We get it; annuities and financial planning can be challenging to understand. The industry is riddled with jargon and impenetrable terminology that can make learning about how finances work daunting to many people.
At ABB Wealth Strategies, we believe in transparency and well-informed decision-making. For this reason, we make it a point to educate our clients about the little-understood aspects of annuities to help you feel less intimidated and more empowered to navigate their finances.
Below you’ll find a list of some of the most common terms and concepts in the industry explained in non-technical terms. We invite you to review this page and get familiar with the terminology. As always, we are here to answer all your questions and give you personalized guidance as you need it.
Please remember, these materials are purely educational. This page is not intended to be financial advice but rather a general, surface-level familiarization with the language you might be exposed to in your annuity process. You should always contact your financial advisor before making any investment decision.
Account Value:
Refers to the total amount of money in an annuity. Another way to think of account value is as the balance in your annuity.
Accumulation Phase:
This is the growing stage of an annuity where the quantity of money in your account increases before you withdraw. In some cases, annuity holders will allow you to add money to your account during this phase. This is also called the growth period.
Advisor:
The qualified and licensed professional whose job it is to help you understand your financial options and assist you in making financial decisions. Used interchangeably with ‘financial advisor’ and ‘financial consultant.’
Annual Lock:
Annual locks almost exclusively refers to fixed indexed annuities. This is your chance to tie down, secure, or protect the interested earned up to the annuity’s cap every year. This allows you to protect your gains from future dips in the index.
Annuity:
A financial product that offers a series of regularly scheduled payments protected to ensure a lifetime income. Insurance companies typically provide annuities in exchange for regular payments on your behalf during the growth/accumulation phase. Some annuities allow you to grow your money by accruing interest or through investment options. When you own an annuity, you become the annuity owner and the final authority about any changes to the annuity.
Beneficiary:
A designated person who will receive the remaining balance of an annuity should the annuity owner pass away.
Benefit:
Some annuities offer additional (optional) perks or protections for beneficiaries at an added cost.
Bonus:
An option to lock in your income based on a predetermined guaranteed growth rate for an annuity. Bonuses are applied periodically to your benefit base (income plus any added guaranteed growth increases for an annuity), increasing the amount you receive permanently.
Cap:
The maximum amount an annuity can earn after your chosen time period.
Charge:
Fees or costs that come with owning an annuity. These charges can include set-up fees, adding benefits, commissions, etc.
Contract Value:
Interchangeable with account balance – the total amount of money in an annuity.
Cost Basis:
The initial investment amount in an annuity.
Covered Person(s):
Protected persons whose lifetime income payments from the annuity are based upon and whose age determines the rate of withdrawal.
Crediting Strategy:
The process of determining how interest is added to applicable annuities.
Death Benefits:
Should the annuity holder pass away, these are the benefits that pay out the remaining account balance to your beneficiaries.
Decumulation Phase:
When you start receiving income from your annuity. Also used interchangeably with the term ‘distribution phase.’
Deferral Bonus:
During the growth stage of your annuity, this is a bonus that can be credited to your income annually for each year you do not withdraw income – this only applies to an age specified by your annuity holder.
Deferred Income Annuity:
Also called a longevity annuity, this option is a type of income annuity to which you can contribute a lump sum, then set a rate and amount for your payments. Deferred income annuities also allow you to delay payments until a predetermined date.
Discretionary Expense:
Essential expenses to cover basic needs like mortgage, rent, food, etc.
Non-Discretionary Expense:
Non-essential expense for lifestyle benefits like entertainment and travel.
Diversification:
Financial strategy that involves spreading investments across different types of industries and companies to minimize the risk of market downturns.
Dollar-Cost Average:
Financial strategy in which one invests a set amount of money spread over a period of time rather than a large amount on the outset. This reduces the risk of investing at a high point in the market.
Earning Sensitive Adjustment:
Income added to the guaranteed amount or other permanent income increases. Earning sensitive adjustments are based on market performance and allow you to add earnings to the number of permissible withdrawals. This option will enable you to make larger withdrawals and enjoy the same after-tax withdrawal year after year.
Fee-Based Annuity:
This annuity allows you to pay a financial professional through an annual advisory fee instead of a commission.
Fiduciary:
A qualified and licensed financial professional required to help you make financial decisions that are in your best interest.
Fixed Account:
An annuity account that earns a guaranteed interest rate and is not tied to the stock market.
Fixed Annuity:
Annuity option that is fully protected from market downturns with the added potential for earned interest.
Fixed Index Annuity:
Annuity that guarantees principal protection and potential for growth based on the market index.
Free Amount:
The maximum amount you can withdraw from an annuity without incurring feeds.
Guaranteed Income:
Reliable income that can last the rest of your life and has the potential to carry over to your beneficiaries.
Guaranteed Minimum:
Optional benefit that secures a minimum amount for your annuity payment, assuming all terms are met by both the annuity owner and the company.
Guaranteed Minimum Withdrawal Rate:
Optional benefit that ensures you can withdraw a minimum percentage of your account value annually for a specified time period.
Immediate Income Annuity:
Annuity option that allows you to contribute a lump sum and set the intervals and amount at which you’d like to receive your income payments. With immediate income annuities, you can receive payments immediately or defer the payments for up to 12 months.
Income Base:
The amount of money you can withdraw money against.
Income Stage:
When you start receiving income from your annuity.
Index:
A benchmark representing how a portion of a market is doing is used to evaluate performance.
Index Participation Rate:
Percentage increase of the index value that will be credited to your annuity.
Interest Rate Floor:
Guaranteed minimum interest for a period of time.
Investment Divisions:
Investment options available to annuity owners.
Joint Life:
Added covered person who can lengthen annuity income benefits if they outlive the primary account holder.
Legacy:
Benefits paid to beneficiaries should the primary account holder pass away. This term is interchangeable with legacy benefits or legacy protection benefits.
Liquidity Risks:
Risk potential of having to withdraw money before you anticipated, therefore incurring penalties.
Longevity Risk:
Risk potential of outliving your income.
Market Risk:
Risk of losing money due to market downturn.
Market Value Adjustment:
Changes to the amount you are able to withdraw from a fixed annuity above the free withdrawal amount. This amount depends on the interest rate environment that has changed since your first opened your annuity account.
Market Volatility:
Quick changes to the market that may affect your annuity value. There are annuity options that can protect your investment from being affected by market volatility.
Minimum Guaranteed Surrender Value:
Minimum amount an annuity owner is guaranteed when withdrawing money from their account.
Option:
Feature which protects you or your beneficiaries for an additional fee.
Participation Rate:
Percentage increase of index value credited to your annuity after a selected time period.
Penalty-Free Withdrawal:
Maximum amount you can withdraw without being charged any fees.
Performance Trigger:
Pre-set amount credited to an annuity after a change to the underlying index – Also known as a performance credit.
Period Certain:
Payout option that allows you to choose when and how to receive payments – this option can be potentially transferred to beneficiaries.
Qualified Dollars/Money:
Untaxed money that can be used to fund annuities with tax-qualified retirement plans like 401(k)s.
Required Minimum Distribution:
Income you are required to receive from your account each year after reaching your retirement age.
Rider:
Feature which protects you or your beneficiaries for an added fee.
Risk-Adjusted Returns:
Estimated measure of returns relative to the risks involved in the investment.
Roll-Up:
Adjusting income based on a pre-set guaranteed growth rate. The growth rate is periodically added to your benefits, permanently increasing the benefit amount you receive.
Sequence of Returns Risk:
Potential for market downturn in the early stages of retirement, which can have a disproportionately negative effect on your account balance if you’ve already begun making withdrawals.
Spousal Continuation:
Option to transfer annuity payments and guaranteed income to a spouse were the primary holder pass away.
Spread:
Index crediting method that uses a predetermined rate which is subtracted from percentage increases based on the underlying index. This difference is accredited to the annuity.
Sustainable Withdrawal Rate:
Estimated maximum percentage you’re allowed to withdraw without risking outliving your guaranteed income.
Variable Annuity:
Option that offers potential growth for your money through market investment options, with the risk for possible market loss.
Variable Portfolios:
Different options a variable annuity owner can choose to allocate their investment money to.
Waiver:
Option that provides protections to you or beneficiaries at an additional cost.
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