Glossary for Annuities
Accumulation Unit- Money paid in or transferred into an investment division of the Separate Account is credited in the form of accumulation units. Any increase or decrease in value is based upon the investment performance of the corresponding underlying investment portfolio.
After Tax Savings- Term used to describe investments or contracts purchased with money that has already been taxed. Also known as "non-qualified" investments or contracts.
Annuitant- The person(s) on whose life the income payments are based. The contract owner decides who the annuitant(s) will be.
Annuitize- To convert the account balance under a deferred annuity contract into a stream of income, either for one or more lifetimes or a specific period of time.
Annuity- A tax-deferred contract that can provide an income for a specified time period, such as a number of years or for life. There are two types of annuities: deferred annuities, which allow you to grow your assets tax deferred and convert your account balance to income payments at a later date, and immediate annuities, which generally allow you to receive income payments right away.
Annuity Date- The date when your annuity income payments begin. This date usually appears in your annuity contract. You may be able to change this date, with limitations, before you reach the annuity or maturity date.
Asset Allocation- A financial strategy for investing money 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.
Benchmark Index- Commonly refers to stock or bond indexes used to measure market performance and to compare the relative performance of an investment portfolio. Investing directly into an index is not possible. In addition, these benchmark indexes do not have transaction costs and other expenses as does an investment portfolio.
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.
Bonds- An IOU or promissory note issued by companies or governments and their agencies. Bonds provide income and some growth potential but not as much growth potential or historical price fluctuations as stocks. The amount of interest paid by a bond varies depending on its credit risk (the risk the issuer will repay the loan) and on its maturity risk. High quality, short-term bonds generally pay the lowest yields, and low quality, long-term bonds pay higher yields.
Cash Equivalents - A security that can be readily converted into cash (e.g. Treasury bill or money market fund).
Contract Owner - The person(s) or entity who purchases the annuity and has all rights to the contract. For example, in a variable deferred annuity this person can make investment decisions, transfer money among funding options, make withdrawals, and name the annuitant (usually the contract owner) and the beneficiary.
Credit Risk - The risk that a creditor or bond issuer will not pay the interest and/or principal owed when it is due.
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.
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.
Diversification - A financial strategy to help reduce risk by spreading your assets 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 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.
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.
Expense Ratio- The amount, as a percentage of your total annuity account balance, that you pay annually for investment and insurance-related charges.
Fixed Annuity - A tax-deferred annuity that guarantees you will earn stated or declared rates of return during the savings phase. When you convert this money into income payments, you will receive a fixed amount of income on a regular schedule.
Flexible Premium Annuity - An annuity that accepts periodic contributions, which can usually be made at any time (as opposed to single premium).
Free Look Period - Period of time after an annuity contract is issued and delivered (usually between 10 and 30 days) when the owner may cancel the contract and receive either their initial payment or the current value of the annuity contract. State rules vary.
Guaranteed Minimum Income Benefit – A type of "living benefit" in a variable annuity that can provide a guaranteed minimum future income level regardless of how the stock and bond markets perform. This benefit is usually available for an additional annual fee and must meet certain requirements. For example, the owner may be required to own the contract for a specified time period before exercising the benefit. This benefit guarantees a fixed income stream by calculating the value of purchase payments compounded annually at a specified rate. This benefit grows independently of investment performance. However, you must annuitize the contract to receive this benefit, generally at conservative annuity purchase rates. This benefit does not establish or guarantee investment performance or a minimum account balance.
High-Yield Bonds - Lower-rated bonds, or bonds rated below investment grade quality (also known as "junk bonds"). These bonds typically have higher yields than investment grade bonds but also have higher credit risk, or risk that the issuer will not pay the interest and/or principal when it is due. High yield bonds generally fluctuate more in value than investment grade bonds.
Historical Performance - The return on an investment or an investment portfolio over its lifetime or certain periods of time.
Immediate Annuity - An annuity contract that you generally buy with a lump sum and from which you begin receiving income within a short period, always less than 13 months. An immediate annuity can be either fixed or variable.
Income Options - The various ways to receive income payments that an annuity contract offers. Many annuities offer a variety of options you can choose from, including guaranteed income for life.
Income for a Guaranteed Time Period Annuity - An annuity income option that guarantees payments for a specific time period, usually from 5 to 30 years. If the annuitant dies before all payments have been made, then the owner (or beneficiary if the owner is deceased) will receive the balance of payments for the rest of the guaranteed period. You may be able to choose fixed or variable payments, depending on the annuity.
Income for Life Annuity - An annuity income option that guarantees income for the life of the annuitant, no matter how long he/she lives. The amount of the payment depends on your account value and the life expectancy of the annuitant. The payment amounts may be fixed or variable, depending on the annuity.
Income for Life with a Guaranteed Time Period Annuity - An annuity income option that guarantees payments for the annuitant's life, with a guaranteed number of years. If the annuitant dies during the guaranteed period, payments will continue to the annuity's owner (or beneficiary if the owner is deceased), for the remainder of the period. Many annuities also offer this option for the lives of two annuitants. You may be able to choose fixed or variable payments, depending on the annuity.
Income For Two Lives Annuity - An annuity income option that guarantees income for the lives of two annuitants. After one annuitant dies, payments continue if the other annuitant is alive. Payments stop once both annuitants are no longer alive. Payments after the first annuitant's death may be the same, or lower, depending on what was selected at the time of purchase. You may be able to choose fixed or variable payments, depending on the annuity.
Index Portfolio - Investment portfolio that attempts to mirror the performance of a benchmark index, such as the Standard and Poor's® 500 Composite Stock Price Index ("S&P 500®"). The portfolio tends to hold all or many of the same stocks or bonds that are tracked by the actual index. Index portfolio fees may be lower than those of other portfolios because there is relatively little buying and selling of portfolio securities.
Individual Retirement Account/Annuity (IRA) - A tax-deferred retirement account for individuals that allows a contribution of 100% of earned income up to a maximum of $3,000 per year in 2004. See the table below for increased limits and age considerations. Under current law, these increased limits expire after 2010.
Year Age 49 and Below Age 50 and Above
2004 $3,000 $3,500
2005 $4,000 $4,500
2006-2007 $4,000 $5,000
2008 $5,000 $6,000
With a Traditional IRA, some or all of the contribution may be tax deductible, depending on the individual's income level and coverage by qualified retirement plans. With a Roth IRA, the contribution is not tax deductible, but all earnings are tax free, provided certain conditions are met.
Inflation Risk - The risk that the rising cost of goods and services will reduce the value of your investment, and your buying power, over time.
Interest Rate Risk - The risk that interest rates will rise and reduce the value of an investment. For example, bond prices generally move in the opposite direction of interest rates. As interest rates rise, bond prices generally fall, and vice versa.
International Stocks - Stocks of companies that are domiciled outside of the United States.
Investment Choices - The investment portfolios offered in a variable annuity are sometimes referred to as investment choices, subaccounts or investment divisions. Many variable annuities offer a wide range of stock and bond investment options, with different risk levels.
Investment Objective - A financial goal a client hopes to achieve through investing. Common investment objectives include: Preservation of Capital, Income, Growth and Income, Growth and Aggressive Growth.
Investment-Related Charges - In a variable annuity, the investment-related charges are the annual amount you pay to cover the costs of the professionals who manage the investment portfolios and the expenses incurred by the portfolios and 12b-1 fees. The amounts you pay depend on which investment options you select.
Joint Account - An account in which two or more individuals are co-owners.
Large Cap U.S. Stocks - An asset class that represents common stocks issued by large U.S. companies that generally have a market capitalization of $5 billion or more. (Market capitalization is the total market value of a company's outstanding shares.) A common benchmark for large-sized U.S. stocks is the Standard & Poor's Composite Stock Price Index.
Lehman Brothers® Aggregate Bond Index - Most widely used benchmark for U.S. bond mutual funds and U.S. bond variable annuity portfolios. Tracks performance of debt instruments issued by corporations and the U.S. Government and its agencies.
Market Risk - The chance that the stock or bond markets, or the economy as a whole, may stumble.
Mid Cap U.S. Stock - An asset class that represents common stocks of medium-sized U.S. companies, generally with a market capitalization of $1 billion to $5 billion. Mid cap stocks have a generally higher growth potential than large-sized companies, but also have a higher degree of risk.
Minimum Distribution Service - Federal tax law and regulations generally require that you begin taking minimum distributions from your Traditional IRAs, SEPs and SIMPLEs by April 1st of the calendar year following the year in which you reach age 70½.
Morgan Stanley Capital International's EAFE® Index - Most widely used benchmark for international stock mutual funds and international stock variable annuity portfolios. Its holdings represent 80% of the world's stock market capital outside North America. EAFE® stands for Europe, Australasia and the Far East.
Non-Qualified Annuity- A tax-deferred annuity generally purchased by individuals with after-tax dollars, rather than as part of a tax qualified retirement plan such as an IRA.
Prospectus - The legal document that provides detailed information about your variable annuity contract. It must be given to every person who is offered to buy a variable annuity contract.
Purchase Payments - The contribution(s) made to an annuity. Some annuities allow you to make a single contribution, and some allow you to make multiple contributions on a regular basis, or anytime you like.
Qualified Annuity - An annuity contract you generally buy with pre-tax dollars as part of a tax-qualified retirement plan.
Renewal Rate - The new, declared interest rate for money that has completed the initial guaranteed interest rate period. In a fixed deferred annuity, for example, the interest rate on your contract may be renewed periodically, usually every year, to reflect current market conditions.
Risk - A measure of the price volatility of an investment. There are different types of risk, including credit risk, interest rate risk, inflation risk and currency risk.
Roth IRA - An IRA that enables your earnings to grow tax free, if certain conditions are met. Roth IRA contributions are not tax deductible, and are purchased with after-tax dollars. Like traditional IRAs, your contributions are limited to $3,000 per year in 2004. See the table below for increased limits and age considerations. Under current law, these increased limits expire after 2010.
Year Age 49 and Below Age 50 and Above
2004 $3,000 $3,500
2005 $4,000 $4,500
2006-2007 $4,000 $5,000
2008 $5,000 $6,000
Eligibility is based on Adjusted Gross Income (AGI) limits. For single taxpayers, you may contribute to a Roth IRA if your AGI is under $110,000. For married taxpayers filing jointly, the combined AGI must be under $160,000 to make the maximum contribution.
Russell 2000® Index - Most widely used benchmark for small-cap stock mutual funds and small-cap stock variable portfolios. The Russell 2000 Index is an unmanaged index composed of 2,000 small companies.
Savings and Investing Phase - Time period during a deferred variable annuity contract when money is invested and/or left to grow on a tax deferred basis. Also known as the Accumulation Phase.
Separate Account - The account established by an insurance company to hold the money you contribute to the investment choices in your variable annuity. It is separate from the company's general account. Money in the separate account is not available to the company's general creditors.
Separate Account Charge - An annual fee in a variable annuity that pays for insurance related charges, such as mortality and expense risks. The mortality portion generally pays for: the guarantee to pay you a lifetime income, even if you live longer than originally estimated; and the guarantee to pay your beneficiary a death benefit, even if it is larger than your account balance. The expense portion pays for the guarantee that your contract expenses won't increase, even if costs are greater than estimated. This charge also pays for distribution costs.
SIMPLE Plans - A retirement plan designed for small businesses. It can be set up either as an IRA or as a cash-or-deferred arrangement (401(k)). In general, they are funded by the employees' contributions on a pre-tax basis, and employers are required to make matching contributions. Contributions and earnings grow tax deferred.
Small-Cap U.S. Stocks - This asset class represents common stocks of the smallest companies in the United States, with market capitalizations of under about $1 billion. In general, small-sized stocks are considered to be riskier than stocks of large companies, but also tend to have greater return potential over time.
Spousal Continuation Option – A feature that enables the annuity owner's surviving spouse to continue the annuity contract, if the owner dies before annuitizing the contract. Generally, the contract may be continued at the highest of the account balance or the death benefit amount.
Standard & Poor's® Index (S&P 500® Index) - Most widely used benchmark for U.S. stock mutual funds and U.S. stocks variable portfolios. The S&P 500 Index is an unmanaged index of stocks of 500 of the largest publicly-traded companies in the U.S., with the bigger ones given more weight than the smaller ones.
Surrender Charge — See Withdrawal Charge
Systematic Withdrawal Program - A program that allows for periodic payments from an annuity, for example on a monthly, quarterly, semiannual or annual basis. In a variable deferred annuity, you can generally make systematic withdrawals from your contract while keeping the rest of your money invested in the funding options.
Tax-Free Transfers - The ability to move money between the investment choices and fixed account within a variable annuity without incurring current taxes. In most annuities, these transfers are free of charge.
Tax-Sheltered Annuity - A tax-deferred annuity available only to employees of schools, nonprofit hospitals and certain other tax-exempt organizations in which your contributions are made through payroll reduction on a pre-tax basis (up to certain limits). All earnings grow tax deferred until such time as you make any withdrawals.
Unbundled Variable Annuity– A type of variable annuity that offers a choice of standard features and optional benefits that enable you to choose and pay for only those benefits which best suit your needs.
Unit Value - The dollar value of a single accumulation unit or annuity unit in a particular investment division. Unit value changes to reflect the current value of the underlying portfolios that correspond to the investment division.
Variable Annuity - A type of annuity in which the account balance may fluctuate based on the value of investment portfolios underlying the separate account. The contract owner has the ability to allocate money among several available investment choices. The contract owner, not the insurance company issuing the contract, assumes investment risks.
Variable Immediate Annuity - An income annuity that begins providing income payments right away, or soon after purchase. The amount of the payments is based upon the performance of the investment choices that you select.
Volatility - The speed and extent to which the price of a security or an investment rises and falls within a given period of time.
Withdrawal Charge - The penalty imposed by an annuity issuer for early withdrawal. The withdrawal charge will be set forth in the annuity contract.
Withdrawals - Money that you withdraw from your annuity. In a deferred annuity, you can generally make full or partial withdrawals, although a withdrawal charge may be imposed. A tax penalty may also be imposed.
Yield - The rate of return on an investment, generally expressed as a percentage of the current price.