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Understanding annuity terminology is the first step toward making informed retirement decisions. Browse our comprehensive glossary of terms to build your financial knowledge.
Have questions about these terms or how they apply to your situation?
Speak with a ProfessionalThe phase during which you make contributions to your annuity and your money grows tax-deferred. This period can last for years or even decades before you begin receiving payments.
If you purchase a fixed annuity at age 55 and plan to start receiving income at 65, those 10 years represent your accumulation period.
The person whose life expectancy is used to calculate annuity payments. The annuitant is often, but not always, the same person as the contract owner.
A husband may own an annuity contract but name his wife as the annuitant, meaning payments would be based on her life expectancy.
The process of converting your annuity accumulation into a stream of periodic income payments. Once annuitized, you typically cannot access the remaining principal as a lump sum.
After 15 years of accumulation, John decided to annuitize his contract, converting his $200,000 balance into monthly payments of $1,100 for life.
A financial contract between you and an insurance company where you make a lump sum payment or series of payments in exchange for regular disbursements, beginning either immediately or at some point in the future.
Mary purchased a fixed annuity with $150,000 from her retirement savings to guarantee income throughout her retirement years.
The person or entity designated to receive the remaining value of an annuity contract upon the death of the annuitant or contract owner.
Susan named her two children as equal beneficiaries, so each would receive 50% of the annuity value if she passed away.
A type of fixed annuity that works similarly to a bank certificate of deposit, offering a guaranteed interest rate for a specific term, typically ranging from 1 to 10 years.
Robert chose a 5-year CD-type annuity offering 4.5% guaranteed interest, knowing his principal would be protected.
The person who owns the annuity contract and has the right to make changes, such as naming beneficiaries, making withdrawals, or surrendering the contract.
As the contract owner, Patricia had the authority to change her beneficiary designation from her ex-husband to her daughter.
The amount paid to beneficiaries upon the death of the annuity owner or annuitant. In fixed annuities, this is typically the accumulated value of the contract.
When George passed away, his wife received the full $175,000 death benefit from his fixed annuity, which included all accumulated interest.
An annuity contract where income payments begin at a future date, allowing your money to grow tax-deferred during the accumulation period.
At age 50, Linda purchased a deferred annuity, planning to start receiving income payments when she retires at 67.
The portion of each annuity payment that is considered a return of your original investment and therefore not subject to income tax.
With an exclusion ratio of 60%, only 40% of each monthly payment is taxable income, reducing the overall tax burden.
An insurance contract that guarantees a minimum interest rate on your contributions while protecting your principal from market losses. The insurance company assumes all investment risk.
Carol chose a fixed annuity because she wanted guaranteed growth without worrying about stock market volatility affecting her retirement savings.
The amount you can withdraw from your annuity each year without incurring surrender charges, typically 10% of the contract value.
Even though his annuity was in the surrender period, Tom could withdraw up to 10% annually without any penalty.
The minimum rate of return that an insurance company promises to pay on a fixed annuity, regardless of market conditions.
The fixed annuity guaranteed a 3.5% interest rate for the first 5 years, providing predictable growth for retirement planning.
An annuity that begins making income payments within one year of purchase, typically within 30 days. Often purchased with a single lump sum payment.
Upon retiring, James used $300,000 to purchase an immediate annuity that started paying him $1,500 monthly right away.
An optional feature added to an annuity contract that guarantees a minimum level of lifetime income, regardless of the actual account value.
The income rider guaranteed that Helen would receive at least $1,200 per month for life, even if her account value dropped to zero.
The method and timing by which interest is added to your annuity account. Fixed annuities typically credit interest daily, monthly, or annually.
With daily interest crediting, your annuity earns compound interest every day, maximizing growth over time.
An annuity payout option that continues making payments for as long as either of two people (typically spouses) is alive.
Bill and Martha chose a joint and survivor option so that whoever lived longer would continue receiving monthly income.
An annuity payout option that guarantees income payments for the lifetime of the annuitant, regardless of how long they live.
At 70, Margaret chose a life annuity option, ensuring she would receive $1,800 monthly for as long as she lives.
The ease with which you can access your money. Annuities generally have limited liquidity during the surrender period, though most allow some penalty-free withdrawals.
While her annuity had limited liquidity, Sarah appreciated the 10% annual free withdrawal provision for emergencies.
The lowest interest rate that a fixed annuity will ever pay, as specified in the contract. This rate provides a floor of protection for your earnings.
Even if market rates dropped significantly, the annuity contract guaranteed a minimum rate of 1.5% would always be credited.
A type of fixed annuity that guarantees a specific interest rate for a set number of years, similar to a CD but with tax-deferred growth.
David purchased a 7-year MYGA with a 4.75% guaranteed rate, knowing exactly what his money would earn each year.
An annuity purchased with after-tax dollars, not held within a retirement account like an IRA or 401(k). Only the earnings are taxed upon withdrawal.
Since she had maxed out her IRA contributions, Nancy used additional savings to purchase a non-qualified annuity.
The different ways you can choose to receive income from your annuity, including life only, joint and survivor, period certain, or lump sum.
When annuitizing, Frank reviewed all payout options and selected a 20-year period certain to ensure his family would receive payments.
An annuity payout option that guarantees payments for a specific number of years. If the annuitant dies before the period ends, payments continue to the beneficiary.
With a 15-year period certain, if the annuitant passed away after 8 years, beneficiaries would receive the remaining 7 years of payments.
The amount of money you pay to purchase an annuity contract. This can be a single lump sum or a series of payments over time.
Elizabeth made a single premium payment of $100,000 to purchase her fixed annuity.
A key feature of fixed annuities where your original investment is guaranteed not to decrease due to market losses. Your principal is protected by the insurance company.
Unlike her stock investments, Annas fixed annuity principal was fully protected even during the market downturn.
An annuity held within a tax-advantaged retirement account such as an IRA or 401(k), purchased with pre-tax dollars. All withdrawals are taxed as ordinary income.
Richard rolled over his 401(k) into a qualified annuity IRA to maintain the tax-deferred status of his retirement savings.
The interest rate applied to a fixed annuity after the initial guaranteed rate period expires. This rate is set by the insurance company and may be higher or lower.
After the 5-year guaranteed period, the renewal rate was set at 3.25%, still above the minimum guaranteed rate.
An optional add-on feature to an annuity contract that provides additional benefits, such as enhanced death benefits or guaranteed income, usually for an additional fee.
For an extra 0.5% annual fee, the income rider guaranteed lifetime payments regardless of account performance.
An annuity purchased with one lump sum payment rather than multiple payments over time.
Using her inheritance, Karen made a single premium payment of $250,000 to fund her retirement annuity.
An annuity purchased with a single lump sum that begins paying income immediately, typically within 30 days of purchase.
At retirement, Michael converted $200,000 into a SPIA that began paying him $1,100 monthly within two weeks.
A fee charged if you withdraw more than the free withdrawal amount or cancel your annuity contract during the surrender period. These charges typically decrease over time.
In year one, the surrender charge was 7%, but it decreased by 1% each year until it reached zero in year eight.
The number of years during which surrender charges apply if you withdraw more than the allowed amount or cancel your annuity contract.
The annuity had a 7-year surrender period, after which all funds could be accessed without any penalties.
A key benefit of annuities where your earnings grow without being taxed until you make withdrawals, allowing for potentially greater compound growth.
Thanks to tax-deferred growth, Lindas annuity earnings compounded faster than they would have in a taxable account.
Taking money out of your annuity before annuitization. Withdrawals may be subject to surrender charges, taxes, and potential IRS penalties if taken before age 59½.
After turning 60, Steven began making systematic withdrawals of $500 monthly from his annuity to supplement his income.