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Your Annuity Translator – What Do Those Annuity Terms Mean?

Have you ever been sitting in a room and wondered what people were talking about? Sometimes, the seemingly easiest words can make a conversation confusing to everyone. That’s why Annuity Alliance wants to keep you informed because when you meet with an independent agent or advisor, we want you to understand the terminology and benefits of an annuity.

Here are a few words that may help you next time you talk to an agent or advisor:

  • Accumulation Phase: The period of time before income is taken from the annuity. During this time, the accumulation value grows on a tax-deferred basis. For annuities that allow additional premiums (called “flexible” annuities), the annuity owner can continue to pay into the annuity.
  • Annuity: A contract between you (annuity owner) and an insurance company where you purchase the annuity (the amount you spend is called “premium”) from an insurance company that promises to provide a series of income payments to you over time, typically at retirement.
  • Annuity Owner: Person who arranges and pays for the annuity. The owner is responsible for any tax-related matters.
  • Annuitant: Person (could be the annuity owner or someone else) that will receive the payments from the annuity in the future. There are many cases where the annuity owner and annuitant are different; like in the case of working spouse (owner) and non-working spouse (annuitant), or a parent (owner) and disabled child (annuitant).
  • Beneficiary: Person (or people) chosen by you, the annuity owner, who will receive the proceeds of the annuity policy upon the death of the annuitant.
  • Deferred Annuity: Provides income payments that begin later, often after many years. Deferred annuities are designed for long term retirement accumulation.
  • Fixed Indexed Annuity: A tax-deferred, long-term savings option that provides principal protection in a down market and opportunity for growth. It gives you more growth potential than a fixed annuity along with less risk and less potential return than a variable annuity.
  • Immediate Annuity: Provides income payments that normally begin within a year after the premium is paid.
  • Indexed Annuity: A type of variable annuity contract that delivers cash flows to the annuitant based on the return of a stock index, usually the S&P 500. Indexed annuities give people the opportunity to enhance their annuity income, but fees and caps may limit the potential upside actually returned.
  • Joint Life Annuity: An annuity set up to pay a continuing income to a designated dependent after the annuitant’s death.
  • Non-Tax Qualified: This means the annuity is purchased using after-tax dollars. These are dollars that you have earned and already paid taxes on.
  • Suitability: A process that your adviser and the insurance company use to make sure that the sale of the annuity to you is suitable and follows industry rules and regulations.
  • Tax-Qualified: This means the annuity is purchased using before-tax dollars. These are dollars that you have earned before any federal and state taxes have been taken out. This may be done through salary reduction if you contribute to an annuity through your employer’s retirement plan.
  • Variable Annuity: This is a tax-deferred retirement vehicle that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose. Compare that to a fixed annuity, which provides a guaranteed payout.

We hope you have learned a lot about annuities from our vocabulary lesson in this blog. If you have additional questions, Annuity Alliance can align you with a licensed professional to explain in more detail how an annuity can align with your retirement planning goals.

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