Accumulation Phase
The period during which you fund an annuity contract through lump-sum or periodic contributions. Your money grows tax-deferred inside the contract during this time, typically for 5 to 25 years.
Annuitant
The person who receives the benefits of an annuity. For most purposes, the contract owner and annuitant are the same person.
Annuitize / Annuitization
The process of converting an annuity into a series of periodic income payments. Annuities may be annuitized over a long or short period, or in a single payment.
Annuity
A financial product sold by insurance companies designed to accept and grow funds, then pay out a stream of income at a later date. Most often used to secure steady cash flow during retirement.
Beneficiary
A person who gains an advantage or profits from something — in the financial world, someone eligible to receive distributions from a trust, will, life insurance policy, or annuity contract.
Bonus Credit / Bonus Rate
Some fixed annuity contracts offer a higher interest crediting rate in the first contract year. After year one, the rate reverts to a rate consistent with current market conditions. Some variable annuities offer an additional credit when the annuity is purchased.
Cap Rate
In an indexed annuity, the maximum percentage gain that can be credited in a given period, regardless of how much the linked index actually increases.
CD (Certificate of Deposit)
A bank savings product that holds funds for a fixed term at a fixed interest rate. Fixed annuities are often compared to CDs — both offer guaranteed returns, but annuity growth is tax-deferred.
Cost Basis
The total after-tax contributions made to an annuity. When distributions are made, the cost basis portion is not taxed again — only the earnings above it are subject to income tax.
Death Benefit
A contract provision guaranteeing your named beneficiary receives a specified value upon your death — at minimum the present value of the annuity including gains, minus withdrawals and fees.
Deferred Annuity
An annuity that does not begin income payments until a future date, allowing funds to grow inside the contract for several years before conversion to income.
Distribution Phase
The period during which an annuity pays income to the annuitant. Also called the payout phase. Distributions can be structured as periodic payments for life, a set term, or a lump sum.
Equity-Indexed Annuity
See Fixed Index Annuity. An alternate name for indexed annuities highlighting that returns are tied to an equity market index such as the S&P 500.
Fixed Annuity
An insurance product that guarantees to return both the principal invested plus a fixed rate of interest. The insurance company assumes all investment risk.
Fixed Index Annuity (FIA)
A type of annuity combining features of fixed and variable annuities. Growth is tied to a benchmark equity index but a minimum interest guarantee protects principal if the index declines.
Floor Rate
The minimum interest rate guaranteed in an indexed annuity, regardless of how the linked index performs. Prevents the credited rate from going below zero (or a stated minimum).
Free Look Period
A period — typically up to one month after purchase — during which an annuity can be cancelled with no penalty. Rules vary by state.
Free Withdrawal
A provision in most deferred annuities allowing early withdrawal of up to 10% of the annuity value without an insurance company-imposed penalty. IRS tax penalties may still apply before age 59½.
Guaranteed Income
A stream of income payments contractually guaranteed by the insurer, regardless of market performance or how long the annuitant lives.
Hybrid Annuity
A newer evolution borrowing features from fixed, immediate, and variable annuities. Best suited to investors who want to preserve principal while participating in market upside potential.
Immediate Annuity
An annuity that begins income payments immediately after purchase, funded by a single lump-sum premium. Also called a Single Premium Immediate Annuity (SPIA).
Income Rider
An optional contract amendment guaranteeing a minimum level of income withdrawals during the distribution phase, often based on a "benefit base" that grows independently of the cash value.
Index
A benchmark measure of market performance — most commonly the S&P 500 — used to calculate interest credits in an indexed annuity contract.
Indexed Annuity
See Fixed Index Annuity. An annuity whose interest credits are tied to a market index, subject to a cap rate and minimum floor guarantee.
Insurer
The insurance company that issues and backs the annuity contract, assuming investment risk in fixed annuities and guaranteeing all payments to the annuitant.
Joint Life Annuity
An annuity providing income for the lifetimes of two people — typically a couple. Payments continue until both annuitants have died. Monthly amounts are typically lower than a single-life annuity.
Life Annuity (Income for Life Annuity)
An annuity guaranteeing income for the life of the annuitant, no matter how long he or she lives. Payout is based on age, life expectancy, and contract value at annuitization.
MYGA (Multi-Year Guaranteed Annuity)
A type of fixed deferred annuity that locks in a guaranteed interest rate for a set number of years, similar to a bank CD but with tax-deferred growth.
Participation Rate
In an indexed annuity, the percentage of the total index gain used to calculate credited interest. For example: an 85% participation rate on a 10% index gain results in an 8.5% basis for interest calculation, before any cap or spread is applied.
Period Certain
A guarantee that annuity payments will continue for a specified minimum term, even if the annuitant dies before that term expires.
Premium
A contribution or payment made into an annuity contract. May be a single lump sum or multiple contributions.
Principal
The original capital contributed to an annuity, distinct from earnings. Fixed and indexed annuities typically offer principal protection.
Prospectus
A formal written document, filed with the SEC, setting forth the terms, investment options, risks, and fees of a variable annuity. Required reading before purchase.
Qualified Annuity
An annuity funded with pre-tax dollars — for example, from a 401(k) or IRA rollover. Distributions are fully taxable as ordinary income.
Renewal Rate
The new declared interest rate applied to a fixed deferred annuity after the initial guaranteed rate period expires. Also called the Current Declared Rate.
Required Minimum Distribution (RMD)
The minimum annual withdrawal the IRS requires from certain tax-deferred accounts, including qualified annuities, beginning at age 73.
Rider
An amendment to an annuity contract that expands or restricts benefits. Common riders include income riders, death benefit riders, and long-term care riders. Adding riders typically increases costs.
Spread / Margin
An alternative to a cap rate in some indexed annuities. The insurer subtracts a fixed percentage from the index gain before crediting interest. For example: 10% index gain minus 2% spread = 8% credited basis.
Surrender Charge
A penalty applied if funds are withdrawn during the surrender period — typically expressed as a declining percentage (e.g., 8% in year one, declining to 0% by year eight or nine).
Surrender Period
The number of years during which early withdrawal triggers a surrender charge. Commonly ranges from 5 to 10 years.
Tax Deferral
The ability to postpone income tax on annuity earnings until distributions are taken, allowing full compounding without annual tax drag.
Tax-Free "1035" Exchange
The IRS-recognized tax-exempt exchange of one annuity contract for another. No capital gains or income taxes are assessed at time of exchange, provided contracts are directly exchanged.
Term Certain Annuity
An annuity guaranteeing payments for a fixed term even if the annuitant dies before the term expires — payments continue to a named beneficiary for the remainder.
Variable Annuity
A contract under which the insurer agrees to make periodic payments based on the performance of underlying investment sub-accounts (typically mutual funds). The contract holder assumes all investment risk.
Variable Immediate Annuity
A contract funded with a single lump-sum that provides monthly income whose amount varies according to the performance of the underlying investment portfolio.
Withdrawal Charge
A charge assessed when funds are withdrawn during the surrender period. Also called surrender charge or surrender fee.
Withdrawals
Money taken from an annuity contract. Surrender charges and income taxes apply to earnings. An additional 10% IRS penalty applies if under age 59½.