Plain-English glossary · 47 terms
Every term below is defined in plain English, in 40 to 80 words, with no rates, caps, or percentages that go stale. These are the 47 words and phrases people actually meet in annuity and indexed universal life paperwork, from annuitization to wash loan. Jump to a letter, or look up the exact term your contract or advisor used.
A tax-deferred swap under Section 1035 of the tax code that lets you replace an existing life insurance policy or annuity with a new one without triggering current taxes on the gains. Funds must move directly between insurers, never through your hands. Life insurance can exchange into an annuity, but an annuity cannot become life insurance.
Deeper guide: The retirement tax picture
The IRS test that decides whether a life insurance policy becomes a modified endowment contract. It sets a maximum total premium you can pay during the policy's first seven years; pay in more than that limit and the policy permanently loses the favorable first-in, first-out tax treatment on lifetime withdrawals and loans.
See also: Modified Endowment Contract · Deeper guide: IUL, honestly
The most common indexed crediting method. The insurer records the index level on your contract anniversary, compares it to the level exactly one year later, and applies your cap, participation rate, or spread to the change. Everything that happens between those two dates, including crashes and rallies, is ignored by the calculation.
Deeper guide: Types of annuities
A feature of most indexed crediting methods where each year's ending index value becomes the next year's starting point. Interest credited in past years is locked in and cannot be lost, and after a down year your contract measures growth from the new lower level rather than waiting for the index to recover first.
Deeper guide: Types of annuities
The person whose life expectancy the insurance company uses to calculate annuity income payments, and to whom those payments are made. The annuitant is often, but not always, the same person as the contract owner. When the annuitant dies, the contract's death benefit or survivor provisions determine what happens next.
Deeper guide: What is an annuity?
The moment you convert an annuity's accumulated value into a stream of guaranteed payments, either for the rest of your life or for a set number of years. Once you annuitize, the decision is generally irreversible: you trade access to the lump sum for the certainty of scheduled income from the insurance company.
Deeper guide: Guaranteed lifetime income
A bookkeeping value used only to calculate income payments under an annuity rider. It is not money you can withdraw, surrender, or leave to heirs; the real cash is the account value. Bonuses and roll-ups often inflate the benefit base, so always compare it against what the contract is actually worth in dollars.
See also: Roll-Up Rate · Deeper guide: Guaranteed lifetime income
The maximum interest an indexed annuity or indexed universal life policy will credit for a given term, no matter how well the underlying index performs. Insurers can usually change caps at renewal, so the cap that sold the product is not guaranteed for the life of the contract. Lower caps mean lower growth potential.
Deeper guide: Types of annuities
What you actually receive if you cancel a permanent life insurance policy or annuity: the account value minus any surrender charge and outstanding loans. In the early years it can be dramatically less than what you have paid in, which is why these products punish early exits and reward holding through the surrender schedule.
Deeper guide: IUL, honestly
An insurance company's financial capacity to honor its promises to policyholders, which is the foundation every annuity and life insurance guarantee rests on. Independent rating agencies grade it through financial-strength ratings. Annuities are not FDIC-insured, so the strength of the issuing insurer, backed secondarily by state guaranty associations, is your real protection.
See also: COMDEX Score · Deeper guide: What is an annuity?
A composite percentile ranking, from one to one hundred, that combines an insurance company's financial-strength ratings from A.M. Best, Standard and Poor's, Moody's, and Fitch. A company must be rated by at least two agencies to receive one. It offers a quick way to compare carriers, which matters because every guarantee rests on the insurer.
Deeper guide: What is an annuity?
The monthly charge inside a universal life or IUL policy that pays for the actual life insurance protection. It is based on your age, underwriting class, and the amount the insurer has at risk, and it rises as you get older, which is a key reason underfunded policies can collapse in later years.
Deeper guide: IUL, honestly
The formula an indexed annuity or IUL policy uses to translate index movement into interest actually credited to your money. Annual point-to-point, monthly averaging, and multi-index weighting are common examples. The method, combined with the cap, participation rate, or spread applied to it, shapes your real growth far more than the index itself.
See also: Cap Rate, Participation Rate, Spread · Deeper guide: Types of annuities
You pay a premium now and guaranteed income payments start at a future date you select, more than one year away. Because the insurer holds your money longer before paying anything out, each dollar of premium typically buys more future income than an immediate annuity would. A QLAC is a special tax-qualified version.
See also: QLAC · Deeper guide: Types of annuities
The IRS formula that splits each payment from an annuitized, non-qualified annuity into two parts: a tax-free return of the money you originally paid in, and taxable earnings. It spreads your cost basis evenly across your expected payments, so only the growth portion of each check is taxed as ordinary income.
Deeper guide: The retirement tax picture
An annuity that credits interest based on the movement of a market index, such as the S&P 500, while protecting your principal from index losses. Growth is limited by caps, participation rates, or spreads, and your money is never directly invested in the market. Interest, once credited, is locked in and cannot be taken back by a downturn.
Deeper guide: Types of annuities
The minimum interest an indexed annuity or IUL policy can be credited in a term, typically set at zero. The floor means an index decline cannot reduce your credited value for that period, though policy fees and rider charges can still pull the account balance down in a flat or negative year.
Deeper guide: Types of annuities
A state-required window, generally ten to thirty days after you receive your contract, during which you can return an annuity or life insurance policy and get your money back. The exact length varies by state. It is your last chance to reverse the purchase without paying a surrender charge or other penalty.
Deeper guide: Is an annuity right for me?
A contract feature that lets you take out a set portion of your annuity's account value each year, even during the surrender period, without triggering surrender charges. Amounts above the free withdrawal limit are penalized. It provides limited liquidity while the annuity is still inside its penalty window, though taxes may still apply.
See also: Surrender Charge · Deeper guide: What is an annuity?
An optional rider that lets you withdraw a set annual amount for as long as you live, even if your annuity's account value falls to zero, without annuitizing or giving up control of the remaining balance. The guaranteed amount depends on your age when withdrawals begin and is calculated on the rider's benefit base.
See also: Benefit Base · Deeper guide: Guaranteed lifetime income
A rider promising that when you annuitize at a stated future date, your income will be calculated on at least a guaranteed minimum amount, regardless of how the annuity's investments actually performed. Unlike a lifetime withdrawal benefit, using a GMIB typically requires converting the contract into annuity payments and giving up the lump sum.
Deeper guide: Guaranteed lifetime income
A rider guaranteeing you can withdraw a set amount each year until you have recovered your entire premium, no matter how the account itself performs. Unlike a guaranteed lifetime withdrawal benefit, payments stop once your original money has been returned rather than continuing for the rest of your life.
Deeper guide: Guaranteed lifetime income
The promise that if you die before annuity payments begin, your beneficiary receives at least a stated amount, commonly the greater of the account value or your total premiums minus withdrawals. Enhanced versions can periodically lock in market gains on contract anniversaries, raising the guaranteed floor as the account grows.
Deeper guide: Guaranteed lifetime income
An optional benefit added to an annuity, for an annual fee, that guarantees future lifetime income, most commonly through a guaranteed lifetime withdrawal benefit. The rider's income is calculated on a separate benefit base rather than your real account value, which is why quoted rider guarantees can sound larger than the money actually available.
See also: Benefit Base, GLWB · Deeper guide: Guaranteed lifetime income
Permanent life insurance with flexible premiums whose cash value earns interest linked to a market index, subject to caps, participation rates, and a floor that blocks index losses. It combines a death benefit with tax-advantaged cash accumulation, but internal policy charges and insurer-controlled caps make real performance heavily dependent on design and funding.
Deeper guide: IUL, honestly
An annuity payout structure covering two people, usually spouses. Payments continue as long as either person is alive, protecting the survivor from losing household income when the first spouse dies. Because the insurer expects to pay over a longer combined lifetime, each payment is smaller than a comparable single-life annuity would provide.
Deeper guide: Guaranteed lifetime income
An adjustment, up or down, applied when you withdraw more than the penalty-free amount or surrender certain fixed annuities early. If interest rates have risen since you bought the contract, the adjustment reduces what you receive; if rates have fallen, it can increase it. It shifts interest-rate risk to you during the surrender period.
Deeper guide: Annuity vs CD
A life insurance policy that was funded faster than IRS limits allow under the seven-pay test. Once a policy becomes a MEC the status is permanent: loans and withdrawals are taxed earnings-first, and taking money out before age fifty-nine and a half can add an IRS penalty. The death benefit itself generally remains income-tax-free.
See also: 7-Pay Test · Deeper guide: IUL, honestly
An annual fee deducted from variable annuity assets that pays for the contract's insurance guarantees, including the death benefit, the promise that contract charges will not rise, and the insurer's overhead. It is one of the main reasons variable annuities cost more than most other annuity types, and it compounds against returns yearly.
Deeper guide: Types of annuities
A fixed annuity that locks in one declared interest rate for the entire multi-year term you choose, rather than resetting each year. Often compared to a bank CD, but issued by an insurance company, with tax-deferred growth and surrender charges for leaving before the guarantee period ends. At term end you can renew, exchange, or withdraw.
Deeper guide: Annuity vs CD
A provision that keeps a universal life policy in force, sometimes to an advanced age or for life, as long as you pay the specified premium on schedule, even if poor cash value performance would otherwise cause the policy to lapse. Paying late, skipping, or reducing premiums can permanently void the guarantee.
Deeper guide: IUL, honestly
A rider on permanent life insurance that prevents the policy from lapsing after loans have consumed most of the cash value. When triggered, it freezes the policy as reduced paid-up coverage, avoiding the surprise tax bill a loan-driven lapse would create. Conditions apply, and it typically must be exercised late in the policy's life.
See also: Policy Loan · Deeper guide: IUL, honestly
The share of an index's gain that counts toward your credited interest in an indexed annuity or IUL policy. If your contract participates in only part of the index's rise, your interest reflects that smaller portion. Like caps, participation rates are declared by the insurer and can change at each renewal period.
Deeper guide: Types of annuities
A payout option guaranteeing payments for a minimum number of years no matter what happens. If the annuitant dies before the period ends, the remaining payments go to the named beneficiary. It is often combined with a lifetime payout, such as life with ten years certain, so an early death does not forfeit the premium.
Deeper guide: Guaranteed lifetime income
Money borrowed from the insurer using your life insurance cash value as collateral. Loans are generally income-tax-free while the policy stays in force, but interest accrues and unpaid balances reduce the death benefit. If the policy lapses with a large loan outstanding, the previously untaxed gains can suddenly become taxable income.
See also: Wash Loan · Deeper guide: IUL, honestly
Extra money the insurer adds to your annuity's account value, calculated as a percentage of what you deposit. Bonuses are not free: contracts that pay them typically carry longer surrender periods, lower caps, or vesting schedules that claw the bonus back if you leave early. Judge the whole contract, never the bonus alone.
Deeper guide: Is an annuity right for me?
A deferred income annuity purchased with money from a traditional IRA or workplace retirement plan. The amount you put in, up to an IRS dollar cap, is excluded from required minimum distribution calculations until payments begin, which you can delay as late as age eighty-five. It converts retirement savings into guaranteed income for late life.
See also: Required Minimum Distribution · Deeper guide: The retirement tax picture
A qualified annuity is bought with pre-tax retirement money, such as IRA or 401(k) funds, so every dollar withdrawn is taxable and required minimum distribution rules apply. A non-qualified annuity is bought with after-tax dollars: only the earnings are taxed on withdrawal, there is no IRS contribution limit, and lifetime distributions are generally not forced.
Deeper guide: The retirement tax picture
The minimum amount federal law requires you to withdraw each year from traditional IRAs and workplace retirement plans once you reach the age set by current law. Annuities held inside those accounts count toward the calculation. Missing an RMD triggers an IRS penalty, which is why deferral strategies such as QLACs exist.
Deeper guide: The retirement tax picture
Sometimes called a buffer annuity. Growth tracks a market index, and a buffer or floor absorbs part of any index loss, but unlike a fixed indexed annuity you can lose money beyond that protection level. It is a securities product sold by prospectus, sitting between fixed indexed and variable annuities on the risk spectrum.
Deeper guide: Types of annuities
The guaranteed annual growth an insurer applies to an income rider's benefit base while you delay taking withdrawals. It is not a return on your actual money; it only increases the number used to calculate future income, and it usually stops after a stated number of years or once withdrawals begin.
See also: Benefit Base · Deeper guide: Guaranteed lifetime income
You hand the insurer one lump sum and income payments begin within a year, continuing for life or for a period you choose. There is no accumulation phase and little or no liquidity afterward. It is the simplest annuity: a straightforward trade of principal today for a guaranteed paycheck starting now.
Deeper guide: Types of annuities
An amount the insurer subtracts from the index's gain before crediting interest to an indexed annuity or IUL policy, also called a margin or asset fee. If the index gain for the term is smaller than the spread, you receive no interest that term, though the floor still protects you from negative crediting.
Deeper guide: Types of annuities
A state-level safety net, funded by assessments on licensed insurers, that protects annuity and life insurance policyholders if an insurance company fails. All fifty states maintain one, and coverage limits differ from state to state and by product type. It is the industry's backstop, but carrier strength remains the first line of defense.
See also: Claims-Paying Ability · Deeper guide: What is an annuity?
A penalty the insurance company deducts if you withdraw more than your contract allows, or cash out entirely, during the early years of an annuity or permanent life policy. The charge typically follows a declining schedule over roughly seven to ten years, then disappears. It exists to recover the insurer's upfront costs of issuing the contract.
See also: Free Withdrawal Provision · Deeper guide: Is an annuity right for me?
An annuity whose value rises and falls with the investment subaccounts, essentially mutual-fund-like portfolios, you select inside it. You bear the market risk, and total fees run higher than most other annuity types. It is a security sold with a prospectus, often paired with optional riders that add income or death-benefit guarantees.
See also: Mortality and Expense Charge · Deeper guide: Types of annuities
A policy loan in which the insurer credits the cash value backing the loan at the same rate it charges in loan interest, making the net cost of borrowing effectively zero. Wash loans are common in IUL retirement-income strategies, though the exact terms are set by the insurer and may only apply in later policy years. Loans still reduce the death benefit, and a lapse with loans outstanding can trigger taxable income.
See also: Policy Loan · Deeper guide: IUL, honestly
Definitions describe how these features generally work. Every contract is different, and the specific terms, schedules, and figures that apply to you are set by your own contract and the issuing insurer. All guarantees are backed by the claims-paying ability of the issuing insurer and are not FDIC-insured.
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