Glossary

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  • 1035 Exchange
    An exchange of one annuity contract for another that does not create a taxable event. This is important because money taken out of an annuity prior to age 59½ will incur a penalty by the IRS. However, the money can be moved from one annuity contract to another without incurring penalties or owing taxes.
  • 401(k)
    A defined contribution plan where employees can save money for retirement on a pre-tax (and sometimes post-tax) basis. In some plans the employer also makes contributions to the accounts, commonly referred to as “matching”.
  • 403(b)
    A defined contribution plan, similar to a 401(k), offered by public schools and certain tax-exempt organizations. With 403(b)s, employees of these institutions can save money for retirement on a pre-tax basis. In some plans the employer also makes contributions to the accounts, commonly referred to as “matching”.
  • 457(b)
    A defined contribution plan, similar to a 401(k) or 403(b), offered by state and local governments. 457(b)s allow government employees to save money for retirement on a pre-tax basis. In some plans the employer also makes contributions to the accounts, commonly referred to as “matching”.
  • Annuitant
    The person upon whom the life annuity payments are based. The amount of each annuity payment for life annuities is determined by the age and gender of the annuitant. The owner is typically the annuitant. The annuitant has no rights in the annuity contract but rather is merely the measuring life for the purposes of a life annuity.
  • Annuitization
    The concept of turning a sum of money into a stream of income. Some annuity products have optional annuitization or annuitization over a finite period of time. In the case of Deferred Income Annuities, annuitization occurs automatically at the income start date.
  • Annuitize
    The act of turning a sum of money into a stream of income. All annuities come with the option to annuitize, but for some it is the key feature of the annuity, and others it's an option at maturity. The former is true for income annuities - SPIAs and DIAs - which exist purely for annuitizing your premium right away or in the future. For accumulation annuities - MYGAs, VAs, and FIAs - you have the option to annuitize at the end of the contract.
  • Annuity
    A contract or policy that is issued by an insurance company providing a regular payment of income to the owner of the policy in exchange for an upfront premium. The income is paid by the issuer of the annuity policy or contract. There are several types of annuities but they can be generally categorized according to how the annuity is purchased (simple or flexible premiums); when the annuity payments begin (immediate or deferred); and how the policy value is invested (fixed or variable).
  • Beneficiary
    The person or party that will receive any death benefit payments payable under the annuity contract. These payments can be in the form of a continuation of the annuity payments or a lump sum. Not all annuities will have beneficiaries. If payments cease on the date of the annuitant's death, there are no remaining payments for the beneficiary. Generally, the beneficiary has no rights unless the beneficiary is named irrevocably.
  • Book Value
    A feature of a Multi-Year Guaranteed Annuity (MYGA) that affects the amount of money you can take out of the contract if surrendered before the end of the locked-in period. A Book Value MYGA would offer the accumulated value of the annuity less surrender fees applicable at that time of surrender. This is in contrast to a Market Value Adjustment, which reduces/increases the amount available on surrender if interest rates have moved since purchase.
  • Cash Refund
    If the annuitant passes away before receiving the specified amount, which may or may not be less than the originally annuitized amount, the remaining amount will be paid to the beneficiary as a lump sum.
  • Cash Value
    A feature of an annuity contract that specifies the value of the account accessible should the owner decide to withdraw from the policy. Depending on how long into the contract the withdraw is made and how large it is, a surrender/withdrawal fee might apply. Multi-Year Guaranteed Annuities, Fixed Indexed Annuities, and Variable Annuities all have cash values, where as income annuities (Single Premium Immediate Annuities and Deferred Income Annuities) do not.
  • Certificate of Deposit (CD)
    A short-term investment contract sold by banks that offers a guaranteed return over a specified period of time. CDs offer a safe way to earn higher interest rates than those available through savings accounts by requiring you to lock your money away for 3 months to 5 years.
  • Commission
    The amount paid by the insurance company to the person or company selling an annuity. Commissions vary from product to product and insurer to insurer. While not a direct cost to the purchaser of the annuity, purchasers should still ask about them to better understand the costs associated with their annuity purchase.
  • Commutation
    The option available on some income annuities permitting acceleration of a limited number of upcoming monthly benefits.
  • Consumer Price Index (CPI)
    A statistic maintained by the US Department of Labor that measures the average change over time in the prices paid by urban consumers for a basket of goods and services.
  • Cost of Living Adjustment (COLA)
    (Also known as Inflation Rider). An optional feature that can be added to many annuity contracts that increases the income payments to account for changes in the cost of living. Annuities available in the market today do not cover inflation during the deferral period. Inflation riders are only applicable to payments once the income has begun.
  • Credit Rating
    Credit ratings give you a quick way to get a sense of of how trustworthy the promises made by the insurance company actually are.
  • Death Benefit
    An option/rider that refunds premiums paid into an annuity less cumulative income payments made, upon the death of the annuitant. Definitions vary from carrier to carrier, but this option or rider is typically effective after the income start date.
  • Deferral Period
    The time between the annuity purchase date and the income start date.
  • Deferred Income Annuity (DIA)
    (Also known as Longevity Insurance or Longevity Annuity). A contract with a life insurance company that provides a guaranteed stream of income payments for a fixed period of time or life (or both) beginning at a specified date years in the future. The annuitant pays one or multiple premiums to the insurance company, which typically then cannot be accessed outside of the planned payments.
  • Defined Benefit
    An older type of employer retirement plan that has been effectively replaced by Defined Contributions plans in recent years. Also known as Pensions, Defined Benefit plans provide employees with income in retirement based on their salaries and years of service.
  • Defined Contribution
    The type of tax-incentivized employer retirement plan that has become more commonplace in recent years, effectively replacing Defined Benefit plans. Employees decide how much they want to contribute to their Defined Contribution plan, such as a 401(k), and the employer may or may not match some or all of those contributions. There are limits to how much can be contributed and how the employee can access their savings.
  • Exclusion Ratio
    Determines the portion of payments from an income annuity that will be taxable for non-qualified annuities. It is calculated by taking the total contract value and dividing it by the expected return.
  • Fixed Deferred Annuity (FDA)
    (Also known as a Multi-Year Guaranteed Annuity or Fixed Rate Annuity.) Very similar to a Certificate of Deposit (CD) sold by banks, FDAs are sold by insurance companies. Like CDs, they offer a low-risk, fixed return over a specified period of time. But, as retirement savings vehicles, they also offer tax-deferred interest growth and can be annuitized to create an income stream at the end of the contract.
  • Fixed Indexed Annuity (FIA)
    While labeled an annuity, Fixed Indexed Annuity are primarily sold for their accumulation, or wealth-building, potential as opposed to their ability to create income streams. The premium paid into a FIA gets invested in market indices of your choice, with gains from the growth of those indices accumulating tax-deferred. Typically, the FIA will offer principal protection so that you don't lose money, but it will also charge high annual fees that significantly reduce your money's growth. FIAs also offer Income Riders, at a cost, which will create a stream of income payments starting in the future.
  • Fixed Rate Annuity
    (Also known as a Multi-Year Guaranteed Annuity or Fixed Deferred Annuity.) Very similar to a Certificate of Deposit (CD) sold by banks, Fixed Rate Annuities are sold by insurance companies. Like CDs, they offer a low-risk, fixed return over a specified period of time. But, as retirement savings vehicles, they also offer tax-deferred interest growth and can be annuitized to create an income stream at the end of the contract.
  • Free Look Period
    The time horizon over which you can terminate your contract after it's been issued without paying a penalty. The length varies by state, but most are at least ten days.
  • Full Retirement Age
    The age at which you are eligible to start claiming your full Social Security benefit. Your full retirement age depends on when you were born but is between 66 and 67 for people retiring today. Claiming Social Security before your full retirement age will reduce your benefit, and the opposite is true if you delay claiming.
  • I-Bonds
    Similar to TIPS, I-Bonds are inflation-linked securities issued by the government. They offer low-risk inflation protection because the bond's coupon payments increase with inflation, as measured by the Consumer Price Index. I-Bonds don't generate income, instead accruing interest until maturity.
  • Income Annuity
    A contract entered into with an insurance company where an upfront premium is exchanged for a stream of steady income payments. These income payments can continue for a specified period of time or for life, or both. A Single Premium Immediate Annuity (SPIA) is an income annuity with payments starting immediately. A Deferred Income Annuity (DIA), on the other hand, has income payments starting as late as 40 years in the future.
  • Income Start Date
    For a Deferred Income Annuity, this is the date chosen by the owner for the start of the guaranteed stream of income payments. This date is typically greater than one year and often is many years after the purchase date of the annuity contract.
  • Individual Retirement Account (IRA)
    IRA accounts are tax-qualified retirement savings vehicles that incentivize saving for retirement by offering tax-deductions and/or deferral. The two main types of IRAs - Traditional and Roth - have different tax rules. For Traditional IRAs, taxes are paid when the money comes out, whereas for Roth IRAs, taxes are paid when the money goes in. Both require you to wait until age 59½ to start taking withdrawals. Additionally, Traditional IRAs are subject to Required Minimum Distributions.
  • Inflation
    A sustained increase in the level of pricing of goods and services. It is measured as an annual percentage increase. As inflation increases, the purchasing power of one dollar decreases.
  • Inflation Rider
    (Also known as Cost of Living Adjustment). An optional feature that can be added to many annuity contracts that increases the income payments beginning at the income start date. Annuities available in the market today do not cover inflation during the deferral period. Inflation riders are only applicable to payments once the income has begun.
  • Installment Refund
    Available option with a Deferred Income Annuity whereby if the annuitant dies before a specified amount of payments are received, the remaining balance will be paid to the beneficiary in installments.
  • Insurance Company
    (Also known as Insurer, Carrier, or Annuity Company). The party that issues the policy and is required to keep guarantees and promises made in it.
  • Interest Rate
    A feature of a Multi-Year Guaranteed Annuity (MYGA) that specifies how money invested will grow over a specified period of time. Typically, there will be an interest rate guaranteed for number of years during which the owner cannot access his/her investment without paying a fee. The interest rates offered on MYGAs are normally higher than those offered on CDs.
  • IRA Contribution Limits
    The maximum amount you can contribute to an IRA (combined across traditional and Roth) each year. As of 2017, the limit is $5,500 for people under 50 and $6,500 for people 50 and over.
  • IRR
    An Internal Rate of Return (IRR) is a measure of the profitability of an investment. An IRR is calculated as the discount rate that makes the present value of all cash flows equal to 0.
  • Joint and Survivor Annuity
    Life annuity payments that continue until the death of both annuitants. Payments to the surviving annuitant can remain unchanged or can be reduced.
  • Life Only
    This is the simplest contract option whereby, once annuitized, the annuitant receives income guaranteed to last his or her entire life. Upon passing of the annuitant, no further payments are due.
  • Life with Cash Refund
    This contract option provides for income that is guaranteed for the life of the annuitant similar to the Life Only contract option. However, with this contract option if the annuitant passes before receiving income payments at least totaling the premium paid, the difference will be refunded to the designated beneficiary.
  • Life with Period Certain
    This contract provides for payments that continue for the greater of a "certain period" or the life of the annuitant. If the annuitant passes away during the certain period, the remaining certain period payments will be paid to the beneficiary named in the policy. The payments to the beneficiary continue until the certain period is complete. If instead the annuitant outlives the certain period, payments will continue until his/her death without anything being owed to the beneficiaries at that time.
  • Longevity Annuity
    (Also known as a Deferred Income Annuity or Longevity Insurance). A contract with a life insurance company that provides a guaranteed stream of income payments for a fixed period of time or life (or both) beginning at a specified date years in the future. The annuitant pays one or multiple premiums to the insurance company, which typically then cannot be accessed outside of the planned payments.
  • Longevity Insurance
    (Also known as a Deferred Income Annuity or Longevity Annuity). A contract with a life insurance company that provides a guaranteed stream of income payments for a fixed period of time or life (or both) beginning at a specified date years in the future. The annuitant pays one or multiple premiums to the insurance company, which typically then cannot be accessed outside of the planned payments.
  • Longevity Risk
    The chance that you live longer than expected. More specifically, the chance that you outlive your savings by living longer than you expect.
  • Market Value Adjustment
    A feature of a Multi-Year Guaranteed Annuity (MYGA) that affects the amount of money you can take out of the contract if surrendered before the end of the locked-in period. A MYGA with a Market Value Adjustment would increase/decrease the amount of money available upon premature surrender if interest rates have decreased/increased since purchase. The adjustment is meant to disincentivize surrenders in a rising-rate environment, but has no impact on the contract if held until maturity. This is in contrast to a Book Value annuity, which does not have this adjustment.
  • Modified Adjusted Gross Income (MAGI)
    A specific calculation of an individual's income that determines eligibility for tax-deductible IRA contributions. First, Adjusted Gross Income is calculated as one's gross income (salaries, wages, interest income, dividends, capital gains, etc.) less tax-deductible expenditures (student loan interest, health insurance, etc.). Then, some sources of income which had been excluded from Gross Income (N/A for the average taxpayer) are added back in to arrive at the MAGI.
  • Multi-Year Guaranteed Annuity (MYGA)
    Very similar to a Certificate of Deposit (CD) sold by banks, MYGAs are sold by insurance companies. Like CDs, they offer a low-risk, fixed return over a specified period of time. But, as retirement savings vehicles, they also offer tax-deferred interest growth and can be annuitized to create an income stream at the end of the contract.
  • Non-Qualified
    Refers to money that has already been taxed, as opposed to funds in qualified retirement savings vehicles that have not yet been taxed. Interest and equity gains on non-qualified savings accounts are typically taxed annually. However, annuities, which can be purchased with non-qualified savings, have tax-deferred status meaning that gains inside the contract are not taxed until the money is withdrawn.
  • Ordinary Income Tax Rates
    The tax rate applicable to ordinary income as defined by the IRS. Ordinary income is essentially non-capital gains income, which includes wages, salaries, tips, commissions, interest, and dividends. Distributions from qualified retirement accounts, such as IRAs, are taxed as ordinary income regardless of the underlying investments.
  • Owner
    The person or entity that has the ownership right of the contract. These rights include the right to name the annuitant, commence annuity payments and surrender the contract.
  • Pension
    A retirement account that an employer maintains to give an employee fixed payments during retirement.
  • Period Certain
    An annuity payout option that pays income for a certain period. For example, a fifteen year period certain payout option will pay for exactly fifteen years. If the annuitant dies during the period of payment, the payments will continue to the designated beneficiary (or a contingent annuitant, if named). If the annuitant is still living at the end of the period, payments cease.
  • Premium
    The amount paid to the insurance company in return for some future income. The minimum and maximum initial premium levels can differ by state and by carrier.
  • Principal
    The amount invested in an annuity contract.
  • Qualified
    The name given an investment account where taxes have not yet been paid on the money invested or the gains earned. The qualified status was created to encourage saving for retirement, as with 401(k)s and Individual Retirement Accounts (IRAs), and charges penalties for withdrawals made prior to age 59½. When the account holder begins taking withdrawals, which are mandated by age 70½, taxes will be paid on distributions according to ordinary income tax rates applicable at that time. Annuities can be be both qualified and non-qualified, both receiving tax-deferred status.
  • Qualified Longevity Annuity Contract (QLAC)
    A certain type of Deferred Income Annuity funded with qualified funds that is exempt from Required Minimum Distributions as long as it meets certain standards set forth in 2014 by the US Department of Treasury. It is the only way to delay taking Required Minimum Distributions from qualified accounts, which typically start at age 70½, to as late as age 85.
  • Qualified Retirement Account
    Retirement savings accounts, like 401(k)s and IRAs that qualify for tax-deferred status under the Internal Revenue Code. Contributions are typically made on a pre-tax basis, and growth accumulates without being taxed until withdrawn. Withdrawals cannot be made prior to age 59½ but are required starting at age 70½.
  • Renewable Rate
    The interest rate credited on Multi-Year Guaranteed Annuities (MYGAs) once the guaranteed investment term has ended. If money is not withdrawn, or rolled over into a new annuity, at this time, it will earn the renewable rate. This rate will likely be lower than the initial guaranteed rate and will reset weekly, monthly, or quarterly by the insurance company.
  • Required Minimum Distributions (RMDs)
    The minimum amount you must withdraw from your qualified retirement accounts each year beginning at age 70½.
  • Return of Premium
    For an income annuity, this feature allows for the return of premium upon the death of the annuitant if death occurs before the contract has been annuitizated. However, the Return of Premium definition can differ slightly by carrier.
  • Reverse Mortgage
    Also known as a Home Equity Conversion Mortgage, it's a tool used by people aged-62 and older to access the equity in their home. The homeowner is granted a loan based on the home's value, his/her age, and prevailing interest rates, which will never need to be paid off. Instead, the home will be used to repay the loan (with interest) when the homeowner passes away.
  • Riders
    Extra and optional additions to an annuity contract that are available for purchase. These options change, add, or increase the guarantees in the contract in exchange for upfront or recurring fees.
  • ROI
    Return on Investment (ROI) is a simple, but limited, way to measure the profitability of an investment. ROI is calculated as the gain made from an investment divided by the investment made. It does not reflect the time value of money.
  • Roth IRA
    A tax-qualified retirement savings vehicle which, in contrast to a Traditional IRA, is funded with post-tax money. As long as you follow the rules - principally that no withdrawals are taken prior to age 59½ - you'll never have to pay taxes on the gains inside the Roth IRA. Roth IRAs are geared towards people with low tax brackets today that might increase in retirement, and as such, only people with income under a certain level can contribute.
  • Single Premium Immediate Annuity (SPIA)
    An income annuity that converts a lump-sum premium payment into a stream of income payments beginning within one year from purchase. The income stream could last for a specified period, for life, or a combination of both.
  • Social Security
    Social Security is a government run program that collects your money (through taxes) while you work and provides qualifying workers a paycheck each month in retirement.
  • Social Security Credits
    Credits earned while you work to qualify you for Social Security benefits and to determine how much your benefits will be. You can earn up to 4 credits per year based on your wages. To receive retirement benefits, you need to accumulate 40 credits.
  • State Guaranty Funds
    A fund administered by a U.S. state that protects policyholders in the event of default on benefit payments or insolvency of an insurance company. These funds are funded by the insurance companies operating in the U.S. state.
  • Surrender Fee
    The fee that is charged by the insurance company upon surrender of the contract. These fees vary by insurance company and often decline the longer the contract owner waits to surrender the contract. Most income annuities do not have surrender fees because they cannot be surrendered.
  • Tax-Deferred
    Certain retirement savings accounts are afforded special tax status which allows for taxes on gains to be deferred until the money is withdrawn from the account. Annuities, 401(k)s, and IRAs are examples of qualified retirement vehicles with this status.
  • Traditional IRA
    A tax-qualified retirement savings vehicle which allows you to save money on a pre-tax basis. In addition, the growth of your savings does not get taxed until you begin taking withdrawals in retirement. Withdrawals will incur penalties if made prior to age 59½ but are required starting at age 70½.
  • Treasury Inflation Protected Securities (TIPS)
    Inflation-linked bonds issued by the government in 5-, 10-, and 30-year maturities. TIPS offer low-risk inflation protection because the bond's value will increase with inflation, as measured by the Consumer Price Index.
  • Variable Annuity (VA)
    While labeled an annuity, Variable Annuities are primarily sold for their accumulation, or wealth-building, potential as opposed to their ability to create income streams. The premium paid into a Variable Annuity gets invested in market funds of your choice, with gains from those funds growing tax-deferred. Typically, the VA will offer principal protection so that you don't lose money, but it will also charge high annual fees that significantly reduce your money's growth. VAs also offer Income Riders, at a cost, which will create a stream of income payments starting in the future.
  • 1035 Exchange
    An exchange of one annuity contract for another that does not create a taxable event. This is important because money taken out of an annuity prior to age 59½ will incur a penalty by the IRS. However, the money can be moved from one annuity contract to another without incurring penalties or owing taxes.
  • 401(k)
    A defined contribution plan where employees can save money for retirement on a pre-tax (and sometimes post-tax) basis. In some plans the employer also makes contributions to the accounts, commonly referred to as “matching”.
  • 403(b)
    A defined contribution plan, similar to a 401(k), offered by public schools and certain tax-exempt organizations. With 403(b)s, employees of these institutions can save money for retirement on a pre-tax basis. In some plans the employer also makes contributions to the accounts, commonly referred to as “matching”.
  • 457(b)
    A defined contribution plan, similar to a 401(k) or 403(b), offered by state and local governments. 457(b)s allow government employees to save money for retirement on a pre-tax basis. In some plans the employer also makes contributions to the accounts, commonly referred to as “matching”.
  • Annuitant
    The person upon whom the life annuity payments are based. The amount of each annuity payment for life annuities is determined by the age and gender of the annuitant. The owner is typically the annuitant. The annuitant has no rights in the annuity contract but rather is merely the measuring life for the purposes of a life annuity.
  • Annuitization
    The concept of turning a sum of money into a stream of income. Some annuity products have optional annuitization or annuitization over a finite period of time. In the case of Deferred Income Annuities, annuitization occurs automatically at the income start date.
  • Annuitize
    The act of turning a sum of money into a stream of income. All annuities come with the option to annuitize, but for some it is the key feature of the annuity, and others it's an option at maturity. The former is true for income annuities - SPIAs and DIAs - which exist purely for annuitizing your premium right away or in the future. For accumulation annuities - MYGAs, VAs, and FIAs - you have the option to annuitize at the end of the contract.
  • Annuity
    A contract or policy that is issued by an insurance company providing a regular payment of income to the owner of the policy in exchange for an upfront premium. The income is paid by the issuer of the annuity policy or contract. There are several types of annuities but they can be generally categorized according to how the annuity is purchased (simple or flexible premiums); when the annuity payments begin (immediate or deferred); and how the policy value is invested (fixed or variable).
  • Beneficiary
    The person or party that will receive any death benefit payments payable under the annuity contract. These payments can be in the form of a continuation of the annuity payments or a lump sum. Not all annuities will have beneficiaries. If payments cease on the date of the annuitant's death, there are no remaining payments for the beneficiary. Generally, the beneficiary has no rights unless the beneficiary is named irrevocably.
  • Book Value
    A feature of a Multi-Year Guaranteed Annuity (MYGA) that affects the amount of money you can take out of the contract if surrendered before the end of the locked-in period. A Book Value MYGA would offer the accumulated value of the annuity less surrender fees applicable at that time of surrender. This is in contrast to a Market Value Adjustment, which reduces/increases the amount available on surrender if interest rates have moved since purchase.
  • Cash Refund
    If the annuitant passes away before receiving the specified amount, which may or may not be less than the originally annuitized amount, the remaining amount will be paid to the beneficiary as a lump sum.
  • Cash Value
    A feature of an annuity contract that specifies the value of the account accessible should the owner decide to withdraw from the policy. Depending on how long into the contract the withdraw is made and how large it is, a surrender/withdrawal fee might apply. Multi-Year Guaranteed Annuities, Fixed Indexed Annuities, and Variable Annuities all have cash values, where as income annuities (Single Premium Immediate Annuities and Deferred Income Annuities) do not.
  • Certificate of Deposit (CD)
    A short-term investment contract sold by banks that offers a guaranteed return over a specified period of time. CDs offer a safe way to earn higher interest rates than those available through savings accounts by requiring you to lock your money away for 3 months to 5 years.
  • Commission
    The amount paid by the insurance company to the person or company selling an annuity. Commissions vary from product to product and insurer to insurer. While not a direct cost to the purchaser of the annuity, purchasers should still ask about them to better understand the costs associated with their annuity purchase.
  • Commutation
    The option available on some income annuities permitting acceleration of a limited number of upcoming monthly benefits.
  • Consumer Price Index (CPI)
    A statistic maintained by the US Department of Labor that measures the average change over time in the prices paid by urban consumers for a basket of goods and services.
  • Cost of Living Adjustment (COLA)
    (Also known as Inflation Rider). An optional feature that can be added to many annuity contracts that increases the income payments to account for changes in the cost of living. Annuities available in the market today do not cover inflation during the deferral period. Inflation riders are only applicable to payments once the income has begun.
  • Credit Rating
    Credit ratings give you a quick way to get a sense of of how trustworthy the promises made by the insurance company actually are.
  • Death Benefit
    An option/rider that refunds premiums paid into an annuity less cumulative income payments made, upon the death of the annuitant. Definitions vary from carrier to carrier, but this option or rider is typically effective after the income start date.
  • Deferral Period
    The time between the annuity purchase date and the income start date.
  • Deferred Income Annuity (DIA)
    (Also known as Longevity Insurance or Longevity Annuity). A contract with a life insurance company that provides a guaranteed stream of income payments for a fixed period of time or life (or both) beginning at a specified date years in the future. The annuitant pays one or multiple premiums to the insurance company, which typically then cannot be accessed outside of the planned payments.
  • Defined Benefit
    An older type of employer retirement plan that has been effectively replaced by Defined Contributions plans in recent years. Also known as Pensions, Defined Benefit plans provide employees with income in retirement based on their salaries and years of service.
  • Defined Contribution
    The type of tax-incentivized employer retirement plan that has become more commonplace in recent years, effectively replacing Defined Benefit plans. Employees decide how much they want to contribute to their Defined Contribution plan, such as a 401(k), and the employer may or may not match some or all of those contributions. There are limits to how much can be contributed and how the employee can access their savings.
  • Exclusion Ratio
    Determines the portion of payments from an income annuity that will be taxable for non-qualified annuities. It is calculated by taking the total contract value and dividing it by the expected return.
  • Fixed Deferred Annuity (FDA)
    (Also known as a Multi-Year Guaranteed Annuity or Fixed Rate Annuity.) Very similar to a Certificate of Deposit (CD) sold by banks, FDAs are sold by insurance companies. Like CDs, they offer a low-risk, fixed return over a specified period of time. But, as retirement savings vehicles, they also offer tax-deferred interest growth and can be annuitized to create an income stream at the end of the contract.
  • Fixed Indexed Annuity (FIA)
    While labeled an annuity, Fixed Indexed Annuity are primarily sold for their accumulation, or wealth-building, potential as opposed to their ability to create income streams. The premium paid into a FIA gets invested in market indices of your choice, with gains from the growth of those indices accumulating tax-deferred. Typically, the FIA will offer principal protection so that you don't lose money, but it will also charge high annual fees that significantly reduce your money's growth. FIAs also offer Income Riders, at a cost, which will create a stream of income payments starting in the future.
  • Fixed Rate Annuity
    (Also known as a Multi-Year Guaranteed Annuity or Fixed Deferred Annuity.) Very similar to a Certificate of Deposit (CD) sold by banks, Fixed Rate Annuities are sold by insurance companies. Like CDs, they offer a low-risk, fixed return over a specified period of time. But, as retirement savings vehicles, they also offer tax-deferred interest growth and can be annuitized to create an income stream at the end of the contract.
  • Free Look Period
    The time horizon over which you can terminate your contract after it's been issued without paying a penalty. The length varies by state, but most are at least ten days.
  • Full Retirement Age
    The age at which you are eligible to start claiming your full Social Security benefit. Your full retirement age depends on when you were born but is between 66 and 67 for people retiring today. Claiming Social Security before your full retirement age will reduce your benefit, and the opposite is true if you delay claiming.
  • I-Bonds
    Similar to TIPS, I-Bonds are inflation-linked securities issued by the government. They offer low-risk inflation protection because the bond's coupon payments increase with inflation, as measured by the Consumer Price Index. I-Bonds don't generate income, instead accruing interest until maturity.
  • Income Annuity
    A contract entered into with an insurance company where an upfront premium is exchanged for a stream of steady income payments. These income payments can continue for a specified period of time or for life, or both. A Single Premium Immediate Annuity (SPIA) is an income annuity with payments starting immediately. A Deferred Income Annuity (DIA), on the other hand, has income payments starting as late as 40 years in the future.
  • Income Start Date
    For a Deferred Income Annuity, this is the date chosen by the owner for the start of the guaranteed stream of income payments. This date is typically greater than one year and often is many years after the purchase date of the annuity contract.
  • Individual Retirement Account (IRA)
    IRA accounts are tax-qualified retirement savings vehicles that incentivize saving for retirement by offering tax-deductions and/or deferral. The two main types of IRAs - Traditional and Roth - have different tax rules. For Traditional IRAs, taxes are paid when the money comes out, whereas for Roth IRAs, taxes are paid when the money goes in. Both require you to wait until age 59½ to start taking withdrawals. Additionally, Traditional IRAs are subject to Required Minimum Distributions.
  • Inflation
    A sustained increase in the level of pricing of goods and services. It is measured as an annual percentage increase. As inflation increases, the purchasing power of one dollar decreases.
  • Inflation Rider
    (Also known as Cost of Living Adjustment). An optional feature that can be added to many annuity contracts that increases the income payments beginning at the income start date. Annuities available in the market today do not cover inflation during the deferral period. Inflation riders are only applicable to payments once the income has begun.
  • Installment Refund
    Available option with a Deferred Income Annuity whereby if the annuitant dies before a specified amount of payments are received, the remaining balance will be paid to the beneficiary in installments.
  • Insurance Company
    (Also known as Insurer, Carrier, or Annuity Company). The party that issues the policy and is required to keep guarantees and promises made in it.
  • Interest Rate
    A feature of a Multi-Year Guaranteed Annuity (MYGA) that specifies how money invested will grow over a specified period of time. Typically, there will be an interest rate guaranteed for number of years during which the owner cannot access his/her investment without paying a fee. The interest rates offered on MYGAs are normally higher than those offered on CDs.
  • IRA Contribution Limits
    The maximum amount you can contribute to an IRA (combined across traditional and Roth) each year. As of 2017, the limit is $5,500 for people under 50 and $6,500 for people 50 and over.
  • IRR
    An Internal Rate of Return (IRR) is a measure of the profitability of an investment. An IRR is calculated as the discount rate that makes the present value of all cash flows equal to 0.
  • Joint and Survivor Annuity
    Life annuity payments that continue until the death of both annuitants. Payments to the surviving annuitant can remain unchanged or can be reduced.
  • Life Only
    This is the simplest contract option whereby, once annuitized, the annuitant receives income guaranteed to last his or her entire life. Upon passing of the annuitant, no further payments are due.
  • Life with Cash Refund
    This contract option provides for income that is guaranteed for the life of the annuitant similar to the Life Only contract option. However, with this contract option if the annuitant passes before receiving income payments at least totaling the premium paid, the difference will be refunded to the designated beneficiary.
  • Life with Period Certain
    This contract provides for payments that continue for the greater of a "certain period" or the life of the annuitant. If the annuitant passes away during the certain period, the remaining certain period payments will be paid to the beneficiary named in the policy. The payments to the beneficiary continue until the certain period is complete. If instead the annuitant outlives the certain period, payments will continue until his/her death without anything being owed to the beneficiaries at that time.
  • Longevity Annuity
    (Also known as a Deferred Income Annuity or Longevity Insurance). A contract with a life insurance company that provides a guaranteed stream of income payments for a fixed period of time or life (or both) beginning at a specified date years in the future. The annuitant pays one or multiple premiums to the insurance company, which typically then cannot be accessed outside of the planned payments.
  • Longevity Insurance
    (Also known as a Deferred Income Annuity or Longevity Annuity). A contract with a life insurance company that provides a guaranteed stream of income payments for a fixed period of time or life (or both) beginning at a specified date years in the future. The annuitant pays one or multiple premiums to the insurance company, which typically then cannot be accessed outside of the planned payments.
  • Longevity Risk
    The chance that you live longer than expected. More specifically, the chance that you outlive your savings by living longer than you expect.
  • Market Value Adjustment
    A feature of a Multi-Year Guaranteed Annuity (MYGA) that affects the amount of money you can take out of the contract if surrendered before the end of the locked-in period. A MYGA with a Market Value Adjustment would increase/decrease the amount of money available upon premature surrender if interest rates have decreased/increased since purchase. The adjustment is meant to disincentivize surrenders in a rising-rate environment, but has no impact on the contract if held until maturity. This is in contrast to a Book Value annuity, which does not have this adjustment.
  • Modified Adjusted Gross Income (MAGI)
    A specific calculation of an individual's income that determines eligibility for tax-deductible IRA contributions. First, Adjusted Gross Income is calculated as one's gross income (salaries, wages, interest income, dividends, capital gains, etc.) less tax-deductible expenditures (student loan interest, health insurance, etc.). Then, some sources of income which had been excluded from Gross Income (N/A for the average taxpayer) are added back in to arrive at the MAGI.
  • Multi-Year Guaranteed Annuity (MYGA)
    Very similar to a Certificate of Deposit (CD) sold by banks, MYGAs are sold by insurance companies. Like CDs, they offer a low-risk, fixed return over a specified period of time. But, as retirement savings vehicles, they also offer tax-deferred interest growth and can be annuitized to create an income stream at the end of the contract.
  • Non-Qualified
    Refers to money that has already been taxed, as opposed to funds in qualified retirement savings vehicles that have not yet been taxed. Interest and equity gains on non-qualified savings accounts are typically taxed annually. However, annuities, which can be purchased with non-qualified savings, have tax-deferred status meaning that gains inside the contract are not taxed until the money is withdrawn.
  • Ordinary Income Tax Rates
    The tax rate applicable to ordinary income as defined by the IRS. Ordinary income is essentially non-capital gains income, which includes wages, salaries, tips, commissions, interest, and dividends. Distributions from qualified retirement accounts, such as IRAs, are taxed as ordinary income regardless of the underlying investments.
  • Owner
    The person or entity that has the ownership right of the contract. These rights include the right to name the annuitant, commence annuity payments and surrender the contract.
  • Pension
    A retirement account that an employer maintains to give an employee fixed payments during retirement.
  • Period Certain
    An annuity payout option that pays income for a certain period. For example, a fifteen year period certain payout option will pay for exactly fifteen years. If the annuitant dies during the period of payment, the payments will continue to the designated beneficiary (or a contingent annuitant, if named). If the annuitant is still living at the end of the period, payments cease.
  • Premium
    The amount paid to the insurance company in return for some future income. The minimum and maximum initial premium levels can differ by state and by carrier.
  • Principal
    The amount invested in an annuity contract.
  • Qualified
    The name given an investment account where taxes have not yet been paid on the money invested or the gains earned. The qualified status was created to encourage saving for retirement, as with 401(k)s and Individual Retirement Accounts (IRAs), and charges penalties for withdrawals made prior to age 59½. When the account holder begins taking withdrawals, which are mandated by age 70½, taxes will be paid on distributions according to ordinary income tax rates applicable at that time. Annuities can be be both qualified and non-qualified, both receiving tax-deferred status.
  • Qualified Longevity Annuity Contract (QLAC)
    A certain type of Deferred Income Annuity funded with qualified funds that is exempt from Required Minimum Distributions as long as it meets certain standards set forth in 2014 by the US Department of Treasury. It is the only way to delay taking Required Minimum Distributions from qualified accounts, which typically start at age 70½, to as late as age 85.
  • Qualified Retirement Account
    Retirement savings accounts, like 401(k)s and IRAs that qualify for tax-deferred status under the Internal Revenue Code. Contributions are typically made on a pre-tax basis, and growth accumulates without being taxed until withdrawn. Withdrawals cannot be made prior to age 59½ but are required starting at age 70½.
  • Renewable Rate
    The interest rate credited on Multi-Year Guaranteed Annuities (MYGAs) once the guaranteed investment term has ended. If money is not withdrawn, or rolled over into a new annuity, at this time, it will earn the renewable rate. This rate will likely be lower than the initial guaranteed rate and will reset weekly, monthly, or quarterly by the insurance company.
  • Required Minimum Distributions (RMDs)
    The minimum amount you must withdraw from your qualified retirement accounts each year beginning at age 70½.
  • Return of Premium
    For an income annuity, this feature allows for the return of premium upon the death of the annuitant if death occurs before the contract has been annuitizated. However, the Return of Premium definition can differ slightly by carrier.
  • Reverse Mortgage
    Also known as a Home Equity Conversion Mortgage, it's a tool used by people aged-62 and older to access the equity in their home. The homeowner is granted a loan based on the home's value, his/her age, and prevailing interest rates, which will never need to be paid off. Instead, the home will be used to repay the loan (with interest) when the homeowner passes away.
  • Riders
    Extra and optional additions to an annuity contract that are available for purchase. These options change, add, or increase the guarantees in the contract in exchange for upfront or recurring fees.
  • ROI
    Return on Investment (ROI) is a simple, but limited, way to measure the profitability of an investment. ROI is calculated as the gain made from an investment divided by the investment made. It does not reflect the time value of money.
  • Roth IRA
    A tax-qualified retirement savings vehicle which, in contrast to a Traditional IRA, is funded with post-tax money. As long as you follow the rules - principally that no withdrawals are taken prior to age 59½ - you'll never have to pay taxes on the gains inside the Roth IRA. Roth IRAs are geared towards people with low tax brackets today that might increase in retirement, and as such, only people with income under a certain level can contribute.
  • Single Premium Immediate Annuity (SPIA)
    An income annuity that converts a lump-sum premium payment into a stream of income payments beginning within one year from purchase. The income stream could last for a specified period, for life, or a combination of both.
  • Social Security
    Social Security is a government run program that collects your money (through taxes) while you work and provides qualifying workers a paycheck each month in retirement.
  • Social Security Credits
    Credits earned while you work to qualify you for Social Security benefits and to determine how much your benefits will be. You can earn up to 4 credits per year based on your wages. To receive retirement benefits, you need to accumulate 40 credits.
  • State Guaranty Funds
    A fund administered by a U.S. state that protects policyholders in the event of default on benefit payments or insolvency of an insurance company. These funds are funded by the insurance companies operating in the U.S. state.
  • Surrender Fee
    The fee that is charged by the insurance company upon surrender of the contract. These fees vary by insurance company and often decline the longer the contract owner waits to surrender the contract. Most income annuities do not have surrender fees because they cannot be surrendered.
  • Tax-Deferred
    Certain retirement savings accounts are afforded special tax status which allows for taxes on gains to be deferred until the money is withdrawn from the account. Annuities, 401(k)s, and IRAs are examples of qualified retirement vehicles with this status.
  • Traditional IRA
    A tax-qualified retirement savings vehicle which allows you to save money on a pre-tax basis. In addition, the growth of your savings does not get taxed until you begin taking withdrawals in retirement. Withdrawals will incur penalties if made prior to age 59½ but are required starting at age 70½.
  • Treasury Inflation Protected Securities (TIPS)
    Inflation-linked bonds issued by the government in 5-, 10-, and 30-year maturities. TIPS offer low-risk inflation protection because the bond's value will increase with inflation, as measured by the Consumer Price Index.
  • Variable Annuity (VA)
    While labeled an annuity, Variable Annuities are primarily sold for their accumulation, or wealth-building, potential as opposed to their ability to create income streams. The premium paid into a Variable Annuity gets invested in market funds of your choice, with gains from those funds growing tax-deferred. Typically, the VA will offer principal protection so that you don't lose money, but it will also charge high annual fees that significantly reduce your money's growth. VAs also offer Income Riders, at a cost, which will create a stream of income payments starting in the future.