Annuities Glossary - WBOC-TV 16, Delmarvas News Leader, FOX 21 -

Annuities Glossary

Accumulation phase The period when an annuity owner can add money and accumulate assets tax-deferred.

Accumulation unit value (AUV)
An annuity's subaccount price per share during the accumulation phase. It's the net asset value after income and capital gains have been included and subaccount management expenses have been subtracted.

Annual insurance fee
This covers mortality and expense (M & E) risk charges and other administrative expenses. It also provides for a guaranteed death benefit and for lifetime guaranteed income payouts.

Annual policy fee
This covers the costs of maintaining and administering an account during the accumulation phase. It is often waived, however, when an account's value reaches a certain level (which is stated in the contract).

Annual subaccount fee
A fee deducted for fund operating costs, management fees, and other asset-based costs incurred by the fund. This charge is assessed at the subaccount level and is not deducted from policy values.

Annuitant
The person, usually the annuity owner, whose life expectancy is used to calculate the income payment amount on the annuity.

Annuity owner
The person or people who make decisions about an annuity's investments. The owner or owners have the rights to make withdrawals, surrender or change the designated beneficiary or other terms of the contract.

Anticipated initial investment
The amount of money you want to invest at the beginning. Most companies have certain minimum initial investment amounts.

Assets under management
All the financial assets under the management of a company, including stocks, bonds, mortgage loans, real estate, investments, policy loans and cash.

Balance inquiry
An online function that lets you check the performance and balance of the subaccounts in your annuity.

Beneficiary
The person designated to receive payments due upon the death of the annuity owner or the annuitant.

Beta (3 year)
This is a number, expressed in a percentage, that reflects the volatility of the subaccount relative to the overall market (usually the S&P 500). A Beta above 1 percent is usually more volatile than the overall market.

Death benefits
The payment the investor's estate or beneficiaries will receive if he or she dies before the annuity matures. There are several types of death benefits with variable annuities, including: Current account value or initial investment (whichever is greater), in which the beneficiary receives the vale of the annuity when the policyholder dies; Rising floor, in which an investment company guarantees a minimum return on premium deposits, regardless of subaccount investment performance; Ratchet, a benefit equal to the greater of (a) the contract value, (b) premium payments less prior withdrawals or (c) the contract value on a specified prior date; and Stepped-up, which guarantees the account value to the beneficiary as of a particular anniversary date (e.g. every 5 years).

Equity investment style
An annuity subaccount's investment style (the blend of investment types in the annuity).

Five-year annualized total return
This percentage figure reflects a subaccount's total return (gain or loss) averaged over 5 years.

Front-end load fee
A one-time fee insurance companies charge to defray the costs of establishing new accounts.

Morningstar rating
A rating of annuity products based on their quality as measured by Morningstar, a leading, independent provider of investment information. Annuities subbaccounts are rated with 1-5 stars, with 5 being the best possible rating.

Mortality and expense risk charge (M&E)
A fee for insurance guarantees, including the death benefit, the choice of guaranteed lifetime payout options, and the guarantee that insurance charges will not increase.

Non-qualified
Subject to taxes.

Non-qualified sources
Sources of money where the money has already been taxed, such as cash, mutual funds, certificates of deposit (CDs), and money market funds.

One-year annualized total return
This percentage figure reflects a subaccount's total return (gain or loss) averaged over a year.

Payout phase or payout period
The period during which the money accumulated in an annuity is paid out as regular income payments.

Previous month-end AUV
A dollar amount that reflects the previous month's accumulated unit value price.

Qualified
Not subject to taxes.

Qualified sources
Sources of money that have not been taxed yet, including 401(k) accounts, traditional individual retirement accounts (IRAs), 403(b) retirement plans for teachers and other employer-sponsored plans.

R squared (3 year)
This number measures how closely a subaccount correlates to the performance of the benchmark index (S&P 500). A smaller number like 0 reflects no correlation, and a higher number like 100 reflects perfect correlation.

Sales material
The presentation documents insurance companies provide that describe an annuity in detail.

Source of funds
Where you'll get the money you plan to invest. Your source or sources can be qualified or non-qualified. Qualified sources are pre-tax sources such as 401(k) accounts, traditional individual retirement accounts (IRAs), 403(b) retirement plans for teachers and other employer-sponsored plans. Non-qualified sources are after-tax sources such as cash, mutual funds, certificates of deposit (CDs), money market funds and exchanges of other non-qualified annuities (1035 exchanges).

Standard deviation (3 year)
A statistical measure of a subaccount's range of performance. When a subaccount has a high degree of deviation, chances are greater that it will fluctuate.

Subaccounts
The various investment portfolios in which your annuity funds are invested. You choose which subaccounts you want your money invested in and how much you want to allocate to each.

Subaccount investment objective
Identifies a subaccount's investment type (for example, aggressive growth, balanced, money market or corporate bond).

Subaccount net assets
The assets of a subaccount expressed in millions of dollars.

Surrender charges
The charge for withdrawing money from an annuity before the date agreed upon in the contract. Surrender charges typically are a percentage of the total premium deposited, and the charge decreases to 0 over time as the annuity gets closer to the date it will mature.

Term certain annuity
An annuity with income payments over a set number of years.

Three-month total return
This number is a percentage figure that reflects the subaccount's previous 3-month return (gain or loss).

Trading
Transferring funds from one subaccount to another within an annuity. These transfers are free of load or tax.

Variable annuity
An annuity that lets you invest your money among various investment portfolios, called subaccounts. The performance of the underlying investments in those portfolios determines the value of the variable annuity (less any applicable fees).

Underlying investments
The stocks, bonds, cash equivalents or other investments purchased with the money you invest in an annuity.

1035 exchange
Named after the section 1035 (a) of the tax code, this allows the transfer of funds from one annuity to another (NOT transferring within subaccounts of the same annuity). Usually, there is no tax on this type of transfer.

401 (k)
An employer-sponsored retirement savings plan that lets employees withhold and invest a portion of their income before it is taxed. From an employer-selected list of investment options, employees choose how they want their money invested. Employers sometimes contribute to employees' 401 (k) plans based on a percentage (such as contributing 50 cents for every dollar an employee invests).

403 (b)
A tax-deferred retirement savings plan similar to a 401 (k) but aimed at teachers and employees of some non-profit organizations. Participants contribute to either annuity contracts (often called a TSA) with insurance companies, or directly with mutual fund companies.

Bond
Interest paying certificate issued by a government, public agency or corporation, promising to pay the holder a specified sum on a specified date.

Certificate Owner
The person or entity that purchases the annuity.

Contingent Annuitant
A person who will receive annuity payments in case the first annuitant dies before annuity payments begin.

Contingent deferred sales charge (CDSC)
The charge deducted from the annuity for withdrawing purchase payments in excess of allowed limits or upon full surrender of the annuity contract.

Deferred Annuity
An annuity contract where premiums are accumulated with interest and then used to provide periodic payments at a future date.

Direct Rollover
A transfer that qualifies as a rollover, but is done directly from one company to another. Usually, it is from a qualified plan into an IRA . It is reportable, but not taxable. The annuitant can avoid having taxes taken out of the eligible distribution by having a direct rollover.

Effective Interest Rate
AKA: Annual Effective Rate or Annual Effective Yield. The interest rate earned if compounded annually. If a person has $10,000 and leaves it for one year at an effective rate of 10%, they will earn $1,000 of interest. The interest rate for one day when compounded daily is approximately 0.0261%. Note that 10% divided by 365 days is approximately 0.274%.

Expected Life
Number of years a person is expected to live, given their current age. The expected life is usually obtained from a mortality table.

Fixed annuity
An insurance contract in which the insurance company guarantees your principal and locks in a rate of return for a fixed period of time.

Flexible Premium Annuity
A deferred annuity contract that allows the owner to make continual payments. The amounts and times of these payments are often left completely up to the owner. Interest is paid from the date they are received and the amount available to annuitize is dependent on when and how much is received.

Interim value
The value of an investment in a fixed option before application of any market value adjustment.

Market value adjustment
The gain or loss incurred for withdrawing money from a fixed-rate option prior to maturity.

Money market portfolio
A portfolio that aims to earn income by investing in short-term securities issued by governments or corporations. These portfolios seek stability of principal. They differ from bank market rate accounts, which are bank deposits and are FDIC insured up to applicable limits.

Money market instruments
Short-term debt securities issued by corporations, governments or public agencies.

Owner/Participant
The individual who owns an annuity contract and makes purchase payments.

Periodic Transfer
This is a transfer from one company to another pursuant to IRS Ruling PL102-318. It allows for the transfer of the money from one company to another over a period of time of substantially equal payments. Most are set up as monthly, however they can be quarterly or annually. Effectively, a policyholder annuitizes their policy, but has the proceeds sent as a transfer to another company to purchase an annuity there rather than receiving the payments as income.

Principal
The amount of money you put into an investment.

Purchase payment
A contribution to or an investment in an annuity.

Rollover
Money that originally came from a qualified plan, was distributed to the owner, and is now being placed in an eligible qualified plan. Most often the plan it is being placed into is an IRA. These are reportable to the IRS, but not taxable.

Single Premium Annuity
Annuity purchased with a payment of one lump sum premium.

Surrender Value
Is equal to the accumulated value less any surrender charges specified in the contract.

Stock (equity)
A unit of ownership in a company. When you buy a stock, you become a part-owner of the company whose stock you purchase. Stock is equity.

Tax Sheltered Annuity (TSA)
An employer sponsored retirement savings program limited by law to employees of public educational organizations and certain nonprofit organizations.

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