Annuity Term Glossary
§401(k) Plan
A qualified profit sharing or stock bonus plan under which plan participants have an
option to put money into the plan or receive the same amount as taxable cash
compensation. Amounts contributed to the plan are not taxable to the participants
until withdrawn. Generally funded entirely or in part through salary reductions
elected by employees. Salary reductions are subject to an annual limit.
§403(b) Plan
A tax-deferred annuity retirement plan available to employees of public schools and
certain nonprofit organizations.
A
Annual Reset
An indexing method under which index growth is measured annually. The index value staring point is reset every year.
Averaging
Use of the average values of an index over a period of time rather than the value of the index on a given day. Averaging tends to soften the effects of both market increases and market decreases.
Action at end of Penalty Period
At the end of a surrender penalty period, some annuities require the contract owner to take action or decide what to do with the annuity.
NONE: at the end of the penalty period, no action is required. The contract owner may leave the money in the annuity. The annuity will continue to earn interest as declared by the company.
RRR: The contract owner will have three options at the end of thee penalty period.
1) Renew- the company will declare a new interest rate, usually at the rate paid on new annuities. The annuity will begin a new penalty period. This is the default option unless the owner elects on of the following options.
2) Remove- the annuity may be surrendered for its cash value. Income taxes will be incurred on the interest earnings in the year received.
3) Rollover- the annuity may be rolled over or transferred to another annuity with the same or a different insurance company on a tax free exchange basis.
ANNUITIZE: the annuity must be paid out over a period of time to escape surrender penalties.
Annual Fees
There are no front end sales charges with most annuities. However a few annuities charge annual maintenance fees. Generally these fees are low.
Additional Premiums Allowed
If additional premiums are allowed to the same annuity, there will be a minimum amount stated in the contract, normally about $50.
SINGLE PREMIUM DEFERRED ANNUITY (SPDA): Only one premium is allowed to this type of annuity. Occasionally additional premium can be added in the first year.
FLEXIBLE PREMIUM DEFERRED ANNUITY (FPDA): Contract owners may make additional deposits to their annuity in the future if they desire. Additions may be made monthly or as frequently as defined in the contract. Bank drafts may also be employed, especially in qualified plans.
Annuity Funds Investment Type
The method used by the insurance company to set renewal rates after the initial rate period.
PORTFOLIO: Funds are pooled by type of annuity. All annuities of the same type will earn the same rate, regardless of issue date, after the initial rate guarantee period. Renewal rates may float up or down, depending on overall portfolio investment yield.
BANDED: Funds are pooled by rate and/or time period. Old annuities, based upon the time period they were purchased, may earn a different rate from new annuities. The old rate may be higher or lower than new money. Renewal rates will lag behind the market. As interest rates go down, old money will generally earn more interest than new money. Conversely, as rates go up, old money will earn lower interest than new money.
CD TYPE: These annuities are called CD type because 100% of the annuity value is available to be withdrawn at the end of the rate guarantee period. At the end of the rate guarantee period, either the penalties expire completely or the contract owner will be given a window of time to renew it, remove it or roll it over into a new annuity.
CD/INDEX: These annuities are CD annuities because 100% of the annuity value is available to be withdrawn at the end of the rate guarantee period. They are also designated Index because the company will credit any increase in the index in addition t the fixed rate. If the market is down you still get the fixed rate.
INDEXED: These annuities set a fixed rate which is only applicable if the index performance is equal to or greater than the beginning point or previous contract anniversary point. If the index is down from the previous anniversary, no credit is applied.
Annuitant
The person to whom annuity payments will be made.
Annuity Commencement Date
The date on which the annuitant will begin receiving payments from the annuity.
Annuity Purchase Value
Total premium plus accrued interest minus any previous withdrawals and state premium tax, if applicable.
Absolute Assignment
A policy assignment under which the assignee receives full control over the policy
and full rights to its benefits. As a general rule, when a policy is assigned to secure a
debt, the owner retains all rights in the policy in excess of such debt, even though
the assignment may be absolute in form. The insurance company does not guarantee
the validity of the assignment.
Accelerated Benefits
A provision in some life insurance policies that allows insureds who are terminally ill
to collect part or all of their life insurance benefits before they die, primarily to pay
for the care they require. When the insured dies, the remainder of the death benefit
is paid to the beneficiary, just as under a traditional life insurance policy.
Accrued Benefit
The amount of retirement benefit that has been accumulated on behalf of a
participating employee. In the case of a defined benefit plan, an employee's accrued
benefit would be expressed as the amount he or she could expect to receive at
normal retirement if no future funds were contributed to the plan. In the case of a
money-purchase plan or profit-sharing plan, a participant's accrued benefit means
the balance presently accrued in his or her individual account.
Accrued Interest
Interest earned but not yet paid for a period of time that has elapsed since the last
interest payment.
Accrued Liability
The amount of money needed to offset a participant's accumulated benefits under a
retirement plan. A plan's accrued liability is equal to the difference between the
present value of future benefits promised and the present value of future
contributions. A plan is considered fully funded when the funds held under the plan
equal the plan's accrued liability. Conversely, when the assets of a plan are less than
its accrued liability, the plan is deemed to have an unfunded accrued liability.
Accumulated Benefit Obligation
An accounting term representing the value of retirement benefits already earned by
an employee through prior service.
Accumulated Earnings Tax
A penalty tax imposed on a corporation's accumulated earnings and profits in excess
of $250,000 or, if greater, the reasonable needs of the business. The accumulated
earnings and profits for certain personal service corporations is limited to $150,000,
unless the accumulated earnings and profits are for the reasonable needs of the
personal service corporation.
Accumulated Surplus
A surplus accumulated by a corporation from its profits.
Accumulation Period
In retirement and annuity plans, the period when funds are accumulated for later
disbursement. This is in contrast to the income period, when the accumulated funds
are disbursed in the form of annuity or pension benefits.
Accumulation Trust
A trust in which the income is retained and not paid out to beneficiaries until certain
conditions are met.
Adjustable Term Insurance Rider (ATR)
An Adjustable Term Insurance Rider (ATR) is used to add death benefit coverage to
the base or primary policy. An Adjustable Term Insurance Rider allows the policy
owner to apply for the pattern of the death benefits appropriate for anticipated
needs.
Adjusted Gross Estate
The gross estate less debts, funeral costs, and administrative expenses. This is the
starting point for the federal estate tax computation.
Administration of An Estate
The court-supervised distribution of the probate estate of a deceased person. If there
is a will, the will names an executor (the person who manages the distribution). If
not, the court appoints someone, who is generally known as the administrator.
Administrator
An individual appointed by a probate court to handle the estate of a person who died
intestate. They have the same duties as an executor.
Adverse Selection
Tendency of persons with a higher-than-average chance of loss to seek insurance at
standard (average) rates, which, if not controlled by underwriting, results in higher than-expected loss levels.
After-Tax Retirement Income
The distributions in the form of loans or withdrawals taken from an insurance policy
as retirement income. The retirement income is adjusted by the policy owner's tax
bracket for taxable distributions.
Agent
An individual or firm authorized to act on behalf of another (called the principal),
such as by executing transactions or selling and servicing an insurance policy. The
agent does not assume any financial risk in the transaction.
Alternate Valuation Date
A date used by the administrator to value a decedent's estate. This date is not to
exceed six months after date of death. The value of the assets must be lower and
result in a reduction of the gross estate and reduction in the estate tax liability to
qualify for its use.
Alternative Minimum Tax (AMT)
An alternative tax computation that adds certain tax preference items back into
adjusted gross income. If the AMT is higher than the regular tax liability for the year,
the regular tax and the amount by which the AMT exceeds the regular tax are paid.
It is intended to ensure that high-income individuals, corporations, trusts and estates
pay at least some minimum amount of tax, regardless of deductions, credits or
exemptions.
Amount At Risk
The pure insurance element of a life insurance policy. The net amount at risk is equal
to the difference between the face value of the policy and its accrued cash value at a
given time. The net amount at risk decreases as the cash value increases each year.
If the cash value becomes the face value, the policy is said to mature or endow.
From the IRS perspective, a corridor of protection or net amount of risk must be
apparent in a life insurance policy if the policy is to retain its tax advantaged
treatment.
Ancestor
One from whom a person is descended, whether through father or mother. Also can
mean one from whom an estate has descended.
Annual Gift Tax Exclusion
Every person is permitted to give away up to $10,000 per year (under 2001 law) to
any other person without incurring any gift tax liability. There is no limit on the
number of people who can receive these gifts in a year. To qualify for this exclusion,
the gift must be a gift of a present interest, meaning that the recipient can enjoy the
gift immediately and the donor must not have any control over the asset after it is
given away. This can present problems when gifts are made to trusts. This exclusion
can be doubled to $20,000 per person, per year, if the donors are married and both
spouses consent to join in making the gift. This is called gift splitting. The $10,000
per year amount is indexed for inflation.
Annuity
A contract sold by an insurance company designed to provide payments to the holder
at specified intervals, usually after retirement. Fixed annuities guarantee a certain
payment amount, while variable annuities do not, but may have the potential for
greater returns.
Applicable Estate Tax Exemption Amount
An estate tax exemption amount used to reduce the tax on transfers of property at
death (estate tax). Created by the Economic Growth and Tax Relief Reconciliation Act
of 2001, the applicable estate tax exemption amount will gradually increase to
$3,500,000 in 2009 and is unlimited in 2010.
Articles of Organization
May also be called certificate of formation. This is the initial document filed with the
state to form or organize a Limited Liability Company (LLC). It includes basic
provisions concerning the life, nature, management, owners, etc., of the LLC and
becomes a matter of public record.
Asset Protection
The process of taking steps to minimize the risk of creditors or other claimants from
being able to reach your assets. This can include setting up a different entity, such
as a family limited partnership or limited liability company for each property,
business, etc.
Assets
Things of value owned by a person, family, or business. Everything of economic
value that is owned, whether real or personal property.
Assignment
Transfer of ownership or an asset to another person or party.
At-Risk
The at-risk rules limit the amount of tax losses that can be deducted from a business
or investment to the amount that is at-risk in that investment. The amount at-risk
includes the cash and the fair market value of any property invested in the business.
The amount at-risk (the deduction limit) also includes debts for which the taxpayer is
personally liable.
Attorney-in-fact
A person who holds a power of attorney, and therefore is legally designated to
transact business and execute documents on behalf of another person.
Automatic Premium Loan
Cash borrowed from a life insurance policy's cash value to pay an overdue premium
after the grace period for paying the premium has expired.
B
Base Interest Rate
The Base Rate is the Current Rate less the Bonus Rate if any. In many cases the Base Rate and the Current Rate are the same.
Bonus Rate
A Bonus Rate is the "extra" or "additional" interest paid during the first year. (the initial guarantee period) The term "Bonus Rate" also means that extra interest paid as a pure bonus with no vesting requirements to earn it…a true bonus!
Bonus Credited On
The annuity may pay a premium or rate bonus on different amounts. Some on initial premium only, all new premiums received in the first year only, or on all new premiums received in all years.
Bail Out Interest Rate
After the initial rate period, if the interest rate drops below this rate, the annuity may be surrendered or transferred to another company without paying a surrender penalty.
Beneficiary
Before the Annuity Commencement Date, the person to whom payments will be made if the annuitant/owner dies. After the Annuity Commencement Date, the person to who payments will be made if the annuitant dies.
Before-Tax Earnings
A taxpayer's gross income from salary, commissions, sales, fees, etc., before
deductions for federal, state or other income taxes.
Beneficial Interest
A financial or other valuable interest arising from an insurance policy regardless of
who formally owns the policy.
Beneficiary
An individual, institution, trustee or estate which receives, or may become eligible to
receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or
other contract.
Binder
A temporary, binding agreement, secured by a payment to evidence good faith, used
until a formal contract takes effect.
Book Value
An accounting term. The book value of a stock is determined from a company's
records, by adding all assets then deducting all debts and other liabilities, plus the
liquidation price of any preferred issues. The sum arrived at is divided by the number
of common shares outstanding and the result is book value per common share. Book
value of the assets of a company or a security may have little relationship to fair
market value.
Broker
An individual or firm which acts as an intermediary between a buyer and seller,
usually charging a commission. For securities and most other products, a license is
required.
Buy-Sell Agreement
An agreement between the owners of a business that provides that the shares owned
by any one of them who dies or withdraws from the business shall be sold to and will
be purchased by the surviving co-owners or by the entity itself at a value or formula
previously agreed upon by the parties and stipulated in the agreement. Also applies
to buyout arrangements between owners and key employees.
Bypass Trust
An estate planning device (also called a credit shelter trust, family trust, or B trust in
"AB" plans where the A trust funds for the marital deduction) used to minimize the
combined estate taxes payable by spouses whereby, at the death of the first spouse,
the estate is divided into two parts and one part is placed in trust usually to benefit
the surviving spouse without being taxed at the surviving spouse's death, while the
other part passes outright to the surviving spouse or is placed in a marital deduction
trust. A by-pass trust permits a maximum of $1.350,000 transfer to heirs of the
spouses on an estate tax free basis under the unified gift and estate tax credits as
they exist in 2001.
C
Cap
The Maximum interest rate that can be credited to your equity index annuity policy in a policy year or over the term of the policy
Compounding of Gains
Interest that is credited to your policy is added to your principal as well as interest credited in prior policy years. Some companies do not compound the gains credited to equity index policies from prior years. This dramatically reduces the overall rate of return earned by your money.
Current Interest Rate
This is the interest rate that an annuity is paying it is the sum of the base rate, if any and the bonus rate, if any. The current rate is set by the insurance company at the time of issue and is guaranteed for a specific length of time.
Cash Value (Surrender Value)
The amount that is available for full or partial surrenders.
Capital Gain or Capital Loss
The profit or loss from the sale of a capital asset.
Capitalization
The total amount of the various securities issued by a corporation. Capitalization may
include bonds, debentures, preferred and common stock, long term debt and
surplus. Bonds and debentures are usually carried on the books of the issuing
company in terms of their par or face value. Preferred and common shares may be
carried in terms of par or stated value. Stated value may be an arbitrary figure
decided upon by the board of directors or may represent the amount received by the
company from the sale of the securities at the time of issuance.
Cash Basis Method
A method of determining when income must be reported and when expenses can be
deducted. It is used by most individual taxpayers. Certain partnerships, corporations,
and other taxpayers may not use the cash method. Under the cash method, income
is generally reported in the tax year money is received, and expenses are usually
deducted in the tax year they are paid.
Cash Surrender Value
The equity amount available to the owner of a life insurance policy should he or she
decide it is no longer wanted. Calculated separately from the legal reserve.
Cash Value
The equity amount available to the policy owner when a life insurance policy is
surrendered to the company, or the amount upon which the total available for a
policy loan is determined. During the early policy years in a traditional whole life
policy, the cash value is the reserve less a surrender charge; in the later policy
years, the cash surrender value usually equals or closely approximates the reserve
value.
Certified Financial Planner (CFP)
Professional designation granted to someone who has attained a high degree of
technical competency in financial planning and has passed a series of professional
examinations by the College for Financial Planning.
Charitable Gift Annuity
An arrangement whereby the donor makes a gift to charity and receives back a
guaranteed lifetime (or joint lifetime) income based on the age(s) of the
annuitant(s).
Charitable Lead Trust
An arrangement whereby the charity receives an income from a trust for a period of
years, then the remainder is paid to non-charitable beneficiaries (generally either the
donor or his or her heirs).
Charitable Remainder Annuity Trust
A charitable trust arrangement whereby the donor or other beneficiary is paid
annually an income of a fixed amount of at least 5% but not more than 50% of the
initial fair market value of property placed in the trust, for life or for a period of up to
20 years; one or more qualified charitable organizations must be named to receive
the remainder interest upon the death of the donor or other income beneficiaries,
and the value of the charitable remainder interest must be at least 10% of the net
fair market value of all property transferred to the trust, as determined at the time
of the transfer.
Charitable Remainder Trust
An arrangement wherein the remainder interest goes to a legal charity upon the
termination or failure of a prior interest.
Charitable Remainder Unitrust
A charitable trust arrangement whereby the donor or other beneficiary is paid
annually an income of a fixed percentage of at least 5% but not more than 50% of
the annually revalued trust assets, for life or for a period of up to 20 years; one or
more qualified charitable organizations must be named to receive the remainder
interest upon the death of the donor or other income beneficiaries, and the value of
the charitable remainder interest must be at least 10% of the net fair market value
of all property transferred to the trust, as determined at the time of the transfer.
Chartered Financial Consultant (ChFC)
Professional designation granted to an individual who has attained a high degree of
technical competency in the fields of financial planning, investments, and life and
health insurance and has passed ten professional examinations administered by The
American College.
Chartered Life Underwriter (CLU)
Professional designation granted to an individual who has attained a high degree of
technical competency in the fields of life and health insurance and who is expected to
abide by a code of ethics. Must have minimum of three years of experience in life or
health insurance sales and have passed ten professional examinations administered
by The American College.
Codicil
A legal document, which supplements and changes an existing will. Generally utilized
to make minor changes to the original will.
Collateral Assignment
When a life insurance contract is transferred to an individual or other party as
security for a debt. This usually temporary assignment does not transfer all policy
rights.
Collateral Assignment Method (Split Dollar)
A policy ownership arrangement under a split-dollar arrangement using life insurance
where the employee (or a third party) owns the policy and names a personal
beneficiary but assigns part of the policy or death benefit to the employer as
collateral for the employer's premium advances under the policy.
Community Property
Ten states (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico,
Texas, Washington, and Wisconsin) use some form of the community property
system to determine the interest of a husband and wife in property acquired during
marriage.
Concealment
Deliberate failure of an applicant for insurance to reveal a material fact to the
insurer.
Conditions
Provisions inserted in an insurance contract that qualify or place limitations on the
insurer's promise to perform.
Consideration
One of the elements of a binding contract; the exchange of values by the parties to
the contract. Such values may be money, promises, property, etc. In insurance, the
policy owner's consideration is the first premium payment and the application; the
insurance company's consideration is the contract itself.
Constructive Receipt Doctrine
A federal tax rule, which provides that when a taxpayer has an unrestricted right to
receive a pecuniary benefit, that is when it is made available without a substantial
risk of forfeiture, the benefit is considered to have been received for income tax
purposes whether or not it was actually received.
Contingent Beneficiary
Beneficiary of a life insurance policy who is entitled to receive the policy proceeds on
the insured's death if the primary beneficiary dies before the insured; or the
beneficiary who receives the remaining payments if the primary beneficiary dies
before receiving the guaranteed number of payments.
Convertible
Term life insurance that can be exchanged for a cash value life insurance policy
without evidence of insurability.
Corporate Owned Life Insurance (COLI)
Life insurance owed by a corporation, insuring the lives of its employees.
Corpus of a Trust
The term used to designate the body of assets placed in a trust. The trust holds title
to all property included in the corpus.
Cost of Insurance (COI)
The cost of insurance rate charged on the difference between the death benefit and
account value, also known as the net amount at risk. The cost of insurance rate is
set to cover more than the cost of providing the death benefit. The cost of insurance
rate helps cover administrative costs, taxes, and other expenses. The cost is
deducted from the account value monthly.
Credit Shelter Trust
An estate planning device (also called a bypass trust, family trust, or B trust in "AB"
plans where the A trust funds for the marital deduction) used to minimize the
combined estate taxes payable by spouses whereby, at the death of the first spouse,
the estate is divided into two parts and one part is placed in trust usually to benefit
the surviving spouse without being taxed at the surviving spouse's death, while the
other part passes outright to the surviving spouse or is placed in a marital deduction
trust. A credit shelter trust permits a maximum of $1.350,000 transfer to heirs of the
spouses on an estate tax free basis under the unified gift and estate tax credits as
they exist in 2001.
Cross Purchase Buy Sell Plan
In a cross purchase plan, the surviving owners (rather than the business itself)