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Annuity Glossary

Annuity is a financial topic that should be comprehensively comprehended by an annuity buyer before getting into an annuity contract. The subject will seem to you a confusing and a complicated at first glance, but if you learn the definitions to key terms related to annuities, it’ll become easier for you to grasp the thing properly. Here are some important definitions that will help you understand annuities properly.

1035 Exchange
It is the transfer of an investment from one Annuity Company to another. This transfer is not taxed.
Account Value
It’s the total value of the annuity i.e. the principal plus interest less any withdrawals made.
Annuitant
An Annuitant is the person who receives or is entitled to receive annuity payments. Annuitant, often the annuity policyholder, is also, the “measuring life” of the annuity contract.
Annuitization
The process of converting an annuity from a single sum to take a guaranteed monthly or annual income from the annuity.
Annuity Certain
Annuity Certain is the contract that offers the annuitant or the beneficiary (if the annuitant dies) an income for a specified number of years, regardless of the policyholder’s life or death.
Beneficiary
The person or organization named in the annuity policy as the recipient of annuity insurance proceeds in the event of the demise of the annuity holder.
Bond Strategy Annuity
It’s a type of fixed-deferred annuity that provides a guaranteed minimum interest and allows a client to select from various investment strategies that are designed to follow a particular bond-index.
Bonus Annuity
A type of fixed-deferred annuity providing an additional bonus, in the form of additional interest or additional principal (typically from 1% to 5%), in the first year of the contract.
CD or Certificate of Deposit
A savings instrument offered by banks and savings and loans that guarantees a fixed interest rate for a specific period of time (e.g., 90 days, 6 months, 1 year, 3 years, 5 years).
Death Benefit
The “death benefit” is term used for the annuity benefits offered after the death of a policy holder. All annuities have a death benefit; typically, IRS premature distribution tax is waived under the death benefit.
Equity-Indexed Annuity
A type of deferred annuity that credits interest based upon growth of an equity index such as the S&P 500 Index, the Dow Jones Industrial Average, or the NASDAQ 100 Index, yet still guarantees principal.
Exclusion Ratio
It is the proportion of an annuitized payment, which is a return of capital and thus it’s not taxed.
Fixed Deferred Annuity
It is a type of deferred annuity, which offers a fixed rate of interest guaranteed for a specific period of time. These annuities are also tax deferred.
Flexible Premium Deferred Annuity
It’s an annuity contract, which permits varying premium payments from year to year and is often used for individual retirement accounts. Flexible premiums are extremely common with variable annuities but rare with fixed-rate annuities.
Forced Annuitization
It’s the term used for the condition when an annuity contract requires liquidation once the annuitant reaches a certain age (typically 80 or 85).
Free Withdrawal
It’s a provision in most deferred annuities that allows a policyholder to withdraw a certain amount (typically up to 10% of their account value) without incurring a surrender or withdrawal charge. Normally, the withdrawals are taxable and may be subject to a tax penalty if taken before age 59½.
Guaranteed Death Benefit
Under the “Guaranteed Death Benefit,” the beneficiary gets the greater of the principal or the value of the account as of the date of the annuitant’s death.
Guaranteed Income
It is the monthly or annual income payment made by an insurance company after annuitizing an annuity.
Immediate Annuity
The annuity in which money is paid to annuitant either right away or within a month, quarter, or year. The size of each payment depends on the premium, the accrued interest, and the period of time over which payments are made. The annuity is designed for the people who need income on a regular basis.
Issue Age
The annuitant’s age on the date of issuance of the annuity policy.
Joint Annuitants
Two persons, typically a husband and wife, taking an annuity policy. The payments in the joint annuitants’ case continue until the death of the last annuitant.
Legal Reserve
The minimum amount of funds, as calculated under the state insurance code, which an insurance company must keep to meet future claims and obligations. The amount of the legal reserve varies from state to state.
Legal Reserve Life Insurance Company
A life insurance company operating under state insurance laws specifying the minimum basis for the reserves the company must maintain on its policies.
Life Annuity
An annuity that provides an income for life.
Lifetime Minimum Interest Rate Guarantee
The underlying minimum interest rate (typically 2%) guaranteed on an annuity for the length of the annuity contract.
Multi-Year Interest Rate Guarantee Annuity
It’s a type of deferred annuity that offers an interest rate that is guaranteed for multiple years, e.g. five, seven, or ten years.
No-Load
An investment that does not charge the investor a commission fee. Annuities are “no load” investments.
Non-Qualified
The annuity that is not used to fund a tax qualified plan such as an IRA, Keogh, SEP, SEP IRA, or TSA.
Probate
The legal process used to validate a will. Annuities are not subject to probate.
Qualified
The annuity that is sold as part of a tax-qualified plan such as an IRA, Keogh, SEP, or company pension plan.
Reserve
The amount required to be carried as a liability in the financial statement of an insurance company to provide for future commitments under policies outstanding.
Settlement Options
One of several ways, other than immediate payment in a lump sum, in which the insured or beneficiary may choose to have policy proceeds paid.
State Insurance Department
An administrative agency that implements state insurance laws and supervises, within the scope of those laws, the activities of insurers operating within the state.

 

IMPORTANT DISCLOSURES

Insurance and annuity products

  • are not deposits
  • are not guaranteed by a bank
  • are not insured by the FDIC or any other federal government agency
  • may decrease in value

This website should be considered an advertisement and is not a contract. Our insurance products are underwritten by American Savings Life Insurance Company, a Mesa, Arizona based life insurance company. Products and services mentioned in this website are only available for residents of the states in which American Savings Life Ins Co is licensed, which currently are Arizona and Utah. The information in this website is provided to support the sale of insurance and annuity products offered by American Savings Life Ins Co. Based on your particular circumstances, you should seek advice from an independent tax adviser. You cannot rely upon or use the information on this website for the purpose of avoiding any tax or tax penalty that may be imposed by the Internal Revenue Service.