When it comes to planning for retirement, annuities can play a crucial role. However, the world of annuities can be overwhelming due to the complex terminology involved.
To help you navigate the annuity marketplace with confidence, we’ve broken down some of the most common annuity terms you’ll encounter.
Understanding Annuities
An annuity is essentially a contract between you and an insurance company. You make either a lump sum payment or a series of payments to the insurance company, and in return, the insurance company guarantees to provide you with a regular income stream, either for a fixed period or for the rest of your life.
Common Annuity Terms Demystified
Let’s explore some of the key annuity terms you should know:
Annuitant
The annuitant is the individual who receives the regular payments from an annuity. They are the one who benefits from the income stream generated by the annuity.
Accumulation Phase
This phase is when the annuitant makes payments to the insurance company, which are then invested and allowed to grow over time.
Annuity Contract
The annuity contract is the legal document that outlines all the terms of the annuity, including the payout schedule, surrender fees, and other associated costs.
Annuitization Phase
When the annuitant decides to start receiving income payments from the insurance company, the annuitization phase begins. At this point, the accumulated value of the annuity is converted into a guaranteed income stream.
Death Benefit
Many annuities come with a death benefit, which pays out a lump sum to the beneficiary if the annuitant passes away before receiving all the guaranteed payments.
Deferred Annuity
A deferred annuity offers income payments at a later date, making it a popular choice for individuals looking to save for retirement and delay receiving income until they actually need it.
Distribution Phase
This is the stage when you start receiving income (distributions) from your annuity.
Fixed Annuity
With a fixed annuity, you can expect a guaranteed rate of return, similar to a certificate of deposit (CD). This means that the income payments will be fixed and predictable, making fixed annuities a lower-risk option.
Fixed Indexed Annuity
Learn more about indexed annuities
Free-Look Period
The free-look period is a specific window of time during which you can cancel an annuity contract without incurring any penalties. It allows you to review the terms and conditions and decide if the annuity is the right fit for you.
Guaranty Association
A guaranty association is an organization mandated by the state to protect policyholders in the event of an insurance company’s insolvency. It serves as a safety net, ensuring that policyholders can still receive compensation for their claims even if the insurer goes under.
Guaranteed Minimum Income Benefit (GMIB)
A GMIB is a rider that guarantees a minimum level of income payments, providing a safety net in case the underlying investments perform poorly.
Immediate Annuity
An immediate annuity starts providing income payments within a year of purchase, making it a popular choice for retirees in need of a steady income stream right away.
Indexed Annuity
Indexed annuities offer returns based on market indexes like the S&P 500, providing principal protection and a potential for growth.
Joint and Survivor Annuity
This type of annuity provides income payments for the life of the annuitant, with reduced payments continuing for the surviving spouse after the annuitant’s passing.
Longevity Annuity
Also known as a deferred income annuity, this product offers a guaranteed income stream starting at a specific future date, making it a popular choice for individuals concerned about outliving their savings.
Longevity Risk
Longevity risk refers to the risk of outliving your retirement savings.
Margin or Spread
Indexed annuities use a margin or spread percentage to determine the interest credited to your account based on the index’s performance, ensuring a minimum interest rate even if the index performs poorly.
Multi-Year Guarantee Annuity
MYGAs offer a guaranteed interest rate over a specific period, similar to a CD, but with potential early withdrawal penalties.
Participation Rates
Participation rates in indexed annuities determine the percentage of the index’s growth that will be credited to your account, allowing you to benefit from market gains while limiting downside risk.
Period Certain
This annuity option provides regular payments for a specified period, with the option for a beneficiary to continue receiving payments or receive a lump sum if the annuitant passes away before the period ends.
Premium
The premium is the payment made to the insurance company to fund the annuity contract, which can be a single lump sum for an immediate annuity or a series of payments for a deferred annuity.
Rider
An annuity rider is an optional feature that can be added to enhance the benefits or provide additional protections of an annuity contract.
Single-Premium Immediate Annuity
This type of annuity offers a guaranteed income stream, typically for life, with payments starting within a year of purchase.
Learn more about immediate annuities
Surrender Charge
A surrender charge is a fee deducted if you choose to cash in your annuity contract before the end of its term.
Variable Annuity
Variable annuities offer returns based on the performance of underlying investments, making them more risky but potentially more rewarding than fixed annuities.
1035 Exchange
This provision in the Internal Revenue Code allows for a tax-free exchange of one annuity contract for a more suitable one.