• 401(k):A defined contribution plan where employees can make pre or post-tax contributions from their paychecks, depending on the options offered in the plan. In some plans the employer also makes contributions to the accounts, commonly referred to as “matching”. The contributions go into a 401(k) account where the employee often chooses investment options based on the options provided through the plan.
    Source:Summarized from the Internal Revenue Service, http://www.irs.gov/Retirement-Plans
  • Advanced Life Deferred Annuity:A term coined by academic Moshe Milevsky in a 2004 article to refer to a concept that would later become commercialized as a Deferred Income Annuity. Milevsky conceived of the product having no death benefit and that it would be acquired at a younger age and begin payment of inflation-adjusted life contingent payments at an advanced age of 85 or 90.
    Source:Summarized from “Real Longevity Insurance with a Deductible: Introduction to Advanced-Life Deferred Annuities”, Moshe A. Milevsky
  • Annuitant:The person upon whom the life annuity payments are based.  The amount of each annuity payment for life annuities is determined by the age and gender of the annuitant. The owner is typically the annuitant. The annuitant has no rights in the annuity contract but rather is merely the measuring life for the purposes of a life annuity.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Annuitization:The concept of turning a sum of money into a stream of income. Some annuity products have optional annuitization or annuitization over a finite period of time. In the case of Deferred Income Annuities, annuitization occurs automatically at the Income Start Date.
  • Annuity:A series of regular payments over a period of time. In common usage typically refers to a contract or policy that is issued by an insurance company providing a regular payment of income to the owner of the policy. The income is paid by the issuer of the annuity policy or contract. The income is for a finite period of time or for the life of the annuitant. There are several types of annuities but they can be generally categorized in the following way:
    • How the annuity is purchased (simple or flexible premiums)
    • When the annuity payments begin (immediate, deferred or longevity)
    • How the policy value is invested
     
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Annuity Company:(Also known as Insurer, Carrier or Underwriter). The party that issues the policy and is required to keep guarantees and promises made in it.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Beneficiary:The person or party that will receive any death benefit payments payable under the annuity contract. These payments can be in the form of a continuation of the annuity payments or a lump sum. Not all annuities will have beneficiaries. If payments cease on the date of the annuitant’s death, there are no remaining payments for the beneficiary. Generally, the beneficiary has no rights unless the beneficiary is named irrevocably.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Carrier:Also known as (Annuity Company, Insurer or Underwriter). Please refer to Annuity Company definition.
  • Cash Refund:If the annuitant passes away before receiving the specified amount, which may or may not be less than the originally annuitized amount, the remaining amount will be paid to the beneficiary as a lump sum.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Commission:The amount paid by the insurance company to the person selling an annuity. Commissions vary from product to product and insurer to insurer. Insurers are sometimes shared between multiple parties. Commissions are not a direct cost to the purchaser of the annuity. However, purchasers should be diligent about asking what commissions are so they better understand the costs associated with their annuity purchase.
  • Consumer Price Index (CPI):A statistic maintained by the US Department of Labor that measures the average change over time in the prices paid by urban consumers for a basket of goods and services. To learn more about CPI, visit the Labor Department's website here.
    Source:Summarized from The US Department of Labor website, http://stats.bls.gov/cpi/cpifaq.htm#Question_1
  • Creditor:A party, person or institution to whom money is owed. In the case of an annuity contract, once the annuity owner pays a premium to the Annuity Company in return for future payments, the annuity owner becomes a creditor of the Annuity Company.
  • Credit Rating:Credit ratings give you a quick way to get a sense of of how trustworthy the promises made by the insurance company actually are. To learn more about credit ratings and why they are important for your annuity purchasing decision, visit our learn module here.
  • Cost of Living Adjustment (COLA):(Also known as Inflation Rider). Please see the definition for Inflation Rider.
  • Death Benefit Rider:The death benefit rider definition can differ slightly based upon the Annuity Company. However, in principle this option allows for the return of premium values less any already paid income, upon the death of the annuitant assuming death happens after the Income Start Date.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Deferral Period:The time between the annuity purchase date and the Income Start Date.
  • Deferred Income Annuity (DIA):(Also known as Longevity Insurance or Longevity Annuity). A product first introduced in 2011 different from both immediate and deferred annuities. It provides only a guaranteed stream of income payments for a fixed period of time or life (or both). Typically the account balance cannot be accessed other than through annuitization. While immediate annuity income begins within a year of the contract’s purchase date, the income of a Deferred Income Annuity is deferred until the Income Start Date determined by the annuitant. The Income Start Date can be many years removed from the annuity purchase date.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Exclusion Ratio:This figure is important for the taxes that will be owed on the income payments received from a Deferred Income Annuity. It is calculated by taking the Total Contract Value and dividing by the Expected Return.
  • Free Look Period:The time horizon over which you can terminate your contract without paying a penalty. The length varies by state, but most are at least ten days. If you terminate your contract the refund received may equal the account value when the contract is terminated or the amount of purchase payments. This depends on the terms of the contract and the applicable state law. For more information, visit the SEC Website. While those regulations are related specifically to variable annuities, the rules are typically the same for fixed contracts.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Income Start Date:For a Deferred Income Annuity, this is the date chosen by the owner for the start of the guaranteed stream of income payments. This date is typically greater than one year and often is many years into the future from the purchase date of the annuity contract.
  • Individual Retirement Account (IRA):IRA accounts can be broadly segmented into two categories, Traditional IRAs and Roth IRAs. Traditional IRA funds are generally not taxed until distributed and contributions to traditional IRAs can be deducted if you qualify. Conversely, Roth IRA contributions cannot be deducted and if qualifying distributions are taken then no taxes are applied to the distributions. Both IRA funds are subject to withdrawal penalties if distributions are taken prior to age 59 ½. Additionally, IRA funds are subject to Required Minimum Distributions. To learn more visit the IRS website here.
    Source:Summarized from the Internal Revenue Service, http://www.irs.gov/Retirement-Plans
  • Inflation:A sustained increase in the level of pricing of goods and services. It is measured as an annual percentage increase. As inflation increases, the purchasing power of one dollar decreases. To learn more about Inflation you can view our module here.
  • Inflation Rider:(Also known as Cost of Living Adjustment). An optional feature that can be added to many annuity contracts that increases the income payments beginning at the Income Start Date. Annuities available in the market today do not cover inflation during the Deferral Period. Inflation riders are only applicable to payments once the income has begun.
  • Installment Refund:Available option with a Deferred Income Annuity whereby if the annuitant dies before a specified amount of payments are received, the remaining balance will be paid to the beneficiary in installments.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Insurer:(Also known as Annuity Company, Carrier, or Underwriter). Please refer to Annuity Company definition.
  • Joint And Survivor Annuity:Life annuity payments that continue until the death of both annuitants. Payments to the surviving annuitant can remain unchanged or can be reduced. Joint and Survivor annuities can be purchased with a refund feature from certain carriers.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Life With [10 Year] Period Certain:This contract provides for payments that continue for the life of the annuitant. If the annuitant does not live to receive 10 years worth of payments (or, if monthly payouts, annuitant passes before 120 monthly payments are received), the remaining payments will continue to be paid to the beneficiary named in the policy. The payments to the beneficiary continue until the 10 year term is complete.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Life Only (Also known as Life Only, No Refund):This is the simplest contract option whereby if the contract owner elects it, he or she, once annuitized, receives income guaranteed to last the entire annuitant’s life. Upon passing of the annuitant, no further payments are due.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Life Annuity With Refund:This contract option provides for income that is guaranteed for the life of the annuitant similar to the Life Only contract option. However, with this contract option if the annuitant passes, the refund amount will be paid to the designated beneficiary.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Longevity Annuity:(Also known as Deferred Income Annuity or Longevity Insurance). Please see the definition for Deferred Income Annuity.
  • Longevity Insurance:(Also known as Deferred Income Annuity or Longevity Annuity).
  • Longevity Risk:The chance that you live longer than expected, specifically the chance that you outlive your savings by living longer than you expect.
  • Owner Of Annuity:The person or entity that has the ownership right of the contract. These rights include the right to name the annuitant, commence annuity payments and surrender the contract.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Pension:A retirement account that an employer maintains to give an employee fixed payments during retirement.
  • Premium:The amount paid to the insurance company in return for some future income. The minimum and maximum initial premium levels can differ by state and by carrier.
  • Qualified Longevity Annuity Contracts (QLACs):A certain type of Deferred Income Annuity funded with qualified funds that must meet certain standards set forth in 2014 by the US Department of Treasury to be exempt from Required Minimum Distributions. If you would like to learn more please check out our learning module on QLACs here.
  • Required Minimum Distribution (RMD):The minimum amount you must withdraw from your retirement accounts each year. Generally payments are required to begin by age 70 ½ from retirement accounts or IRAs. If you would like to learn more about RMD you can visit the IRS website here.
    Source:Summarized from the Internal Revenue Service, http://www.irs.gov/Retirement-Plans
  • Return Of Premium:The return of premium definition can differ slightly based upon the Annuity Company. However, in principle this option allows for the return of premium values upon the death of the annuitant if death occurs before annuitization has occurred.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Period Certain:An annuity payout option that pays income for a certain period. For example, a fifteen year period certain payout option will pay for exactly fifteen years. If the annuitant dies during the period of payment, the payments will continue to the designated beneficiary (or a contingent annuitant, if named). If the annuitant is still living at the end of the period, payments cease.
    Source:Summarized from “The Advisor’s Guide to Annuities”, John L. Olsen and Michael E. Kitces
  • Single Premium Immediate Annuity (SPIA)Similar to a Deferred Income Annuity except that premiums begin immediately upon purchase. The purchaser of a SPIA makes an upfront payment in exchange for an income stream, either for a period certain, for life, or a combination of both.
  • State Guaranty Fund:A fund administered by a U.S. state that protects policyholders in the event of default on benefit payments or insolvency of an insurance company. These funds are funded by the insurance companies operating in the U.S. state.
  • Surrender Fee:The fee that is charged by the Annuity Company upon surrender of the contract. These fees vary by Annuity Company and often are smaller the longer the contract owner waits to surrender the contract. Most Deferred Income Annuities do not have surrender fees because they cannot be surrendered.
  • Underwriter:(Also known as Annuity Company, Carrier or Insurer). Please refer to Annuity Company.