Annuities Glossary

Accumulation phase

The phase in which you pay into your annuity. You can either contribute a lump sum of money or make payments into your annuity over time.

Annuitization phase

The phase in which you receive monthly payments from your annuity.

Basis points.

The fees in your annuity. The number of basis points reflects a percentage of your investment. For example, 200 basis points would be 2 percent of your investment.

Death benefit.

The amount of money your beneficiary receives if you die before you begin the annuitization phase. It is generally the value of your annuity or the amount you have invested, whichever sum is greater.

Mortality and expense (M&E).

The fee the insurance company charges you to provide you with a lifetime income, and your beneficiaries with a death benefit should you die during the accumulation phase.

Non-qualified annuity.

An annuity that is funded with after-tax dollars.

Qualified annuity.

An annuity that is funded with pre-tax dollars.

Rider.

A feature on your annuity that provides an additional benefit. For example, a long term care rider would cover nursing home costs. A bonus rider would give you an extra 1 to 5 percent of your investment upon buying the annuity.

Surrender.

The act of getting out of your annuity. There is usually a fee if you surrender your annuity within the first seven or eight years of owning it. This fee is also known as a contingent deferred sales charge (CDSC) or a back-end sales load.

Tax deferral.

The money that accumulates in your annuity grows tax-deferred, meaning you do not pay taxes on it until you begin receiving annuity payments. The death benefit on your annuity is also taxable to your beneficiary.

Term certain annuity.

An annuity that provides you with income payments for a specific period of time, such as 10 or 20 years, rather than a lifetime.

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surance company for more details.

For example, if you divide $100,000 evenly into the split annuity in which half is tax deferred and the other half is received immediately, you reap larger gains than if you place the funds into a single investment option, like a CD. The $50,000 is put into the immediate portion of the annuity at seven percent. You will be provided more than $6,000 (of interest and principal) every year for 10 years, which of course is significantly higher than the principal. The other $50,000 would be invested in the deferred portion of the annuity contract and grow back to the original $100,000, and the process can be started over. Talk this over with a professional first to ensure rates and time constrictions.

If you invest in a CD, you earn the interest rate on the total principal, but only the one single amount of after-tax income. You would be able to earn anywhere from 25 to 35 higher income over the course of the same time period.

Another advantage, which is common to all annuities, is the death benefit. If the primary policyholder passes on, his or her beneficiaries will continue to receive the rewards of the split annuity contract.

Some items to keep in mind when purchasing a split annuity are surrender charges, which are applied against the funds withdrawn if you are not of a certain age (59 ½) or before the contract has matured. Also, annuities are not as liquid as CD’s. Finally, the federal government does not insure annuities as they do CD’s.

The other issue to keep in mind is the rate of return. If interest rates are low, you may have to choose an annuity that has a variable rate rather than a fixed annuity that has a guaranteed rate. You may be able to acquire a higher income, but the risk is greater because the rate is not guaranteed and may drop below that of a fixed rate annuity.

The worry here is churning; many people are in variable annuities, which are doing poorly in these markets. If a broker puts them into a split annuity with a promise of income, they might be losing their insured amount in the variable one.

But, as far as earning income in both the long and short terms, split annuities are a better option than CD’s and the like. Since they allow you to receive tax-deferrable benefits with very good rates of return as well as a regular stream of monthly income, consider split annuities for your next investment.

For expert help with your annuity call toll-free 866-866-1999
© Copyright 2004 - 2008 Total Return Annuities

Enter your state, age, and dollar amount and click to calculate.