A
Accumulation Phase The period during which an annuity grows in value before the owner begins taking withdrawals or income. All growth during this phase is tax-deferred. Also called the "deferral phase." Learn more → Administrative Fee An annual charge (typically 0.10–0.30%) covering record-keeping and contract administration in a variable annuity. Separate from M&E charges and subaccount expenses. Not charged on fixed annuities or MYGAs. Variable annuity fees → Annual Reset The most common crediting method for fixed indexed annuities (FIAs). At the end of each contract year, any index gain is locked in (subject to cap/spread) and becomes the new floor. Index losses do not reduce the account value. The index tracking resets to the new starting point. FIA crediting methods → Annuitization The process of converting an annuity's accumulated value into a stream of income payments. Once annuitized, the decision is typically irrevocable — the owner receives periodic payments but can no longer access the account as a lump sum. Annuitization can produce life-only, period-certain, or joint-and-survivor payment options. SPIA guide → Annuity An insurance contract that provides either tax-deferred growth, guaranteed income, or both. Issued by insurance companies. The seven main types are: Traditional Fixed, MYGA, Fixed Indexed (FIA), Variable, SPIA, DIA, and QLAC. All guarantees are backed by the issuing insurer's claims-paying ability. Not FDIC-insured. What is an annuity? → Annuity Ladder A strategy of purchasing multiple annuities with staggered maturity or income start dates. Similar to a CD ladder, it provides periodic liquidity, rate diversification, and flexibility. Types include MYGA ladders, income ladders, and hybrid ladders. Laddering guide →
B
B-Share Variable Annuity The most common variable annuity share class, featuring a declining surrender charge schedule (typically 5–8 years) and M&E charges of 1.25–1.50%. Compare to L-shares (shorter surrender, higher M&E) and C-shares (no surrender charge, highest M&E). Share classes explained → Beneficiary The person or entity designated to receive the annuity's death benefit or remaining value when the owner dies. Naming a beneficiary allows the annuity to bypass probate. Spousal beneficiaries have continuation options; non-spousal beneficiaries must generally distribute within 10 years (SECURE Act). Bucket Strategy A retirement income framework dividing assets into time-based segments: near-term (1–3 years in cash/CDs), medium-term (3–7 years in MYGAs/bonds), and long-term (7+ years in growth assets or deferred income annuities). Annuity laddering implements the medium and long-term buckets. Laddering guide →
C
Cap Rate The maximum interest rate credited to a fixed indexed annuity in a given period. If the underlying index gains 12% and the cap is 8%, you receive 8%. Caps are set by the insurer and may change at renewal. Higher caps are generally better for the policyholder. FIA crediting methods → Certificate of Deposit (CD) A time deposit offered by banks that pays a fixed interest rate for a specified term. FDIC-insured up to $250,000. Interest is taxable annually. CDs are the closest bank product to a MYGA but typically offer lower rates and no tax deferral. Annuity vs. CD → Claims-Paying Ability The financial capacity of an insurance company to meet its contractual obligations. All annuity guarantees depend on the issuing insurer's claims-paying ability. Carrier financial strength is rated by agencies including A.M. Best, S&P, Moody's, and Fitch. Choosing A-rated or better carriers reduces credit risk. Cost Basis The amount of after-tax money invested in a non-qualified annuity. Also called "investment in the contract." The cost basis is returned tax-free; only earnings above the basis are taxable. In a 1035 exchange, the cost basis carries over to the new contract. Tax rules → Cost Basis Carryover In a 1035 exchange, the original contract's cost basis transfers to the new contract. No taxes are due at the time of exchange, but deferred gains will be taxed upon withdrawal from the new contract. The new contract does not get a "fresh start." 1035 exchange guide → Crediting Method The formula used to calculate interest earned in a fixed indexed annuity based on index performance. Common methods: annual point-to-point (most common), monthly sum, and monthly average. Each method responds differently to market movements. FIA crediting methods →
D
Deferral Period The waiting period between when an annuity is purchased and when income payments begin. SPIAs have no deferral (income starts within 1–13 months). DIAs have deferral periods of 2–40 years. Longer deferrals produce higher per-dollar income. DIA guide → Deferred Income Annuity (DIA) An income annuity purchased now with income starting at a future date (typically 2–40 years later). The deferral period allows the premium to grow through investment returns, mortality credits, and fewer expected payments — producing dramatically higher income than a SPIA. Also called a "longevity annuity." DIA guide → Direct Transfer The required method for a valid 1035 exchange: funds move directly from the old insurance company to the new one. The contract owner must never take constructive receipt. If the owner receives a check, the exchange may be treated as a taxable surrender. 1035 exchange guide → Distribution Phase The period when an annuity owner is taking withdrawals or receiving income payments. Taxes apply during this phase: qualified annuities are fully taxable; non-qualified annuities are taxed on earnings only (via LIFO or exclusion ratio). Tax rules →
E
Exclusion Ratio The formula determining the tax-free portion of each payment from a non-qualified income annuity: Investment ÷ Expected Total Payments. Each payment is split into tax-free return of principal and taxable earnings. After the full investment is recovered, all subsequent payments are fully taxable. Tax rules →
F
FDIC Insurance Federal Deposit Insurance Corporation coverage protecting bank deposits up to $250,000 per depositor, per bank. Backed by the U.S. government. Annuities are NOT FDIC-insured. Annuity vs. CD → Fixed Annuity A category of annuities that guarantee the owner's principal will not decrease due to market performance. Includes three subtypes: Traditional Fixed (declares a rate annually), MYGA (locks a rate for a fixed term), and Fixed Indexed (credits interest based on an index with a 0% floor). Fixed annuity guide → Fixed Indexed Annuity (FIA) A fixed annuity that credits interest based on the performance of a market index (e.g., S&P 500) subject to caps, spreads, or participation rates. Principal is protected by a 0% floor — the account never decreases due to index losses. Not a security; not directly invested in the market. FIA guide → Floor The minimum interest rate that can be credited to a fixed indexed annuity in any period, typically 0%. The floor guarantees the account value never decreases due to negative index performance. This is the defining feature separating FIAs from variable annuities. FIA guide → Free Look Period A window (typically 10–30 days, varies by state) after an annuity is issued during which the owner can cancel the contract and receive a full refund of premium. Always review a new contract during this period. Free Withdrawal Provision A contract feature allowing the owner to withdraw a portion of the annuity's value (typically 10% per year) without surrender charges. Available on most deferred annuities during the surrender period.
G
Guaranteed Lifetime Withdrawal Benefit (GLWB) An optional rider on FIAs and variable annuities (0.60–1.25% annually) guaranteeing a minimum annual withdrawal for life, regardless of account performance. The GLWB has its own benefit base (not the same as account value). Withdrawals continue for life even if the account value reaches $0. FIA income riders → Guaranteed Minimum Accumulation Benefit (GMAB) An optional variable annuity rider (0.25–0.75% annually) guaranteeing the account value equals at least the premium after a holding period (typically 10 years), regardless of market performance. VA guarantees → Guaranteed Minimum Death Benefit (GMDB) A standard variable annuity feature guaranteeing the beneficiary receives at least total premiums paid (minus withdrawals), regardless of investment performance. Enhanced GMDBs (at additional cost) may offer highest anniversary value or roll-up benefits. VA guarantees →
I
Income Ladder Multiple income annuities (SPIAs and/or DIAs) with staggered start dates, creating layers of guaranteed income that activate at different ages. Each deferred layer provides higher per-dollar income due to investment growth, fewer expected payments, and increased mortality credits. Laddering guide → Income Rider See Guaranteed Lifetime Withdrawal Benefit (GLWB). An optional rider that guarantees minimum lifetime income from a deferred annuity without requiring annuitization. Available on FIAs and variable annuities at an annual cost of 0.60–1.25%. FIA income riders → IRC Section 1035 The Internal Revenue Code provision permitting tax-free exchanges of insurance products: annuity for annuity, life insurance for annuity (but not annuity for life insurance). Cost basis carries over; gains are deferred, not forgiven. 1035 exchange guide →
J
Joint and Survivor Annuity An income annuity payout option that continues payments for the lifetimes of two people (typically spouses). Payments continue until the last survivor dies. Monthly income is lower than a single-life annuity because the insurer expects to make payments for a longer period. Available with SPIAs and DIAs. SPIA payout options →
L
LIFO (Last-In, First-Out) The IRS rule for taxing withdrawals from non-qualified deferred annuities. Earnings (last in) are deemed to come out first and are taxed as ordinary income. After all earnings are withdrawn, remaining withdrawals are tax-free return of premium. This differs from income annuities, which use the exclusion ratio. Tax rules → Life Annuity An income annuity payout option that provides payments for the owner's entire lifetime, regardless of how long they live. Payments stop at death with no remaining value for beneficiaries (unless a period certain or refund option is added). Provides the highest monthly income per premium dollar. SPIA payout options → Longevity Insurance A strategy of using a deferred income annuity (DIA) or QLAC to provide guaranteed income starting at an advanced age (typically 75–85). Protects against the financial risk of living longer than expected. The long deferral makes this the most capital-efficient form of guaranteed income. DIA guide →
M
Mortality and Expense Risk Charge (M&E) The primary insurance charge in a variable annuity, typically 1.00–1.50% annually. Covers the death benefit guarantee and the insurer's risk. Charged regardless of whether optional riders are elected. Not present in fixed annuities or MYGAs. VA fee structure → Mortality Credits The actuarial mechanism that makes income annuities more efficient than self-managed withdrawals. Premiums from annuitants who die earlier than expected subsidize payments to those who live longer. This pooling of longevity risk is why annuities can guarantee income for life at rates higher than safe withdrawal rates. How SPIAs work → Multi-Year Guaranteed Annuity (MYGA) A fixed annuity that guarantees a stated interest rate for a specific number of years (typically 2–10). The annuity equivalent of a CD. No annual fees. Tax-deferred growth. Backed by the insurer's claims-paying ability (not FDIC-insured). The simplest and most transparent annuity type. MYGA guide → MYGA Ladder Multiple MYGAs with staggered terms (e.g., 2, 3, 4, 5-year) so that one matures each year. Provides rate optimization, annual liquidity at each maturity, and the ability to reinvest via tax-free 1035 exchange. Laddering guide →
N
Non-Qualified Annuity An annuity purchased with after-tax money (not inside a retirement account). Only earnings are taxable at withdrawal. Cost basis is returned tax-free. Withdrawals use LIFO rules (earnings first). Not subject to required minimum distributions. No contribution limits. Tax rules →
P
Partial 1035 Exchange A transfer of a portion of an annuity's value to a new contract, tax-free. Clarified by IRS Revenue Procedure 2011-38. Valid as long as no withdrawals are taken from either contract within 180 days. Cost basis splits proportionally. 1035 exchange guide → Participation Rate In a fixed indexed annuity, the percentage of index gain credited to the account. If the index gains 10% and the participation rate is 80%, you receive 8%. Participation rates may be used instead of or in addition to caps and spreads. FIA crediting methods → Payout Rate The percentage of premium returned as annual income from an income annuity (SPIA or DIA). A $100,000 SPIA paying $6,500/year has a 6.5% payout rate. The payout rate is NOT the same as an investment return — it includes return of principal. SPIA guide → Period Certain An income annuity payout option that guarantees payments for a minimum number of years (e.g., 10 or 20) regardless of whether the annuitant lives that long. If the annuitant dies during the certain period, the beneficiary receives the remaining payments. Reduces monthly income compared to life-only. SPIA payout options → Prospectus A legal document required for variable annuities (which are securities) that discloses fees, investment options, risks, and terms. Must be provided before sale. The prospectus is the binding document — verbal representations that contradict it are not enforceable. Variable annuity guide →
Q
Qualified Annuity An annuity purchased with pre-tax money inside a qualified retirement account (Traditional IRA, 401(k), 403(b), SEP, SIMPLE). All withdrawals are 100% taxable as ordinary income. Subject to required minimum distributions starting at age 73. Tax rules → Qualified Longevity Annuity Contract (QLAC) A deferred income annuity purchased within a qualified retirement account (IRA, 401(k), etc.) that is exempt from required minimum distribution calculations. Maximum premium: $200,000 (SECURE 2.0 Act, 2022). Income must start by age 85. The only annuity product that reduces RMDs. QLAC guide →
R
Required Minimum Distribution (RMD) The minimum amount that must be withdrawn annually from qualified retirement accounts (IRA, 401(k), etc.) beginning at age 73 (rising to 75 in 2033). RMDs are fully taxable as ordinary income. QLAC premiums (up to $200,000) are excluded from the RMD calculation. QLAC and RMDs → Return of Premium (ROP) A death benefit or payout option guaranteeing that at least the total premiums paid will be returned. In a SPIA, ROP ensures that if the annuitant dies before receiving payments equal to the premium, the beneficiary receives the difference. Reduces monthly income compared to life-only. SPIA payout options → Roll-Up Rate A stated growth rate applied to the benefit base of a GLWB rider (not the actual account value). Common misconception: a "6% roll-up" does not mean the account earns 6%. The benefit base is an income calculation figure only — it cannot be withdrawn as cash. FIA income riders →
S
SECURE 2.0 Act (2022) Federal legislation that expanded QLAC limits from $145,000 to $200,000, eliminated the 25%-of-account-balance restriction, added inflation indexing to the $200,000 limit, raised the RMD starting age to 73 (and 75 in 2033), and eliminated RMDs from Roth 401(k)s. QLAC and SECURE 2.0 → Single Premium Immediate Annuity (SPIA) An income annuity that begins payments within 1–13 months of purchase. You pay a single premium; the insurer guarantees income for life, a set period, or both. The most straightforward form of guaranteed lifetime income. Payments depend on age, gender, interest rates, and payout option selected. SPIA guide → Spread (Margin) In a fixed indexed annuity, a percentage deducted from the index gain before crediting. If the index gains 10% and the spread is 2.5%, you receive 7.5%. Spreads may be used instead of or in addition to caps. Unlike caps, spreads allow unlimited upside above the deduction. FIA crediting methods → Subaccount An investment option within a variable annuity, similar to a mutual fund. Each subaccount invests in a specific asset class. Returns depend entirely on market performance — there is no floor or guarantee. Subaccounts have their own expense ratios in addition to the annuity's insurance charges. Variable annuity guide → Surrender Charge A fee charged when an annuity is surrendered or withdrawn from before the end of a specified period (typically 3–10 years). Usually a declining percentage that decreases each year. Most contracts allow 10% annual free withdrawals without surrender charges. Surrender charges also apply during 1035 exchanges if the old contract is still in its surrender period. 1035 exchange guide →
T
Tax Deferral The ability to postpone paying income tax on investment gains until a future date. All annuity types offer tax-deferred growth — no annual taxes on interest, gains, dividends, or rebalancing until withdrawal. Tax deferral is more valuable in higher tax brackets and over longer time horizons. Tax rules → 10% Early Withdrawal Penalty An IRS penalty on the taxable portion of annuity withdrawals before age 59½, in addition to ordinary income tax. Applies to both qualified and non-qualified annuities. Exceptions: death, disability, substantially equal periodic payments (SEPP/72(t)), and certain immediate annuity payments. Tax rules → 1035 Exchange A tax-free transfer of one annuity to another under IRC Section 1035. Gains are deferred, cost basis carries over, and funds must transfer directly between insurance companies. Any annuity can be exchanged for any other annuity. Life insurance can be exchanged for an annuity (but not the reverse). 1035 exchange guide → Traditional Fixed Annuity A fixed annuity that declares an interest rate annually (or more frequently). The insurer may adjust the rate each year, subject to a contractual minimum guarantee (typically 1–3%). Offers safety and predictability but less rate certainty than a MYGA. Fixed annuity types →
V
Variable Annuity An insurance contract that invests in market-based subaccounts with tax-deferred growth. Full market risk — account value can increase or decrease. Highest fees of any annuity type (2–3%+ annually). Regulated as a security by the SEC and FINRA. Optional guaranteed living and death benefits available at additional cost. Variable annuity guide →