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10% Early Withdrawal Penalty
A federal tax penalty imposed by the IRS on annuity earnings withdrawn before age 59 and a half. This 10% penalty is in addition to regular income taxes on the gains. The penalty does not apply to 1035 exchanges or to certain exceptions such as death, disability, or substantially equal periodic payments.
1035 Exchange
A provision under IRS Section 1035 that allows you to transfer funds from one annuity contract to another without triggering a taxable event. The funds move directly between insurance companies and your cost basis carries over to the new contract. A 1035 exchange is the standard method for replacing an existing annuity with a new one.
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Accumulation Phase
The period during which you make contributions to your annuity and the account grows in value. Interest or investment returns are credited on a tax-deferred basis during this phase. The accumulation phase ends when you begin taking withdrawals or annuitize the contract.
Annual Reset
A feature of many fixed indexed annuities where the index value is 'reset' at the beginning of each contract year. Any gains from the prior year are locked in, and the new crediting period starts fresh. This means a market decline in one year does not erase gains credited in previous years.
Annuitant
The person whose life expectancy is used to calculate annuity payments during the distribution phase. The annuitant is often the same person as the owner, but they can be different individuals. Payments continue based on the annuitant's life.
Annuitization
The process of converting your accumulated annuity value into a stream of periodic income payments. Once annuitized, you typically cannot access the remaining balance as a lump sum. Annuitization options include payments for life, for a fixed period, or for the joint lives of you and a spouse.
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Bailout Provision
A contract feature that allows you to surrender your annuity without penalty if the renewal interest rate drops below a specified minimum threshold. Bailout provisions protect you from being locked into a contract with unacceptably low returns and are most commonly found in fixed annuities.
Beneficiary
The person or entity designated to receive the death benefit or remaining annuity value if the owner or annuitant passes away. Naming a beneficiary allows the annuity proceeds to bypass probate, providing a faster and more private transfer of funds.
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Cap Rate
The maximum interest rate your fixed indexed annuity can earn in a given crediting period, regardless of how well the linked index performs. If the cap is 7% and the index gains 12%, your credited interest is limited to 7%. Cap rates are set by the insurer and may be adjusted annually.
Crediting Method
The formula used to calculate how much index-linked interest is credited to a fixed indexed annuity. Common crediting methods include annual point-to-point and monthly averaging. Different methods can produce significantly different results from the same index performance.
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Death Benefit
A provision guaranteeing that your named beneficiaries will receive at least a specified amount (usually the premiums paid minus withdrawals) if you pass away before receiving all payments. Some contracts offer enhanced death benefits that include accumulated interest or a return of the highest contract value.
Declared Rate
The interest rate set by the insurance company for a fixed annuity or the fixed account option within an indexed annuity. The declared rate is typically guaranteed for one year at a time and may be adjusted by the insurer annually, subject to a contractual minimum.
Deferred Annuity
An annuity where income payments begin at a future date, allowing your money to grow during the accumulation phase. Deferred annuities are designed for people who are still years away from retirement and want to build a larger income base before starting withdrawals.
Distribution Phase
The period when you begin receiving income payments from your annuity. The insurance company converts your accumulated value into periodic payments based on the terms of your contract. Payments can last for a specific period or be guaranteed for your entire lifetime.
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Fixed Annuity
A type of annuity that pays a guaranteed interest rate on your contributions for a specified period. Your principal is fully protected and your returns are predictable, making fixed annuities one of the most conservative options for retirement savings.
Fixed Indexed Annuity (FIA)
An annuity that earns interest based on the performance of an external market index (such as the S&P 500) while protecting your principal from market losses. FIAs combine downside protection with upside growth potential through mechanisms like participation rates and cap rates.
Flexible Premium
An annuity that allows you to make multiple premium payments over time rather than a single lump sum. The timing and amount of each payment may be at your discretion, subject to contract minimums. Flexible premium annuities are useful for people who want to fund their annuity gradually.
Floor Rate
The minimum interest rate your account can earn in any given crediting period. For most fixed indexed annuities, the floor is 0%, meaning that in years when the index declines, you simply earn no interest rather than losing money. The floor is the key protection that distinguishes FIAs from variable annuities.
Free Withdrawal Provision
A contract feature that allows you to withdraw a certain percentage of your annuity value each year (typically up to 10%) without incurring surrender charges. This provision provides liquidity during the surrender period and is a standard feature in most modern annuity contracts.
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Guaranteed Lifetime Withdrawal Benefit (GLWB)
A rider that guarantees you can withdraw a specific percentage of your income base each year for life, regardless of actual account performance. The income base often grows at a guaranteed roll-up rate during the deferral period. GLWBs are one of the most popular riders on fixed indexed annuities.
Guaranteed Minimum Income Benefit (GMIB)
A rider that guarantees a minimum level of annuitized income regardless of actual account performance. After a waiting period (typically 10 years), you can annuitize based on the higher of your actual account value or the guaranteed benefit base. GMIBs are more commonly found on variable annuities.
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Immediate Annuity (SPIA)
A Single Premium Immediate Annuity (SPIA) begins paying income within one year of purchase, often within 30 days. You make a single lump-sum payment and immediately start receiving periodic income payments. SPIAs are ideal for retirees who need income right away.
Income Base
The value used to calculate guaranteed income withdrawals under a GLWB or similar income rider. The income base is not the same as the account value — it is a separate calculation that often grows at a guaranteed roll-up rate (e.g., 5% to 7% annually) during the deferral period and is used solely to determine the income payment amount.
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Liquidity
The ease with which you can access funds from your annuity without penalty. Annuities are generally less liquid than bank accounts, especially during the surrender period. Liquidity features include free withdrawal provisions, nursing home waivers, and terminal illness waivers that allow penalty-free access in certain circumstances.
Long-Term Care Rider
A rider that provides enhanced benefits if you need long-term care, such as nursing home care, assisted living, or home health care. The rider may increase your withdrawal amount or waive surrender charges when qualified long-term care expenses arise. This offers a way to address potential care costs within your annuity.
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Market Value Adjustment (MVA)
A contract provision that adjusts the surrender value of your annuity based on changes in interest rates since your contract was issued. If interest rates have risen, an MVA can reduce your surrender value; if rates have fallen, it can increase it. MVAs are common in fixed and indexed annuities with longer surrender periods.
Minimum Guaranteed Rate
The lowest interest rate an insurance company guarantees for your annuity over the life of the contract. Even if market conditions deteriorate, your annuity will earn at least this minimum rate. This guarantee is backed by the claims-paying ability of the issuing insurance company.
Monthly Averaging
A crediting method that calculates the index change for each month and sums the results. Positive months may be subject to a monthly cap while negative months are typically uncapped. Monthly averaging generally performs best in steadily rising markets and can underperform in volatile markets.
Multi-Year Guarantee Annuity (MYGA)
A type of fixed annuity that guarantees a specific interest rate for a set number of years (typically 3 to 10 years), similar to a bank CD but often with higher rates. MYGAs offer predictable, guaranteed growth with no market risk.
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Participation Rate
The percentage of an index's gain that is credited to a fixed indexed annuity. For example, if the S&P 500 gains 10% and your participation rate is 80%, your account is credited with 8%. Participation rates vary by contract and can range from 25% to over 100%.
Payout Rate
The percentage of your income base or account value that determines your annual income withdrawal amount. Payout rates vary based on your age at the time you begin withdrawals, with higher rates available at older ages. For example, a 5% payout rate on a $200,000 income base would provide $10,000 per year.
Point-to-Point
A crediting method that compares the index value at the beginning and end of a crediting period (usually one year). If the index is higher at the end, interest is credited based on the percentage gain, subject to caps, participation rates, or spreads. This is the most straightforward and widely used crediting method.
Premium
The payment or series of payments you make to the insurance company to fund your annuity contract. Premiums can be a single lump sum or multiple payments over time, depending on the type of annuity and the terms of the contract.
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Required Minimum Distribution (RMD)
Mandatory annual withdrawals from qualified annuities (those funded with pre-tax dollars from IRAs or 401(k) plans) once the owner reaches the applicable age set by the IRS. RMDs do not apply to non-qualified annuities. Failing to take the required distribution results in a significant tax penalty.
Rider
An optional add-on feature attached to an annuity contract for an additional cost, typically an annual fee of 0.75% to 1.25% of the benefit base. Common riders include guaranteed lifetime income riders, enhanced death benefit riders, and long-term care riders. Riders customize the annuity to fit your specific needs.
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Single Premium
An annuity funded with one lump-sum payment at the time of purchase. After the initial premium is paid, no additional contributions are accepted. Single premium annuities are commonly used when rolling over retirement accounts or investing a lump sum from a pension, inheritance, or savings.
Spread / Margin
A percentage subtracted from the index gain before interest is credited to your FIA. For example, if the index gains 9% and the spread is 2%, you receive 7%. Some contracts use a spread instead of or in addition to a cap rate. Spreads are typically fixed for the life of the contract.
Surrender Charge
A fee charged by the insurance company if you withdraw more than the allowed amount during the surrender period. Surrender charges are expressed as a percentage of the withdrawal amount and typically decrease each year on a declining schedule (for example, 7%, 6%, 5%, 4%, 3%, 2%, 1%, 0%).
Surrender Period
A specified time frame (typically 3 to 10 years) during which you may incur penalties for withdrawing more than the allowed percentage of your annuity value. Surrender charges typically start high and decrease each year until they reach zero. Once the surrender period ends, you can access your full account value without penalty.
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Continue Learning
Now that you know the terminology, explore our in-depth guides and tools to put your knowledge into action.
Understanding Annuities
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Fixed Indexed Annuities
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The True Value of FIAs
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Replacement Guide
Evaluate whether replacing your annuity makes sense.
Lifetime Income Calculator
Estimate guaranteed lifetime income from an FIA.
FIA Growth Calculator
See how FIAs protect your savings while capturing gains.
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