Annuity Glossary: Key Terms Explained

Accumulation phase

The stage during which you make payments into an annuity and your money grows, sometimes at a fixed rate, sometimes tied to an index, and sometimes invested in the market, depending on the type.

Annuitize

To convert your annuity funds into an income stream.

Annuity

A long-term contract between you and an insurance company. You pay the insurer a lump sum or a series of payments, and in return the insurer agrees to pay you a certain amount at regular intervals for a specific period of time.

Caps, spreads, and participation rates

The limits an insurance company sets on how much of an index's gain you receive as indexed interest credits.

Death benefit

An amount payable to your beneficiaries. Some variable annuities offer a stepped-up death benefit that can lock in your investment performance and help prevent a decline in value later.

Deferred annuity

An annuity built for growth that does not pay out until a set period of time has passed, often years.

Fixed annuity

An annuity that pays a predetermined interest rate for a specified period, without exposure to market volatility.

Fixed indexed annuity (FIA)

A fixed annuity that tracks a selected stock market index, such as the S&P 500 or the Dow Jones Industrial Average, and can earn interest tied to that index while protecting a portion of your principal. If the index goes down, the worst that can happen is that you earn zero interest for that year.

Guarantee period

The set number of years, usually between one and ten, during which a MYGA pays a guaranteed interest rate. After it ends, the rate resets based on current economic conditions, at the discretion of the issuing company.

Immediate annuity

An annuity that starts paying income soon after you buy it, often within a year.

Indexed interest credits

The interest credited to a fixed indexed annuity based on a portion of the index's growth, subject to limits set by the company called caps, spreads, or participation rates.

Market value adjustment (MVA)

A positive or negative adjustment some contracts apply to the accumulated value of your investment if you make a full or partial surrender during the surrender charge period.

Multi-year guarantee annuity (MYGA)

A type of fixed annuity that pays a guaranteed interest rate on a single premium for a set number of years, usually between one and ten, while growing tax-deferred. All MYGAs are fixed annuities, but not all fixed annuities are MYGAs.

Payout phase

The stage during which the insurer pays your money back to you, either as a lump sum or as payments over a set period or for the rest of your life.

Single premium immediate annuity (SPIA)

An annuity that converts a lump sum of retirement savings into a permanent stream of income, with payments that usually begin within one month of signing the contract.

Subaccount

An investment option within a variable annuity, such as bonds, U.S. stocks, or international stocks, that you allocate your purchase payments to during the accumulation phase.

Surrender charge period

The set number of years you are locked into an annuity, during which withdrawing more than the contract allows will incur penalties.

Tax deferral

Annuity funds and their growth are taxed only upon withdrawal, at ordinary income rates, with a possible additional 10% federal penalty for withdrawals before age 59.5.

Variable annuity

An annuity that offers periodic payments in exchange for a lump sum, with your money invested in subaccounts that grow tax-deferred until you withdraw. Because it is invested in the market, it can grow significantly or lose money.

This material is for informational purposes only and is not intended as a solicitation or as legal, tax, social security, or investment advice. While derived from sources believed to be reliable, accuracy is not guaranteed. All guarantees, including optional benefits, are backed solely by the financial strength and claims-paying ability of the issuing insurance company. Annuities are insurance products issued by insurance carriers. Early withdrawals may result in surrender penalties. Withdrawals are generally subject to ordinary income tax and a 10% federal penalty if taken before age 59.5. HiWire Financial offers insurance products and services.