Annuitant – The person upon who’s life expectancy the amount of annuity payment is calculated and who receives or is qualified to receive payments from the annuity. When the annuitant dies, the annuity death benefit, if any, is paid to the beneficiary.
Annuitization – The initiation or start of payments from the annuity.
Annuity -a contract for one party to pay to another, often based upon the life expectancy of the recipient (annuitant) or for a fixed number of years.
Annuity Tax Advantage – safe way to reduce current income taxes. 2. income taxes are only paid when interest is withdrawn. 3. a retirement vehicle utilized by individuals who are concerned with the impact of taxation as it relates to their ability to save. 4. federal government extends tax advantages to annuity as a way for taxpayers to supplement their retirement (more money later will mean more income later.)
Accumulation Phase – the annuity phase where a customer allows their interest earnings to accumulate. 2. interest is not report on tax return. 3. income taxes not paid on accumulated interest.
Beneficiary – the party who receives proceeds (in most annuity contracts) if owner or annuitant dies. 2. the party who pays income taxes on the dollars that have been tax deferred.
Certain – the number of years in which the insurance company guarantees payments if annuitization is elected by owner (for example, 5 year Certain, 10 year Certain and Life). 2. payments will continue for the balance of the certain period even if annuitant dies before the “certain period” ends.
Death Benefit – the entire value of an annuity paid to beneficiary upon annuitant’s death.
Distribution Phase – the annuity phase where the customer asks and receives dollars from their annuity and decides to pay taxes.
Exclusion Ratio – used when and if the owner annuitizes, the ratio determines the percentage of guaranteed payments that are tax-free and the percentage that are taxable. 2. the primary factors that determines the ratio for settlement options with a life expectancy tables, and the guaranteed payments, if any, of the settlement option selected. 3. the primary factors that determine the exclusion ratio for options without a life contingency (certain period ) would be initial premium (cost basis) and expected return. 4. percentage of payments are tax-free since this represents the return of their premium.
Guaranteed Minimum Interest Rate – mandated by state that annuity contracts provide some sort of minimum guarantee for life of the contract, usually 3%, with some companies filing at 1.5%.
Joint Survivorship – a settlement option that owner may select upon “annuitization”, which includes two annuitants. 2. guaranteed payments will continue for as long as “one” of them is alive. 3. depending upon insurance company, it is possible for a) payments to be guaranteed for x years, b) payments to decrease after death of one spouse.
Life Only – a settlement option that owner may select upon annuitization. 2. payments continue for life of annuitant and payments stop when annuitant dies. 3. the option provides the highest payment since more risk is assumed by the customer.
Life and 10 Year Certain – a settlement option that the owner may select upon annuitization. 2. payments continue for life of annuitant like Life Only option but 10 years of payments are guaranteed (protecting beneficiary from premature death of annuitant). 3. off-shoots of this option are Life and : 5 year, 15 year and 20 year Certain.
Life: Installment Refund – a settlement option that owner may select upon annuitization. 2. payment continue for life of annuitant like Life Only option, but beneficiary may continue to receive payments until insurance company has paid out payments equaling the initial premium (includes payments already paid to annuitant).
Owner – the person who decides when to surrender or withdraw money, selects the annuitant (often themselves), and who selects the beneficiary. 2. the person who enjoys tax advantages and pays less current income taxes.
Partial Withdrawal – the amount an owner can withdraw from their annuity.
Private Annuity – an annuity payment between two parties that is not insured.
Probate – proceedings that are avoided when an annuity proceeds are paid to a “named” beneficiary, which avoids unnecessary expense, publicity, and delays for the customer.
Qualified Annuity – an annuity to be used in pension plans. Non-pension annuities are often referred to as “Non-Qualified Annuities.”
Safety – the peace of mind many annuity owners receive having no market risk.
Simplified Employee Pension Plan – easy, simple way for many to reduce their current taxable income each year by as much as $30,000. 2. contributions can be 15% of compensation or $30,000, whichever is less. 3. no fixed contributions each year, no specialized record keeping, no need to file with IRS for approval, no fees for actuarial certification. 4. considered by many as the best retirement plan for small business owners and their employees (employees can be excluded if one of several conditions are met.)
Split Annuity – combination of two annuities, one immediate annuity and one deferred annuity. 2. the immediate provides guaranteed monthly income for 5, 7, or 10 years on a tax advantaged basis. During the interim, the monies deposited into the deferred annuity are increasing. The ultimate goal is that the value of the deferred annuity will equal the sum of dollars initially paid into the immediate and deferred annuity.
Surrender Charges – penalties imposed against the annuity value for premature surrender or for excess withdrawals. 2. protection for the customer that their insurance company will recover acquisition costs and protection for the customer that their insurance company will not be hurt if interest rates were to increase substantially. 3. these penalties will disappear and will not perpetually stay with customer every renewal year. 4. usually imposed on principal and interest (excluding the free annual partial withdrawal). 5. usually lasts a period as short as five years and as long as ten years.
Tax Deferral – the major benefit of annuities. 2. paying taxes later instead of now, and allow dollars you would normally pay in taxes to accumulate additional interest for you. 3. putting a stop to annual interruptions by the IRS.
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