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Annuity Jargon & Terms - Understanding Annuities

Annuity Jargon & Terms - Understanding Annuities

June 14, 2016
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There are a lot of questions about annuities… So to help you better understand annuities we provided some annuity terms and jargon you will see or hear along with definitions.

Accumulation Value: The sum of principal plus interest earned, minus withdrawals.

Annuitant: A person who will receive annuity benefits and whose lifetime is used to measure the length of time periodic income payments are payable under an annuity contract. 

Annuitization: The process in which an annuity is paid out according to the annuity option the policy owner has selected. 

Beneficiary: The person(s) to whom the death benefit is paid in the event of the death of the annuitant or owner of an annuity contract. 

Claimant: A person who submits a claim to an insurance company. 

Cost Basis: A contract owner's initial investment in an annuity of after tax money, plus any additional funds invested in the same annuity at a later date. This applies to non-qualified annuities only. 

Dollar Cost Averaging: A variable annuity investment strategy that involves investing a fixed dollar amount at regular intervals, regardless of market conditions. 

Free-look Period: The period after the owner receives the annuity contract in which the contract can be cancelled and treated as void from the contract date. 

Guaranteed Interest Rate: The percentage return that is stated by the company to be paid on funds in an annuity. 

Guarantee Period: A period of time during which the company will credit a stated rate of interest. The guarantee is usually one year unless stated otherwise. 

Index Cap Rate: The Index Cap Rate is the maximum annual percentage increase in the Index Value that can be credited to the annuity. 

Index Margin: Amount deducted from the index gain. 

Interest Adjustment (also known as Market Value Adjustment): The impact of the Interest Adjustment is similar to how bond values are impacted by interest rates. The surrender value of your annuity will generally decrease as new money interest rates for your annuity product increase, which creates a negative adjustment to your surrender value. Alternatively, when new money rates for your annuity product have decreased since your Contract was issued, the surrender value generally increases due to the Interest Adjustment. 

Joint Annuitant: A person who is one of two or more people who will receive annuity benefits.

Joint Owner: The person or other entity that enters into a joint contract of insurance with an insurer and actually jointly owns the insurance policy with another person or entity. 

Maturity Date: The Maturity Date is the date on which income payments will begin from your annuity. With the exception of contracts that have a fixed Maturity Date which cannot be changed, the Maturity Date will automatically be set at the maximum Maturity Date allowed in your state, provided you have not requested a specific date on the annuity application. Please refer to your contract for the Maturity Date provision applicable to your annuity. 

Non-Qualified Funds: Funds that have already been taxed. Non-qualified funds provide for the cost basis in the policy. 

Owner: The person or entity to whom the contract is issued, who is entitled to exercise all rights and privileges under the contract. 

Participation Rate: The percentage of index gain credited to the annuity. 

Pre 59 1/2 withdrawals (IRS Rule 72t): Early distributions from your retirement plan that must be "substantially equal" payments based upon one of the three methods approved by the IRS. Once the distributions begin, they must continue for a period of five years or until you reach age 59 1/2, whichever is longest. 

Premium Tax: A tax charged by certain states or any other governmental authority on either the premium payment or value of the Separate Account. 

Premium: (sometimes referred to as Principal) The original amount of funds on which interest is calculated. 

Probate: The legal process in which a court oversees the distribution of property left in a will. Annuities have the ability to avoid probate. 

Qualified Funds: Funds that have not been taxed. 

Required Minimum Distributions (RMDs): Annual amounts that participants in qualified retirement plans and owners of traditional individual retirement arrangements (IRAs) must begin to receive by the year following the year the person turns age 70 1/2. Also known as minimum required distributions (MRD). 

Retained Asset Account: A completely liquid, interest-earning account established for beneficiaries to invest their funds, allowing time to make decisions on future plans. 

Riders: An addition to an annuity contract that becomes a part of the annuity contract and that is as legally effective as any other part of the contract. Riders usually expand or limit the benefits under the contract. 

Section 1035 exchange: In the United States, a tax-free replacement of an insurance contract for another insurance contract or annuity covering the same person that is performed in accordance with the conditions of Section 1035 of the Internal Revenue Code. 

Security: A certificate that represents either ownership interest in a business (for example, a share of stock) or an obligation of indebtedness owed by an institution (for example, a bond). 

Separate Account: In the United States, an investment account that is subject to risk based on market performance placed in variable insurance products such as variable annuities. The contract owner assumes all risk for funds invested in the separate account. 

Simplified Employee Pension (SEP) plan: In the United States, a qualified employer-sponsored pension plan whereby an employer establishes and makes contributions into an individual retirement account or individual retirement annuity for each participating employee; however, the employee owns the account. Self-employed people also may establish a SEP plan. Also called SEP-IRA. 

Subaccount: One of several alternative pools of investments within an insurer's separate or segregated account into which a variable contract owner may allocate premiums paid. Also known as variable investment account and variable subaccount. 

Surrender Charge: An amount charged to an annuity contract owner when he prematurely withdraws a portion or all of the contract's accumulated value (over any penalty free amount). Also known as back-end load, contingent deferred sales load, and withdrawal charge. 

Surrender Period: The period of time stated in the annuity contract during which a surrender charge will apply to any full or partial surrender that is in excess of the penalty free amount available. 

Tax Deferred Basis: Accumulation of interest on which income taxes are not payable until money is withdrawn from the annuity 

 For more information go to: Titan Financial & Insurance Services

 SOURCES: Midland National, Allianz Life,

This content was produced to provide information on a topic that may be of interest and developed from sources believed to provide accurate information. This information is not intended as insurance, tax or legal advice.

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