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12 B-1 Fees

12 b-1 fees are a percentage of a mutual fund’s assets used to defray marketing and distribution expenses. These fees are deducted from the overall mutual fund value and each fund owner is assessed these fees based on their number of shares. The amount of the fee is stated in the fund’s prospectus. 12 b-1 fees can range from .10% to as high as 1% of the annual account value.


An employer-sponsored retirement savings plan that lets employees withhold and invest a portion of their income before it is taxed. From an employer-selected list of investment options, employees choose how they want their money invested. Employers sometimes contribute to employees’ 401(k) plans based on a percentage (such as contributing 50 cents for every dollar an employee invests).


A tax-deferred retirement savings plan similar to a 401(k) but aimed at teachers and employees of some non-profit organizations. Participants contribute to either annuity contracts (often called a TSA) with insurance companies, or directly with mutual fund companies.


Accounts Receivable

Money owed to you for products and/or services you provided

Accumulation Phase

The accumulation phase is the period when an annuity owner can add money and accumulate assets in a tax-deferred manner. Now that the national trend is individuals wanting to save money for retirement, it is common for people to ask, “How am I doing?” This really means, “Will I have enough to retire on – because I don’t want to run out.” Understanding the accumulation phase can better prepare you to avoid confusion as you save money for your retirement.

Accumulation Unit Value (AUV)

An annuity’s subaccount price per share during the accumulation phase. An AUV is the net asset value after income and capital gains have been included and subaccount management expenses have been subtracted. Many insurance companies keep daily charts for the tracking of AUVs and also offer performance summary sheets.

Adjustable-Rate Mortgage (ARM)

A mortgage that provides predetermined adjustments of the loan interest rate at preset regular intervals based on an established and agreed factor or index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined and agreed upon spread or margin, above the index.

Adjusted Cost Basis

The price from which to calculate and derive capital gains, income tax liability, or losses upon the sale of an asset.

Adjusted Gross Income (AGI)

Taxpayer’s Gross Income less allowable adjustments is the income on which an individual income tax liability is based by the federal government.

Annual Gift

An annual gift is a donation that is made every year and is a way to provide significant tax savings for many individuals. Annual gifts provide ongoing support for university campuses, schools, departments, and other programs or organizations. An annual gift is often associated with annuities

Annual Insurance Fee

An annual insurance fee covers mortality and expense risk charges and other administrative expenses. It also provides for a guaranteed death benefit and for lifetime guaranteed income payouts. Annual fees are usually smaller than upfront charges and are often considered less important, but this isn’t really the case. The percentage of the annual fee may be small but remember your investment or policy may reasonably be expected to grow and, assuming it does, then the amount of money you actually pay in annual management charges grows with it even though the percentage levy remains unchanged. It is important to consider special offer investments; these investments often waive the initial charge but have an annual fee that is considerably higher.

Annual Policy Fee

An annual policy fee covers the costs of maintaining and administering an account during the accumulation phase. It is often waived, however, when an account’s value reaches a certain level (which is stated in the contract). An annual insurance fee covers mortality and expense (M & E) risk charges and other administrative expenses. It also provides for a guaranteed death benefit and for lifetime guaranteed income payouts.

Annual Subaccount Fee

A fee deducted for fund operating costs, management fees, and other asset-based costs incurred by the fund. This charge is assessed at the subaccount level and is not deducted from policy values.


The person, usually the annuity owner, whose life expectancy is used to calculate the income payment amount on the annuity.

Annuitization (Annuitize)

When you annuitize your contract, you trade the value of your annuity for the issuing company’s guarantee to make payments to you periodically for a certain time, or for the span of your lifetime.


An annuity is a contract issued by a life insurance company that provides for tax deferral of investment income until withdrawn from the contract. An annuity can also be referred to as a contract or agreement by which one receives fixed payments on an investment for a lifetime or for a specified number of years.

Annuity Owner

The annuity owner is the person or people who make decisions about an annuity’s investments. The owner or owners have the right to make withdrawals from the annuity, surrender or change the designated beneficiary or other terms of the annuity.

Anticipated Initial Investment

The anticipated initial investment is the amount of money you want to invest at the beginning. Most companies have certain minimum initial investment amounts for annuities or other investments.


Arbitrage is an attempt to make a profit by exploiting price differences of identical or similar financial instruments on different markets or in different forms. The ideal version that is sought after is called risk-less arbitrage.

Asset Manager

The person in charge of the financial assets such as immediate annuities, deferred annuities, or stocks and bonds.

Asset Protection Trust (APT)

An APT is a legal arrangement in which an individual (the trustor) gives fiduciary control of property to a person or institution (the trustee) for the benefit of beneficiaries. This type of agreement applies to both annuities and other investments.


All the financial assets under the management of a company, including stocks, bonds, mortgage loans, real estate, annuities, investments, and cash.


An average is an arithmetic mean of a group of stocks designed to represent the overall market or some part of it. An average differs from an index in that it is not weighted. The Dow Jones Industrial Average is the most common average.


Backend Loaded Mutual Fund

A backend loaded mutual fund charges investors a fee to sell (redeem) shares. The fees can range from 2% to 6% based on the actual fund. Some backend load funds impose a full commission if the shares are sold within a designated length of time, such as one or two years. The commission is called the “contingent deferred sales charge” (CDSC).

Backup Withholding

A Backup withholding is a mandatory withholding that may be imposed when rules regarding taxpayer identification numbers, (usually a Social Security number) are not met by the individual. Another way for these withholdings to take effect is when a notice is issued by the IRS to withhold payments to that individual. Backup withholding may be claimed as a credit by taxpayers on their federal income tax return.

Beneficial Owner

The individual who enjoys the benefits of owning a security or property – regardless of whose name the title is in.


A beneficiary is the person designated to receive payments due upon the death of the annuity owner or the annuitant themselves. Annuities are an example of an investment that can give you peace of mind for your family’s financial future.


A bequest may be of a specific sum, a percentage, or the residue of an estate, and may consist of cash, securities, life insurance proceeds, real estate, and / or personal property. A bequest may be made through a will or by a living trust.

Bonus Rate

A bonus rate is the “extra” or “additional” interest paid during the first year (the initial guarantee period), typically used an added incentive to get companies to switch or select their annuity policy over another.


Certificate of Deposit (CD)

Short or medium-term, interest-bearing, FDIC-insured debt instrument offered by banks and savings and loans. A low risk investment vehicle with low returns, there is usually an early withdrawal penalty.

Charitable Annuity (Gift Annuity)

A charitable gift annuity is a contract between a donor and a foundation, under which the foundation guarantees payment of an annuity, unlike a trust which pays the annuity from its assets alone. Two features in particular make charitable gift annuities appealing. An individual may specify whether he or she wants an immediate annuity, with payment to begin not later than one year from the date of the gift, or a deferred gift annuity, from which payments are not to begin until a specified future date. In addition, the income stream from such an arrangement can be higher than current market rates.

Charitable Lead Trust

These trusts provide income-either a percentage or a specified amount-to a Foundation for a specific number of years. At the termination of this period, the principal is returned to the donor or others whom the donor has designated. Under one type of charitable lead trust the donor includes the income in his or her taxable income, but is entitled to a corresponding charitable deduction if he or she itemizes the amount of income paid to the Foundation in that year.

Charitable Remainder Annuity Trust

One of many types of available trusts, charitable remainder annuity trusts provide that a specified dollar amount (at least 5% of the fair market value of the assets at the time the trust is created) be paid at least once a year to the beneficiary for their lifetime or for a term of years, not to exceed twenty.

Charitable Remainder Trust

In turn for the irrevocable transfer of cash or property to a trustee such as a Foundation or Charity, you receive a certain percentage or amount of the annual income from the property to you and/or another named beneficiary for life or for a specified term of years. The remainder interest in the property would then pass to the Foundation, for their benefit. You would be entitled to a federal income tax deduction for the value of that charitable remainder interest, which is based on the number and ages of life income beneficiaries and the percentage of payout you and the trustee agree upon.

Charitable Remainder Unitrust

This type of trust provides that a fixed percentage (at least 5% of the fair market value of the assets in trust, computed each year) be paid to the beneficiary(ies) at least once a year. In a unitrust, however, the amount paid to the beneficiary(ies) will vary on a yearly basis according to the annual reevaluation of the trust principal.

Collateral Assignments

A collateral assignment is when the ownership rights in a contract or account are transferred from one person to another to serve as collateral for a debt. This transfer is usually made with the provision that the ownership rights revert to the original owner when the debt is repaid. A collateral assignment of a nonqualified annuity is considered a taxable event to the owner of the contract.

Compounding of Gains

Interest that is credited to your policy is added to your principal as well as interest credited in prior policy years.

Contingent Annuitant

The person who is entitled to receive the annuity benefits based on other specified events.

Corporate Gift

If you are an owner or CEO of a business, you might wish to consider making a corporate gift through which you may derive federal tax benefits as well as additional benefits in some states. In some states, for instance, corporations making gifts to institutions of higher education within the state are entitled to a credit against gross income tax, subject to applicable limits.

Cost Basis

Your initial payment/premium(s) paid to a nonqualified annuity is known as the cost basis in your contract. Since it was previously taxed, your cost basis will not be taxed upon withdrawal. If a previous distribution was not fully taxable, the cost basis would be reduced by the amount that was not taxable. For contracts purchased after August 14, 1982, a “withdrawal” must come from earnings first for tax purposes, and any amounts in excess of your cost basis will be taxed as ordinary income (an additional 10 percent “federal income” tax penalty may apply for those less than 59 1/2 years of age) upon withdrawal.

Cost of Insurance PS58

When life insurance protection is used to fund benefits in a qualified retirement plan or Section 403(b) tax-deferred annuity, the contributions used to pay the life insurance premiums must be included in gross income for the year in which they are made.

Cost of Waiver

Waiver of premium is a benefit available on qualified life insurance contracts that provides for the waiver or payment of premiums that fall due while the insured is totally disabled. Under a qualified retirement plan, contributions used to purchase waiver of premium benefits are taxable to the plan participant and must be included in gross income in the year in which they are paid.

Current Interest Rate

This is the interest rate that an annuity is paying, including the sum of the base rate, if any and the bonus rate, if any. The current rate is set by the insurance company at the time of issue and is guaranteed for a specific length of time.

Current Yield

For bonds or notes, the coupon (price) rate divided by the market price of the bond. (or note)


Death Benefits

The payment the investor’s estate or beneficiaries will receive if he or she dies before the annuity matures. There are several types of death benefits with variable annuities, including: Current account value or initial investment (whichever is greater), in which the beneficiary receives the vale of the annuity when the policyholder dies; Rising floor, in which an investment company guarantees a minimum return on premium deposits, regardless of subaccount investment performance; Ratchet, a benefit equal to the greater of (a) the contract value, (b) premium payments less prior withdrawals or (c) the contract value on a specified prior date; and Stepped-up, which guarantees the account value to the beneficiary as of a particular anniversary date (e.g. every 5 years).


Any debt obligation backed strictly by the borrower’s integrity or credit worthiness. A debenture is only secured by the “promise” to pay.

Debenture Bond

An unsecured bond whose holder has the claim of a general creditor on all assets of the issuer not pledged specifically to secure other debt.

Deferred Annuities

Deferred annuities are annuity contracts for people who want to save on a tax-deferred basis for many years, and then convert to a payout schedule once they retire. Contrary to an immediate annuity, taxes on deferred annuities do not become payable until some years after its purchase. The single premium or regular premiums are capitalized during the deferred period, then the built up capital is converted into an annuity. Deferred annuities typically stipulate that payments be made to the Annuitant at a later date, such as when the annuitant reaches a certain age.

Direct Rollover

This is when an eligible qualified retirement plan or Section 403(b) distribution is moved directly from a qualified retirement plan or Section 403(b) tax-deferred annuity to an IRA or to another qualified retirement plan or Section 403(b) tax-deferred annuity. The individual’s employer will not have to withhold 20% for federal income taxes from a direct rollover.

Discharge of Bankruptcy

The legal termination of bankruptcy proceedings in bankruptcy court, resulting in cancellation of the debtor’s obligations.

Dividend Rate

The fixed or occasionally floating rate paid on preferred stock based on the par value of the stock.

Dogs of the Dow

The fixed or occasionally floating rate paid on preferred stock based on the par value of the stock.

Dow Jones Industrial Average

The best known U.S. index of stocks. A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including, stocks that trade on the New York Stock Exchange. The Dow is a barometer of how the largest U.S. companies are performing.


Effective Interest Rate

The actual annual interest rate that accrues after taking into consideration the effects of compounding.


A term used to refer to large investors, usually institutional.

Employer Plan or Qualified Plan

A tax-qualified retirement plan is an advantage that an employer establishes to benefit employees. Permissible contributions will depend on the type of plan (such as a defined benefit plan or a profit-sharing plan, including a Section 401(k) plan) and on what the particular employer elects. These plans are highly regulated and subject to significant IRS restrictions.


In an endowment fund the principal is invested and only a portion of the investment earnings is spent. The rest of the earnings are channeled back into the fund so that the endowment grows over time. In this way, the endowment becomes a perpetual source of funding for whatever the donor wishes to achieve.

Equitable Owner

An equitable owner is the beneficiary of a property held in a trust.

Equity Indexed Annuity

An annuity whose returns are based upon the performance of an equity market index, such as the S&P 500, DJIA, or NASDAQ. The principal investment is protected from losses in the equity market, while gains add to the annuity’s returns.

Estate Planning

The preparation of a plan of administration and disposition of one’s property before or after death, including will, trusts, gifts, power of attorney, etc.

Estate Tax

A federal or state tax imposed on an individual’s total assets inherited by heirs. The current limits for Federal Estate Tax deduction is $5,000,000. Estates larger than $5,000,000 would be liable to the tax. Many states do not have a State Estate Tax.


This literally means “without dividend.” The buyer of equity shares of stock when they are quoted ex-dividend is not entitled to receive a declared dividend

Ex-Dividend Date

The first day of trading when the seller, rather than the buyer, of a stock will be entitled to the most recently announced dividend payment

Excess Contributions to IRA

An excess IRA contribution is one that exceeds the combined deductible and nondeductible limits established by the IRS. If an excess contribution is not removed prior to the tax return due date (including extensions) by the contributing individual, the excess contribution is subject to the 6% excise tax in the year of contribution. The excess will be carried over and subject to excise tax each year thereafter until it is removed. It is the responsibility of the client to file Form 5329 to calculate his or her penalty.

Exchange (1035)

A 1035 exchange is an exchange of one nonqualified annuity contract for another. Internal Revenue Code (IRC) Section 1035 generally allows individuals to exchange life, endowment, or annuity contracts for similar contracts that are better suited to their needs, if eligibility requirements are met. For a 1035 exchange, the annuity contract owner and the insured or annuitant combination on the old and new contract must be the same.

Exchange Fund (Swaps)

This investment vehicle introduced in 1999 and appeals to wealthy investors with large holdings (with low stock cost basis) in a single stock who want to diversify without paying capital gains taxes. These funds allow investors to exchange their stock for shares in the diversified portfolio of stocks in a tax-free transaction.

Exclusion Ratio

(Nonqualified Income Annuity.) This is the ratio that determines which portion of an annuity distribution is earnings and which portion is a return of your original investment. Only the portion consisting of earnings is taxable.


Federal Reserve Rate

The interest rate that the Federal Reserve charges a bank member to borrow funds when a bank is temporarily short of funds, generally an overnight loan. Mostly short term lending issues.

Five-Year Annualized Total Return

This percentage figure reflects annuities subaccounts total return (gain or loss) averaged over 5 years.

Fixed Annuity (Fixed Rate Annuity)

Fixed annuities are an investment vehicle offered by insurance companies that guarantee a stream of fixed payments over the life of the annuity. The insurer, not the insured, takes the investment risk. Fixed annuities are sometimes called a fixed dollar annuity.

Fixed Deferred Annuity

With fixed annuities, an insurance company offers a guaranteed interest rate plus safety of your principal and earnings. Your interest rate will be reset periodically, based on economic and other factors, but is guaranteed to never fall below a certain rate

Flexible Premium Annuity

A flexible premium annuity has a regular periodic payment that varies.


Immediate Annuity

An immediate annuity is an annuity which is purchased with a single payment and which begins to pay out right away. When you purchase an immediate annuity, it is generally with a single lump sum, and your income payments begin within 12 months of the date of purchase. With fixed immediate annuities, your payment from the annuity is based on a fixed interest rate. With variable immediate annuities, your payment is based on the value of the underlying investment, usually a stock portfolio.

After choosing an immediate annuity the annuity owner determines the schedule of payments. This can be done either monthly, quarterly, semiannually or annually. Another important decision to make with your immediate annuity is how long the payments will last. The annuity owner can choose to receive payments for a specified period of time, an entire lifetime or even for the life of a beneficiary.

Indexed Annuity

An Indexed Annuity is an annuity based on a statistical indicator, the equity market index, which provides a representation of the value of the securities, which constitute it. An index annuity is a hybrid of both fixed and variable annuities. Indices often serve as guides for a given market or industry and benchmarks against which financial or economic performance is measured. An indexed annuity can be based on the S&P, Nasdaq, or the DJIA

The principal investment into the indexed annuity is protected from losses in the equity market, while gains add to the annuity’s returns. This means that once you make a premium payment you will never have less in your indexed annuity account than your premium payment, and as the index appreciates in value, so does the Indexed annuity. Indexed annuities can be a wise investment and become a great source of additional income revenue.

Individual Retirement Account (IRA)

An IRA is a tax-advantaged personal savings plan that lets an individual set aside money for retirement. All or part of the participant’s contributions may be tax deductible, depending on the type of IRA chosen and the investor’s personal financial circumstances. Distributions from many employer-sponsored retirement plans may be eligible to be rolled into an IRA to continue tax-deferred growth until the funds are needed.

Interest Only Option

A settlement option for annuities in which an individual is paid only the interest on the maturity proceeds. A Form 1099-R is issued in the year the annuity matures, and will report any taxable gain. From that point on, the owner receives interest on the maturity proceeds left on deposit.


Life Annuity

A life annuity is an annuity that continues to pay out as long as the annuitant is alive

Living Trust

A trust created for the trustor and administered by another party while the trustor is still alive. Can be either revocable or irrevocable.


Market Value Adjustment

Adjustments or deductions made to charge off a loss.

Medicaid Annuity

The process of using an immediate annuity to help protect assets against the high cost of nursing homes and expensive healthcare charges. Since Medicaid won’t pay for people’s nursing home care if they have assets over $2,000, (excluding a house or car), some individuals transfer all of their liquid assets into an irrevocable medicaid annuity. The annuity effectively transfers all of their wealth to a third party insurance company, which guarantees the owner a monthly fixed income for life. In many states, the medicaid annuity can be an attractive alternative to traditional advice of self-impoverishment to qualify for welfare, providing that the annuity contract is irrevocable, actuarially sound, includes equal payments over the lifetime of the annuitant, and does not include a benefactor or balloon payment upon death.

Money Market Portfolio

Your portfolio is a collection of investments all owned by the same individual or organization. A portfolio could contain annuities, stocks, bonds or a 401(k) plan.

Morningstar Rating

A rating of annuity products based on their quality as measured by Morningstar, a leading, independent provider of investment information. Annuities subaccounts are rated with 1-5 stars, with 5 being the best possible rating.

Mortality and Expense Risk Charge (M&E)

A fee for insurance guarantees, including the death benefit, the choice of guaranteed lifetime payout options, and the guarantee that insurance charges will not increase.


New York Stock Exchange (NYSE)

The “Exchange” or “Big Board” are nicknames for the New York Stock Exchange. More than 2000 common and preferred stocks are traded daily at the exchange. It is the oldest in the United States, dating to 1792, and is the largest. The NYSE is located on Wall Street in New York City.

Nonqualified Deferred Annuity

A contract that provides for tax deferral of investment income until withdrawn from the contract. Fixed annuities offer a fixed rate of return for a stipulated period, while variable annuities offer a choice of investment options.

Nonqualified Income Annuity

A contract that provides periodic payments based on life or joint life expectancies and/or a period certain (i.e., life and 10 years certain). The periodic payment amount is based on the amount used to purchase the contract, the terms of the payout, and an assumed rate of return.

Nonqualified Sources

Sources of money where the money has already been taxed, such as cash, mutual funds, certificates of deposit (CDs), and money market funds.

Nonresident Alien (NRA)

A person who is not a citizen of the United States or does not maintain a tax residence within the country. NRAs are subject to special tax consideration. NRAs also include foreign fiduciaries, foreign partnerships, and foreign corporations. Form W-8 (BEN, ECI, EXP, IMY) has to be obtained from all persons claiming NRA status. For individuals, Form W-8 BEN will generally be the appropriate form. Payments to properly documented NRAs are generally exempt from IRS 1099 reporting and backup withholding rules. However the tax law requires 30% NRA withholding rate. Special Internal Revenue Code (IRC) provisions or income tax treaties may reduce or eliminate this withholding. Note: The old IRS Form W-8 will expire on December 31, 2000. You must file a new Form W-8 (BEN, ECI, EXP, IMY) before January 1, 2001, to be treated as an NRA.


Offshore Annuities

Offshore annuities allow tax-deferred account accumulation and build up for high net worth persons. When investing into offshore annuities, the client’s monies are put into segregated accounts in a range of investment funds. Banks and professional investment managers outside the US manage these monies for maximum client benefit.

Offshore annuities companies generally offer term life insurance protection as well. The proceeds of claims going to dependents & beneficiaries are tax free.

Because of the complexity of the taxation regimes that apply to nationals of different countries, it’s important to work with tax advisors, accountants and lawyers to find a suitable offshore annuities provider.

One-Year Annualized Total Return

This percentage figure reflects a subaccount’s total return (gain or loss) averaged over a year.



An individual who participates in a retirement plan sponsored either by his employer or, if self-employed, by himself or herself.

Participation Index Rate

The amount of the percentage change (which is set by the company) used to determine the amount to be credited to your policy for that year.

Payout Phase or Payout Period

The period during which the money accumulated in an annuity is paid out as regular income payments.

Pension Annuities

A pension is a qualified retirement plan set up by a corporation, labor union, government, or other organization for its employees. Examples of pensions include profit-sharing plans, stock bonus and employee stock ownership plans, thrift plans, target benefit plans, money purchase plans, and defined benefit plans.

Percentage Change

The change in the S&P 500 Index from the beginning of the term to the end of the term expressed as a percentage.

Periodic Transfer

A changing of ownership, such as real estate, a security or a financial account, from one party to another, or a movement of funds from one account to another.

Premature Distribution

(Premature Distribution Penalty.) Withdrawals made from certain tax-favored plans may be subject to an additional 10% federal income tax if the withdrawal is made before the contract owner reaches age 59 1/2. Certain exemptions do apply. The contract owner should seek legal and tax advice before making plan withdrawals.

Premium Bonus

A Premium bonus is additional money that is credited to the accumulation account of an annuity policy under certain conditions.

Premium Deferred Annuities

In the world of annuities there are many options to choose from. When it comes to premium deferred annuities it is important to know how they are different from other fixed annuities. There are two different types of deferred fixed annuities. Those purchased with a onetime premium are called single-premium deferred annuities. Annuities funded by ongoing contributions over a period of time are called flexible-premium deferred annuities.

Premium Taxes

Some states charge a tax on the contributions made to an annuity. The issuing company generally charges the annuity contract for any premium tax and other taxes based on premium it pays to the state.

Private Annuity

A private annuity is a personal or restricted annuity. The major difference between private annuities and commercial annuities is that the person or entity that assumes the obligation for the private annuity is not in the business of selling annuities. The private annuity is an arrangement where the client transfers property to another in return for the other’s promise to make periodic payments to the client in fixed amounts for the rest of the Client’s life. The typical situation involves an insurance company; but properly established private annuities are fully recognized by the Internal Revenue Service as well.


Qualified Annuities

Qualified annuities are annuities purchased for funding an IRA, 403(b) tax-deferred annuity, or other type of retirement arrangements. An IRA or qualified retirement plan provides the tax deferral. An annuity contract should be used to fund an IRA or qualified retirement plan to benefit from an annuity’s features other than tax deferral, including the lifetime income payout option, the death benefit protection and, for variable annuities, the ability to transfer among investment options without sales or withdrawal charges.

Qualified Retirement Plan

Qualified retirement plans are generally any plan or arrangement eligible for special federal income tax treatment. Examples of qualified retirement plans include 401(k) plans, profit sharing plans, IRAs, etc.


Real Estate Investment Trust (REIT)

A Real Estate Investment Trust assumes ownership in the property it invests in which enables investors of the REIT to receive dividends on rental income and appreciation on the property at the time of sale.

Retirement Annuities

Retirement annuities can refer to many different types of investment vehicles. But in general these are ‘old style’ individual pension plans. These types of retirement annuities were similar in nature to personal pension plans, which allowed you to take a greater amount of your pension fund at retirement as a tax-free lump sum but insisted that you should normally be at least 60 years old before gaining the benefits.

Retirement annuities can be immediate, deferred or even fixed or variable. In general, retirement annuities are can mean many things to many different people. It is important to understand every form of retirement planning before simply jumping into retirement annuities

Retirement Plan Withholding

A distribution to an employee from an employer-sponsored retirement plan is generally subject to a mandatory 20% withholding for federal income taxes (unless the distribution is $200 or less). No withholding is necessary if the funds are directly rolled over into an IRA or other qualified retirement plan. Other rules apply to periodic distributions.

Reverse Annuity Mortgage

A reverse annuity mortgage is an arrangement in which a homeowner borrows against the equity in his/her home and receives regular monthly tax-free payments from the lender. A reverse annuity mortgage is also called home equity conversion mortgage.


A rollover is a distribution from a qualified retirement plan or Section 403(b) to an individual and then from the individual to another qualified retirement plan, Section 403(b), or IRA. After constructive receipt of the distribution, an individual has 60 days to roll the funds over into another qualified funding vehicle in order for the funds to remain qualified. (If the funds are distributed from a qualified plan or Section 403(b) tax deferred annuity, mandatory withholding will take place at a rate of 20%.)

Roth Conversion

You can roll over funds from a traditional IRA to a Roth IRA if you meet certain requirements. The taxable amount of the rollover funds will be included in the gross income for the year in which the conversion is made. If the conversion occurred in 1998, the taxable amount can be spread out over four years.

Roth IRA

A Roth IRA is a special type of IRA under which distributions may be tax exempt. Individuals may make nondeductible contributions into a Roth IRA if certain income requirements are met. Qualified distributions from a Roth IRA are tax-free.


S&P Rating A

An insurer rated ‘A’ has STRONG financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are insurers with higher ratings.

S&P Rating AA

An insurer rated ‘AA’ has VERY STRONG financial security characteristics, differing only slightly from those rated higher.

S&P Rating AAA

An insurer rated ‘AAA’ has EXTREMELY STRONG financial security characteristics. ‘AAA’ is the highest Insurer Financial Strength Rating assigned by Standard & Poor’s.

S&P Rating B

An insurer rated ‘B’ has WEAK financial security characteristics. Adverse business conditions will likely impair its ability to meet financial commitments.

S&P Rating BB

An insurer rated ‘BB’ has MARGINAL financial security characteristics. Positive attributes exist, but adverse business conditions could lead to insufficient ability to meet financial commitments.

S&P Rating BBB

An insurer rated ‘BBB’ has GOOD financial security characteristics, but is more likely to be affected by adverse business conditions than are higher rated insurers. An insurer rated ‘BB’ or lower is regarded as having vulnerable characteristics that may outweigh its strengths. ‘BB’ indicates the least degree of vulnerability within the range; ‘CC’ the highest.

S&P Rating CC

An insurer rated ‘CC’ has EXTREMELY WEAK financial security characteristics and is likely not to meet some of its financial commitments.

S&P Rating CCC

An insurer rated ‘CCC’ has VERY WEAK financial security characteristics, and is dependent on favorable business conditions to meet financial commitments.

S&P Rating NR

An insurer designated ‘NR’ is NOT RATED, which implies no opinion about the insurer’s financial security. and contracts in accordance with their terms.

S&P Rating R

An insurer rated ‘R’ is under regulatory supervision due to its financial condition. During the regulatory supervision, the regulators may have the power to favor one class of obligations over others or pay some obligations and not others. The rating does not apply to insurers subject only to non-financial actions such as market conduct violations.


Drawn securities are securities that call for redemption.

Settlement Option

The methods by which the insurer may pay annuity or life insurance policy proceeds to the annuitant, contract owner, policy owner or beneficiary.

Simplified Employee Pension

A simplified employee pension is a written arrangement or program that allows an employer to contribute tax-deductible dollars toward an employee’s retirement. A SEP may be established by a corporate or noncorporate employer. From an individual’s perspective, a SEP has the administrative simplicity of an IRA, but also allows the employer to make contributions on the employee’s behalf in addition to the employee’s annual contribution limit.

Single Premium Immediate Annuity

Plan in which an individual makes a single payment to a mutual fund or insurance company. Similar to an IRA but having no annual contribution limit.

Source of Funds

Where you’ll get the money you plan to invest. Your source or sources can be qualified or non-qualified. Qualified sources are pre-tax sources such as 401(k) accounts, traditional individual retirement accounts (IRAs), 403(b) retirement plans for teachers and other employer-sponsored plans. Non-qualified sources are after-tax sources such as cash, mutual funds, certificates of deposit (CDs), money market funds and exchanges of other non-qualified annuities (1035 exchanges).

Split Annuities

A split annuity is a very tax efficient and intelligent investment vehicle combining two different types of annuities – a single premium deferred annuity and a single premium immediate annuity. One annuity repays you a set sum of money each and every month over a specified period of time. The other annuity is left in place to grow on a fixed interest basis, with the goal being that by the time funds in your immediate annuity are depleted, the single premium deferred annuity will be restored to your original starting principal. This allows you to then restart the process with new prevailing interest rates.

Standard & Poor’s (S&P) Ratings

Standard & Poor’s analyzes and rates insurance companies’ financial strengths in part on their ability to meet their contractual obligations to policyholders.

Standard Deviation (3 year)

A statistical measure of a subaccount’s range of performance. When an annuity’s subaccount has a high degree of deviation, chances are greater that it will fluctuate.


The various investment portfolios in which your annuity funds are invested. You choose which subaccounts you want your money invested in and how much you want to allocate to each.

Subaccount Investment Objective

Identifies a subaccount’s investment type (for example, aggressive growth, balanced, money market or corporate bond).

Subaccount Net Assets

The assets of a subaccount expressed in millions of dollars.

Surrender Charges

The charge for withdrawing money from an annuity before the date agreed upon in the contract. Surrender charges typically are a percentage of the total premium deposited, and the charge decreases to 0 over time, as the annuity gets closer to the date it will mature.

Surrender Value

The surrender value is the amount that is available in cash for loans and that may be available for withdrawals. Accessing Cash Surrender Value may reduce the death benefit and may increase the risk of lapse.

Swiss Annuities (offshore accounts)

In the spectrum of global investments Swiss annuities are unique. Swiss annuities and endowments are products offered by Swiss insurance companies. This type of annuity does not incur Swiss or U.S. excise taxes; they can protect you from creditors and are available in fixed or variable type. The options and variations to choose from are diverse and ensure maximum flexibility to fit your individual investment requirements. The goals of Swiss Annuities are the preservation of capital and to provide an excellent asset protection and estate-planning vehicle.


Tax deferred Annuities

A tax-deferred annuity is a contract for people who want to save on a tax-deferred basis for many years, and then convert to a payout schedule once they retire. Contrarily to an immediate annuity, the tax deferred annuities do not become payable until some years after its purchase. The single premium or regular premiums are capitalized during the deferred period, then the built up capital is converted into an annuity.

Tax Incentives

Tax incentives allow corporations to receive credits or deductions ranging from 10% to 35% against the cost of equipment or installation to promote renewable energy equipment. In some cases, the incentive decreases over time. Some states allow the tax credit only if a corporation has invested a certain dollar amount into a given renewable energy project. In most cases, there is no maximum limit imposed on the amount of the deductible or credit.

Tax Sheltered Annuities

Tax sheltered annuities are a type of retirement plan for employees of tax-exempt organizations or schools, also known as a Section 403(b) plans. The tax-sheltered annuities are made possible by “before-tax contributions,” made via salary reduction agreements to the tax sheltered retirement plan. Employers are also allowed to make direct contributions on behalf of employees.

Tax-Equivalent Yield

The pre-tax yield required from a taxable bond in order to equal the tax-free yield of a municipal bond (nontaxable).

Tax-Exempt Security

An obligation whose interest is tax-exempt, often called a municipal bond (muni), offered by a country, state, town, or any political district as an example a sewer district. The funds raised can be for specific projects or for general obligation.

Tax Equity and Fiscal Responsibility Act (TEFRA)

Legislation to increase tax revenue by eliminating various taxation loopholes in vehicles such as annuities and life insurnace policies. Tougher enforcement procedures in collecting taxes was also implemented.

Term Certain Annuity

An annuity with income payments over a set number of years.

Term Life Insurance

Provides a death benefit only, no build up of cash value. A term life insurance policy provides protection for a specific time period such as 10 years etc. (term, a period of time)

Testamentary Trust

A trust created by a will, which comes in existence after the trust maker’s death. Not valid during the life of the trust maker.

Three-Month Total Return

This number is a percentage figure that reflects the annuity subaccount’s previous 3-month return (gain or loss).

Time to Maturity

The time remaining until a financial contract (bond) expires. Consider a 30 year bond maturity being resold in year 20 (of the bond life) What is the yield to maturity would need to be asked before being purchased.


Transferring funds from one subaccount to another within an annuity. These transfers are free of load or tax.


The direct transfer of funds from one financial institution to another financial institution for the benefit on an individual.

Treasury Bills

Debt obligations of the U.S. Treasury that will mature of one year or less. Maturities for T-bills are usually 91 days, 182 days, or 52 weeks.

Treasury Bonds

Debt obligations of the U.S. Treasury that mature in 10 years or more.

Treasury Direct

A system allowing an individual investor to make a noncompetitive bid on U.S.Treasury Securities and avoid broker dealer fees and expenses..

Treasury Notes

Debt obligations of the U.S. Treasury that mature more than 2 years but less than 10 years.

Trust or Corporate Owner IRC Section 72 (u)

If an annuity is issued after February 28, 1986, to a trust or corporation, the income earned on the annuity must generally be reported yearly. Generally, private individuals only report income at the time the annuity matures or a distribution occurs. Please refer to IRC Code Section 72(u) or consult your tax or legal adviser for more information.


Underlying Portfolios

The stocks, bonds, cash equivalents or other investments purchased with the money you invest in an annuity.

Uniform Gifts to Minors Act or Uniform Transfers to Minors Act

Allows gifting to the name and taxpayer identification number of a minor and may provide a tax benefit because some or all of the income produced by the investment may be taxed at the rate for the minor’s assumed lower income

US Treasuries

U.S. Department of the Treasury, which issues all US Treasury bonds, notes and bills as well as overseeing operating agencies. Treasuries are auctioned by the US Treasury and anyone can buy them. Time period varies from 90 days to 30 years.


Variable annuities

Investment contract whose issuer provides investment options called sub accounts (like mutual funds). Performance of the variable annuity is linked to the performance of the sub accounts, sub accounts are invested in stock market securities and bonds. The value of the annuity can increase or decrease based on performance. Variable annuities contain fees for the annuity contract and fees for the fund management. The value and performance of a variable annuity is never guaranteed.

Variable Annuity

With billions of investment dollars going into mutual funds, insurance companies created a competing product called Variable Annuities that allows you to invest your money within investment portfolios called subaccounts. Unlike other annuities, a variable annuity does not guarantee a set rate of interest or earnings, being based instead off fund performance and account averages. However you can buy, sell and switch funds at any time without incurring taxes until you begin to withdraw your original investment and income after age 59 ½. At that time your gains are taxed as ordinary income. of time. Transfers between your portfolios can also reduce tax burdens.



The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond or note.

Yield on Dividend

The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond or note.

Yield on Invested Assets

Ratio of net investment income to mean invested assets.