Introduction | Regulation | Annuity Rates |
Crediting Methods | History |
Glossary of Terms
1035 Exchange—a tax-free method of exchanging an existing
life insurance or annuity policy for a new policy with a different company. This
procedure is often exercised when it is beneficial for the policyowner to move to
a more favorable contract that offers rates or features they don’t currently have in their existing plan
(1035 refers to the tax code number).
3-Month LIBOR—a three-month average of the London Interbank
Offered Rate (LIBOR) is a daily reference rate based on the interest rates at which
banks borrow unsecured funds from other banks in the London wholesale money market.
5-Year Constant Maturity Treasury Rate—an index published
by the Federal Reserve Board, based on the average yield of a range of Treasury
securities, all adjusted to the equivalent of a five-year maturity.
Account Value—the gross value of an annuity, prior to adjustments
from any applicable loans, Market Value Adjustments, premium taxes, or Surrender
A.M. Best Rating—an independent opinion of an insurer's financial
strength and ability to meet its ongoing insurance policy and contract obligations,
as provided by the firm A.M. Best.
Annual Step-Up—a common feature on optional Guaranteed Lifetime
Withdrawal Benefit riders, which raises the Benefit Base to the greater of the Benefit
Base or the Account Value each year.
Annuitant—the individual or entity that receives the benefits of an annuity.
Annuitization Bonus—a feature offered on some Fixed, Indexed,
and Variable Annuities where the insurance company issuing the annuity credits the
Account Value of the contract with a stated percentage of additional money, in the
event that the contract is annuitized.
Annuitize—to change all or a portion of the annuity contract
from a cash accumulation period to the periodic distribution of funds.
Annuity—a contract in which an individual agrees to pay premiums
to an insurance company and receives, in exchange, a regular stream of income payments
from the issuer either now or at some time in the future.
Bailout Provision—an annuity contract provision that enables
the contract owner to surrender the annuity contract, usually without a surrender
charge applying, if renewal interest rates or Caps fall below a pre-established
Barclays Capital Aggregate Bond Index—formerly the “Lehman
Aggregate Bond Index,” this is a broad base index, maintained by Barclay’s Capital,
which is used to represent investment grade bonds being traded in the United States.
Beneficiary—the person or legal entity that receives the
annuity Death Benefit upon death of the contract owner or annuitant.
Benefit Base—the secondary “shadow fund” value on an annuity’s
optional Guaranteed Lifetime Withdrawal Benefit rider; the value from which the
annuitant’s Guaranteed Withdrawal Payments are based upon. This is a separate value
from the Account Value, and it is only available by taking Guaranteed Withdrawal
Benefit Base Bonus—a feature which credits a premium bonus
directly to the Benefit Base of the optional Guaranteed Lifetime Withdrawal Benefit
rider. This bonus cannot be accessed in the event of cash surrender; it solely increases
the “shadow fund” value, upon which Guaranteed Withdrawal Payments are calculated.
Broker/Dealer—as defined by the SEC Act of 1934, a broker
is “any person engaged in the business of effecting transactions in securities for
the account of another.” A dealer means “any person engaged in the business of buying
or selling securities for his own account.” Accordingly, a broker/dealer trades
for his or her own account and for the accounts of others.
Cap Rate—the maximum interest rate that will be used in the
crediting calculation on an Indexed Annuity. Note that indexed crediting methods
may also use a Participation Rate or a Spread Rate.
Cash Surrender Value—the amount that an insurance policyholder
is entitled to receive should he or she discontinue the coverage.
Certificate of Deposit (CD)—a receipt issued by a bank for
a cash deposit for a specified period of time at a fixed rate of interest. Upon
maturity, the bank pays the depositor the principal plus all accumulated interest.
Commission Override—the amount of commission that is paid
to a marketing organization for any independently-contracted salesperson’s Fixed
or Indexed Annuity production.
Compound Interest—a type of interest crediting whereby interest
is credited on the principal payment, in addition to the interest itself.
Consumer Price Index (CPI)—a time series measure of the price
level of consumer goods and services in the United States.
Consumer Price Index- Urban (CPI-U)—the government’s method
of measuring the buying habits of approximately 80 percent of the non-institutional
population of the United States.
Contract Owner—the individual or entity that applies for,
and purchases, an annuity contract and is responsible for funding the annuity.
Crediting Method—a premium allocation option on an Indexed
Annuity, which determines the formula for crediting interest on the annuity contract.
Death Benefit—the annuity benefits that are paid to the beneficiary
upon the death of the Contract Owner or Annuitant.
Deferred Annuity—an insurance product whereby at least a
year will elapse between when the lump sum or series of premium(s) are paid, and
the annuity is transitioned into stream of income through annuitization. Deferred
annuities can be Fixed, Indexed, or Variable in nature.
Dow Jones Industrial Average (DJIA)—a stock indicator calculated
each trading day that tracks the market value of 30 leading industrial stocks.
Due Diligence—research conducted by insurance salespeople
and other financial advisors on the legal and economic soundness of an investment
Enhanced Death Benefit—a provision that provides an annuity
Death Benefit that is greater than the full Account Value on the contract.
Exclusion Ratio—regarding payments from an immediate annuity
or annuitization, part of each payment the Annuitant receives is considered to be
a return of principal, which is not taxed. The remaining portion of the payment
consists of interest earnings and is taxable. The Exclusion Ratio determines the
taxable and nontaxable portions of each payment.
Euro Stoxx 50—a market capitalization-weighted index of 50
blue-chip stocks from the countries that participate in the European Monetary Union.
Executor—the person named in a will to carry out the decedent’s
wishes for the distribution of his or her assets; the executor fulfills his or her
duties under court supervision.
FIFO to LIFO—in 1982 the tax treatment of annuity distributions
changed from first in, first out (“FIFO”), meaning your principal came out first,
then interest, to last in, first out (“LIFO”) meaning interest is distributed before
Fixed Account Rate—the interest rate declared by the insurance
company for an optional crediting method on a Fixed, Indexed, or Variable Annuity;
this method performs similarly to a Fixed Annuity.
Fixed Annuity—a contract issued by an insurance company that
guarantees a minimum interest rate with a stated rate of excess interest credited,
which is determined by the performance of the insurer’s general account. A Fixed
Annuity is considered a low risk/low return annuity product.
Flexible Premium Deferred Annuity (FPDA)—an annuity
contract which is acquired with a premium payment, in which an individual receives,
in exchange, a regular stream of income payments from the issuer at some time in
the future, while maintaining the ability to continue making additional payments
into the contract until that time.
Floor—the minimum amount of interest that is credited to
an annuity each year.
Forced Asset Allocation Model—when an insurance company forces an Indexed or Variable Annuity purchaser to allocate their premiums among the available crediting methods, according to criteria that are pre-determined by the issuing insurance company.
Free Look Period—an annuity contract provision that varies
by state, and dictates that the contract owner has approximately 10 to 20 days to
examine the annuity contract immediately after purchase, with the option of returning
it to the insurer for a full refund.
Free Withdrawal Provision—an annuity contract provision
that grants the annuity owner the right to withdraw a portion of the annuity’s Account Value
(typically 10%) during the accumulation period without incurring a Surrender Charge.
FTSE 100—A market-weighted index of the 100 leading companies
traded in Great Britain on the London Stock Exchange. The full name is Financial
Times-Stock Exchange 100 Share Index.
General Account—an investment portfolio used by an insurance company for investment of premium income. This portfolio generally consists of safe, conservative, guaranteed investments, such as real estate and mortgages.
Gold Commodity—the index that provides gold rates for the
members of The London Gold Market Fixing Limited consist of Barclays Capital , Scotia
Mocatta, Deutsche Bank, Societe Generale, and HSBC Investment Banking Group.
Guaranteed Lifetime Withdrawal Benefit (GLWB)—a rider, endorsement,
or additional feature embedded in, or accompanying a Fixed or Indexed Annuity ,which
guarantees annual withdrawals at a specified level (based on the annuitant’s age),
regardless of the contract’s Account Value falls to zero.
Guaranteed Minimum Accumulation Benefit (GMAB)—a rider, endorsement,
or additional feature embedded in, or accompanying a Fixed or Indexed Annuity which
guarantees that the Account Value of the annuity will grow by a minimum specified
percentage over a period of time.
Guaranteed Minimum Death Benefit (GMDB)—a rider, endorsement,
or additional feature embedded in, or accompanying a Fixed or Indexed Annuity which
guarantees that the annuity Death Benefit payable will be no less than a specified
Guaranteed Withdrawal Payments—the lifetime income payments
that the Annuitant receives under any optional Guaranteed Lifetime Withdrawal Benefit
rider on their Fixed or Indexed Annuity.
Guarantee Period—the number of years that the interest rate
is guaranteed on a Multi-Year Guaranteed Annuity.
Hang-Seng—a market-weighted index of 33 stocks making up
approximately 70% of the market value of all stocks traded on the Stock Exchange
of Hong Kong.
Heaped Commissions—a commission structure where Fixed and/or
Indexed Annuity compensation is paid up-front to the salesperson in a lump sum.
This commission is typically paid at the time the annuity contract is issued to
the Annuitant, and is based on the amount of premium paid into the contract. Generally,
heaped commissions will pay a greater percentage commission than other commission
Hybrid Indexed Annuity—an annuity that performs like a Fixed
Annuity in that it credits a rate that is declared by the issuing insurance company,
but is also like an Indexed Annuity from the standpoint that the rate is not credited
unless an external index performs in a specified manner.
Immediate Annuity—an insurance product whereby a lump sum
premium is paid and the annuity is transitioned into stream of income through annuitization
within one year from the date of purchase. Immediate annuities can be Fixed, Indexed,
or Variable in nature.
Index—statistical composite that measures changes in the
economy or in financial markets, often expressed in percentage changes from a base
period or from the previous month.
Indexed Annuity—a contract issued by an insurance company
that has a minimum guarantee where crediting of any excess interest is determined
by the performance of an external index, such as the Standard and Poor’s 500® index.
An Indexed Annuity is considered a moderate risk/moderate return annuity product.
Indices—the plural form of the word ‘index'.
Individual Retirement Account (IRA)—an arrangement that allows
people with earned income to deposit a portion of that income in a tax-deferred
savings plan. An IRA can be established and funded at any time between January 1st
of the current year, up to and including the date an individual’s income tax return
is due (generally, April 15 of the following year), not including extensions.
Insolvency—when an insurance company does not have the assets
to pay the claims which are being made against it by their policyholders.
Interest Rate Bonus—a feature offered on Fixed and Multi-Year
Guaranteed Annuities where the insurance company issuing the annuity offers a higher
introductory credited interest rate, in addition to the base annuity credited interest
iShares Barclays Capital U.S. Aggregate Bond Index—a bond
fund that seeks investment results that correspond generally to the price and yield
performance, before fees and expenses, of the total United States investment grade
bond market, as defined by the Barclays Capital U.S. Aggregate Bond Index.
iShares MSCI ACWI Index—a free float-adjusted market capitalization
weighted index that is designed to measure the equity market performance of developed
and emerging markets. The MSCI ACWI consists of 45 country indices comprising 24
developed and 21 emerging market country indices. The developed market country indices
included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany,
Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United
States. The emerging market country indices included are: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico,
Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and
iShares MSCI Hong Kong Index—a free float adjusted index
which lists every security in the Hong Kong market.
Joint Annuitant—an individual who is named in the contract
with the Annuitant, whose age and life expectancy are also used in the calculations
to determine what the annuity payments will be.
Joint Owner—a person who shares ownership of an annuity contract
and would have the same right as the contract owner to approve any decisions made
about the contract.
Lehman Brothers Aggregate Bond Index—an index of U.S. Treasury
bonds and notes, and government-agency bonds (excluding mortgage-backed securities).
Levelized Commissions—a commission structure where Fixed
and/or Indexed Annuity compensation is paid to the salesperson over a period of
years as opposed to all (heaped) up-front. This commission is typically paid at
the time the annuity contract is issued as well as on a limited number of subsequent
policy anniversaries. Generally, levelized commissions will pay a lesser percentage
commission than a heaped commission structure, but over a longer period of time.
Long Term Care (LTC) Kicker—a feature on some optional Guaranteed
Lifetime Withdrawal Benefit riders, which enhances the Guaranteed Withdrawal Payment
amount, in the event that the annuitant meets the insurance company’s criteria for
long term care benefits. Note: LTC Kickers do not qualify for preferential tax treatment
under the Pension Protection Act.
Marketing Organization (a.k.a. AFMO, FMO, IMO)—an establishment
that serves as a distributor of many carrier’s insurance products, and may perform
many of the functions traditionally provided by an insurance company (recruiting,
licensing, and education of agents, marketing, and sales support). Typically these
services are provided to independently contracted insurance agents, in exchange
for a relatively small percentage of their commission.
Market Value Adjustment (MVA)—feature that is often attached
to deferred annuities, which could increase or decrease the Cash Surrender Value
of an annuity if more than the penalty-free amount is withdrawn or the contract
is surrendered during the Surrender Charge period. In general, if interest rates
are lower at the time of withdrawal than at the time the contract was issued, the
annuity’s Cash Surrender Value will be increased (market value adjusted). If interest rates
are higher at the time of withdrawal than at the time of issue, the Cash Surrender
Value will be reduced.
Maturity Date—the latest date at which an annuity must be
converted to income payments (or annuitization).
Maximum Rollup Period—the maximum number of years that the
Rollup on an optional Guaranteed Lifetime Withdrawal Benefit rider will be credited
to the Benefit Base on the annuity contract.
Minimum Guaranteed Surrender Value (MGSV)—the secondary guarantee
on a Fixed or Indexed Annuity, which guarantees a minimal value to be paid to the
annuitant in the event of death, surrender, or non-performance of the index (in Indexed
Annuities). Note that the NAIC has mandated that MGSVs on annuities cannot credit
anything less than 1% interest on 87.5% of the premiums paid on the annuity. However,
as much as 3% interest can be credited on 100% of the premiums paid on the annuity,
dependent on the 5-Year Constant Maturity Treasury Rate and the annuity’s design.
Note that there is a direct inverse correlation between the richness of the annuity’s
MGSV and the potential for gains on the contract.
Mortality and Expense (M&E) Risks Charge—this fee only
applies to Variable Annuities. In most cases, the “M&E” pays for the guaranteed
death benefit, ensures that the expense risks charged on the contract won’t increase,
covers a guaranteed interest rate paid on one type of Variable Annuity subaccount,
and may cover the overhead expenses the insurer incurs with the annuity contract.
Multi-Year Guaranteed Annuity (MYGA)—a type of Fixed Annuity
where the credited interest rate is guaranteed for longer than a one-year period.
NASDAQ—National Association of Securities Dealers Automated
Quotation. The automated quotation system for the Over-the-Counter (OTC) market,
showing current bid-ask prices for thousands of stocks.
NASDAQ-100—a modified capitalization-weighted stock market
index of 100 of the largest non-financial companies listed on the NASDAQ.
National Association of Insurance Commissioners (NAIC)—the
U.S. standard-setting and regulatory support organization created and governed by
the chief insurance regulators from the 50 states, the District of Columbia and
five U.S. territories.
National Association of Securities Dealers (NASD)—a nonprofit
self-regulatory organization of brokers and dealers in the over-the-counter securities
business, under supervision of the SEC.
Nikkei 225—a stock market index for the Tokyo Stock Exchange.
Non-Qualified Annuity—a type of annuity that has no contribution
limit and no required minimum distributions at age 70 1/2 (unlike qualified). It
can be funded with after-tax dollars from any source and is available to any annuity
Non-Rolling Surrender Charge—in a flexible premium deferred
annuity, the stated length of the surrender charge term will start the day the initial
premium deposit is received. Future deposits will not change the point at which
all of the funds are penalty free.
Options—calls (puts) that give the holder the right to buy
(sell) 100 shares of stock within a specified period at a specified price.
Participation Rate—the percentage of positive index movement
that will be used in the crediting calculation on an Indexed Annuity. Note that
indexed crediting methods may also use a Cap Rate or a Spread Rate.
Penalty-Free Withdrawals—the annual amount that an annuitant
is permitted to withdrawal from their annuity’s value, without Surrender Charges
being imposed. This amount is typically expressed as a percentage, and is most commonly
10% of the annuity’s Account Value.
Period Certain—an income option offered by an immediate annuity
where the contract owner can select to receive periodic payments for a specified
period of time. The payout amount is determined by the contract value and the length
of the period selected.
PIMCO U.S. Advantage Index—a comprehensive U.S. bond market
index, offering exposure to interest rate swaps, inflation-protected securities,
investment-grade corporate bonds, and securitized instruments such as mortgage-backed
Premature Withdrawal—taking cash out of an annuity before
the Contract Owner reaches the age of 59 1/2. Subject to a 10% federal tax penalty,
in addition to any income taxes that may be due, and possible policy Surrender Charge
from the insurance company.
Premium Bonus—a feature offered on Fixed, Indexed, and Variable
Annuities where the insurance company issuing the annuity credits the Account Value
of the contract with a stated percentage of additional money on the day the policy
is issued (and often on subsequent policy anniversaries). Note that annuities with
Premium Bonuses have relatively lower rates and higher/longer Surrender Charges than annuities without Premium Bonuses.
Premium Tax—a tax on annuity premium payments that some states
impose on insurance companies.
Principal—the total amount the Contract Owner has invested
in an annuity, not including interest earned.
Prospectus—a written document federal regulations require
be given to any prospective Variable Annuity purchaser, before the sale. It describes
the investment objectives of any separate accounts, past performance of subaccounts,
as well as any fees or expenses.
Qualified Annuity—an annuity that is purchased to either
fund or distribute funds from a tax-qualified plan. In most instances, premiums
paid can reduce current income taxes and the accumulations are tax-deferred.
Rainbow Crediting Method—an indexed crediting method that
performs a lookback over the crediting period, and subsequently credits a specified
percentage based on the performance of the better-performing indices. For example,
an insurance carrier offers indices A, B, and C on an annual point-to-point multiple
index crediting method. The best performing index over the one-year period gets
75% weighting in the crediting calculation; the next-best performing index gets
25% weighting; and the least-best performing index gets zero credit. The insurance company
then applies a Participation Rate, Cap, or Spread to any potential indexed gains
at the end of the term.
Recapture Charge—a feature used on Fixed, Indexed, and Variable
Annuities with Premium Bonuses, whereby a portion of the Premium Bonus is forfeited
in the event of withdrawal in excess of the penalty-free amount, during a specified
Registered Indexed Annuity—an Indexed Annuity that has been
filed with, and classified as, a security with the Securities and Exchange Commission.
Required Minimum Distribution (RMD)—IRA’s and qualified plans
both have certain “required” distributions. For IRA’s, you must begin to withdraw
funds by April 1st of the year following the calendar year you attain age 701/2.
For qualified plans, withdrawals must begin by April 1st of the year following the
later of, (a) the year you reach age 701/2, or (b) the year you retire.
Return-of-Premium (ROP) Option—an annuity feature that guarantees
a return of the premiums paid in the contract to the annuity purchaser, at any time.
Rider (a.k.a. Endorsement)—an optional benefit that is added
to the base annuity contract, which changes the annuity’s terms or conditions.
Risk Averse—a client or investor who will not assume a given
level of risk unless there is an expectation of adequate compensation for having
Rolling Surrender Charge—in a flexible premium deferred annuity,
each deposit will have its own independent Surrender Charge schedule. (i.e. with
a 5 year Surrender Charge, each deposit will start the 5-year period the day the
money is received by the company). Therefore, different amounts of the annuity will
be free of Surrender Charge at different times.
Rollover—funds from an IRA or qualified retirement plan that
are moved to another of the same type, or to an IRA, preserving its tax-deferred
Rollup—a common feature on optional Guaranteed Lifetime Withdrawal
Benefit riders, which guarantees that the GLWB’s Benefit Base will grow by a specified
percentage, as long as the annuity contract is held in deferral and Guaranteed Withdrawal
Payments are not taken. This percentage is not a bonus or a guaranteed annual return
on the base annuity contract; it can only be realized if the Annuitant holds the
policy in deferral. The Rollup is generally limited to a specified number of years.
Rollup Period—the initial number of years that the Rollup
on an optional Guaranteed Lifetime Withdrawal Benefit rider will be credited to
the Benefit Base.
Rollup Period Reset—a provision on many optional Guaranteed
Lifetime Withdrawal Benefit riders, which allows the purchaser to re-start the Rollup
Period, so that the Annuitant can continue to take advantage of any Rollup for a
longer period. Typically these resets can only occur over a specified duration,
such as once every five years in the contract.
Rule of 72—a simple method for approximation the number of
years it takes an investment to double at a given compound interest rate; divide
the interest rate into 72.
Russell 2000 Index—an index that measures the performance
of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset
of the Russell 3000® Index representing approximately 10% of the total market capitalization
of that index. It includes approximately 2000 of the smallest securities based on
a combination of their market cap and current index membership.
S&P MidCap 400 Index—an index that provides investors
with a benchmark for mid-sized companies. The index covers over 7% of the U.S. equity
market, and seeks to remain an accurate measure of mid-sized companies, reflecting
the risk and return characteristics of the broader mid-cap universe on an on-going
S&P 500 Composite Index (S&P 500)—market value index
of stock market activity covering 500 leading stocks.
S&P GSCI—formerly the “Goldman Sachs Commodity Index,”
this index serves as a benchmark for investment in the commodity markets and as
a measure of commodity performance over time.
Savings Bond—a non-transferable U.S. government bond issued
in denominations from $50 to $10,000. They are sold at discount with their effective
interest pegged to Treasury securities. Income from savings bonds is exempt from
state and local income taxes and federal income tax is deferred until redemption.
Securities and Exchange Commission (SEC)—federal regulatory
and enforcement agency that oversees public investment trading activities.
Separate Account—insurance company's investment portfolio
that supports a Variable Annuity; kept separate from the insurance company's regular
Simple Interest—a type of interest crediting whereby interest
is only credited on the Principal payment, not on the interest accrued.
Single Premium Deferred Annuity (SPDA)—an annuity contract
which is acquired with a single premium payment, in which an individual receives,
in exchange, a regular stream of income payments from the issuer at some time in
Solvency—when an insurance company has the assets to pay
the claims which are being made against it by their policyholders.
Specimen Contract—a generic sample annuity contract.
Spousal Continuation—a standard feature on optional Guaranteed
Lifetime Withdrawal Benefit riders, which allows the spouse of the Annuitant to
continue the Guaranteed Withdrawal Payments under their own name, once the Annuitant
has passed away.
Spread Rate (a.k.a. Asset Fee, Margin)—a deduction that comes
off of the positive index growth at the end of the index term in the crediting calculation
on an Indexed Annuity. Note that indexed crediting methods may also use a Cap Rate
or a Participation Rate.
Standard and Poor’s Rating (S&P Rating)—an independent
opinion of an insurer's financial strength and ability to meet its ongoing insurance
policy and contract obligations, as provided by the firm Standard and Poor’s.
Standard Policy Form State Approval—when a state insurance
division approves the exact version of the annuity policy form that is filed by
the insurance company, to be sold within that state. Typically, the majority of
states within the nation approve the Standard Policy Form.
State Guaranty Funds—each of the 50 states has enacted legislation
to protect the contract owners of that state, should an insurance company be faced
with insolvency. Most state guaranty funds assess their admitted insurers an extra
charge to cover any insurance company insolvencies within the state. Different states
have different limits of protection. All guaranty associations are funded by insurance
companies and administered by the states.
Street Level Commission—the maximum advertisable commission
that can be paid to a salesperson on a Fixed or Indexed Annuity product. (i.e. a
marketing group cannot run a promotion in a magazine, saying that the commission
paid on an annuity is greater than the street level amount) Salespeople may be paid
more or less than street level; typically the amount paid is based on the saleperson’s
level of annuity production and his/her clients’ annuity premiums paid.
Subaccount—the investment portfolios offered in Variable
Annuity contracts where premiums may be allocated.
Suitability Review—a review that is performed by an insurance
salesperson in the course of recommending the proper amount of risk that one should
take if they purchase an annuity, and whether a particular annuity product is appropriate
Surrender Charge—a penalty imposed by the insurance company
for withdrawing funds from an annuity prematurely; usually applies during the first
7 -10 years.
Surrender Charge Waiver—a feature on Fixed, Indexed, and
Variable Annuities that permits the Annuitant to withdraw a portion of their annuity’s
value, without Surrender Charges being imposed, in the event of certain triggers.
Typical triggers providing a waiver of Surrender Charges include death, disability,
nursing home confinement, terminal illness, and unemployment.
Tax-deferral—when taxes on earnings are postponed until any
earnings are withdrawn from the annuity.
Tax-Sheltered Annuity (TSA)—a retirement annuity sold only
to public school teachers and employees of hospitals, colleges, and other organizations
offering qualified retirement plans under section 403(b) of the U.S. Internal Revenue
Trail Commissions—a commission structure where regular commissions
are paid, based on the annuity’s Account Value, and made payable to the salesperson
after the annuity contract is issued. Trail commissions are usually offered in addition
to some form of heaped commission. An annuity may offer a number of trail commission
options, each varying in the amount of heaped and trail commission paid. Trail commissions
are typically paid on a monthly or quarterly basis, and may begin as early as month
two of the contract. Relative to other commission structures, trail commissions
will pay a much lesser percentage commission.
Two-Tiered Annuity—an annuity where the interest rate credited
to the annuity during the accumulation phase is competitive against comparable products
that are not two-tiered, and benefits are contingent upon annuitization. If the
owner does not stay, their contract will be assessed an applicable Surrender Charge
and be retroactively credited with lower interest rates back to the inception of
the contract (i.e. the contract owner gets one tier of interest rates by staying
with the contract through annuitization and another, lower tier of rates if he or
she does not). Comparing the annuitization rates as well as the rates while in the
accumulation phase is advisable on Two-Tiered Annuities.
U.S. 10-Year Swap Rate—a benchmark published daily by the
United States Federal Reserve, which represents the borrowing rate between the most
credit-worthy U.S. financial institutions and large corporations.
U.S. 10-Year Treasury Bond—a marketable, fixed-interest U.S.
government debt security with a maturity of ten years.
Variable Annuity—a contract issued by an insurance company
where crediting of any interest is determined by the performance of underlying investment
choices that the annuity owner selects. A Variable Annuity is considered a high
risk/high return annuity product.
Variation State Approval—when a state insurance division
approves a modified version of the Standard Annuity Policy Form, to be sold within
Vesting Schedule—a feature used on Fixed, Indexed, and Variable
Annuities with Premium Bonuses, whereby a timetable is presented for when the annuitant
gains ownership (or nonforfeitable rights) in the Premium Bonus on the annuity contract.
Weighting Multiple Index Crediting Method—an indexed crediting
method that applies a stated percentage weighting to each of two or more indices
offered on the crediting method over the crediting term. Potential indexed gains
will be credited based on those weightings at the end of the period, based on the
performance of each index. For example, an insurance company offers indices A, B,
and C on a monthly averaging multiple index crediting method. Index A will receive
a weighting over a three-year period of 40%; Index B will receive a weighting of
35%; Index C will receive a weighting of 25%. The carrier then applies a Participation
Rate, Cap, or Spread to any potential indexed gains at the end of the term.