Annuity Terms Flashcards
Annuity
An annuity is a contractual financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time.
Annuitization
Annuitization is the process of converting an annuity investment into a series of periodic income payments. Annuities may be annuitized for a specific period of time or for the life of the annuitant. Annuity payments may only be made to the annuitant or to the annuitant and a surviving spouse in a joint life arrangement. Annuitants can arrange for beneficiaries to receive a portion of the annuity balance upon their death.
Variable Annuity
A variable annuity is a type of annuity contract that allows for the accumulation of capital on a tax-deferred basis. As opposed to a fixed annuity that offers a guaranteed interest rate and a minimum payment at annuitization, variable annuities offer investors the opportunity to generate higher rates of returns by investing in equity and bond subaccounts. If a variable annuity is annuitized for income, the income payments can vary based on the performance of the subaccounts.
Surrender Period
The amount of time an investor must wait until he or she can withdraw funds from an annuity without facing a penalty. Surrender periods can be many years long, and withdrawing money before the end of the surrender period can result in a surrender charge, which is essentially a deferred sales fee. Generally, but not always, the longer the surrender period, the better the annuity’s other terms. If you make additional investments or premium payments to the annuity, there may be a separate surrender period for each investment.
Surrender Fee
A charge levied against an investor for the early withdrawal of funds from an insurance or annuity contract, or for the cancellation of the agreement. Surrender fees act as an economic incentive for investors to maintain their contract, and they allow the insurance company to have reasonable expectations for the frequency of early withdrawals.
Also referred to as a “surrender charge”.
Annuitant
The person on whose life the annuity payments depend. The annuitant has no rights associated with the contract unless he or she is also an owner.
Beneficiary
The person(s) or entities named by the owner to receive contract benefits payable at the death of either the owner or annuitant (depending on the terms of the contract).
