In a variable annuity, distribution of assets across multiple classes, e.g., stocks, bonds, cash, in order to meet an individual’s financial goals in terms of risk and length of investment. Can reduce risk and maximize returns on the investment.
Fee incurred by an investor for cashing out early on a deferred annuity or variable annuity, usually within the first 7–10 years after investing. Also called a surrender charge.
If a fixed annuity’s interest rate falls unpredictably below a rate specified in the annuity contract, assures the surrender-charge-free withdrawal of all funds from an annuity account.
An on-line tool allowing contract holders to check the balance of all accounts held within an annuity.
Index that measures the performance of market allocations in a variable annuity. Also compares performance between a variable annuity and an investment portfolio. These indices cannot be invested in directly; also, in contrast to an investment portfolio, these indices do not require that transaction fees and other costs be paid by an investor. Also called stock or bond indices.
The benefiting party who receives money upon the death of an immediate annuity contract holder. Also, the benefiting party who receives continuing payments upon the death of an immediate annuity contract holder. The benefiting party is determined at the discretion of the contract holder.
Beta (3 year)
A percentage reflecting the relative volatility of the subaccounts in a variable annuity as compared to the market as a whole (often determined using the S&P 500). A value greater than 1 percent is indicative of volatility over the market.
Extra interest accumulated in the first year of a deferred annuity that is added to the sum upon which interest is calculated in later years. Also called a first-year bonus rate.
The purchaser of an annuity, either an individual or entity.
In a deferred annuity, the reinvestment of previous interest earnings back into the annuity account.
In the case of the death of an annuitant prior to the beginning of annuity payments, the person who is designated to receive the payments in the original annuitant’s stead.
Contingent Deferred Sales Charge (CDSC)
A fee charged to the account of a deferred annuity or variable annuity upon the full surrender of an annuity contract or upon the withdrawal of funds in excess of annuity contract limits.
The purchaser of an annuity contract, either person or entity, and holder of all rights pertaining to the annuity contract. With a variable deferred annuity, this person or entity may have rights extending to making investment decisions, initiating monetary transfer and redistribution among funding elements, withdrawal rights, and the naming of the annuitant (usually the contract holder) and any beneficiaries.
A guarantee of payment of the annuity account value or a different, specified amount (i.e., the value of the original lump sum funding payment minus withdrawals) to designated account beneficiaries upon the early death of an annuitant or annuity contract holder, before the deferred annuity or variable annuity is annuitized (before the annuity is converted into systematic payouts). In many variable annuities the value of the death benefit increases over time, and several kinds of death benefits exist: the greater of the value of the current account or the value of the initial funding payment; rising floor, in which the insurance company provides a guaranteed minimum return, regardless of the performance of any annuity subaccounts, on any deposits; Ratchet, the greater of the values of the contract, any payments minus any withdrawals, or the contract on a given date; and Stepped-up, guaranteeing payment of the value of the annuity account as per set anniversary dates (e.g., on a yearly periodic basis).
Deferred annuities feature a contract with accumulation and can be funded either through a one-time lump sum payment or through multiple payments over time. Any investment accumulates over the years with a tax-deferred status. Deferred annuities can be variable or fixed. At a time specified by the policy holder, e.g., upon a certain age or at the onset of a life change, such as retirement, payments from the annuity can commence.
A monetary transfer classified as a rollover but which occurs from one investment company directly to another, often from one investment plan into another (e.g., a 401(k) into an IRA). Direct rollovers must be reported but are not taxed, and therefore annuitants can avoid taxation of distributions by using this method.
In a variable annuity, a method that helps an annuitant reduce or avoid risk by distributing funds over multiple asset classes, i.e., over stocks, bonds, or different security types within a given asset class; for example, an annuitant could diversify by investing in stocks within different industries.
Dollar Cost Averaging
In a variable annuity, the investment of a fixed amount of dollars at regular intervals. This is a financial strategy that could, over time, ensure that the average cost per unit will fall below the average price or the market high; however, it does not guarantee profit or guarantee the avoidance of a loss. Investor must invest in securities on a continual basis despite any fluctuation in prices and should assure his or her ability to continue purchasing in times of low prices before using this strategy.
Effective Annual Yield
In a deferred annuity, the rate used after the daily compounding and crediting of the annuity’s interest. The effective annual yield includes any first-year bonus and can be calculated as follows: using the rate bonus, a bonus paid on the base rate by some annuities (e.g., with a 6 percent base rate and a 1 percent first-year bonus, the effective annual yield will be 7 percent), and using the premium bonus, paid upfront by some annuities (e.g., with a 6 percent base rate and a 1 percent premium bonus, the effective annual yield might be 7.06 percent).
Effective Interest Rate
The interest rate if an annuity is compounded annually. For example, with an initial $10,000 deferred annuity investment, over one year at an effective rate of 10%, $1,000 will be earned in interest. Also called an annual effective rate or an annual effective yield.
Enhanced Dollar Cost Averaging Program
In a fixed annuity, a dollar cost averaging program providing an often higher interest rate in particular cases, e.g., for new minimum purchase payments within a limited period of time. Specified amounts are usually transferred automatically over a given time period from a fixed to an investment account.
In equity-indexed annuities, the index used to measure the performance of stocks or bonds selected for indexing the annuity, with an increase in performance resulting in an increase in the value of the equity-indexed annuity.
An annuity offering a guaranteed minimum return rate; may also offer additional interest earnings based on the value of an equity index. The indices used for determining the value of an equity-indexed annuity are commonly well-known stock indices, e.g., the S&P 500.
Equity Investment Style
Within an annuity, the combination of investment types used.
The ratio of taxable to nontaxable proceeds in an immediate annuity payment.
The percentage of an annuity account that is paid on a yearly basis toward insurance and investment charges.
Immediate annuities guarantee a systematic stream of income. They are funded by a lump sum payment to an insurance company. In a given annuity period, e.g., monthly or yearly, an immediate annuity provides payments composed of both the principal and any interest earnings; payments will, over time, liquidate the principal. Immediate annuities are often purchased for the purpose of providing income during retirement.
Fee charged to a deferred annuity account for excessive or multiple withdrawals that exceed the limits imposed by the annuity contract. Upon the surrender of the entire annuity, the penalty could be assessed according to the total annuity account value.
Value of an annuity account minus any surrender penalties paid, as laid out in the annuity contract.
An annuity’s rate of return. Often a percentage of earnings in relation to the annuity balance.
As specified by the tax code, section 1035(a), permits a (usually) tax-free funds transfer from annuity to annuity. Excludes the transfer of funds within an annuity from one subaccount to another.
Similar to a 401(k), a tax-deferred retirement savings account offered to employees of nonprofit organizations, through which contributors invest in annuities (often referred to as TSAs) or in mutual funds.
10% Penalty Tax
A 10 percent IRS fee charged upon the withdrawal of pretax savings (contributions or earnings) from an annuity before the age of 59.5.