Bookmark this page. When an agent or a brochure uses a term you do not recognize, look it up here before you nod along.
1035 exchange
A tax-free swap of one annuity (or life insurance policy) for another, named for the IRS code section that allows it. Useful when a better contract exists, but watch for new surrender periods starting over.
Accumulation value
Your actual account balance. The real money in the contract, as opposed to the benefit base.
Annuitization
Permanently converting your account balance into a stream of payments. Older contracts required this to get income. Most modern income riders do not.
Benefit base
A calculation number used only to determine income payments under a rider. It is not cash and cannot be withdrawn as a lump sum.
Cap rate
The maximum interest you can be credited in a given period, no matter how well the index performed.
Crediting strategy
The method used to calculate your interest, such as annual point-to-point with a cap, or a participation rate strategy. Most contracts let you allocate among several.
Death benefit
What the contract pays your named beneficiaries when you die, typically at least the remaining accumulation value.
Fixed indexed annuity (FIA)
An annuity that credits interest based on an index's performance, with limits, while protecting your principal from market losses.
Floor
The minimum interest you can be credited. In most FIAs the floor is zero, meaning a bad index year credits you nothing but costs you nothing.
Free look period
A state-mandated window after delivery of your contract, commonly 10 to 30 days, during which you can cancel for a full refund. See your state page for specifics.
Free withdrawal provision
The amount, commonly 10 percent of account value per year, you can withdraw without surrender charges.
Income rider
An optional add-on, usually for an annual fee, that provides lifetime income payments calculated from the benefit base.
Income value
Another name for the benefit base. If a proposal shows two account values, ask which one is real cash. The answer is the accumulation value.
MYGA
Multi-year guaranteed annuity. Pays a locked guaranteed rate for a set term, often compared to a CD.
Participation rate
The percentage of an index gain credited to you. A 50 percent participation rate on a 10 percent gain credits 5 percent.
Premium
The money you put into the annuity.
Premium bonus
An upfront credit some contracts add to your premium. Bonuses are never free. They are paid for with longer surrender periods, lower caps, or fees. Judge the whole contract.
SPIA
Single premium immediate annuity. You pay a lump sum and income payments begin right away, often for life.
Spread
A percentage subtracted from index gains before interest is credited to you.
Surrender charge
The penalty for withdrawing more than the free amount during the surrender period.
Surrender period
The years, typically 7 to 10, during which surrender charges apply. The charge usually declines each year until it reaches zero.
A rule worth keeping
If someone selling you an annuity cannot define one of these terms in plain language, that is your answer about whether to buy from them.