Financial lingo isn’t the easiest to understand, especially when it comes to the annuity industry. We’ll help you along with this glossary of common terms found throughout our site. Hopefully, it will give you a better understanding of the process.
A rule under Section 1035 of the Internal Revenue Code that allows for a tax-free exchange of a life insurance or annuity policy for a different annuity contract that is better suited to the policyholder’s needs.
1099-R Distribution Codes
Codes listed on form 1099-R from the IRS that signify the different types of distributions that can be taken from a retirement account and how they should be taxed.
A fee charged most often by mutual fund companies but also companies that sell variable annuities that covers costs related to marketing the fund or security.
The 4% rule states you should withdraw 4% of your portfolio in the first year of retirement, and then adjust that percentage to account for inflation yearly.
A retirement plan that allows employees and employers to make cash or percentage-based contributions to the employee’s retirement account. Most commonly used by public institutions (government, educations & non-profits). 401(a) plans typically give more control to the employer over participation and funding decisions.
An employer-sponsored retirement savings plan that allows employees to save pre-tax money from their paychecks, often with a partial match from their employers. Money deposited into 401(k) accounts is not taxed until it is withdrawn. Some 401(k) plans also allow for post-tax earnings to be saved, depending on the employer plan.
The 60-day rollover rule states that indirect rollovers from a qualified retirement plan or IRA to another qualified retirement plan or IRA must take place within a 60-day window starting from the day funds were withdrawn
The accumulation or increase of a thing over time, specifically for annuities, the accumulation of interest earned.
An accumulation period is the period of time when annuity premiums increase in value.
Period of time during which an annuity grows in value before payments are distributed.
An active participant is an individual who is eligible to receive benefits from a qualified retirement plan or to participate in such a plan.
An actuary is a professional who analyzes data to measure and predict potential financial risk.
An agreement between multiple parties in which those involved do not have to perform a particular action until a future uncertain event occurs. An annuity contract is an example of an aleatory contract.
AM Best Rating
Insurance company ratings from AM Best, an independent credit rating agency. The ratings are based mainly on the assessed ability of an insurance carrier to pay out claims, the level of debt the carrier is holding and any other financial obligations that may indicate a likelihood of default.
Annual Reset Method
An interest crediting method In fixed or fixed indexed annuity contracts which serves to capture and lock in gains over the course of a year.
The investment options that generate the return on an annuity and determine guaranteed income payment amount. Bonds and other fixed-rate investments comprise the annuity fund for fixed annuities, whereas variable annuity funds consist of a selection of bonds and stock options.
The rate of growth, expressed as a percentage, set by the insurance company at the start of the annuity contract term. Depending on the type of annuity, the insurance company may guarantee the interest rate for a year or longer, or the rate may fluctuate with a stock market index.
A measurement associated with some fixed indexed annuities that show the potential interest they can earn.
A bank run occurs when the customers of a bank become convinced that their money is in jeopardy. When lots of customers try to withdraw their money all at once, a bank run happens, which can create further instability in the bank’s finances.
Also referred to as the “account value” or “accumulated value,” the sum of all premiums and interest minus any losses incurred from low-performing funds. The cash value is different from the surrender value, which is the cash value less any surrender charges.
Catastrophic Injury Case
Lawsuit filed for serious injuries to the spine, spinal cord, brain or skull that result in death or permanent neurologic damage.
CBC Settlement Company
Better Business Bureau “A”-rated structured settlement purchasing company and Annuity.org partner headquartered in Conshohocken, Pennsylvania.
A fixed annuity contract meant to mimic a certificate of deposit (CD).
A low-risk, low-return financial product that falls into the cash-equivalent category of investment options and is similar to a savings account. Unlike a savings account, however, the investor has little to no access to the principal or interest until the CD matures.
An alternative to a traditional cash donation, a charitable gift annuity is a type of annuity purchased on behalf of donors for the benefit of the donor. The donor receives payments until their passing, in which case the charity receives the remaining balance on the contract.
The person in a lawsuit who is making a claim; plaintiff.
Commissioners Annuity Valuation Reserve Method
A method established by the National Association of Insurance Commissioners (NAIC) to measure the statutory cash reserves of an annuity provider.
Court-ordered monetary payment, or any other remedy, from a negligent party who has caused injury to another party.
The process of adding the interest earned during the investing period to the principal, increasing the return over time.
An alternate beneficiary for an annuity in the event that the primary beneficiary is unable to receive the benefit.
The maximum amount you can contribute to a retirement account.
A final order from a court in the county in which either the structured settlement holder lives or the structured settlement agreement was approved that confirms that the transfer of structured settlement payments in the best interest of the payee and the payee’s dependents.
In a disability insurance policy, the elimination period is how many days a policyholder must be disabled and unable to work before they can receive the benefits of their policy.
An emergency fund, also known as a rainy day fund, is money set aside for unplanned expenses or financial emergencies.
Employer-Sponsored Retirement Account
A retirement account that allows taxpayers to either defer income taxes on contributions and earnings or to contribute after-tax dollars and collect tax-free income earned from interest, dividends and/or capital gains.
A percentage that represents the portion of an annuity payment that is excluded from gross income and is, therefore, not subject to ordinary income tax. The exclusion ratio is calculated by dividing the premium by the expected return.
An annuity and structured settlement purchasing company that offers a lump sum of cash in exchange for the rights to future income payments.
The sale or transfer of all or a portion of annuity or structured settlement payments in exchange for a lump sum of cash.
An annuity product offered to some federal government employees as part of an employer-sponsored retirement plan.
Federal Deposit Insurance Corporation (FDIC)
The independent agency created by the Congress to ensure stability and public confidence in the U.S. financial system, by insuring deposits, supervising financial institutions, and backing large financial institutions in crisis conditions.
The FERS annuity supplement provides income benefits for eligible federal employees who retire before the age of 62. The supplement represents income the employee would be getting from Social Security if they were 62 or older.
A guideline that helps retirees decide how much money to withdraw from their retirement account annually. The guideline states that a person could withdraw 4 percent of their retirement account annually.
A provision in your annuity contract that allows you to cancel the contract within a specified time frame and receive a full refund without having to pay surrender charges. While the free look period varies from state to state, it often lasts at least 10 days.
FT Wilshire 5000
The FT Wilshire 5000 is a stock index that tracks the performance of virtually all publicly traded companies in the United States.
A type of trust that designates any person who is at least 37 ½ years younger than the settlor as the beneficiary of the trust. Generation-skipping trusts are not exclusive to grandparent-grandchild relationships. They can be set up for a variety of relationships, with the exception of spouses and ex-spouses.
An optional rider that can be added to an annuity contract that ensures a steady stream of retirement income by allowing you to withdraw a specific percentage of funds each year, regardless of market conditions.
An annuity contract that converts all or part of a consumer’s savings into a guaranteed stream of income, either for the consumer’s lifetime or for a specified number of years. Income annuity payments can be immediate or deferred.
A government tax, the amount of which is contingent upon how much money a taxpayer earns annually.
Independent Broker Dealers
Firms responsible for trading securities.
An index is a statistical market indicator. It tracks the performance of a group of assets or basket of securities.
An annuity contract that guarantees payments for the remainder of two people’s lives. A joint and survivor annuity ensures that the secondary annuitant, often the spouse, will continue to receive payments after the annuitant’s death.
A financial strategy that involves buying multiple financial products with different maturity dates. In the case of annuities, laddering refers to purchasing several annuities of lower value over a period of years.
Type of annuity that has smaller payments, but guarantees a specified number of fixed payments. If the annuitant dies before the period ends, payments will go to a beneficiary. If the annuitant outlives the payment period, he or she will continue to collect income until death.
Lifestyle creep is a change in spending habits associated with an increase in disposable income.
A fixed immediate annuity that allows applicants to meet Medicaid’s asset criteria by reducing his or her non-exempt assets, thus making them eligible for Medicaid benefits, such as long-term care. They help spouses of Medicaid recipients continue to pay their bills in retirement.
A money market account is a federally insured savings account that allows you to add or remove funds up to six times per month with a debit card or check.
Money Market Accounts
A cash-equivalent investment with low risk and low returns that are based on current Treasury rates.
Mortality and Expense Fees
Fees designed to mitigate risks to the annuity issuer for covering some kind of guarantee, usually guaranteed death benefits.
The payments that remain when an annuitant whose premiums were pooled with the premiums paid by other annuitants dies prematurely. These payments, referred to as mortality credits, are distributed to the surviving annuitants in the pool.
An annuity that is purchased with after-tax dollars, i.e., money not contributed to a tax-deferred retirement plan, such as an IRA or a 401(k). Non-qualified annuity premiums are not deductible from gross income.
A percentage by which the insurer multiplies the change in an index during the contract term to arrive at the amount of interest they will credit to an indexed annuity contract.
Revenue generated from an activity that requires little to no management or participation on the part of the investor. Annuities are among the most reliable financial strategies for generating passive income.
The phase of an annuity contract that follows the accumulation phase. During the payout phase, you can convert the contract into a fixed income stream, a process known as annuitization, or take a lump-sum distribution.
The current cash value of an annuity, as calculated using a specific discount rate.
The amount that is originally invested, not including subsequent interest.
An estate planning tool whereby the annuitant can transfer property to the obliger in exchange for regular payments.
Private banking is a banking service that provides the common products and services of traditional retail banking but with some additional perks and features.
Private credit is debt that is negotiated in private markets. While similar to public credit, these investments are less liquid and carry higher risk. In return, they typically earn higher yields. Private credit investments also generally have higher requirements that the borrower must meet.
A statement adding to the specifications of a law or contract.
A financial disclosure document meant to describe a security offering.
A statement adding to the specifications of a law or contract.
Public credit is debt issued or traded in public markets. Examples include bank loans and investment grade corporate bonds.
An annuity contract purchased with pre-tax dollars, such as funds from an IRA or a 401(k) plan. The money you use to purchase a qualified annuity is subtracted from your annual income in the year you make the purchase. It is taxed only when you begin to receive the funds from the annuity, usually in retirement.
An annuity that uses a stock market index to determine gains and losses. With a RILA, previously referred to as a buffered annuity, you have the ability to set the maximum loss you are willing to tolerate.
The IRS-mandated minimum annual withdrawal amount from tax-deferred retirement accounts for participants aged 70½ or 72, depending on the year they were born. Annuities held inside tax-deferred retirement accounts, such as 401(k) plans or IRAs, are subject to RMDs.
Self-directed IRAs are a type of IRA that allows holders to invest in alternative asset classes not open to regular IRAs. They are held by custodians, but the account holders are responsible for managing investments.
Type of annuity that converts a lump-sum premium to a stream of income payments within a year of purchase. Also known as an income annuity or immediate annuity, a SPIA has no cash value and withdrawals are generally not allowed before income benefits begin.
Social Security is a federal benefits program for retirees in the United States, funded by taxes.
Special Purpose Acquisition Company (SPAC)
A special purpose acquisition company is a shell corporation listed on the stock exchange with the purpose of acquiring a private company and taking it public, thereby bypassing the traditional initial public offering process.
An annuity that pays a guaranteed stream of income but ceases payments upon the death of the annuitant, usually the annuity contract holder. Straight life annuities don’t include a death benefit, so payments can’t be made to a beneficiary.