Annuity Glossary: 60+ Key Terms Defined

A

Accumulation Phase

The period during which your annuity grows before you begin taking income. During the accumulation phase, earnings compound on a tax-deferred basis. This phase ends when you annuitize the contract or begin withdrawals. See our What Is an Annuity? guide for a full overview.

Annuitant

The person whose life expectancy is used to calculate annuity income payments. The annuitant is often the contract owner, but does not have to be. If the annuitant dies during the payout phase, the payment terms of the contract determine what happens next.

Annuitization

The process of converting an annuity’s accumulated value into a stream of periodic income payments. Once annuitized, the decision is generally irrevocable — you give up access to the lump sum in exchange for guaranteed payments. Payment options include life only, period certain, and joint life.

Annuity

A financial contract between you and an insurance company. You pay a premium (lump sum or series of payments), and in return the insurer guarantees future income payments or tax-deferred growth. Annuities are the only financial product that can guarantee income you cannot outlive. See our What Is an Annuity? guide.

Annuity Rider

An optional add-on feature purchased for an additional cost (or sometimes included at no charge) that modifies the base annuity contract. Common riders include income riders (GLWB), enhanced death benefits, and nursing home waivers. Riders allow you to customize the contract to your specific needs.

B

Beneficiary

The person or entity designated to receive the annuity’s death benefit when the owner or annuitant dies. Naming a beneficiary allows the annuity to bypass probate. You can name primary and contingent beneficiaries and change them at any time during the accumulation phase.

Bonus Rate

An additional interest rate credited in the first year (or first few years) of an annuity contract as an incentive. Bonus rates are common in fixed indexed annuities and some MYGAs. Be aware that contracts with bonus rates often have longer surrender periods or lower base rates to offset the bonus cost.

C

Cap Rate

The maximum rate of interest that can be credited to a fixed indexed annuity in a given period, regardless of how well the underlying index performs. For example, if the index gains 12% and the cap is 8%, you are credited 8%. Caps are one of several crediting method parameters. See our Fixed Annuity Guide.

Cash Surrender Value

The amount you receive if you cancel (surrender) your annuity contract before the end of the surrender period. It equals the accumulated value minus any applicable surrender charges. After the surrender period ends, the cash surrender value equals the full accumulated value.

Claims-Paying Ability

The financial capacity of an insurance company to meet its contractual obligations to policyholders. Unlike bank deposits (FDIC-insured), annuity guarantees are backed by the issuing insurer’s claims-paying ability. Independent rating agencies like A.M. Best, S&P, Moody’s, and Fitch assess this strength.

COMDEX Score

A composite score that ranks an insurance company’s financial strength relative to all other rated carriers, expressed on a scale of 1 to 100. It is calculated by averaging percentile rankings from multiple rating agencies (A.M. Best, S&P, Moody’s, Fitch). A higher COMDEX indicates stronger relative financial strength.

Crediting Method

The formula used by a fixed indexed annuity to calculate how much index-linked interest is added to your contract value. Common crediting methods include annual point-to-point, monthly averaging, and monthly sum. Each method interacts with cap rates, participation rates, and spreads differently. See our Fixed Annuity Guide.

Cost Basis

The amount of after-tax money you invested in the annuity. For non-qualified annuities, your cost basis is the total premiums paid. When you take withdrawals, only gains above the cost basis are taxable. The cost basis carries over in a 1035 exchange.

D

Death Benefit

The amount paid to your named beneficiary when you die. The standard death benefit equals the contract’s accumulated value. Some contracts offer enhanced death benefits (via riders) that guarantee a minimum payout regardless of market performance, which is common in variable annuities.

Deferred Income Annuity (DIA)

An annuity purchased now that begins income payments at a future date, typically 2 to 40 years later. DIAs offer higher monthly payouts than immediate annuities because the insurer has more time to invest your premium. They are used to hedge longevity risk — guaranteeing income starting at a specific age.

Distribution Phase

The period during which you receive income payments from your annuity, also called the payout phase or income phase. This follows the accumulation phase. During distribution, each payment is split between taxable gain and non-taxable return of premium (for non-qualified contracts) using the exclusion ratio.

E

Early Withdrawal Penalty

A 10% federal tax penalty applied to annuity withdrawals of taxable gains taken before age 59½, in addition to ordinary income taxes owed. This penalty is similar to the early withdrawal penalty on IRAs and 401(k)s. Exceptions exist for death, disability, and certain annuitized payment schedules (72(t) distributions).

Exclusion Ratio

The percentage of each annuity income payment that is considered a tax-free return of your original premium (cost basis). The exclusion ratio is calculated by dividing your cost basis by the expected total payments. Only the portion above the exclusion ratio is taxable. This applies to non-qualified annuities only.

F

Fixed Annuity

A type of annuity that credits a guaranteed interest rate for a specified period. Fixed annuities provide principal protection and predictable growth. The most common type is the MYGA (multi-year guaranteed annuity). See our complete Fixed Annuity Guide.

Fixed Indexed Annuity (FIA)

An annuity that credits interest based on the performance of a market index (such as the S&P 500) while guaranteeing your principal against market losses. Returns are subject to caps, participation rates, and/or spreads. FIAs offer more growth potential than fixed annuities with less risk than variable annuities. See our Fixed Annuity Guide.

Floor

The minimum interest rate that can be credited to your annuity in any given period. In most fixed indexed annuities, the floor is 0%, meaning you will never lose money due to index declines. Some contracts offer floors above 0% for additional protection, though this typically comes with lower caps or participation rates.

Free Look Period

A window of time (typically 10 to 30 days, depending on state law) after you receive your annuity contract during which you can cancel the contract for a full refund with no surrender charges or penalties. This is a consumer protection required by state insurance regulations.

Free Withdrawal Allowance

The percentage of your annuity value that you can withdraw each year without incurring surrender charges, typically 10% of the accumulated value. This provides limited liquidity during the surrender period. The free withdrawal amount may or may not be cumulative depending on the contract. See our MYGA Guide.

G

GMAB (Guaranteed Minimum Accumulation Benefit)

A rider on a variable annuity that guarantees your contract value will be at least equal to a specified minimum (typically your original premium) after a set period (usually 10 years), regardless of market performance. This provides a safety net for growth-oriented investors in variable annuities. See our Variable Annuity Guide.

GMDB (Guaranteed Minimum Death Benefit)

A rider that guarantees the death benefit paid to your beneficiary will be at least a specified minimum, even if the contract’s market value has declined. Common GMDB options include return of premium, highest anniversary value, or a stepped-up amount. This rider is standard in many variable annuities.

GLWB (Guaranteed Lifetime Withdrawal Benefit)

A rider that guarantees you can withdraw a specific percentage of a “benefit base” each year for life, regardless of actual account performance. The benefit base often grows by a guaranteed roll-up rate (e.g., 5–7% annually) during the deferral period. This is the most popular income rider on fixed indexed and variable annuities.

Guaranteed Rate

The interest rate an insurance company contractually promises to credit to your annuity for a specified period. In a MYGA, the guaranteed rate applies for the full term (e.g., 5 years). This rate is backed by the insurer’s claims-paying ability and cannot be reduced during the guarantee period. See our MYGA Guide.

H

Hybrid Annuity

An informal term for an annuity that combines features of multiple annuity types, most commonly a fixed indexed annuity with an income rider. Hybrid annuities aim to provide both growth potential and guaranteed lifetime income. The term is a marketing label, not a distinct regulatory category.

I

Immediate Annuity

An annuity that begins income payments within one year of purchase, typically within 30 days. You pay a single lump-sum premium, and the insurer converts it into guaranteed periodic payments (monthly, quarterly, or annually) for life or a specified period. Also called a SPIA (Single Premium Immediate Annuity).

Income Rider

An optional add-on that provides a guaranteed lifetime income stream from your annuity without requiring annuitization. The rider typically has its own “benefit base” that grows by a guaranteed roll-up rate during the deferral period. The most common type is the GLWB. Income riders charge an annual fee (typically 0.5–1.5% of the benefit base).

Index

A market benchmark used to calculate interest credits in a fixed indexed annuity. Common indices include the S&P 500, Nasdaq-100, Russell 2000, and various proprietary indices. Your money is not directly invested in the index — the index is only used as a measuring stick for calculating interest credits.

Interest Rate Spread

A percentage subtracted from the index gain before interest is credited to your fixed indexed annuity. For example, if the index gains 10% and the spread is 2%, you are credited 8%. Spreads are an alternative to caps — some crediting methods use one or the other, and some use both. See our Fixed Annuity Guide.

J

Joint Life Annuity

An annuity income option that makes payments for as long as either of two people (typically spouses) is alive. Monthly payments are lower than a single-life annuity because the insurer expects to pay for a longer period. This is a common choice for married couples who need retirement income to continue for the surviving spouse.

L

Laddering

A strategy of purchasing multiple annuities with staggered maturity dates rather than putting all your money into a single contract. Laddering reduces interest rate risk (you are not locked into one rate environment), provides periodic liquidity as contracts mature, and lets you take advantage of potentially higher future rates. See our MYGA Guide.

Life Only Payout

An annuity income option that pays for the annuitant’s lifetime only, with no payments to a beneficiary after death. Life only payouts provide the highest monthly income of any payout option because the insurer bears no obligation after the annuitant dies. The tradeoff is that if you die early, remaining funds are forfeited to the insurance pool.

LIFO Rule

Last In, First Out — the IRS tax rule for non-qualified annuity withdrawals. Gains (the “last in”) are considered withdrawn first and are fully taxable as ordinary income. Once all gains have been withdrawn, subsequent withdrawals are a tax-free return of your cost basis. This rule makes partial withdrawals less tax-efficient than annuitized payments.

Living Benefits

Annuity features and riders that provide guaranteed benefits while the contract owner is alive, as opposed to death benefits. Living benefits include guaranteed lifetime withdrawal benefits (GLWB), guaranteed minimum accumulation benefits (GMAB), and nursing home or terminal illness waivers.

Longevity Risk

The risk of outliving your savings — the possibility that you will live longer than your money lasts. Annuities are the primary financial tool for mitigating longevity risk because they can guarantee income for life regardless of how long you live. This is the core insurance function of an annuity.

M

M&E Charge (Mortality and Expense)

An annual fee charged by variable annuities to cover the insurer’s mortality risk (guaranteeing a death benefit) and administrative expenses. M&E charges typically range from 0.50% to 1.50% of account value per year. This is one of the primary costs that makes variable annuities more expensive than fixed annuities. See our Variable Annuity Guide.

Market Value Adjustment (MVA)

A formula applied to annuity surrenders or withdrawals (above the free withdrawal allowance) that adjusts the payout based on changes in interest rates since the contract was issued. If rates have risen, the MVA reduces your payout; if rates have fallen, it may increase it. MVAs allow insurers to offer higher initial rates by sharing interest rate risk with the contract owner.

MYGA (Multi-Year Guaranteed Annuity)

A type of fixed annuity that guarantees a specific interest rate for a set number of years (typically 2 to 10). MYGAs are the annuity equivalent of a bank CD — simple, predictable, and fee-free. They are the most popular annuity type for conservative savers seeking tax-deferred growth at guaranteed rates. See our complete MYGA Guide and current MYGA rates.

N

Non-Qualified Annuity

An annuity purchased with after-tax dollars (money that has already been taxed). Non-qualified annuities have no contribution limits and no required minimum distributions (RMDs). Only the earnings are taxable upon withdrawal, and withdrawals follow LIFO rules (gains come out first). This is the most common type of annuity purchase.

O

Owner

The person or entity who owns the annuity contract and has the right to make changes, take withdrawals, name beneficiaries, and surrender the contract. The owner may or may not be the same person as the annuitant. Ownership determines the tax treatment of the contract and who controls its terms.

P

Participation Rate

The percentage of an index’s gain that is credited to your fixed indexed annuity. For example, if the index gains 10% and your participation rate is 60%, you are credited 6%. Participation rates above 100% are possible with some crediting methods. See our Fixed Annuity Guide.

Period Certain

An annuity income option that guarantees payments for a specified number of years (e.g., 10 or 20 years), regardless of whether the annuitant lives or dies during that period. If the annuitant dies before the period ends, remaining payments go to the beneficiary. Period certain can be combined with life payout (“life with 10-year certain”) for both lifetime and minimum-period guarantees.

Point-to-Point

A crediting method in fixed indexed annuities that measures the index change from one specific date to another (e.g., from the contract anniversary to the next anniversary). Annual point-to-point is the most common and easiest to understand: it compares the index value on day one to the value one year later, subject to the cap, participation rate, and/or spread. See our Fixed Annuity Guide.

Premium

The money you pay to the insurance company to purchase or fund your annuity contract. Premiums can be a single lump sum (single premium) or a series of payments over time (flexible premium). Most MYGAs and immediate annuities require a single premium; some deferred annuities accept additional deposits.

Q

QLAC (Qualified Longevity Annuity Contract)

A deferred income annuity purchased within a qualified retirement account (IRA or 401(k)) that allows you to defer required minimum distributions on the amount used to buy the QLAC until as late as age 85. The maximum QLAC premium is $200,000 (as of 2024, adjusted for inflation). QLACs provide longevity insurance within a tax-qualified retirement plan.

Qualified Annuity

An annuity held within a tax-qualified retirement account such as an IRA, 401(k), or 403(b). Premiums are typically made with pre-tax dollars, and the entire withdrawal amount is taxable as ordinary income. Qualified annuities are subject to required minimum distributions (RMDs) after age 73 (as of 2024). Contribution limits of the underlying account apply.

R

Required Minimum Distribution (RMD)

The minimum amount the IRS requires you to withdraw annually from qualified retirement accounts (including qualified annuities) beginning at age 73 (as of 2024 under the SECURE 2.0 Act). Failure to take the RMD results in a 25% excise tax on the shortfall. RMDs apply to qualified annuities but not to non-qualified annuities.

Return of Premium

A death benefit provision that guarantees your beneficiary will receive at least the total premiums you paid into the contract, even if the annuity’s current value has declined below that amount. Return of premium is the standard death benefit on most annuity contracts. Enhanced death benefits (available via riders) may offer more.

Risk-Based Capital (RBC) Ratio

A regulatory measure of an insurance company’s capital adequacy relative to its risk profile. The RBC ratio compares the insurer’s actual capital to the minimum capital regulators require based on the company’s risk. A ratio above 300% is generally considered strong. State regulators can intervene when the ratio falls below specified thresholds.

Rollover

The transfer of funds from one qualified retirement account to another (e.g., from a 401(k) to an IRA annuity) without triggering taxes or penalties. A direct rollover (trustee-to-trustee transfer) is the safest method. An indirect rollover gives you 60 days to redeposit the funds; failure to do so within 60 days results in taxes and potential penalties.

S

Single Premium Immediate Annuity (SPIA)

An annuity purchased with a single lump-sum payment that begins income payments immediately (typically within 30 days). SPIAs convert savings into a guaranteed income stream for life or a specified period. They offer the simplest and most cost-efficient way to create guaranteed lifetime income. See our What Is an Annuity? guide.

Spread

See Interest Rate Spread. A percentage deducted from the index return before crediting interest to a fixed indexed annuity. Also sometimes called a “margin” or “asset fee.”

Subaccount

An investment option within a variable annuity, similar to a mutual fund. Subaccounts invest in stocks, bonds, or other securities, and their value fluctuates with market performance. Variable annuity owners choose how to allocate their premium among available subaccounts. See our Variable Annuity Guide.

Surrender Charge

A fee charged by the insurance company if you withdraw more than the free withdrawal allowance or surrender the contract during the surrender period. Surrender charges typically start at 5–10% in year one and decline by about 1% per year until they reach zero. The charge is deducted from the withdrawal amount.

Surrender Period

The number of years during which surrender charges apply if you withdraw funds beyond the free withdrawal allowance or cancel the contract. Surrender periods typically range from 3 to 10 years depending on the product. After the surrender period ends, you can access 100% of your accumulated value with no charges. See our MYGA Guide.

T

Tax-Deferred Growth

The ability to accumulate investment earnings without paying taxes on them each year. In an annuity, interest, dividends, and capital gains compound tax-deferred until you make a withdrawal. This is one of the primary advantages of annuities — every dollar of earnings generates additional earnings without an annual tax reduction. See our Annuity vs. CD comparison.

1035 Exchange

A tax-free transfer of one annuity contract to another, authorized under Internal Revenue Code Section 1035. The funds move directly between insurance companies, and all gains are deferred (not taxed) at the time of transfer. Your cost basis carries over to the new contract. See our complete 1035 Exchange Guide.

V

Variable Annuity

An annuity whose value fluctuates based on the performance of underlying investment subaccounts (similar to mutual funds). Variable annuities offer higher growth potential but carry market risk — you can lose principal. They typically have higher fees (M&E charges, fund expenses, rider fees) than fixed annuities. See our complete Variable Annuity Guide.

W

Withdrawal Charge

See Surrender Charge. A fee applied when you withdraw funds from your annuity above the free withdrawal allowance during the surrender period. The terms “withdrawal charge” and “surrender charge” are used interchangeably in annuity contracts.