Annuity Glossary

Plain-language definitions for the terms you'll encounter when researching annuities.

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Accumulation Phase: The period during which you make contributions to an annuity and your money grows tax-deferred before you begin receiving payments.
Annuitant: The person whose life expectancy is used to calculate annuity payments. Often the same person as the contract owner.
Annuitization: The process of converting your annuity's accumulated value into a series of periodic income payments.

Beneficiary: The person or entity designated to receive the remaining annuity value upon the annuitant's death.

Cap Rate: The maximum rate of return you can earn in a given period on an indexed annuity, regardless of how well the underlying index performs.

Death Benefit: The amount paid to your beneficiary if you pass away before or during the annuitization phase. Many annuities guarantee at least the original premium.
Deferred Annuity: An annuity where income payments begin at a future date, allowing your investment to grow during the accumulation phase.
Distribution Phase: The period when you begin receiving income payments from your annuity, also called the payout phase.

Exclusion Ratio: The portion of each annuity payment considered a return of your original investment and therefore not subject to income tax.

Fixed Annuity: An annuity that pays a guaranteed interest rate for a specified period. Your principal is protected and returns are predictable.
Fixed Indexed Annuity: An annuity that earns interest based on the performance of a market index (like the S&P 500) while protecting your principal from market losses.
Free Withdrawal Amount: The portion of your annuity value (typically 10% per year) that you can withdraw during the surrender period without incurring surrender charges.

Guaranteed Minimum Income Benefit (GMIB): An optional rider that guarantees a minimum level of annuity payments regardless of the actual investment performance of your annuity.

Immediate Annuity: An annuity purchased with a single lump-sum payment that begins making income payments within one year, typically within 30 days.

Mortality and Expense (M&E) Charge: An annual fee in variable annuities (typically 1-1.5%) that compensates the insurer for insurance risks and administrative costs.

Participation Rate: The percentage of the index's gain that is credited to your indexed annuity. A 80% participation rate means you receive 80% of the index's return.
Premium: The payment(s) you make to purchase an annuity. Can be a single lump sum or a series of payments over time.

Rider: An optional add-on feature you can purchase for additional cost, such as guaranteed lifetime income, enhanced death benefits, or long-term care coverage.

Spread/Margin: A percentage deducted from the index return before interest is credited to your indexed annuity. If the index gains 8% and the spread is 2%, you're credited 6%.
Sub-Account: Investment options within a variable annuity, similar to mutual funds. Your returns depend on the performance of the sub-accounts you select.
Surrender Charge: A fee charged if you withdraw more than the free withdrawal amount during the surrender period. Typically starts at 7-10% and decreases each year.
Surrender Period: The number of years during which surrender charges apply if you make excess withdrawals. Typically 5-10 years from purchase.

Tax-Deferred Growth: Earnings in your annuity are not taxed until you withdraw them, allowing your money to compound more effectively over time.

Variable Annuity: An annuity where your returns depend on the performance of underlying investment sub-accounts. Offers higher growth potential but your principal is at risk.

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