Accumulation Period: The time between the purchase and pay out period of a deferred annuity. Also called Growth Period.
Annuitant: The person who receives annuity income benefits. Annuitization: The conversion of an annuity contract’s value into a series of income payments.
Annuity: An investment in which an insurance company agrees to pay an income for life or for a specified number of years.
Annuity Starting Date: The beginning date of the annuity pay out period.
Back-End Charge Fee: Charged by the insurance company for cashing out early. Usually applies during the first 7 – 10 years of the investment. Same as Surrender Charge.
Bailout Provision: Safety feature where investor may withdraw all the money in the account without paying a surrender charge if the fixed annuity’s interest rate falls below a specified rate.
Bonus Rate: Extra interest in the first year that increases the annuity’s value on which future interest will be calculated in subsequent years. Also known as 1st Year Bonus Rate.
Compound Earnings: Reinvesting the previous years’ interest earnings. Also known as Compounding.
Current Declared Rate: The rate of interest set by the insurance company each policy year based on the prevailing market rates. Also known as Initial Interest Rate.
Deferred Annuity: Most annuities are this type, where investor puts off taking annuity payments from the annuity. Allows investment to grow over time, increasing the value.
Equity Index: A statistical measure used to report the performance of a select group of stocks or bonds. When index appreciates in value, so does annuity.
Exclusion Ratio: Determines how much of each annuity payment is excluded from income tax and how much is taxable when income is received.
Fixed Annuity: Specifies a fixed rate of interest (usually set annually based on the prevailing market interest rates) that will be paid on the amount invested in the annuity. The insurance company assumes the investment risk. Most Fixed Annuities provide a guaranteed minimum rate of interest of 3% for the life of the contract. If the interest rate falls below a specific rate, a Bailout Provision may apply.
Fixed Number of Years: Annuity pay out option for a set number of years instead of for a lifetime. You run the risk of seeing your income payments stop if you live longer than the period you choose.
Flexible Premium Annuity: Can be purchased with a series of regular payments over a period of time. The investor is usually allowed to change the amount or frequency of payments, subject to minimum annual amounts.
Growth Period: Time between purchase and pay out period of deferred annuity where annuity earns interest. Also called Accumulation Period.
Guaranteed Interest Rate: The minimum rate of interest insurance company agrees to pay each year on a fixed annuity (usually 3%). Also known as Minimum Guaranteed Interest Rate.
Immediate Annuity: Annuity purchased with a lump sum that begins to pay regular income soon after purchase. There is no investment growth period.
Initial Interest Rate: The rate of interest set by the insurance company each policy year based on the prevailing market rates.
Investment: Money used to purchase an annuity.
Joint-and-Survivor Annuity: Annuity that pays an income as long as either of two or more designated people is alive.
Lifetime Income: You receive income payments for the rest of your life. The income ceases upon your death.
Liquidity: Assets that can be converted into cash quickly. An annuity is a long term investment and has very limited liquidity.
Non-qualified Annuity: Annuity purchased outside of an IRS-approved pension plan. Contributions are made with after-tax dollars. Earnings can accumulate tax deferred until withdrawn.
Premature Withdrawal: Taking cash out of an annuity before investor reaches the age of 59 1/2. Subject to a 10% federal tax penalty in addition to any income taxes that may be due, and possible policy surrender charge from the insurance company. See Surrender Charge.
Qualified Annuity: Approved by the IRS for inclusion as an investment in Keogh plans, IRA’s, and other IRS-approved pension plans.
Renewal Rate: Rate at time of annuity renewal, usually set annually at the end of each policy year. Also known as Renewal Rate Interest or Current Declared Rate.
Separate Account: Insurance company’s investment portfolio that supports a variable annuity. Kept separate from the insurance company’s regular investment accounts.
Single Premium Annuity: Used for an investment all at one time with no plans to add to it.
Straight Life Annuity: An annuity income option that pays regular annuity income to one person until that person dies. Annuity terminates after death.
Surrender Fee: Fee charged by the insurance company for cashing out early. Usually applies during the first 7 -10 years of the investment. Same as Back-End Charge.
Variable Annuity: Annuity where you bear investment risk, including possible loss of principle. The potential to achieve greater investment gains, but investment losses will be passed through to investor as well.
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