Accumulated assets: Accumulated assets represent
the total value of assets accumulated through an investment
Accumulation phase or Accumulation period: The time
when the owner of a deferred annuity makes payments into the
contract and accumulates assets.
Annual contract fee: An annual fee, typically $30
or $40, paid to the insurance company for administering the
contract. The fee is often waived for contracts with high
Annuitant: The person(s) upon whose life annuity
payments are based. Often, but not always, the annuitant and
the owner are the same person.
Annuitization: The process of converting an annuity
from an accumulation vehicle into a guaranteed (or variable,
if a variable immediate annuity is selected) stream of income.
Annuity consideration: The payment, or one of the
subsequent payments, that a policyholder makes for an annuity.
Beneficiary: The person or financial instrument (e.g.,
a charity or trust fund) named in the contract as the recipient
of the account value, or the death benefit, whichever is greater,
in the event of the contract owner’s death.
Bonus credit or Bonus rate: Some fixed annuity contracts
offer a higher interest crediting rate in the first year of
the annuity contract. After the first year, the rate drops
back to a rate consistent with the current market. Some variable
annuities offer an additional credit to the annuity account
when the annuity is purchased.
Broker/Dealer: NASD member firms that act as securities
dealers or brokers, or perform both functions.
Capital gains: The gain in value of certain investments
over and above the initial amount paid into an investment.
Capital gains are subject to a different tax rate than ordinary
income. In many cases, the capital gains tax rate is lower
than the income tax rate for an individual.
Cash value: The amount available
in cash upon surrender of a permanent life insurance policy.
Also known as cash surrender value.
Commission: Fees charged by financial professionals
to buy or sell securities.
Contract fee: A flat fee charged by an insurance
provider to cover administration costs on a variable annuity.
This fee is charged on a yearly basis.
Death benefit: The payment made to the beneficiary
upon the death of the contract owner or annuitant. 4
Deferred variable annuity: A type of deferred annuity in which
funds are placed in underlying investments and money accumulates
on a tax-deferred basis until it is withdrawn or converted
to income at some later date. The account value fluctuates
based on the performance of the investments.
Diversification: Allocating your assets among various conservative,
moderate and aggressive investments in order to reduce the
inherent risks of investing.
Equity indexed annuity: This annuity typically provides
the contract owner with an investment return that is a prescribed
percentage of the return of an index, such as the S&P
500, while guaranteeing no less than a stated fixed return
on the investment.
Forced annui tization: The automatic liquidation
of an annuity upon the contract owner’s reaching a specific
age, as defined by the insurance provider.
“Free look” period: The “trial period” during which
you can freely evaluate your investment. You can exit from
your variable annuity contract during this period without
incurring any penalties. By NASD regulation, all variable
annuities are required to have a free look period. The length,
however, is determined by the provider.
Free withdrawal: A stipulation in most deferred annuities
that allows for early withdrawal without an insurance company-imposed
penalty. The maximum withdrawal is usually up to 10% of the
annuity value. Tax penalties may apply if you withdraw assets
before reaching age 59 ½.
General account: The account in a variable annuity
that is backed by the issuing insurance company, and in which
a guaranteed interest rate is credited, and in which current
market rates (if higher than the minimum guaranteed rate)
may also be credited to the account.
Global variable fund: One of several options for
investment within a variable annuity, this type of fund invests
in securities throughout the world, sometimes in developing
nations, but mostly in developed markets such as the United
Growth variable fund: One of several options for
investment within a variable annuity, this type of variable
fund invests in companies that the investment manager believes
are likely to grow based on current market conditions.
Immediate annuity: An annuity that is purchased with
a single lump sum, with payments beginning within a short
period – less than 13 months. Immediate annuities can be fixed
Income variable fund: One of several options for
investment within a variable annuity; sometimes referred to
as an “equity income” variable fund. The goal of this type
of variable fund is to invest in companies or asset classes
that the investment manager believes will deliver a steady
stream of income to the fund, often through dividends.
Index variable fund: One of several options for investment
within a variable annuity, this type of variable fund invests
in an array of companies that are part of a major market index,
such as the S&P 500, in order to replicate the performance
of the index.
Joint and survivor annuity: An annuity in which payout's
are made to the owner for life and, after the owner’s death,
to the designated beneficiary for life.
Life annuity: Annuity payments that are guaranteed
to continue for the life of the annuitant.
Money market fund variable fund: One of several options
for investment within a variable annuity, this type of variable
fund focuses on investments in short-term cash market instruments,
such as CDs, short term corporate debt, and Treasury notes.
Mortality and expense risk fee: The M&E fee pays
for three important insurance guarantees:
to choose a payout option that provides an income that
cannot be outlived at rates set in the contract at the
time of purchase.
A death benefit to protect beneficiaries.
The promise that the annual insurance charges will not
NASD (National Association of Securities Dealers):
A self-regulatory body of securities brokers/dealers. The
NASD is responsible for regulating the securities, trading,
and sales activities of its members and for addressing,
among other matters, consumer complaints, the examination
of securities firms, and the licensing of financial professionals.
Variable annuity sellers are regulated by the NASD under
rules approved by the Securities and Exchange Commission
Non-qualified plan: In a non-qualified tax deferred
plan, such as an annuity outside of a retirement plan, money
can only be invested after income taxes are applied. Contributions
grow in the account on a tax-deferred basis. Taxes are incurred
on only the earnings or growth withdrawn from the account.
Payout phase: The phase of the annuity in which
an insurance provider makes payments to you, the annuitant,
according to an agreed-upon schedule. This is also known
as the “annuitization period.”
Premium: A contribution or payment into an annuity.
Principal: Both the initial investment and any
ongoing contributions made into an annuity.
Prospectus: A legal document that describes the
financial details of a variable annuity, as well as the
risks. The Securities and Exchange Commission (SEC) requires
that a prospectus be presented to consumers prior to purchasing
Qualified tax-deferred plan: A qualified tax-deferred
plan is a an investment plan approved by the Internal Revenue
Service (IRS) for special tax treatment. Examples of qualified
tax-deferred plans are IRAs and 401(k) plans, where you
don’t pay income tax on your contribution, or on interest
or profit earned. Taxes at ordinary income tax rates are
incurred on any withdrawals from the account. In some tax-deferred
plans (401(k) and 403(b), you can also choose to make contributions
after-tax, with withdrawals received tax-free. The IRS restricts
contributions and any withdrawals taken before age 59 ½.
Registered Representative: The employee or an associate
of an NASD member firm who gives advice on which securities
to buy and sell, and who collects a percentage of the commission
income he or she generates.
Rider: An amendment to an insurance policy that
expands or restricts the policy’s benefits or excludes certain
conditions from coverage.
Risk: The possibility that an investment will not
earn an anticipated return.
Risk tolerance: How much risk of loss you are willing to
take in order to achieve an investment goal, such as the
potential for a higher rate of return.
Savings period: The period in which the owner of
a deferred annuity makes payments and accumulates assets.
Surrender charge: The cost to a contract owner
for early redemption of a contract. The charge is usually
not applied after the contract is 5 to 7 years old.
Surrender charge period: A time period imposed
by the variable annuity provider, during which you will
be subject to a withdrawal charge for any funds that are
withdrawn (generally after a “free corridor”).
Value variable fund: One of several options for
investment within a variable annuity, this type of variable
fund invests in companies the investment manager believes
are undervalued in the marketplace.
Variable annuity: A contract in which the premiums
paid are invested in funds offered by the insurance company,
including bond and stock funds. The selection of funds is
guided by the level of risk assumed. The account value reflects
the performance of the funds that the owner has chosen for
investment. Variable annuities have historically reflected
the growth and performance of the economy and served as
a hedge against inflation, although no one knows whether
they will continue to do so.
Withdrawal: Distributions from an annuity other
than scheduled annuity payments.