Annuity Basics Glossary
Updated: —Clear, plain-English definitions of common annuity terms. Use the A–Z index or search to jump to what you need. Links go to in-depth guides, rate pages, and calculators.
Accumulation Phase
The period when you add money to an annuity and allow it to grow tax-deferred before taking income.
In plain English: The “saving up” stage before you start withdrawals.
Why it matters: Dictates how long interest or index credits can compound.
Actuarial Present Value (APV)
The calculated value today of future annuity payments, accounting for interest and mortality assumptions.
In plain English: What a future income stream is worth right now.
Why it matters: Used in pricing riders and comparing payout options.
Annuitant
The person whose life expectancy is used to determine annuity payments.
In plain English: Payments are based on this person’s age and life.
Why it matters: Impacts income amounts, especially for life-only options.
Annuitization
Converting an annuity’s value into a guaranteed stream of periodic payments.
In plain English: Turning your account into steady income.
Why it matters: Often irreversible; affects liquidity and death benefits.
Beneficiary
The person or entity designated to receive the annuity’s value or payments after the owner’s death.
In plain English: Who gets the money if the owner dies.
Why it matters: Determines how and when payouts continue or end.
Beneficiary designations (guide) · Transferring an annuity to a trust · Inherited IRA stretch rules
Bonus (Premium Bonus)
An additional percentage the insurer credits to your annuity premium at issue or for a period.
In plain English: Extra credit added to your deposit.
Why it matters: Often tied to longer surrender schedules or rider fees.
Cap (Rate Cap)
The maximum index credit you can earn in an indexed annuity period.
In plain English: A ceiling on how much you can earn per period.
Why it matters: Directly affects growth; compare caps across carriers.
Index annuity crediting methods · Fixed indexed annuity guide
Surrender Charge
A fee applied if you withdraw more than the penalty-free amount during the surrender period.
In plain English: A penalty for taking out too much, too early.
Why it matters: Impacts liquidity planning.
Commutation
Exchanging future annuity payments for a lump sum, if allowed by the contract.
In plain English: Trade future checks for cash now.
Why it matters: Affects taxes and remaining benefits.
Death Benefit
The amount paid to beneficiaries when the owner or annuitant dies, per the contract terms.
In plain English: Payout to heirs when you pass away.
Why it matters: Shapes estate and income planning.
Owner vs. annuitant implications · Trust & beneficiary planning
Deferred Annuity
An annuity where income begins at a future date; growth is tax-deferred until withdrawals.
In plain English: Save now, take income later.
Why it matters: Offers accumulation and future income flexibility.
Effective Annual Rate (EAR)
The annualized yield accounting for compounding within the year.
In plain English: Your true yearly rate after compounding.
Why it matters: Helps compare MYGAs/CDs with different compounding.
Exclusion Ratio
The portion of each annuity payment considered a non-taxable return of principal versus taxable earnings.
In plain English: What part of each check is tax-free.
Why it matters: Determines tax owed on income payments.
Free Withdrawals
The amount you can take out each year without a surrender charge, often 10% of account value.
In plain English: Your penalty-free allowance each year.
Why it matters: Key for liquidity and emergency access.
Free withdrawals (how it works) · Surrender charges & context
Fixed Annuity
An annuity that credits a fixed interest rate for a set period (e.g., MYGA), with principal protection.
In plain English: CD-like product from an insurer, with tax deferral.
Why it matters: Solid option for conservative growth.
Fixed Indexed Annuity (FIA)
A deferred annuity where interest credits are linked to a market index, with downside protection.
In plain English: Market-linked growth, no market-loss risk.
Why it matters: Balances safety and opportunity.
Guaranteed Lifetime Withdrawal Benefit (GLWB)
An optional rider that allows lifetime withdrawals from an income base, regardless of account value.
In plain English: Pay a fee for a lifetime “paycheck” guarantee.
Why it matters: Provides income longevity protection.
Guaranteed Minimum Interest Rate
The lowest rate a fixed annuity will credit, as specified in the contract.
In plain English: Floor on how low your credited rate can go.
Why it matters: Sets worst-case accumulation assumptions.
Guaranteed minimum interest rate (GMIR) · Fixed annuities overview
High-Water Mark / Point-to-Point
Index crediting methods that compare start and end (or highest) index values over a term.
In plain English: Growth based on how the index changes over the period.
Why it matters: Impacts potential credits; compare caps, spreads, and buffers.
Immediate Annuity
An annuity that begins paying income within 12 months of purchase.
In plain English: Start getting checks right away.
Why it matters: Useful for turning a lump sum into guaranteed income now.
Participation Rate
The percentage of index gain used to calculate your credited interest.
In plain English: How much of the index’s return you get.
Why it matters: Key lever for FIA growth potential.
1035 Exchange
A tax-free transfer from one annuity to another with the same owner/annuitant, under IRC Section 1035.
In plain English: Swap contracts without triggering taxes.
Why it matters: Lets you upgrade rates or features efficiently.
Liquidity
Your ability to access funds through free withdrawals, loans, or surrendering.
In plain English: How easily you can get your money.
Why it matters: Affects emergency planning and product selection.
Market Value Adjustment (MVA)
An adjustment applied to withdrawals/surrenders during the surrender period that reflects interest rate changes.
In plain English: Can increase or reduce what you receive if rates moved.
Why it matters: Affects surrender values; MVAs can work for or against you.
MYGA (Multi-Year Guaranteed Annuity)
A fixed annuity offering a guaranteed interest rate for a multi-year term.
In plain English: Like a CD alternative with tax deferral.
Why it matters: Popular for predictable growth.
Non-Qualified Annuity
An annuity funded with after-tax money, outside retirement accounts.
In plain English: Not inside an IRA/401(k); earnings are tax-deferred.
Why it matters: Different tax treatment vs. qualified annuities.
Owner
The person or entity with rights to make changes, withdrawals, and beneficiary designations.
In plain English: The decision maker on the contract.
Why it matters: Controls tax and estate outcomes.
Qualified Annuity
An annuity owned inside a tax-advantaged account like an IRA or 401(k).
In plain English: Held in a retirement account; taxed when withdrawn.
Why it matters: Subject to RMD and IRA rules.
Rider
An optional add-on that modifies benefits, such as income guarantees or enhanced death benefits.
In plain English: Extra features you can bolt on.
Why it matters: Adds benefits but often includes a fee.
Required Minimum Distribution (RMD)
The minimum amount you must withdraw annually from qualified accounts starting at the applicable age.
In plain English: The IRS-required yearly withdrawal.
Why it matters: Affects tax planning and product fit.
Spread
A percentage subtracted from index gains before crediting interest.
In plain English: The insurer’s cut taken from index returns.
Why it matters: Lowers credited interest; compare with caps/participation.
Surrender Period
The time frame when surrender charges may apply to excess withdrawals.
In plain English: Years when penalties can apply.
Why it matters: Influences liquidity and product selection.
10-Year Rule (Beneficiaries)
A federal rule requiring most non-spouse beneficiaries of qualified accounts to deplete inherited funds within 10 years.
In plain English: Many heirs must withdraw everything within a decade.
Why it matters: Affects beneficiary planning and tax timing.
Secure Act 2.0 and 10-year rule · Who can stretch an inherited IRA?
LIFO Taxation (Last-In, First-Out)
For non-qualified annuities, earnings are withdrawn and taxed before principal.
In plain English: Interest comes out (and is taxed) first.
Why it matters: Impacts after-tax cash flow planning.
Underwriting (Suitability)
The insurer’s review of financial objectives and suitability; medical underwriting may apply to certain products.
In plain English: The check to ensure the product fits your situation.
Why it matters: Impacts approval and available features.
Vesting (Bonus Vesting)
The portion of a premium bonus you actually keep if you surrender early, per the vesting schedule.
In plain English: How much of the bonus is yours over time.
Why it matters: Early exits can forfeit unvested bonus amounts.
Withdrawal Rate
The percentage of account value or income base you withdraw annually.
In plain English: How much you take out each year.
Why it matters: Determines sustainability and rider performance.
Retirement nest egg calculator · Retirement “paycheck” concept
Yield (Effective Yield)
The total annual return factoring stated rate, compounding, and any applicable fees or taxes.
In plain English: Your all-in annualized return.
Why it matters: Lets you compare products apples-to-apples.
