Glossary of Annuity Terms

Glossary of Annuity Terms 2017-05-12T02:11:28+00:00

Annuity Terms

Cap

The Maximum interest rate that can be credited to your equity index annuity policy in a policy year or over the term of the policy.

Base Interest Rate

The Base Rate is the Current Rate less the Bonus Rate if any. In many cases the Base Rate and the Current Rate are the same.

Bonus Rate

A Bonus Rate is the “extra” or “additional” interest paid during the first year. (the initial guarantee period) The term “Bonus Rate” also means that extra interest paid as a pure bonus with no vesting requirements to earn it… a true bonus.

Compounding of Gains

Interest that is credited to your policy is added to your principal as well as interest credited in prior policy years. Some companies do not compound the gains credited to equity index policies from prior years. This dramatically reduces the overall rate of return earned by your money.

Current Interest Rate

This is the interest rate that an annuity is paying it is 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 specific length of time.

Floor

The minimum interest rate that can be credited to your policy equity index annuity in a year or over the term of your contract.

Old Money Rates or Renewal Rates

The Old Money Rate is that rate declared by the company after the initial rate guarantee.

After the initial interest rate guarantee the company decides what the interest rate will be for the following policy year. This rate is based on the company’s original investment portfolio and how the company designed the product.

For example if the annuity policy at the time of issue paid a “current rate” of 7.50% which was guaranteed for one year and had a “base rate” of 6.50%, the company could declare a new interest rate for the second policy year of 6.0%. Each policy year thereafter the company would declare a new interest rate for that policy year.

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. If the Participation Index Rate was 90% and the percentage change of the S&P 500 Index was 10%. Then the 10% change would be multiplied by the Participation Index Rate of 90% resulting in an Interest Rate of 9.0% being credited to your policy for that term.

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. The term could be one policy year, 5 policy years or 7 policy years etc. If the S&P 500 was 500 at the beginning of the policy year and closed at 550 at the end of the policy year, there would have been a 10% increase in the S&P 500 Index. In years where the S&P 500 Index is negative the percentage credited to your policy is (0). In this case there would be no change in your policy value.

Premium Bonus

Additional money that is credited to the accumulation account of an annuity policy under certain conditions. First, the amount of money credited to the policy is calculated as a percentage of your initial premium. Secondly, the money credited to you accumulation account “vests” in your policy after a certain number of years.

For example; if your initial premium is $10,000 and the policy pays a 4.0% premium bonus and vest in years 6 through 9, your policy is credited with $400.00. The $400.00 earns interest as if it were your original premium, however if you surrender your policy, during the first 5 years you DO NOT receive the Premium Bonus and the interest it earns. During year 6, 7, 8 and 9 you “vest in to” 25% of the Premium Bonus and it’s earned interest each year.

Rollover

The transferring of funds accumulated within an employer sponsor retirement plan to another employer sponsored retirement plan or IRA.

Section 1035(a) Exchange

The tax-free exchange of one nonqualified annuity contract or life insurance policy for another with a different company. For example the transfer of a life to life; life to annuity; annuity to annuity policy. Partial transfers are also ppermitted

Serial Issue

A number of annuity contracts, issued by the same company within a twelve month period to the same owner.

Settlement Options

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

Transfer

The direct transfer of funds from one financial institution to another financial institution for the benefit on an individual. For example; the transfer of IRA funds from a bank to an insurance company. The check issued to the insurance company is for “the benefit of James Jones”. The direct transfer avoids the 20% withholding since the check is issued an institution “for the benefit of James Jones” and is not paid directly to James Jones.