“Does that make sense?” Raise your hand loud and proud if someone has ever said this to you and you answered “Yeah, of course,” when you really had no clue what was being said. I am guessing there are quite a few hands up right now. I know I am guilty. Why are we so afraid of admitting that we don’t understand something? Here are some of the essential terms you need to know about annuities so you can spend more time understanding and less time Googling. Understanding what is being said is important. You know what I mean, right?
- Annuity: is a contract between you (annuity owner) and an insurance company. You purchase the annuity (the amount you spend is called “premium”) from an insurance company that promises to provide a series of income payments to you over time, typically at retirement. You also have the option for a lump sum distribution.
- Annuity Owner: the entity who arranges and pays for the annuity. The owner receives the money from the annuity and is responsible for any tax-related matters. The owner can be a living person or a non living entity such as a trust or organization.
- Annuitant: the person that is the measure of life for the policy. Policy benefits that are based on an age will use the age of the annuitant and their death triggers the death benefit of the policy. Normally the owner and annuitant are the same person unless the owner is a non living entity.
- Immediate Annuity: provides income payments that normally begin within a year after the premium is paid.
- Deferred Annuity: provides income payments that begin later, often after many years. Deferred annuities are designed for long term retirement accumulation.
- Tax Deferred Growth: interest credited to an annuity is not subject to taxation until it is withdrawn from the annuity. This allows the owner to potentially pay less in taxes on the interest if in retirement they are in a lower tax bracket than they were when working.
- Tax Qualified: this means that the annuity received a tax benefit in addition to the tax deferred growth. The available advantages are contributing money pre-tax to the annuity via salary reduction, receiving a tax deduction for the contribution or in the case of Roth receiving the interest tax free.
- Non-Qualified: means that the annuity is purchased using after tax dollars and grows tax deferred. These are dollars that you have earned and already paid taxes on.
- Suitability: a process that your adviser and the insurance company use
to make sure that the sale of the annuity to you is suitable and follows industry rules and regulations. - Accumulation Phase: the period of time before income is taken from the annuity. During this time, the accumulation value grows on a tax-deferred basis. For annuities that allow additional premiums (called “flexible” annuities), the annuity owner can continue to pay into the annuity.
- Joint Life Annuity: an annuity that is set up to pay a continuing income to a spouse after the annuitant’s death.
- Beneficiary: the person (or people) chosen by you, the annuity owner, who will receive the proceeds of the annuity policy upon the death of the annuitant.
Not understanding industry lingo is a common occurrence but we want to make sure you have the knowledge you need. Does that make sense?
TC114531(0520)P