Asset Allocation
A financial strategy
for investing money in a variable annuity into various asset classes — such
as stocks, bonds and cash — based upon your financial goals,
risk tolerance and time horizon. Asset allocation has two main
advantages: it can help increase investment returns and reduce
risk.
Back-End Charge
Fee charged by the
insurance company for cashing out an annuity early. Usually applies
during the first 7 - 10 years of the investment. Same as Surrender
Charge.
Bailout Provision
Safety feature where
investor may withdraw all the money in an account without paying
a surrender charge if the fixed annuity's interest rate falls below
a specified rate.
Balance Inquiry
An online function that lets you check the performance and balance of the subaccounts
in your annuity.
Benchmark Index
Commonly referred
to stock or bond indices used to measure market performance in
a variable annuity and to compare the relative performance of an
investment portfolio. Investing into indices directly is not possible.
In addition, these benchmark indices do not have transaction costs
and other expenses which an investment portfolio does.
Beneficiary
Generally, the person(s)
who receive(s) money upon the death of the annuity's contract owner
or annuitant. The contract owner decides who the beneficiary will
be. The person designated to receive payments due upon the death
of the annuity owner or the annuitant. Person chosen by the annuitant
to receive the proceeds from the annuity in case of the annuitant's
death.
Beta (3 year)
This is a number, expressed in a percentage, that reflects the volatility of
the variable annuity's subaccount relative to the overall market (usually
the S&P 500). A Beta above 1 percent is usually more volatile than the
overall market.
Bonus Rate
Extra interest in
the first year that increases the annuity's value on which future
interest will be calculated in subsequent years. Also known as
1st Year Bonus Rate.
Certificate Owner
The person or entity that purchases the annuity.
Compound Earnings
Reinvesting the annuity's
previous years' interest earnings.
Contingent Annuitant
A person who will receive annuity payments in case the first annuitant dies
before annuity payments begin.
Contingent Deferred
Sales Charge (CDSC)
The charge deducted from the annuity for withdrawing purchase payments in excess
of allowed limits or upon full surrender of the annuity contract.
Contract Owner
The person(s) or
entity who purchases the annuity and has all rights to the contract.
In a variable deferred annuity, like Preference Plus Select for
example, this person can make investment decisions, transfer money
among funding options, make withdrawals, and name the annuitant
and the beneficiary, usually the contract owner.
Death Benefit
The guarantee that
if you should die before you convert your variable annuity into
regular income payments (annuitize your contract), your annuity's
beneficiaries will receive the higher of the account value or a
different amount specified in the deferred annuity (such as the
amount you contributed to the annuity, less withdrawals). In many
variable annuities, the death benefit can increase over time. The
payment the investor's estate or beneficiaries will receive if
he or she dies before the annuity matures. There are several types
of death benefits with variable annuities, including: Current account
value or initial investment (whichever is greater), in which the
beneficiary receives the vale of the annuity when the policyholder
dies; Rising floor, in which an investment company guarantees a
minimum return on premium deposits, regardless of subaccount investment
performance; Ratchet, a benefit equal to the greater of (a) the
contract value, (b) premium payments less prior withdrawals or
(c) the contract value on a specified prior date; and Stepped-up,
which guarantees the account value to the beneficiary as of a particular
anniversary date (e.g. every 5 years).
Deferred Annuity
A type of personal
retirement account that provides tax-deferred growth potential
for long-term goals, such as retirement. When you are ready to
receive income payments, the deferred annuity provides many choices,
including guaranteed income for life. There are two types of deferred
annuities: fixed and variable. An annuity contract where premiums
are accumulated with interest and then used to provide periodic
payments at a future date. Most annuities are this type, where
investor puts off taking annuity payments from the annuity. Allows
investment to grow over time, increasing the value.
Direct Rollover
A transfer that qualifies as a rollover, but is done directly from one company
to another. Usually, it is from a qualified plan into an IRA annuity. It
is reportable, but not taxable. The annuitant can avoid having taxes taken
out of the eligible distribution by having a direct rollover.
Diversification
A financial strategy
to help reduce risk by spreading your assets in a variable annuity
across different asset classes, such as stocks and bonds, or across
different types of securities within the same asset class. For
example, you can diversify your stock holdings into stocks of different
industries.
Dollar Cost Averaging
A financial strategy
of making investments in a variable annuity at regular intervals
with a fixed dollar amount. A key benefit is that over time, your
average per unit cost should be lower than either the market high
or the average price. Dollar cost averaging does not guarantee
a profit or protect against a loss. It involves continuous investment
in securities regardless of fluctuating prices. You should consider
your financial ability to continue purchases through periods of
low price levels.
Effective Annual Yield
Most companies compound and credit interest daily. The rate shown is the effective
annual yield after compounding the daily nominal rate. Some companies pay a
first year bonus on their interest to encourage new business. The Effective
Annual Yield (EAY) includes the bonus.
• Rate Bonus
o Some annuities pay a bonus on the base rate. For example, if the base rate
is 6.00% and there is a 1.00% first year bonus, the EAY will be 7.00%.
• Premium Bonus
o Some annuities pay an upfront premium bonus. For example, if the base rate
is 6.00% with a 1.00% premium bonus, 7.06% will be shown as the Effective Annual
Yield.
Effective Interest Rate
AKA: Annual Effective Rate or Annual Effective Yield. The interest rate earned
if compounded annually. If a person has $10,000 and leaves it in an annuity
for one year at an effective rate of 10%, they will earn $1,000 of interest.
The interest rate for one day when compounded daily is approximately 0.0261%.
Note that 10% divided by 365 days is approximately 0.274%.
Enhanced Dollar Cost Averaging Program
A type of dollar
cost averaging program that offers a potentially higher interest
rate under certain circumstances. For example, these programs typically
offer a higher guaranteed rate of interest for new purchase payments
only, have a limited time period, and may require a minimum payment.
The Enhanced Dollar Cost Averaging Program specified amounts of
money are automatically transferred from a fixed account to an
investment division over a specified period of time.
Equity Index
A statistical measure
used in a variable annuity to report the performance of a select
group of stocks or bonds. When index appreciates in value, so does
annuity.
Equity-Indexed Annuity
A variation of the fixed annuity. With this type of annuity, your account accumulates
at a minimum fixed rate of return. Your account also may earn additional interest
based on the performance of an equity index. Generally, the indices used are
widely reported common stock indices, the most prevalent being the Standard & Poor’s
500 Composite Stock Price Index.
Equity Investment
Style
An annuity subaccount's investment style (the blend of investment types in
the annuity).
Exclusion Ratio
Determines how much
of each annuity payment is excluded from income tax and how much
is taxable when income is received.
Expected Life
Number of years a person is expected to live, given their current age. The
expected life is usually obtained from a mortality table.
Expense Ratio
The amount, as a
percentage of your total annuity account balance, that you pay
annually for investment and insurance-related charges.
Surrender Penalty
Penalty applied to any amount exceeding the Free Annual Withdrawal Amount or
to multiple withdrawals within the same contract year if they are not allowed
by the terms included in the contract. In some cases, if the entire annuity
is surrendered, the penalty will be applied to the full value of the annuity.
Surrender Value
Is equal to the accumulated value less any surrender charges specified in the
contract.
Yield
The rate of return
on an annuity, generally expressed as a percentage of the current
price.
1035 Exchange
Named after the section
1035 (a) of the tax code, this allows the transfer of funds from
one annuity to another (NOT transferring within subaccounts of
the same annuity). Usually, there is no tax on this type of transfer.
403 (b)
A tax-deferred annuity retirement savings plan similar to a 401 (k) but aimed
at teachers and employees of some non-profit organizations. Participants contribute
to either annuity contracts (often called a TSA) with insurance companies,
or directly with mutual fund companies.
10% Penalty Tax
A penalty imposed
by the IRS for withdrawing untaxed money (pre-tax contributions
or earned interest) from an annuity prior to age 591/2.
408A
Roth IRA. Special
IRA which accepts only nondeductible annual contributions. See
Roth IRA.
457 Plan
State and local governments
can establish 457 plans that allow their employees to defer compensation
on a tax-favored basis. Available to states, political subdivisions
of states or any state agency or instrumentality.
501(c)(3) Organization
Certain tax-exempt
organizations as specified in the Internal Revenue Code section
that can have a 403(b) plan. A corporation, community chest, fund,
or foundation that is organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary, or
educational purposes; for fostering national or international amateur
sports competition; or for the prevention of cruelty to children
or animals will probably qualify for 501(c)(3) status.
529 Plan
A savings plan by
which earnings and withdrawals for qualified higher education expenses
are free from federal tax (through 2010 unless extended by Congress).
90-24 Transfer
IRS Revenue Ruling
which allows direct, tax-free transfers between Section 403(b)
funding vehicles. Such transfers are not treated as distributions
under IRC Section 72 or as deemed distributions.
Section 72(t) Penalty
Imposes a 10% penalty
tax on premature withdrawals from qualified plans, 403(b) TDAs,
SEPs, and IRAs. |
