Annuity Expressions You Should Know

Terms Deciphered So You Can Better Understand Your Annuity

Taking out an annuity can be a very confusing process. Often there are terms slung around that you may not understand completely—insurance agent jargon that isn’t colloquial for the average citizen. Below, the terms are laid out, compared and contrasted so that you can understand your annuity. To start shopping for annuities use our online forms to compare up to five quotes.

Annuities vs. Annuitization

• An annuity is an investment that you pay for either all at once or over a period of time and, starting at a specified date, begins paying a guaranteed annual income for the rest of your life. You can buy an immediate annuity, which will convert the money into income within a year of the purchase date. Or you can buy a deferred annuity, which converts the money at a later date.
• Annuitization is the process of converting your annuity into income. Annuitization is basically irreversible—once you turn your annuity into an income stream, you can’t change it back, and your access to your money is highly restricted. You don’t HAVE to annuitize. Instead, you can treat your annuity more like a savings account—it will gather interest and you can withdraw money if you need to.

Owner vs. Annuitant

• The contract owner is the one who takes out the annuity from the insurance company. The contract owner pays for the annuity, decides where the annuity is invested, and chooses the other players in the annuity contract.
• The annuitant is the person whose life expectancy determines the annuity payments calculations if and when the contract is annuitized. The annuitant and the contract owner are usually the same people, but they don’t have to be.

Death Benefits vs. Living Benefits

• A death benefit is the technical term for the amount of money from the annuity that the beneficiary to the contract owner receives if the owner dies before the annuity is annuitized. Typically, the death benefit is the face value of the annuity at the time of the owner’s passing.
• Living benefits are the guarantees made by the insurance company when you take out your annuity. Often, they include a certain annual interest rate on the annuity and your guaranteed life-long income after annuitization.

Deferred vs. Income

• A deferred annuity is one that acts more like an investment or savings account, becoming annuitized at a later, previously specified date (retirement, for example).
• An income annuity is also known as an immediate annuity. You begins receiving your payouts within a year of the date you purchase your annuity.

Fixed vs. Variable

Both of these terms have two-fold answers, depending on whether your annuity is a deferred annuity or an income annuity.

Deferred Annuity

• A fixed deferred annuity means your annuity has a fixed rate of return. The insurance company invests your annuity in bonds, and the rate you receive back is guaranteed and does not change.
• With variable deferred annuity, the insurance company distributes your annuity among sub-accounts, kind of like mutual accounts. The rate of return varies, and on the predetermined date, your money is taken out of the accounts and paid to you in installments.

Income annuity

• You receive a fixed income annuity when the insurance company invests your annuity in bonds.
• You receive a variable income annuity if your money is put into sub-accounts, but unless you die, you do not take all of your money out of your accounts.

Qualified vs. Nonqualified

• A qualified annuity means your annuity is tax deductible. You won’t have to pay income tax until you annuitize or being withdrawing from the annuity.
• A nonqualified annuity simply means that your annuity is not tax deductible.

Surrender Period vs. Surrender Charge

• An annuity surrender period is the amount of time in years, often the equivalent of the commission taken by the insurance company, during which you will be charged for withdrawing too frequently from your annuity before the payout date.
• An annuity’s surrender charge is the amount you’re charged for that withdrawal. Typically, it decreases each year of the surrender period.

All of these annuity terms and definitions are helpful to know in order to make the best, most educated decision about your annuity, but it never hurts to ask your life insurance agent for clarification, or any other questions you may have. To find a local agent, use our quick online form to compare up to 5 quotes.