1035 Exchange: A tax-free transfer of an annuity contract from one insurer to another. A good reason to switch insurance companies is to lock in a higher return rate. Although a 1035 transfer is tax-free, it might be accompanied by a surrender charge if surrender fees have yet to lapse.
401(k) plan: A plan offered by an employer that lets employees make contributions to a retirement savings plan on a pre-tax basis, sometimes fully or partially matching these contributions.
403(b) plan: Similar to the 401(k) plan, but generally offered by nonprofit organizations instead of for-profit businesses. Allows contributions from employees to grow on a tax-deferred basis until they are withdrawn. At withdrawal, the funds are subject to tax like ordinary income.
457 Plan: Named in reference to the portion of the Internal Revenue Code that defines its basic rules, the 457 is a tax-exempt deferred compensation program provided to employees in state and federal governments and agencies. While similar to the 401(k) plan, the 457 plan never receives matching contributions from the employer, nor does the IRS consider it to be a qualified retirement plan.
Accrued Monthly Benefit (AMB): This is the monthly amount earned toward an employee’s pension via that individual’s service to the employing company.
Annuitant: The individual who receives payments from an annuity plan under the terms of that plan.
Annuity: Refers to the payments made on a periodic basis to an individual under an annuity plan. The payments are generally provided until the individual dies.
Accrued Interest: The amount of interest that has accrued to a bond since the payment of the last interest amount; buyers of bonds pay the accrued interest to the seller in addition to the market price.
Actuary: The individual who uses statistical mathematics to calculate the premiums, dividends, reserves, and pension, insurance and annuity rates for an insurance company or other institution involved with fiscal risk.
Adjusted Goss Income (AGI): The amount of income obtained after subtracting allowable adjustments from the total income received. These adjustments include contributions to an IRA, paid alimony, moving expenses, and contributions to Keogh accounts.
Administrator: An individual or a bank that is court-appointed to distribute the estate of a deceased person who has died without a will or who left a will that did not name an executor to perform the distribution duties.
After-Tax Dollars: Refers to the amount of money remaining after taxes have been paid on it.
Age-Weighted Plan: A defined contribution plan in which contributions are allocated to participants so that, when converted to equivalent benefit accruals stated as a percentage of compensation received, all participants receive the same benefit accrual rate.
Amortization: The reduction of a debt, on a gradual basis, through making regular, equal payments that meet current interest amounts and that will eliminate the debt in total by its maturity date. Used in banking.
Anniversary Date: The anniversary of the date on which an annuity starts or becomes effective. Index annuities calculate annual yield by taking the difference in the S&P 500 between anniversary dates.
Annual Percentage Rate (APR): The cost of a consumer loan expressed as a basic, yearly percentage amount.
Annual Reset: A way of calculating annual yield for an index annuity in which the baseline from which growth is measured resets every year. With an annual reset, previous years’ growth is never lost.
Annuitant: The individual whose life expectancy is used to determine the term of income payments to be made under an annuity contract; generally, but not necessarily, the person who receives this income. The annuitant cannot make premium deposits or cancel the contract, and has no say over the terms of the annuity or when to withdraw money. The annuitant must typically sign the contract.
Annuitant-Driven: Annuity contracts with provisions that trigger upon the death of a designated individual (annuitant). Besides death, an annuitant’s reaching of a certian age or becoming disabled, can trigger contract provisions.
Annuitization: The process of converting an annuity contract’s value into an income stream represented by periodic payments made over a specified period of time.
Annuity: A plan that allows individuals to make tax-deferred contributions to a retirement savings account and to select a payout option that meets their income needs upon retirement.
Annuity Certain: An immediate annuity income plan from which payments are made for a defined period of time, whether or not the annuitant lives or dies.
Annuity Contract: A legal contract in which an insurer promises to make periodic payments to a designated individual over a specific period of time beginning on a set date in exchange for that individual’s payment of premiums to the insurer.
Annuity Period: The length of time between income payments made under an annuity income plan; the time span may be monthly, quarterly, semi-annually, or annually.
Arbitrage: The act of buying and selling commodities in two markets at the same time to benefit from price differences between the markets.
Ask Price: The price of shares established by the specialist or dealer offers them.
Assumed Investment Rate: The minimum rate of interest that must be obtained on investments in a variable annuity in order to cover the costs and expected profits of an insurance company.
Audit: A review and examination of financial and accounting documents performed by professionals to determine the consistency and accuracy of these documents as well as whether they meet requirements imposed by law and accounting principles.
Bailout Provision: A provision in an annuity contract that allows the owner to surrender the contract, generally without charge, if the renewal interest rates on a fixed annuity drop under the pre-determined amount (usually 1%).
Basis Point: A unit of measure, with 100 basis points being equal to one percentage point.
Before-Tax Dollars: Amounts of money that have not been subjected to taxation.
Beneficiary: The individual or legal entity receiving an annuity death benefit when the annuitate designated in the contract dies. Typically a child or spouse. The beneficiary cannot manage the annuity — a right reserved solely for the contract owner.
Beta: A statistical measurement indicating the volatility of a stock or portfolio of investments, meaning how the value of the holding has risen or lowered in comparison to the general market over a defined period of time. In theory, when volatility is high, beta is also high.
Bond: A form of debt created by an institution that wants to borrow money. Buyers of bonds receive periodic payments of interest, with the principal amount of the bond typically repaid as a lump sum by a specified date.
Bonus Annuity: The amount added by an insurance company to the premium payments of fixed, deferred annuities with surrender charges. Usually imposed as additional interest or principal in the contract’s first year and totals between 1% to 5%.
Buy-Sell Arrangement: An arrangement designed to dispose of an interest in a business when the business’s owner retires, becomes disabled, or dies.
Cafeteria Plan: An employee benefit plan that provides flexible dollars to be used by employees to pay for specific benefits from a list of choices, such as life insurance or health insurance, to put into a 401(k) plan or to use instead of a 401(k).
Catch-Up Provision: With this provision, employees with 403(b) plans can contribute more than is usually allowed to their plans.
Certificate Annuity: A type of annuity in which the interest rate guarantee period is equal to the surrender charge period.
Certificate of Deposit (CD): Certificates issued by banks in exchange for a cash deposit, which is held for a certain period of time and a set interest rate. A bank pays the CD holder the principal amount and all accumulated interest once the specified time period is over.
Charitable Deduction: A deduction taken by an individual or the estate of an individual involving a property transfer to a qualified charitable institution.
Charitable Gift Annuity: An annuity in which a donor provides property to a charity in exchange for an income.
Cliff Vesting: A vesting schedule by which employees may not receive any part of a retirement benefit until “fully vested,” or under a predetermined number of years of service to the employing organization.
Co-Annuitant: Secondard individual whose life determines the length of an annuity contract. Seldom indicated, the co-annuitant typically prolongs a contract because both annuitate and co-annuitant must die for the termt to cease.
Collateral: Certain property provided by an individual seeking a loan as security for repaying the loan amount.
Compound Interest: Interest on money that accrues on both principal and accumulated interest.
Confinement Waiver: An arrangement in which surrender charges are eliminated if the annuity owner must be cared for in a hospital or long-term care facility due to medical necessity.
Consumer Price Index (CPI): The percent change in costs of consumer goods and services. CPI is a metric of consumer-felt inflation, measuring how far your dollar goes towards buying common goods and services. Typically rises 1-3% per year.
Contract Owner: The person or entity that makes application for and buys an annuity contract. This party is responsible for funding the annuity. An owner could be an individual, couple, partnership, corporation, or trust.
Contract Termination: The forced end to an annuity due to death of the annuitant.
Contract Value: The total of paid premiums and earnings, less any charges, withdrawals, or fees that may apply.
Convertible Bonds: Bonds that can be converted to shares of common stock in the same organization at the request of the bondholder.
Custodian: The institution or individual holding the assets of another. For example, a custodian may be a bank that holds the assets of a corporation or mutual fund, or it may be an adult who is responsible for the financial activities of a minor child.
Death Benefit: The annuity benefit paid to a designated beneficiary when the annuity contract’s owner dies.
Debt Insturments: Investments involving the lending of money, where returns are made by charing interest. CDs, treasuries, government bonds, loans, and promissary notes are all debt instruments that promise to returm principle plus interest at a future date.
Debenture: A bond that is backed by the integrity of the borrower and/or the good reputation of a company rather than by collateral and is otherwise unsecured.
Deferred Annuity: An annuity that provides a way to accumulate monies tax-deferred.
Deferred Compensation: Compensation for services rendered provided under an agreement stating that such compensation will be paid sometime in the future, after the actual services have been performed.
Defined Debit Plan: A pension plan in which a lifetime retirement income is guaranteed on the basis of employee income and/or total years of service to the employer.
Defined Contribution Plan: A pension plan whereby an employer deposits a yearly contribution into the plan for each of the plan’s participants, with retirement income depending on these contributed amounts.
Discretionary Income: The amount of money from income that remains after an individual pays essential bills, such as food, housing, and taxes.
Disposition: Ability to distribute fund pending the termination of an annuity.
Diversification: The allocation of assets to several different types of investments so as to reduce the risks associated with any single investment, the idea being that losses in one area would be offset by gains in another.
Dividend: A portion of the net profits of an organization that its board of directors allocates for distribution to shareholders.
Duration: Timeframe of an annuity contract: 1, 2, 3, 5, 7, or 10 years. The longer the duration, the better the return rate on fixed annuities.
Employee Retirement Income Security Act (ERISA): The federal law that formed the basis for modern pension regulation by establishing requirements for nondiscrimination, vesting, participation, reporting and disclosure, as well as standards for funding and fiduciary responsibilities.
Endorsement: An addition written to an insurance policy that includes provisions superseding those of the original policy. It is also known as a rider.
Endowment: An insurance policy that pays out its face amount to the individual insured when it reaches maturity, if that person is still alive. If the insured has died before the policy matures, the face amount is paid to a designated beneficiary.
Equity Indexed Annuity: A type of fixed annuity that earns interest connected to an outside equity index, such as the S&P 500 (Standard & Poor’s 500 Composite Stock Price Index).
Equity Vehicle: Investments involving ownership of company stock, futures, commotities, or real estate. Profit in equity vehicles results from their sale after appreciation (growth in value).
Estate Planning: Refers to the preparations made for the administration and disposition of an individual’s property either before or after his or her death. Plans may include the creation of wills, trusts, and gifts.
Exclusion Ratio: A calculation used to calculate the taxable and non-taxable parts of each payment to an annuitant from an immediate annuity. Part of each payment is considered a return of principal and therefore not subject to taxation, while the remainder includes earnings on interest, which are taxable.
Executor: An individual named in a will who is designated to carry out the wishes of the deceased person for the distribution of his or her property and who performs this activity under the supervision of a court.
Fiduciary: An individual or organization that exercises control over a pension plan and/or the assets it holds.
Fiscal Year: The period of 365 days that is used for purposes of accounting and taxation. It is not necessarily the same period as a calendar year.
Fixed Annuity: An annuity contract that provides a guaranteed minimum interest rate and a higher current interest rate for shorter time periods during a deferred annuity’s accumulation phase.
Flat-Rate Premium: Refers to the premium rate paid on a yearly basis by pension plans to the Pension Benefit Guaranty Corporate (PBGC) on behalf of each plan participant. The rates for multi-employer and single-employer plans are different.
Flexible Premium: A kind of annuity that may be bought into multiple times in the future. After depositing the initial premium, further investment can be made into the same annuity (similar to a money market account).
Flexible Premium Deferred Annuity (FPDA): A type of annuity in which the owner has the option to invest more money in the future, and which forgoes periodic payouts in favor of compounding interest.
Forced Annuitization: The manditory liquidation of an annuity and despersion of funds, triggered by the death the annuitant, or if the annuitant reaches certain maximum age.
Forfeiture: The amount lost when a pension plan participant leaves the employing organization before becoming fully vested under the plan’s schedule.
Free Look Provision: The provision in an annuity contract stating that the owner of the contract has between ten and 20 days to review the contract immediately after buying it. It gives the buyer the chance to return the contract to the insurer for a total refund and is governed by state regulations, which may vary.
Free Withdrawal Provision: The provision in an annuity contract that allows the owner to withdraw some part of its face value, without the imposition of a withdrawal charge, during the accumulation period.
Front-End Load: A sales charge imposed on an investment purchase. When such charges are imposed at the time of an investment’s sale, they are called back-end load.
Frozen Plan: A qualified retirement plan that disallows the continuing benefits accruals of or additional contributions for current employees and also does not permit the recognition of new plan participants.
Fully Funded: When a pension plan has enough assets to pay for all of its current benefits and those promised for the future, it is said to be fully funded.
Government Securities: These securities, which enjoy high credit ratings since they are backed by the fully credit of the federal government, include bonds and other debts programs that are issued by the Treasury Department.
Growth Fund: A mutual fund designed to provide long-term capital gains and growth instead of current income.
Guaranteed Interest Rate: The minimum interest rate an insurer will credit during an annuity contract’s accumulation phase, usually between three and four percent.
Guaranteed Minimum Surrender Value: Index annuities are regulated by the National Association of Insurance Commissioners, which requires investors to at least receive 90% principle + 3% for every year the contract was held.
Holding Period: The period of time during which an investor has ownership of a capital asset.
Immediate Annuity: An annuity contract that begins its payout immediately or within a year.
Income Fund: A type of mutual fund designed to provide current income instead of capital growth. Such funds frequently include bonds as other fixed-income holdings.
Income or Payout Options: Refer to the various ways the owner of an annuity contract may receive income from an immediate annuity.
Index: A statistical system that measures and tracks the performance of similar investments as a group.
Index Fund: A type of mutual fund that holds bond or stock investments with the goals of matching a specific market index.
Individual Retirement Account (IRA): A retirement program that permits individuals who have earned income to save part of that income in a tax-deferred savings plan. IRAs can be created and funded any time between the first day of the current year up to and including the date on which individual income tax returns are due, usually April 15 of the following year.
Initial Interest Rate: The rate of interest that is applied to the first deposit made to a fixed, deferred annuity, with the length of time this rate is guaranteed specified in the annuity contract
Integration: A way of meshing a qualified benefit plan with Social Security benefits so that the qualified plan may discriminate in favor of highly compensated employees to the extent allowed
Insurer: One of the four parties to any annuity contracter. The insurer is the company to whom the owner pays the premium. The insurer invests the premium and doles out payments.
Interest: Fees paid by banks, entities that issue bonds, and other financial institutions for the use of money provided on loan.
Joint Annuitant: A person named in an annuity contract in addition to the owner. This person’s age and life expectancy are used along with those of the contract owner to calculate the amount of annuity payments.
Joint Life Annuity: A type of annuity that continues to provide payments to a spouse after the death of the contract owner, regardless of the date of the death. It also allows for the designation of additional beneficiaries if the spouse dies.
Joint Owner: An individual who co-owns an annuity contract with another person. Both have the right to make and approve decisions relating to the contract.
LEAPS: Long-Term Equity Anticipation Security (LEAPS) refers to call or put options that have long expiration dates, typically between two and five years rather than the more common nine months period.
Life Annuity: An annuity that pays a set amount on a regular, periodic basis, for the duration of the annuitant’s life.
Liquidity: The ability to quickly convert assets into cash by an individual or organization without incurring significant losses of value.
Load: The sales fee or charge imposed on the owner who buys an annuity contract.
Long Position: Refers to an agreement between parties for one to buy an asset at a particular, set date in the future for a pre-determined price.
Market Value Adjustment (MVA): A kind of fixed annuity in which there is a guaranteed rate unless the contract owner withdraws amounts that exceed a specific free-withdrawal amount, or if the owner terminates the annuity contract before it matures.
Maturity Date: The date on which an annuity starts to make income payouts.
Money Market: Refers to the market for very liquid and low-risk short-term assets, including Treasury bills and negotiable Certificates of Deposit.
Money Market Fund: A type of mutual fund that makes investments in a variety of short-term debt, including Certificates of Deposit and Treasury bills.
Multiple Premium Annuity: This is an annuity program that requires more than one premium payment.
Mutual Fund: An account combining the funds of many individuals in order to invest these funds in a range of financial instruments. A financial service company usually establishes this type of account.
Net Worth: The difference between the total value of an individual’s assets and the total of all of his or her liabilities.
Non-Prescribed Annuity: The part of a non-prescribed annuity plan that can be attributed to the return of capital and is therefore not subject to taxation; the interest portion is taxable, however.
Owner-Driven: Annuity whose provisions trigger upon the death, reaching of a certain age, or disability of the contract owner. This is in contrast to typical annuities, which designate an annuitate that may or may not be the contract owner.
Participation Rate: Also call the Index Rate, this refers to the part of the index’s increase credited to an equity-indexed annuity’s account value. In some contracts, a cap is imposed on this amount.
Payout Period: The period of time during which an annuitant is provided payments from an immediate annuity plan.
Payout Ratio: A calculation achieved by dividing the dividend amount by the earnings amount.
Pension Plan: A qualified plan designed to provide payments to an employee upon retirement. Pension plans comprise a yearly funding commitment from employers, no access to plan funds before retirement, and restrictions on investments in employer stock to ten percent.
Period Certain: An income option in an immediate annuity plan whereby the owner of the annuity contract may choose to receive periodic payments for a set period of time, with the payout amount determined by the contract’s value and the length of the period of time chosen.
Perpetuity: A type of investment security that has no maturity date.
Point-to-Point: A way of calculating index annuity yield. The total yield is simply the difference in index value from the day the annuity is purchased to the day it expires.
Portfolio: A group of investments considered a unit.
Premature Distributions: The withdrawal of earnings amounts from an annuity program before the annuity contract’s owner reaches 59.5 years of age.
Premium Bonus: Additional funds that are credited by an insurer to an annuity, expressed as a percentage of the deposited amount.
Premium Tax: Refers to a separate tax imposed on premiums for life insurance or an annuity plan by state governments. While not all states impose this tax, those that do may have different regulations for qualified and non-qualified programs.
Prescribed Annuity: Prescribed Annuity Contracts (PACs) offer non-taxable returns on investment, and the annuitant’s interest income is included at a steady rate during the entire term of the annuity. The amount taxed is lowed than that in a non-prescribed annuity early in the term, but rises later on.
Principal: The total amount of money that an annuity contract owner has put into the annuity, excluding earned interest.
Private Annuity: Refers to a contract entered into by two people who agree to exchange a valuable asset for payment of income for the duration of life.
Prospectus: A written document that must be provided under federal regulations to the prospective buyer of a variable annuity before the actual sale. The document describes the investment goals of accounts, past performance of any sub-accounts included, and defines fees and other expenses.
Qualified Annuity: A type of annuity bought with the intention to fund or distribute money from a tax-qualified plan, generally with paid premiums reducing current income tax and the use of tax-deferred accumulations.
Renewal Rate: The new rate of interest credited to an annuity after the current interest-rate period is over, typically on the anniversary of the contract. This rate may be higher or lower than the current rate, depending on economic conditions and the investments used by the insurer.
Risk-Return Trade-Off: A way of comparing the risks and returns of a potential investment by considering the age of the investor and the time frame for the investment, with higher risks generating greater returns.
Rollover: Refers to the monies from a qualified retirement plan or IRA (Individual Retirement Account) that are shifted from one plan to another plan of the same kind, maintaining the tax-deferred status of the funds.
Roth IRA: While similar to a traditional IRA (Individual Retirement Account), the Roth IRA’s contributions are not deductible. Account distributions may be obtained free of federal income tax if certain conditions are met, however.
Simplified Employee Pension (SEP): A type of retirement plan in which an IRA (Individual Retirement Account) is used to hold contributions; a simpler alternative to a 401(k) or profit-sharing plan.
Single-Employer Plan: A type of pension plan that is sponsored by one employer or a group of employers under a common control structure. It may also be a pension program that is not collectively bargained and is sponsored by a group of unrelated firms.
Single Life Annuity: A type of annuity plan in which the periodic payments are made to the annuity contract owner for life, but end after the owner dies.
Single Premium: A kind of annuity into which funds cannot be deposits after the initial investment. Fixed-rate annuities are commonly of this type, requiring a second annuity purchase should the contract owner decide to invest more money at a future date.
Single Premium Deferred Annuity (SPDA): A kind of annuity that may be bought into once and whose payouts are withheld, compounding interest. Future investments require a new annuity purchase.
Single Premium Immediate Annuity (SPIA): A kind of annuity that may be bought into once and yields periodic payouts (monthly, quarterly, or annually) at the cost of compound interest. Future investments require a new annuity purchase.
Split-Funded Annuity: An annuity contract in which the plan’s owner divides the initial premium into two separate contracts, with one portion of the premium deposit going to a fixed deferred annuity with a guaranteed interest rate over a set period of time, and the other portion going to an immediate annuity that pays income during the same time period.
Standard Termination: Refers to the termination of a plan that holds assets sufficient to pay all benefits.
Straight Life Annuity: A type of annuity plan paying a specified amount over a set period of time until the death of the annuitant. There are no payouts available to survivors after the contract owner dies.
Substandard Health Annuity: A type of straight-life annuity designed for individuals who have serious health problems. The cost of this annuity depends on the life expectancy of the annuitant, with lower life expectancies being more expensive, since the insurer has less of a chance to obtain a profit from the investor’s funds. The periodic payouts are much higher to persons with low life expectancies, however.
Sub-Account: Portion of a variable annuity allocating investment into a specific segment, like a money market account, the S&P 500, mutual funds, or Pacific Basin stocks. The choice of sub-accounts makes up the variable annuity portfolio.
Surrender Charge: A penalty imposed by the insurer if the contract owner terminates the annuity prematurely, by withdrawing all funds.
Surrender Value: Refers to the amount of money received by a contract owner if the annuity is surrendered and all cash is taken out of it.
Surviving Spouse: The term used to describe the living spouse of a deceased plan participant. Under a Qualified Domestic Relations Order (QDRO), a former spouse may be considered a surviving spouse.
Tax-Deductible: An amount of money deducted from the adjusted gross income of a taxpayer in order to calculate the total of taxable income. Medical expenses, paid mortgage interest, and charitable contributions itemized on Schedule A of federal income forms are examples of tax-deductible expenses.
Tax-Deferral: Refers to the fact that earnings from an annuity are not taxed until they are withdrawn from the plan.
Tax-Free Transfers: An activity whereby owners of variable annuity contracts may move assets from one sub-account to another without the imposition of tax liability on these funds.
Tax-Sheltered Annuity (TSA): A type of retirement annuity available for purchase only by public school teachers and individuals employed by colleges, hospitals and other entities that offer qualified retirement programs under Internal Revenue Code Section 403(b).
Temporary Annuity: A type of life annuity that is set to expire after the passing of a pre-established period of time.
Term Certain Annuity: A kind of annuity plan in which predefined income payments are provided until the expiration date of the annuity product. Payments are typically made on a monthly basis for the term of the contract. If the expiry date occurs before the annuitant dies, however, that individual no longer receives a steady income stream.
Top-Heavy Plan: A retirement plan in which employees identified as “key” receive 60 percent or more of the benefits of the plan. Top-heavy plans are subject to additional regulation under the law.
Treasuries: A term that refers to all of the federal government’s negotiable securities. Treasury bills (T-bills) have short-term maturities of three and six months and do not pay interest. Instead, they are sold at face value. Treasury bonds may be obtained in $1,000 units and have maturities of ten years or more. Treasury notes have medium-term maturities of between one and ten years.
Trustee: The individual or organization charged with receiving, managing, and distributing plan assets.
Two-Tier Annuity: A type of annuity that is designed to have a high interest rate, compared to the market, during its first year, based on the assumption that the owner of the annuity contract will remain in the plan through the annuitization period.
Unsecured Loan: A loan that is made on the basis of good credit and the borrower’s promise to repay the funds. Does not require a borrower to provide collateral in the form of a tangible asset in order to secure the loan.
Variable Annuity: A kind of annuity contract that allows the owner to allocate the premium amount among several investments, or sub-accounts. The contract value of such a plan may vary according to the performance of these investments.
Vesting: The term used to describe an employee’s gaining of the right to be paid a current or future benefit from a pension plan.
Withdrawl Charge: A penalty imposed by the insurer if the contract owner cashes out part of the annuity prematurely. Withdrawl charges typically phase out according to a schedule, e.g., 10% before 3 year, 5% after 4 years, 0% after 5 years. Withdrawl charges may be waived in the event of death or illness.
Yield: This usually refers to the profit amount obtained on a capital investment. Also the income portion of the return from a security.