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  • Accumulation Phase: The period of time when the owner builds cash value in an annuity.

    Annuitant: The annuitant is the person on whose life Annuity Payments are based.  Often, the annuitant is also the person who receives the benefits of the annuity.

    Base Interest Rate: The Base Rate is the Current Rate less the Bonus Rate, if any. In many cases, the Base Rate and the Current Rate are the same.

    Beneficiary: The person having the right to receive the death proceeds payable upon the death of the contract owner during the accumulation phase, and the person having the right to receive benefits upon the death of the annuitant during the annuity phase.

    Cap: The Maximum interest rate that can be credited to your equity index annuity policy in a policy year or over the term of the policy.

    Compounding of Gains: Interest that is credited to your policy is added to your principal as well as interest credited in prior policy years. Some companies do not compound the gains credited to equity index policies from prior years. This dramatically reduces the overall rate of return earned by your money.

    Current Interest Rate: This is the interest rate that an annuity is paying, the sum of the base rate, if any, and the bonus rate, if any. The current rate is set by the insurance company at the time of issue and is guaranteed for specific length of time.

    Deferred Annuity: This annuity, which can be variable or fixed, delays payments until the owner elects to receive them. All or a portion of the payments are taxed upon withdrawal.

    Distribution Phase: The period of time when the owner takes money out of an annuity, either through withdrawals from the contracts or through Annuitization, which converts the cash value into a stream of payments

    Fixed Annuity: An annuity in which the accumulation results from fixed interest credits at declared rates.

    Flexible Premium Annuity: A type of deferred annuity that permits flexible premium payments after the initial payment.

    Floor: The minimum interest rate that can be credited to your policy equity index annuity in a year or over the term of your contract.

    Immediate Annuity: This annuity begins making payments to the owner as soon as the contract starts and has no accumulation phase.

    Joint and Survivor: An annuity with two or more annuitants in which payments continue as long as one of the annuitants is alive.

    Life, with Period Certain: An annuity in which the owner receives a certain number of payments whether the annuitant lives as long as the scheduled payments or not.  So if the period of payments is scheduled for 25 years and the annuitant dies after 15 years, a beneficiary will receive the final 10 years of payments.

    Old Money Rates or Renewal Rates: The Old Money Rate is the rate declared by the company after the initial rate guarantee.

    After the initial interest rate guarantee, the company decides what the interest rate will be for the following policy year. This rate is based on the company’s original investment portfolio and how the company designed the product.

    For example, if the annuity policy at the time of issue paid a “current rate” of 7.50%, which was guaranteed for one year, and had a “base rate” of 6.50%, the company could declare a new interest rate for the second policy year of 6.0%. Each policy year thereafter the company would declare a new interest rate for that policy year.

    Participation Index Rate: The amount of the percentage change (which is set by the company) used to determine the amount to be credited to your policy for that year. If the Participation Index Rate was 90% and the percentage change of the S&P 500 Index was 10%, then the 10% change would be multiplied by the Participation Index Rate of 90%, resulting in an Interest Rate of 9.0% being credited to your policy for that term.

    Percentage Change: The change in the S&P 500 Index from the beginning of the term to the end of the term expressed as a percentage. The term could be one policy year, 5 policy years or 7 policy years, etc. If the S&P 500 was 500 at the beginning of the policy year and closed at 550 at the end of the policy year, there would have been a 10% increase in the S&P 500 Index. In years where the S&P 500 Index is negative, the percentage credited to your policy is (0). In this case, there would be no change in your policy value.

    Premium Bonus: Additional money that is credited to the accumulation account of an annuity policy under certain conditions. First, the amount of money credited to the policy is calculated as a percentage of your initial premium. Secondly, the money credited to your accumulation account “vests” in your policy after a certain number of years.

    For example, if your initial premium is $10,000 and the policy pays a 4.0% premium bonus and vest in years 6 through 9, your policy is credited with $400. The $400 earns interest as if it were your original premium, however if you surrender your policy during the first 5 years, you DO NOT receive the Premium Bonus and the interest it earns. During year 6, 7, 8, and 9, you “vest into” 25% of the Premium Bonus and its earned interest each year.

    Rollover: The transferring of funds accumulated within an employer-sponsor retirement plan to another employer-sponsored retirement plan or IRA.

    Section 1035(a) Exchange: The tax-free exchange of one nonqualified annuity contract or life insurance policy for another with a different company. For example, the transfer of a life to life; life to annuity; annuity to annuity policy. Partial transfers are also permitted.

    Serial Issue: A number of annuity contracts, issued by the same company within a twelve month period to the same owner.

    Settlement Options: The methods by which the insurer may pay annuity or life insurance policy proceeds to the annuitant, contract owner, policy owner or beneficiary.

    Single (straight) Life: An annuity that pays the owner as long as annuitant lives.

    Transfer: The direct transfer of funds from one financial institution to another financial institution for the benefit an individual. For example, the transfer of IRA funds from a bank to an insurance company. The check issued to the insurance company is for “the benefit of James Jones.” The direct transfer avoids the 20% withholding since the check is issued to an institution “for the benefit of James Jones” and is not paid directly to James Jones.

    Variable Annuity:  A deferred annuity contract that allows the contract owner to select the investment funds and assume the investment risk.


What Is an Annuity?

An annuity is a long-term, tax-deferred* insurance contract or investment designed for retirement. It allows you to create a fixed or variable stream of income during your retirement through a process called annuitization.

An investor can purchase an annuity with a lump sum or monthly payments. The money is invested for a future date, when the money can be taken by the investor either monthly, quarterly, annually or in a lump sum. That money can also be guaranteed for a specific period or for a lifetime.

If a person has an annuity with a guaranteed 10-year income, and that person dies after five years, the beneficiary will receive payments for the remaining five years.

If a person has an annuity with lifetime payments, beneficiaries receive nothing upon the death of the holder of the annuity. It is possible to get an annuity with lifetime payments and a set number of guaranteed years. In that case, if the person dies before the end of the guaranteed years, beneficiaries would receive the remaining guaranteed funds.

Money invested in an annuity can grow tax-deferred*. When the money is withdrawn, only the investment earnings are taxed, not the amount of money invested.

Similar to a 401(k) or other defined contribution plans, money from an annuity can be subject to an additional 10 percent tax penalty – on top of your current tax rate – if it is removed before 59 ½.

*Tax-Deferred: Tax-deferred means taxes on your interest earnings are postponed until a future point in time. By postponing taxes, your money compounds faster because you earn interest on dollars that would have otherwise been paid to the IRS. This enables you to accumulate more money over a shorter period of time, ultimately providing you with greater income.

There are three types of annuities:

FIXED ANNUITY: It provides a fixed rate of return based on the terms of your contract. Investors will receive a fixed income in retirement.

VARIABLE ANNUITY: It allows you to control how the money in the annuity is invested, such as mutual funds. But the payout amount will change with the performance of the investments. The U.S. Securities and Exchange Commission regulates variable annuities. 

INDEXED ANNUITY: It allows money to be invested in a stock market index, i.e. Standard & Poor’s 500. Payments are based on the performance. 

Excellent videos for a better understanding of annuities:

AIG “Cut the Small Talk”  (FA & IA)
AIG “ Cut the Small Talk” (Index Annuities)
Lincoln Financial Group – FIA Basics
Lincoln Financial Group – LINC Edge
Lincoln Financial Group – Lincoln OptiBlend® Fixed Indexed Annuity

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