Annuity contracts use specialized terminology that can be confusing. This glossary defines the 25 most important annuity terms in plain English.
A
Accumulation phase — The period during which a deferred annuity grows before income payments begin. Growth is tax-deferred. Compare to: distribution phase.
Annuitization — The process of converting an annuity’s accumulated value into a guaranteed stream of income payments. Usually irrevocable once elected.
Annuity due — An annuity that pays at the BEGINNING of each period (e.g., rent). Contrast with ordinary annuity.
B
Benefit base (also: income base, guaranteed withdrawal base) — A separate accounting value used to calculate GLWB or GMIB income — not the same as the actual account value. The benefit base may grow at a guaranteed rate even if the account value declines.
Bonus annuity — An annuity that adds a percentage of the premium (e.g., 5–10%) to the account value in year 1. Bonus annuities typically carry higher fees, longer surrender periods, or lower credited rates that offset the upfront bonus over time.
C
Cap rate — In a fixed index annuity, the maximum interest credited per period regardless of index performance. If the index gains 18% and the cap is 10%, only 10% is credited.
Cash surrender value — The amount you receive if you fully surrender the annuity. Equals the account value minus any applicable surrender charge.
Contract value (also: account value) — The current dollar value of your annuity contract, reflecting premiums paid plus credited growth minus fees and withdrawals.
Cost basis (also: investment in the contract) — The total amount you invested in a non-qualified annuity with after-tax dollars. Withdrawals up to your cost basis are tax-free; amounts above it are taxable.
D
Death benefit — The amount paid to your named beneficiary if you die before annuitizing. The standard death benefit is the greater of the account value or premiums paid. Enhanced death benefit riders can guarantee more.
Deferred annuity — An annuity with an accumulation phase before income begins. Contrast with immediate annuity (SPIA), which begins paying almost immediately.
Distribution phase — The period when you receive income from the annuity. Can be annuitized (guaranteed stream) or systematic withdrawal (ongoing partial withdrawals).
E
Exclusion ratio — The fraction of each annuity payment that is tax-free return of principal. Calculated as: cost basis divided by total expected payments. Applies to non-qualified annuities that have been annuitized.
F
Fixed annuity — An annuity that credits a guaranteed interest rate set by the insurer. No market risk. Contrast with variable annuity.
Fixed index annuity (FIA) — An annuity that credits interest based on index performance (with a cap, participation rate, or spread) and guarantees no loss of principal due to index declines.
Free look period — A window (typically 10–30 days from contract delivery) during which you can cancel the annuity for a full premium refund with no surrender charge.
Free withdrawal provision — The amount you can withdraw annually without triggering a surrender charge. Typically 10% of the account value per year.
G
GLWB (Guaranteed Lifetime Withdrawal Benefit) — A rider that guarantees you can withdraw a set percentage of the benefit base each year for life, even if the account value reaches zero. Cost: 0.50%–1.50%/year.
GMIB (Guaranteed Minimum Income Benefit) — A rider that guarantees a minimum income base for annuitization after a waiting period. Less flexible than GLWB; requires annuitization to access.
I
Income rider — A general term for optional riders (GLWB, GMIB) that add guaranteed income features to a base annuity contract at an additional annual cost.
Immediate annuity — An annuity (SPIA) that begins payments within 1–12 months of purchase. No accumulation phase.
M
Mortality and expense charge (M&E) — Annual fee in variable annuities, typically 0.50%–1.50%, covering the insurer’s mortality risk and operating expenses.
MYGA (Multi-Year Guaranteed Annuity) — A fixed annuity that locks in a guaranteed interest rate for a specific term (2–10 years). Functions like a CD.
O
Ordinary annuity — An annuity that makes payments at the END of each period (e.g., mortgage, most SPIA income payments). Contrast with annuity due.
P
Participation rate — In a fixed index annuity, the percentage of index gain credited to the account. If participation rate is 80% and the index gains 15%, you receive 12%.
Premium — The amount you pay into an annuity contract. Can be a single payment (single premium) or multiple payments (flexible premium).
Q
QLAC (Qualified Longevity Annuity Contract) — A deferred income annuity inside an IRA or 401(k). 2026 limit: $200,000. QLAC amounts are excluded from RMD calculations until income begins (max start: age 85).
R
Rider — An optional add-on to an annuity contract providing additional features (guaranteed income, enhanced death benefit, LTC coverage) for an additional annual fee.
S
Spread — In a fixed index annuity, a fee subtracted from index gains before crediting. If the spread is 2% and the index gains 12%, you receive 10%.
Sub-account — Investment option within a variable annuity (similar to a mutual fund). Account value rises and falls based on sub-account performance.
Surrender charge — A penalty for withdrawing more than the free withdrawal amount during the surrender period. Starts high (typically 7–10%) and declines to 0% over 7–10 years.
Surrender period — The number of years during which surrender charges apply, typically 5–10 years from contract issue date.
V
Variable annuity — An annuity whose account value fluctuates based on investment sub-account performance. No guaranteed rate; returns depend on markets. Higher growth potential and higher fee structure than fixed annuities.
Understanding annuity terminology is the starting point in the annuities hub. Apply these terms when reading how to buy an annuity, and understand how payouts are structured with annuity payout options.
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