Annuities Overview

Types of Annuities

If you're looking ahead to your retirement years, you may want to consider an annuity as part of your overall strategy. Annuities were designed to help you save, grow and protect your retirement assets, as well as provide a stream of steady income payments that will last as long as you live.

Here are the three main types of annuities.

Annuities Glossary

After Tax Savings

Term used to describe investments or contracts purchased with money that has already been taxed. Also known as "non-qualified" investments or contracts.

Annuitant

The person on whose life the annuity income payments are based. The contract owner decides who the annuitant will be. The contract owner and the annuitant are often the same person.

Annuitize

To convert the account balance under a deferred annuity contract into a stream of income, either for one or more lifetimes or a specific period of time for you or you and another person.

Annuity

A tax-deferred contract issued by an insurance company that can provide an income for a specified time period, such as a number of years or for life. There are two types of annuities: deferred annuities, which allow you to grow your assets tax deferred and convert your account balance to income payments at a later date, and immediate annuities, which generally allow you to receive income payments right away (but no later than 12 months after issue).

Asset Allocation

A financial strategy for investing money into various asset classes — such as stocks, bonds and cash — based upon your financial goals, risk tolerance and time horizon. Asset allocation has two main advantages: it can help increase investment returns and reduce risk.

Beneficiary

Generally, the person(s) who receive(s) money upon the death of the annuity's contract owner or annuitant. The contract owner decides who the beneficiary will be.

Contract Owner

The person(s) or entity who purchases the annuity and has all rights to the contract. This person can do things such as make withdrawals, name the annuitant (usually the contract owner) and the beneficiary, and in a variable annuity such as the Preference Plus Select, make investment decisions and transfer money among funding options.

Death Benefit

The guarantee that if you should die before you convert your variable annuity into regular income payments (annuitize your contract), your annuity's beneficiaries will receive the higher of the account value or a different amount specified in the deferred annuity (such as the amount you contributed to the annuity, less withdrawals). A variable annuity may offer additional guarantees that help protect the death benefit against market downturns.

Deferred Annuity

A type of personal retirement account issued by an insurance company that provides tax-deferred savings for long-term goals, such as retirement. When you are ready to receive income payments, the deferred annuity provides many choices, including guaranteed income for life. There are two types of deferred annuities: fixed and variable.

Deferred Income Annuity

A type of Deferred Annuity that offers limited flexibility during the deferral or savings phase (e.g., limited or no availability of withdrawals) in return for guaranteed payments during the income phase. Sometimes called "longevity insurance."

Diversification

A financial strategy to help reduce risk by spreading your assets across different asset classes, such as stocks and bonds, or across different types of securities within the same asset class. For example, you can diversify your stock holdings into stocks of different industries.

Fixed Deferred Annuity

A tax-deferred annuity that guarantees you will earn stated or declared rates of return during the savings phase. When you convert this money into income payments, you will receive a fixed amount of income on a regular schedule. You may also generally be able to receive a lump sum at retirement in lieu of income payments.

Flexible Premium Annuity

A deferred annuity that accepts multiple purchase payments, which can usually be made at any time (as opposed to a single premium).

Free Look Period

Period of time after an annuity contract is delivered (usually between 10 and 30 days) when the owner may cancel the contract and receive either their initial payment or the current value of the annuity contract. State rules vary.

Immediate Annuity

An annuity contract that you generally buy with a lump sum and from which you begin receiving income within a short period, always within 12 months. An immediate annuity can be either fixed or variable. Payments must be no less frequent than annual. Often called an "income annuity."

Income Options

The various ways to receive income payments that an annuity contract offers. Many annuities offer a variety of options you can choose from, including guaranteed income for life.

Income for a Guaranteed Time Period Annuity

An annuity income option that guarantees payments for a specific time period, usually from 5 to 30 years*. If the annuitant dies before all payments have been made, then the owner (or beneficiary if the owner is deceased) will receive the balance of payments for the rest of the guaranteed period. You may be able to choose fixed or variable payments, depending on the annuity. Sometimes called a Period Certain.

Income for Life Annuity

An annuity income option that guarantees income for the life of the annuitant, no matter how long he/she lives. The amount of the payment depends on your account value and the life expectancy of the annuitant. The payment amounts may be fixed or variable, depending on the annuity.

Income for Life with a Guaranteed Time Period Annuity

An annuity income option that guarantees payments for the annuitant's life, with a guaranteed number of years**. If the annuitant dies during the guaranteed period, payments will continue to the annuity's owner (or beneficiary if the owner is deceased), for the remainder of the period. Many annuities also offer this option for the lives of two annuitants. You may be able to choose fixed or variable payments, depending on the annuity. Sometimes called Life With Period Certain, or Life With [X] Years Period Certain.

Income For Two Lives Annuity

An annuity income option that guarantees income for the lives of two annuitants. After one annuitant dies, payments continue if the other annuitant is alive. Payments stop once both annuitants are no longer alive. Payments after the first annuitant's death may be the same, or lower, depending on what was selected at the time of purchase. You may be able to choose fixed or variable payments, depending on the annuity. Sometimes called Joint and Survivor.

Individual Retirement Account/Annuity (IRA)

An IRA is a type of account to which individuals with earned income (and their non-working spouses) can make tax-deductible contributions up to a specified maximum amount. Growth within the account is tax-deferred; however, withdrawals are generally taxed as ordinary income. A 10% tax penalty generally applies to withdrawals prior to age 59½. Withdrawals must begin by the April 1st following attaining age 70½. Eligibility to contribute and deduct contributions from taxable income is subject to rules based on such things as earned income, age and participation in employer-sponsored retirement plans. Often called a "Traditional IRA." (See also Roth IRA)

Non-Qualified Annuity

A tax-deferred annuity generally purchased by individuals with after-tax dollars, rather than as part of a tax qualified retirement plan such as an IRA.

Prospectus

The legal document that provides detailed information about your variable annuity contract. It must be given to every person who is offered to buy a variable annuity contract.

Purchase Payments

The contribution(s) made to an annuity. Some annuities allow you to make a single contribution, and some allow you to make multiple contributions on a regular basis, or anytime you like.

Qualified Annuity

An annuity contract you generally buy with pre-tax dollars as part of a tax-qualified retirement plan.

Renewal Rate

The new declared interest rate for money that has completed the initial guaranteed interest rate period. In a fixed deferred annuity, for example, the interest rate on your contract may be renewed periodically, usually every year, to reflect current market conditions.

Roth IRA

A Roth IRA is a type of IRA where your contributions are not tax-deductible but withdrawals are tax-free after age 59½ (assuming certain conditions are met). Like a Traditional IRA (see "Individual Retirement Account/Annuity"), your eligibility to contribute and contribution limits are based on earned income and age. Unlike a Traditional IRA, no withdrawals are required at age 70½.

Surrender Charge: — See Withdrawal Charge Tax-Deferred

In a tax-deferred investment such as an annuity or a Traditional IRA, no current tax is payable on gains within the investment; no taxes are due until you make withdrawals. This is different from Tax-Free, where withdrawals are not taxable, as with a Roth IRA.

Tax-Deferred

In a tax-deferred investment such as an annuity or a Traditional IRA, no current tax is payable on gains within the investment; no taxes are due until you make withdrawals. This is different from Tax-Free, where withdrawals are not taxable, as with a Roth IRA.

Tax-Free Transfers

The ability to move money between the investment choices and fixed account within a variable annuity without incurring current taxes. In most annuities, these transfers are free of charge. However, additional restrictions may apply.

Tax-Sheltered Annuity

A tax-deferred annuity available only to employees of schools, nonprofit hospitals and certain other tax-exempt organizations in which your contributions are made through payroll reduction on a pre-tax basis (up to certain limits). All earnings grow tax deferred until such time as you make any withdrawals. Often called a 403(b) annuity.

Variable Annuity

A type of annuity in which the account balance may fluctuate based on the value of underlying investments such as stocks and bonds. The contract owner has the ability to allocate money among several available investment choices. The contract owner, not the insurance company issuing the contract, assumes investment risks.

Variable Immediate Annuity

An income annuity that begins providing income payments right away, or soon after purchase. The amount of the payments may increase or decrease based upon the performance of the investment choices that you select.

Withdrawal Charge

The charge imposed by an annuity issuer for early withdrawal. The withdrawal charge will be described in the annuity contract. Most annuities allow some withdrawals without this charge (10% of your balance each year is typical). Withdrawal charges also typically decline over time, eventually reaching zero.

Withdrawals