HometownQuotes.Com Annuity Glossary

Definitions of Common Annuity Terms

Asset Allocation
A financial strategy for investing money in a variable annuity into various asset classes — such as stocks, bonds and cash — based upon your financial goals, risk tolerance and time horizon. Asset allocation has two main advantages: it can help increase investment returns and reduce risk.

Back-End Charge
Fee charged by the insurance company for cashing out an annuity early. Usually applies during the first 7 – 10 years of the investment. Same as Surrender Charge.

Bailout Provision
Safety feature where investor may withdraw all the money in an account without paying a surrender charge if the fixed annuity’s interest rate falls below a specified rate.

Balance Inquiry
An online function that lets you check the performance and balance of the subaccounts in your annuity.

Benchmark Index
Commonly referred to stock or bond indices used to measure market performance in a variable annuity and to compare the relative performance of an investment portfolio. Investing into indices directly is not possible. In addition, these benchmark indices do not have transaction costs and other expenses which an investment portfolio does.

Beneficiary
Generally, the person(s) who receive(s) money upon the death of the annuity’s contract owner or annuitant. The contract owner decides who the beneficiary will be. The person designated to receive payments due upon the death of the annuity owner or the annuitant. Person chosen by the annuitant to receive the proceeds from the annuity in case of the annuitant’s death.

Beta (3 year)
This is a number, expressed in a percentage, that reflects the volatility of the variable annuity’s subaccount relative to the overall market (usually the S&P 500). A Beta above 1 percent is usually more volatile than the overall market.

Bonus Rate
Extra interest in the first year that increases the annuity’s value on which future interest will be calculated in subsequent years. Also known as 1st Year Bonus Rate.

Certificate Owner
The person or entity that purchases the annuity.

Compound Earnings
Reinvesting the annuity’s previous years’ interest earnings.

Contingent Annuitant
A person who will receive annuity payments in case the first annuitant dies before annuity payments begin.

Contingent Deferred Sales Charge (CDSC)
The charge deducted from the annuity for withdrawing purchase payments in excess of allowed limits or upon full surrender of the annuity contract.

Contract Owner
The person(s) or entity who purchases the annuity and has all rights to the contract. In a variable deferred annuity, like Preference Plus Select for example, this person can make investment decisions, transfer money among funding options, make withdrawals, and name the annuitant and the beneficiary, usually the contract owner.

Death Benefit
The guarantee that if you should die before you convert your variable annuity into regular income payments (annuitize your contract), your annuity’s beneficiaries will receive the higher of the account value or a different amount specified in the deferred annuity (such as the amount you contributed to the annuity, less withdrawals). In many variable annuities, the death benefit can increase over time. The payment the investor’s estate or beneficiaries will receive if he or she dies before the annuity matures. There are several types of death benefits with variable annuities, including: Current account value or initial investment (whichever is greater), in which the beneficiary receives the vale of the annuity when the policyholder dies; Rising floor, in which an investment company guarantees a minimum return on premium deposits, regardless of subaccount investment performance; Ratchet, a benefit equal to the greater of (a) the contract value, (b) premium payments less prior withdrawals or (c) the contract value on a specified prior date; and Stepped-up, which guarantees the account value to the beneficiary as of a particular anniversary date (e.g. every 5 years).

Deferred Annuity
A type of personal retirement account that provides tax-deferred growth potential for long-term goals, such as retirement. When you are ready to receive income payments, the deferred annuity provides many choices, including guaranteed income for life. There are two types of deferred annuities: fixed and variable. An annuity contract where premiums are accumulated with interest and then used to provide periodic payments at a future date. Most annuities are this type, where investor puts off taking annuity payments from the annuity. Allows investment to grow over time, increasing the value.

Direct Rollover
A transfer that qualifies as a rollover, but is done directly from one company to another. Usually, it is from a qualified plan into an IRA annuity. It is reportable, but not taxable. The annuitant can avoid having taxes taken out of the eligible distribution by having a direct rollover.

Diversification
A financial strategy to help reduce risk by spreading your assets in a variable annuity across different asset classes, such as stocks and bonds, or across different types of securities within the same asset class. For example, you can diversify your stock holdings into stocks of different industries.

Dollar Cost Averaging
A financial strategy of making investments in a variable annuity at regular intervals with a fixed dollar amount. A key benefit is that over time, your average per unit cost should be lower than either the market high or the average price. Dollar cost averaging does not guarantee a profit or protect against a loss. It involves continuous investment in securities regardless of fluctuating prices. You should consider your financial ability to continue purchases through periods of low price levels.

Effective Annual Yield
Most companies compound and credit interest daily. The rate shown is the effective annual yield after compounding the daily nominal rate. Some companies pay a first year bonus on their interest to encourage new business. The Effective Annual Yield (EAY) includes the bonus.
• Rate Bonus
o Some annuities pay a bonus on the base rate. For example, if the base rate is 6.00% and there is a 1.00% first year bonus, the EAY will be 7.00%.
• Premium Bonus
o Some annuities pay an upfront premium bonus. For example, if the base rate is 6.00% with a 1.00% premium bonus, 7.06% will be shown as the Effective Annual Yield.

Effective Interest Rate
AKA: Annual Effective Rate or Annual Effective Yield. The interest rate earned if compounded annually. If a person has $10,000 and leaves it in an annuity for one year at an effective rate of 10%, they will earn $1,000 of interest. The interest rate for one day when compounded daily is approximately 0.0261%. Note that 10% divided by 365 days is approximately 0.274%.

Enhanced Dollar Cost Averaging Program
A type of dollar cost averaging program that offers a potentially higher interest rate under certain circumstances. For example, these programs typically offer a higher guaranteed rate of interest for new purchase payments only, have a limited time period, and may require a minimum payment. The Enhanced Dollar Cost Averaging Program specified amounts of money are automatically transferred from a fixed account to an investment division over a specified period of time.

Equity Index
A statistical measure used in a variable annuity to report the performance of a select group of stocks or bonds. When index appreciates in value, so does annuity.

Equity-Indexed Annuity
A variation of the fixed annuity. With this type of annuity, your account accumulates at a minimum fixed rate of return. Your account also may earn additional interest based on the performance of an equity index. Generally, the indices used are widely reported common stock indices, the most prevalent being the Standard & Poor’s 500 Composite Stock Price Index.

Equity Investment Style
An annuity subaccount’s investment style (the blend of investment types in the annuity).

Exclusion Ratio
Determines how much of each annuity payment is excluded from income tax and how much is taxable when income is received.

Expected Life
Number of years a person is expected to live, given their current age. The expected life is usually obtained from a mortality table.

Expense Ratio
The amount, as a percentage of your total annuity account balance, that you pay annually for investment and insurance-related charges.

Surrender Penalty
Penalty applied to any amount exceeding the Free Annual Withdrawal Amount or to multiple withdrawals within the same contract year if they are not allowed by the terms included in the contract. In some cases, if the entire annuity is surrendered, the penalty will be applied to the full value of the annuity.

Surrender Value
Is equal to the accumulated value less any surrender charges specified in the contract.

Yield
The rate of return on an annuity, generally expressed as a percentage of the current price.

1035 Exchange
Named after the section 1035 (a) of the tax code, this allows the transfer of funds from one annuity to another (NOT transferring within subaccounts of the same annuity). Usually, there is no tax on this type of transfer.

403 (b)
A tax-deferred annuity retirement savings plan similar to a 401 (k) but aimed at teachers and employees of some non-profit organizations. Participants contribute to either annuity contracts (often called a TSA) with insurance companies, or directly with mutual fund companies.

10% Penalty Tax
A penalty imposed by the IRS for withdrawing untaxed money (pre-tax contributions or earned interest) from an annuity prior to age 591/2.

408A
Roth IRA. Special IRA which accepts only nondeductible annual contributions. See Roth IRA.

457 Plan
State and local governments can establish 457 plans that allow their employees to defer compensation on a tax-favored basis. Available to states, political subdivisions of states or any state agency or instrumentality.

501(c)(3) Organization
Certain tax-exempt organizations as specified in the Internal Revenue Code section that can have a 403(b) plan. A corporation, community chest, fund, or foundation that is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes; for fostering national or international amateur sports competition; or for the prevention of cruelty to children or animals will probably qualify for 501(c)(3) status.

529 Plan
A savings plan by which earnings and withdrawals for qualified higher education expenses are free from federal tax (through 2010 unless extended by Congress).

90-24 Transfer
IRS Revenue Ruling which allows direct, tax-free transfers between Section 403(b) funding vehicles. Such transfers are not treated as distributions under IRC Section 72 or as deemed distributions.

Section 72(t) Penalty
Imposes a 10% penalty tax on premature withdrawals from qualified plans, 403(b) TDAs, SEPs, and IRAs.

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