Annuity Glossary

A

Accumulation Phase

The waiting period before a deferred annuity starts paying you. Your money sits and grows tax-deferred. This only applies to deferred products — if you buy an immediate annuity (SPIA), there's no accumulation phase. You hand over your premium, and payments start within 30 days.

AM Best Rating

The gold standard for judging an insurance company's financial strength. AM Best has been rating carriers since 1899. An A+ or A++ rating means the company has excellent ability to meet its ongoing obligations. We only work with carriers rated A or higher — companies like New York Life (A++), MassMutual (A++), and Pacific Life (A+). When you're trusting a company to send you checks for the next 30 years, the rating matters. A lot. Check our carrier page for the full list.

Annuitant

The person whose life the annuity payments are based on. Usually that's you. The insurance company uses your age and life expectancy to calculate your monthly payment. With a joint and survivor annuity, there are two annuitants — typically a married couple.

Annuitization

The moment you convert a lump sum into a stream of guaranteed income. It's a one-way door. You give the insurance company a pile of money, and they give you a monthly check for the rest of your life. The word sounds complicated. The concept is simple: you're buying a paycheck.

Annuity Rider

An add-on you can bolt onto an annuity contract for extra benefits. Common ones include income guarantees and enhanced death benefits. The catch: riders cost money — usually 0.5–1.25% per year. A fixed life annuity (SPIA) doesn't need riders because lifetime income is already built in. Riders exist mostly to make deferred and variable annuities do what a SPIA does naturally. See also: Income Rider.

B

Beneficiary

The person who gets whatever's left if you die. With a life with period certain annuity, your beneficiary receives the remaining guaranteed payments. With a life-only annuity, payments stop at death — no beneficiary payout. One nice feature: annuity beneficiary designations bypass probate, so the money transfers faster and more privately than most assets.

C

Cash Refund

A payout option that guarantees your beneficiaries receive at least as much as you originally invested, minus whatever you've already been paid. If you put in $200,000 and die after collecting $80,000, your beneficiary gets the remaining $120,000 as a lump sum. Costs a bit more than life-only, but it eliminates the fear of "dying early and losing everything."

Cash Surrender Value

What you'd get if you cashed out a deferred annuity early. It's your account value minus any surrender charges. Doesn't apply to SPIAs — once you've annuitized, there's no account to cash out. Your money has been converted into a permanent income stream.

Contingent Annuitant

A backup person who steps into the annuitant's role if the primary annuitant dies. Different from a beneficiary — a contingent annuitant continues the income stream rather than receiving a payout.

Cost of Living Adjustment (COLA)

An annual bump in payments to keep up with inflation. Social Security has a built-in COLA. Most annuities don't — unless you pay extra for an inflation rider, which typically cuts your starting payment by 20–30%. Our take: you're usually better off taking the higher fixed payment and investing the difference for growth.

D

Death Benefit

The money your beneficiary receives when you die. On a deferred annuity, it's usually whatever's left in your account. On a life-only SPIA, the death benefit is zero — that's the trade-off for the highest possible monthly payment. If leaving money to heirs matters, look at life with period certain or cash refund options.

Deferred Annuity

An annuity where payments start later, not right away. Your money grows during the accumulation phase. These come in several flavors: fixed deferred, indexed, and variable. They all add complexity and fees that an immediate annuity avoids. If you need income now or soon, a deferred annuity is the wrong tool.

Distribution Phase

The period when the annuity is actually paying you. Also called the "payout phase." With a SPIA, the distribution phase starts almost immediately and lasts the rest of your life. With deferred annuities, you might wait years before entering this phase.

E

Exclusion Ratio

This is one of the best-kept secrets in retirement income. When you buy an annuity with after-tax money, the IRS considers part of each payment a tax-free return of your own principal. The exclusion ratio determines how much is tax-free. On a typical SPIA purchased at 65, roughly 55–65% of every payment arrives tax-free. Compare that to a CD, where 100% of the interest gets taxed. The math is straightforward: your original investment divided by your expected total lifetime payments. See our full tax guide for worked examples.

F

Fixed Annuity

An annuity that pays a guaranteed rate. No market risk. No surprises. The most common type for accumulation is a MYGA (basically a CD alternative). The most common type for income is a SPIA (a paycheck for life). We specialize in the income side.

Fixed Indexed Annuity (FIA)

A deferred annuity that links your returns to a stock market index like the S&P 500, but with a floor (usually 0%) so you can't lose money. Sounds great on paper. In practice, caps, participation rates, and spreads dramatically limit your upside. The actual returns often disappoint compared to what the sales pitch implied. And they come with surrender charges that can trap your money for 10+ years.

Free Look Period

A window — usually 10 to 30 days after purchase, depending on your state — where you can cancel an annuity and get a full refund. No penalty. Every state requires it. Think of it as a return policy.

Free Withdrawal Amount

The percentage of a deferred annuity's value you can pull out each year without paying surrender charges. Typically 10% per year. Doesn't apply to SPIAs because there's no account balance to withdraw from — you just get your monthly check.

G

Guaranteed Minimum Income Benefit (GMIB)

A rider on a variable annuity that promises a minimum level of income even if the underlying investments tank. Costs 0.5–1.0% per year. Here's the thing — you're paying an annual fee for a guarantee of income that a SPIA provides at zero annual cost. A SPIA doesn't need a rider to guarantee income. That's just what it does.

Guaranteed Minimum Withdrawal Benefit (GMWB)

Another rider — this one lets you withdraw a set percentage (usually 4–5%) annually for life, even if your account hits zero. Also called GLWB. Costs 0.75–1.25% per year. Again, you're paying ongoing fees to bolt income guarantees onto a product that wasn't designed for income. A SPIA pays 6–8% annually with zero fees. The comparison isn't close. See our fee guide for the full breakdown.

I

Immediate Annuity (SPIA)

A Single Premium Immediate Annuity. You make one payment, and income starts within 30 days. No accumulation phase. No fees. No investment decisions. Just a guaranteed monthly check for the rest of your life. This is what we sell, and what we believe is the best tool for turning savings into retirement income. Period. Learn more in our how annuities work guide.

Income Floor

The minimum amount of guaranteed income that covers your essential monthly expenses — housing, food, healthcare, utilities, insurance. The idea is simple: build an income floor with Social Security and a life annuity so your basic needs are covered no matter what happens in the market. Everything above the floor (travel, gifts, luxuries) can come from investments. This is the foundation of the retirement income strategy we recommend to every client.

Income Rider

An add-on that guarantees a minimum level of lifetime income from a deferred annuity. The fee is typically 0.75–1.25% per year, charged against your account value. We'll say it again: a SPIA provides guaranteed lifetime income without the annual fee. Income riders exist to make other annuity types do what a SPIA already does.

Interest Rate Cap

The maximum return you can earn in a given period on a fixed indexed annuity. If the cap is 7% and the S&P 500 gains 25%, you get 7%. The carrier keeps the rest. Caps change at renewal, so the rate you saw in the brochure may not be the rate you live with.

J

Joint and Survivor Annuity

An annuity that keeps paying as long as either spouse is alive. The monthly payment is lower than a single-life annuity because the carrier expects to pay longer. Common options: 100% survivor (full payment continues to the surviving spouse) or 50% survivor (payment drops by half). For married couples, this is often the right structure. See our joint annuity rates.

L

Life Annuity

An annuity that pays for the rest of your life. Full stop. Doesn't matter if you live to 82 or 107. The check shows up every month. This is the core product we work with, and it solves the single biggest problem in retirement: running out of money. See our complete guide.

Life with Period Certain

A life annuity with a minimum guarantee period — usually 10 or 20 years. You get paid for life, but if you die in year 3, your beneficiary receives payments for the remaining 7 (or 17) years. The monthly payment is slightly less than life-only — maybe 5–8% lower — but most of our clients pick this option because it eliminates the "what if I die next year" worry.

Living Benefit

Any annuity feature that pays while you're alive, as opposed to a death benefit. Income guarantees, withdrawal benefits, nursing care riders — they're all living benefits. With a SPIA, the entire product is a living benefit. You bought it for income while you're alive. That's the point.

Lump Sum

A single, one-time payment. In the annuity world, this usually means the premium you pay to buy the annuity. You hand over $150,000 on day one and receive guaranteed monthly income in return. "Single premium" and "lump sum" mean the same thing here.

M

Market Value Adjustment (MVA)

An adjustment some fixed annuities apply to early withdrawals based on how interest rates have moved since you bought. Rates went up? Your withdrawal value drops. Rates went down? It increases. Only matters if you're cashing out early from a deferred product. Doesn't apply to SPIAs.

Mortality and Expense Charge (M&E)

An annual fee on variable annuities covering insurance guarantees, administrative costs, and the carrier's profit margin. Typically 1.0–1.5% per year. Fixed life annuities don't have this charge. Zero. The carrier makes its money on the investment spread, not by billing you.

Mortality Credits

This is the secret sauce that makes life annuity payouts so much higher than what you'd earn on your own. When a group of people buy annuities, some will die earlier than expected. The money that would have gone to those individuals gets redistributed to the ones who live longer. You're not taking anyone's money — everyone agreed to the same deal. But if you're the one who lives to 95, you benefit from the pooled risk. No bank account, CD, or brokerage can replicate this. It's the reason a SPIA at age 65 pays 6–7% when a CD pays 4%. See our how annuities work guide.

Multi-Year Guaranteed Annuity (MYGA)

A fixed annuity that guarantees a set interest rate for a specific number of years — typically 3 to 10. Think of it as a CD from an insurance company, but with tax-deferred growth and usually a better rate. It's an accumulation tool, not an income tool. If you want income, a SPIA is the better fit. See our annuity vs. CD comparison.

N

Non-Qualified Annuity

An annuity bought with money you've already paid taxes on — not from an IRA or 401(k). The big advantage: only the earnings portion gets taxed. The exclusion ratio determines how much of each payment is tax-free, and it's usually 55–65% for a SPIA purchased at retirement age. That's a tax benefit CDs and bonds can't touch. Compare with Qualified Annuity.

P

Participation Rate

The percentage of an index's gain that actually gets credited to your fixed indexed annuity. A 70% participation rate means if the index gains 10%, you get 7%. Combined with caps and spreads, the real returns on indexed annuities are often far lower than what the sales illustration showed.

Payout Phase

See Distribution Phase.

Period Certain

A payout that lasts for a guaranteed number of years — say 10, 15, or 20 — regardless of whether you're alive. If you die in year 4 of a 20-year period certain, your beneficiary collects the remaining 16 years of payments. On its own, a period-certain-only annuity doesn't provide lifetime income. We prefer life with period certain, which gives you both: income for life and a minimum guarantee for your heirs.

Premium

The money you put in. For an immediate annuity, it's a single lump sum — hence "single premium." Minimum premiums at most carriers start around $10,000 to $25,000, though the sweet spot for meaningful retirement income is usually $75,000 or more.

Q

Qualified Annuity

An annuity funded with pre-tax retirement money (IRA, 401(k), 403(b)). The entire payment is taxed as ordinary income when you receive it — same as a regular IRA withdrawal. No exclusion ratio benefit here. Subject to required minimum distributions starting at age 73, but annuity payments automatically satisfy the RMD requirement for the annuitized amount. Compare with Non-Qualified Annuity.

R

Required Minimum Distribution (RMD)

The amount the IRS forces you to withdraw each year from tax-deferred accounts starting at age 73. Skip it and they hit you with a 25% penalty. If you buy a SPIA with IRA money, your monthly payments automatically count toward your RMD for that portion. No calculations, no December scramble. One less thing to think about.

Rider

An optional provision added to an annuity contract. Income riders, death benefit riders, long-term care riders — they all cost money (usually 0.5–1.25% per year). With a SPIA, you don't need most riders because the guarantees are baked into the base product. See Annuity Rider.

S

Single Premium

A one-time lump sum payment to purchase an annuity. This is how SPIAs work — you make one payment, and income starts immediately. No installment plans. No recurring contributions. You're converting a chunk of savings into a permanent paycheck in one transaction.

Spread / Margin

A percentage the carrier skims off the index gain before crediting your fixed indexed annuity. If the index gains 10% and the spread is 2%, you get 8%. It's one of several mechanisms (along with caps and participation rates) that reduce what you actually earn on an indexed product.

State Guaranty Association

Every state has one. It's the safety net that protects you if your insurance company fails. Coverage varies by state — typically $100,000 to $500,000 per person per carrier. Think of it as the annuity equivalent of FDIC insurance. For large purchases, we recommend splitting across multiple carriers to stay within your state's limits.

Subaccounts

The investment options inside a variable annuity. They work like mutual funds — you pick from stock, bond, and money market options. Your returns depend on performance. Each one carries its own management fee on top of the annuity's base charges. SPIAs don't have subaccounts because there's nothing to invest — your money has already been converted to guaranteed income.

Surrender Charge

The penalty for pulling money out of a deferred annuity too early. Typically starts at 6–8% in year one and drops by about 1% per year until it hits zero. Can trap your money for a decade. SPIAs don't have surrender charges because there's nothing to surrender — your premium was converted to income on day one. See our fee guide.

Surrender Period

The number of years surrender charges apply. Usually 3 to 10 years on deferred annuities. Once the period ends, you can access your money freely. Doesn't apply to SPIAs.

T

Tax-Deferred Growth

Your annuity earns interest without triggering a tax bill each year. You only pay taxes when money comes out. This lets your balance compound faster than a taxable account like a CD, where Uncle Sam takes his cut every April. Applies to deferred annuities. With a SPIA, the tax advantage comes from the exclusion ratio instead.

V

Variable Annuity

An annuity where your returns depend on subaccount performance. Higher growth potential than fixed annuities, but you can lose money — and the fees are brutal. Between M&E charges, fund management fees, admin fees, and rider costs, you're often paying 2.5–4% per year. On a $200,000 contract, that's $5,000 to $8,000 annually in fees before you earn a dime. Compare that to a SPIA at zero annual cost. See our complete fee comparison.