for long term care (LTC) benefits. LTC kickers do not qualify for preferential tax treatment under the Pension Protection Act.
Marketing Organization (a.k.a. AFMO, FMO, IMO)— An organizational structure that serves as a distributor of many carriers’ insurance and annuity products and may perform many of the functions traditionally provided by an insurance company (recruiting, licensing, and education of agents, marketing, and sales support). Typically, these services are provided to independently contracted insurance agents in exchange for a relatively small percentage of their commission.
Market Value Adjustment (MVA)— This is a feature often attached to deferred annuities, which could increase or decrease the cash surrender value of an annuity if more than the penalty-free amount is withdrawn or the contract is surrendered during the declared surrender charge period. In general, if interest rates are lower at the time of withdrawal than at the time the contract was issued, the annuity’s cash surrender value will be increased (market value adjusted). If interest rates are higher at the time of withdrawal than at the time of issue, the cash surrender value will be reduced.
Maturity Date— This is the latest date at which an annuity must be converted to income payments (or annuitization).
Maximum Rollup Period— This is the maximum number of years that the rollup on an optional guaranteed lifetime withdrawal benefit (GLWB) rider will be credited to the benefit base on the annuity contract. A rollup is a common feature on optional GLWB riders, guaranteeing that the GLWB’s benefit base will grow by a specified percentage, as long as the annuity contract is held in deferral and Guaranteed Withdrawal Payments are not taken.
Minimum Guaranteed Surrender Value —A secondary guarantee on a fixed or indexed annuity, which guarantees a minimal value to be paid to the annuitant in the event of death, surrender, or non-performance of the index (for an indexed annuity). Note that the National Association of Insurance Commissioners (NAIC) has mandated that the minimum guaranteed surrender value on annuities cannot credit anything less than 1% interest on 87.5% of the premiums paid on the annuity. However, as much as 3% interest can be credited on 100% of the premiums paid on the annuity, dependent on the five-year constant maturity U.S. Treasury Rate and the annuity’s design.
Mortality and Expense (M&E) Risks Charge— This fee only applies to variable annuities. In most cases, the M&E pays for the guaranteed death benefit. It also ensures that the expense risks charged on the contract won’t increase. It also covers a guaranteed interest rate paid on one type of variable annuity subaccount and may cover the overhead expenses the insurer incurs with the annuity contract.
Multi-Year Guaranteed Annuity (MYGA)- This is a type of fixed annuity where the credited interest rate is guaranteed for longer than a one-year period.
National Association of Insurance Commissioners (NAIC)— The U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories to oversee insurance and annuity organizations and products.
Non-Qualified Annuity— A type of annuity that has no contribution limit and no required minimum distributions at age 70 1/2 (unlike qualified). It can be funded with after-tax dollars from any source and is available to any annuity purchaser.
Non-Rolling Surrender Charge— For a flexible premium deferred annuity, the stated length of the surrender charge term will start the day the initial premium deposit is received. Future deposits will not change the point at which all of the funds are penalty free.
Participation Rate— The percentage of positive index movement that will be used in the crediting calculation on an indexed annuity. Indexed crediting methods may also use a cap rate or a spread rate.
Penalty-Free Withdrawals— The annual amount that an annuitant is permitted to withdrawal from their annuity’s value, without surrender charges being imposed. This amount is commonly 10% of the annuity’s account value.
Period Certain— This is an income option offered by an immediate annuity where the contract owner can select to receive periodic payments for a specified period of time. The payout amount is determined by the contract value and the length of the period selected.
Portfolio-Based Rates— When an insurance carrier credits rates based on their investment portfolio; generally more conservative. Often, portfolio-based rates are a better choice when interest rates are headed down because of a broad portfolio with varying maturities.
Premature Withdrawal— A transaction of taking cash out of an annuity before the contract owner or annuitant reaches the age of 59 1/2. Premature withdrawals are subject to a 10% federal tax penalty, in addition to any income taxes that may be due and possible policy surrender charges from the insurance company.
Premium Bonus— This is a feature offered on fixed, indexed, and variable annuities where the insurance company issuing the annuity credits the account value of the contract with a stated percentage of additional money on the day the policy is issued (and often on subsequent policy anniversaries). Annuities with premium bonuses tend to have relatively lower rates and higher/longer surrender charges than annuities without premium bonuses.
Principal— The total amount the contract owner or annuitant has invested in an annuity, not including interest earned.
Prospectus— A federally required written document which must be given before the sale to any prospective variable annuity purchaser. It describes the investment objectives of any separate accounts, past performance of subaccounts, as well as any fees or expenses, included in the variable annuity’s structure.
Qualified Annuity— An annuity that is purchased to either fund or distribute funds from a tax-qualified plan. In most instances, premiums paid can reduce current income taxes and the accumulations are tax-deferred.
Recapture Charge— This is a feature used on fixed, indexed and variable annuities with premium bonuses, whereby a portion of the premium bonus is forfeited due to an annuitant’s early withdrawal in excess of the penalty-free amount during a specified period.
Registered Indexed Annuity— An indexed annuity that has been filed with and classified as a security with the U.S. Securities and Exchange Commission (SEC)
Required Minimum Distribution (RMD)— A provision that requires withdrawal of funds from IRAs and qualified plans by the calendar year in which you reach the age of 70 1/2. For qualified plans, RMDs may begin at retirement if this occurs after age 70 1/2.
Return-of-Premium (ROP) Option— This is an annuity feature that guarantees a return of the premiums paid in the contract to the annuity purchaser at any time.
Rider (a.k.a. Endorsement)— An optional benefit added to the base annuity contract, which changes the annuity’s terms or conditions. On a life insurance policy, it is an endorsement that either limits policy benefits, or adds supplemental benefits to the policy, and becomes a part of the insurance contract. Riders usually are added at an additional cost to the annuitant or policy owner.
Risk Averse— This term describes a client or investor who will not assume a given level of risk unless there is an expectation of adequate compensation for having done so.
Rolling Surrender Charge— In a flexible premium deferred annuity, each deposit made will have its own independent surrender charge schedule. For example, a new deposit made into an annuity with a five-year surrender charge will start the five-year period the day the money is received by the company. Therefore, earlier deposit amounts of the annuity will become free of surrender charge at different times.
Rollover— This describes the transaction of funds from an IRA or qualified retirement plan being moved to another of the same type or to an IRA, preserving its tax-deferred status.
Rollup— A common feature on optional guaranteed lifetime withdrawal benefit (GLWB) riders, guaranteeing that the GLWB’s benefit base will grow by a specified percentage, as long as the annuity contract is held in deferral and guaranteed withdrawal payments are not taken. This percentage is not a bonus or a guaranteed annual return on the base annuity contract; it can only be realized if the annuitant holds the policy in deferral. The rollup is generally limited to a specified number of years.
Rollup Period— The initial number of years that a rollup on an optional guaranteed lifetime withdrawal benefit (GLWB) rider will be credited to the benefit base.
Rollup Period Reset— A provision on many optional guaranteed lifetime withdrawal benefit (GLWB) riders, which allows the purchaser to re-start the rollup period, so that the annuitant can continue to take advantage of any rollup for a longer period. Typically these resets can only occur over a specified duration, such as once every five years in the contract.
Securities and Exchange Commission (SEC)— The federal regulatory and enforcement agency that oversees public investment trading activities, which would include variable annuities.
Separate Account— This is the insurance company’s investment portfolio that supports the performance of variable annuities and is kept separate from the insurance company’s regular investment accounts.
Simple Interest— A type of interest crediting whereby interest is only credited on the payment of the initial principal amount, not on the interest accrued.
Single Premium Deferred Annuity (SPDA)— This is a retirement income contract acquired with a single premium payment, in which an individual receives a regular stream of income payments in exchange from the issuer at some time in the future.
Solvency— When an insurance company has the assets to pay the claims which are being made against it by their policyholders.
Specimen Contract— A generic sample annuity contract.
Spousal Continuation— A standard feature on optional guaranteed lifetime withdrawal benefit (GLWB) riders, which allows the spouse of the annuitant to continue receiving guaranteed withdrawal payments under their own name, once the annuitant has passed away.
Spread Rate (Asset Fee, Margin)— This is a standard deduction that comes off of the positive index growth at the end of the stated index term in the crediting for an indexed annuity. Indexed crediting methods may also use a cap Rate or a participation Rate.
Standard and Poor’s Rating (S&P Rating)— An independent opinion of an insurer’s financial strength and ability to meet its ongoing policy and contract obligations, as provided by the ratings firm Standard and Poor’s. For example, a company may be commonly described as a AA or AAA rated firm
State Guaranty Funds— Each of the 50 states has enacted legislation to protect the contract owners of that state, should an insurance company be faced with insolvency. Most state guaranty funds assess their admitted insurers an extra charge to cover any insurance company insolvencies within the state. Different states have different limits of protection. All guaranty associations are funded by insurance companies and administered by the states.
Street Level Commission— This is the maximum advertisable commission that can be paid to a salesperson on a fixed or indexed annuity product (i.e. a marketing organization cannot run an advertisement in a magazine, saying that the commission paid on an annuity is greater than the street level amount). Salespeople may be paid more or less than street level. Typically, the amount paid is based on the salesperson’s level of annuity sales production and his/her clients’ annuity premiums paid.
Subaccount— These are investment portfolios offered in variable annuity contracts where premiums may be allocated.
Suitability Review— A review that is performed by an insurance or financial salesperson in the course of recommending the proper amount of risk that an individual should take in considering whether the pending purchase of an annuity or any commissioned financial product is appropriate. Federal regulations require that licensed salespeople disclose why and how a financial product is suitable and appropriate to use.
Surrender Charge— A penalty imposed by the insurance company for withdrawing funds from an annuity prematurely. Surrender charge provision usually applies during the first 7 -10 years of the annuity’s ownership.
Surrender Charge Waiver— A feature on fixed, indexed, and variable annuities that permits the annuitant to withdraw a portion of their annuity’s value without surrender charges being imposed. This waiver is typically available in the event of certain triggers such as death, disability, nursing home confinement, terminal illness, and unemployment.
Tax-deferral— When taxes on earnings are postponed until any earnings are withdrawn from the annuity.
Tax-Sheltered Annuity (TSA)— A retirement income annuity sold only to public school teachers and employees of hospitals, colleges, and other organizations offering qualified retirement plans under Section 403(b) of the U.S. Internal Revenue Code.
Trail Commissions— A commission structure where regular commissions are paid, based on the annuity’s account value, and made payable to the salesperson after the annuity contract is issued. Trail commissions are usually offered in addition to some form of heaped commission. An annuity may offer a number of trail commission options, each varying in the amount of heaped and trail commission paid. Trail commissions are typically paid on a monthly or quarterly basis and may begin as early as the second month of the contract. Relative to other commission structures, trail commissions pay a much lesser percentage commission.
Variable Annuity— This is a retirement income contract issued by an insurance company where crediting of any interest is determined by the investments that the annuity owner selects to perform within the structure of the product. A Variable Annuity is considered a high risk/high return annuity product and is federally regulated as a security.
Vesting Schedule— This is a feature used on fixed, indexed and variable annuities with premium bonuses, whereby a timetable is presented for when the annuitant gains ownership (or nonforfeitable rights) in the premium bonus on the annuity contract.
SAFE thanks WINK and Moore Market Intelligence for providing this glossary of terms.