Safe Money Glossary
Section 1035 Exchange
Section 1035 is the IRS rule that allow for the exchange of one insurance or annuity policy for another insurance or annuity policy without triggering a taxable event. Properly executed, a 1035 exchanges allows the tax-deferred buildup inside of a policy to continue its tax deferral in the new policy.
4% Rule
The 4% Rule is a rule of thumb that may be used by retirees to decide how much they should withdraw from their retirement funds each year. At retirement, one would withdraw 4% of their retirement portfolio adjusted for inflation each year. While designed to allow a retiree to receive income for 30 plus years, it does not guarantee that you will not run out of money during retirement.
Accumulation Phase
The accumulation phase is the period of time that the owner allows an annuity to grow before receiving benefits or starting lifetime income.
Activities of Daily Living (ADLs)
Activities of daily living are activities related to personal care. Many annuities offer liquidity or enhanced benefits if the owner cannot perform 2 of 6 ADLS. The six are bathing, dressing, eating, transferring, toileting, continence.
AM Best
AM Best is the largest credit rating agency in the world specializing in the insurance industry. I only recommend companies with an AM Best rating of at least A-.
Annuitant
The annuitant is the person whose life determines annuity payouts.
Annuity
An annuity is an insurance policy in which you make a lump sum or series of payments to an insurer, who then provides a lump sum or periodic payments to you immediately or at some point in the future. An annuity is a financial product typically used by retirees that offers a guaranteed income stream.
Annuity owner
The annuity owner owns an annuity and has the authority to make any changes. The owner can name the annuitant, the beneficiary, and the payee of any income payments. The owner also decides when to withdraw money from the annuity, exercise any benefits available under the contract, annuitize the annuity, or terminate the annuity and receive its cash value.
Beneficiary
The beneficiary is designed by an annuity owner to receive any remaining policy values or income payments upon the death of the owner. A beneficiary could be a natural person, or a non-natural person like a trust or a charity.
Cap
A CAP in an annuity contract is the maximum interest rate a crediting strategy inside a fixed index annuity may earn at the end of the selected crediting term. The Cap is typically reset at the start of each crediting term.
Cash Surrender Value
An annuity's cash surrender value is the amount of money the owner would receive if the policy was cancelled.
Cost Basis
The cost basis is your original premium amount. Cost basis is generally considered after-tax dollars so you do not pay tax when the cost basis is withdrawn from an annuity.
Crediting Method
A crediting method in a fixed indexed annuity refers to how interest is calculated and is generally a fixed rate or point to point method.
Crediting Term
The crediting term is the period of time that an index is measured to determine interest credits for that term. The most common crediting term is one year but crediting terms up to five years are available.
Death Benefit
An annuity death benefit is a lump sum payment of any remaining balance or income paid to the beneficiary upon death of the owner.
Deferred Annuity
A deferred annuity is a contract with an insurance company that promises to pay the owner a regular income, or a lump sum, at some future date. Deferred annuities allow your principal to increase before you begin to receive the stream of payments.
Delivery Receipt
A policy delivery receipt is signed by the policy owner to acknowledge that the policy has been received. Policy delivery also starts the insured's free look period where the owner can decide if she wants to keep the policy
Earnings-Indexed Income Payments
Earnings-indexed payments are income payments from an income rider that can increase based on any interest credits applied to the annuity's accumulated value.
Exclusion Ratio
A SPIA offers tax advantages by utilizing what’s called an exclusion ratio to spread the gains in the contract over its life. With an immediate annuity, taxes due on earnings (gains) in an immediate annuity are spread out over the life of the policy so each payment is part gain and part is a return of your own money. The part that is a return of your own money is EXCLUDED from taxes. The exclusion ratio is calculated by dividing the premium by the expected return and is expressed as a percentage. So if an immediate annuity purchased for $100,000 provided 20 annual payments of $10,000 totaling $200,000; then the exclusion ratio would be 50% and $5000 of each payment would be taxable and $5000 of each payment would be a return of principal. If an immediate annuity is funded with an IRA, 401k, or other types of qualified money, the exclusion ration is ZERO as all payments are taxable.
Fixed Indexed Annuity
A fixed indexed annuity is a type of annuity that pays an interest rate based on the performance of one or more a specified market indices, such as the S&P 500 while offering protection of principal. Owners participate in some of the gain of the index(es) selected but incur no losses to the index.
Free Look
A contract provision that provides the owner a specific period of time (usually 10-30 days) to cancel an annuity policy and receive a full refund.
Free Withdrawal
A free withdrawal is the amount that can be withdrawn from an annuity during the surrender period without being charged any fees or penalties.
Full Retirement Age
Full retirement age is the age you must reach to be eligible to receive full benefits from Social Security. This age can vary depending on when you were born. The primary insurance amount is the amount you would receive at your full retirement age.
Guaranteed Lifetime Withdrawal Benefit (GLWB)
A guaranteed lifetime withdrawal benefit rider guarantees a retirement income for life even if the annuity runs out of money.
Immediate Annuity
An immediate annuity is designed to provide income payments for life or a set period of time in exchange for an initial lump-sum premium. They’re called “immediate” annuities because you must begin receiving annuity income payments within one year of purchase. Immediate annuities, also called single premium immediate annuities or SPIAs, should be considered anytime you want to create or replace an income stream for a variety of reasons. While the most popular option is lifetime income with a certain number of payments guaranteed, immediate annuities can be used to create an income stream for a certain period of time, for one’s lifetime, or a combination of life and a guaranteed number of payments.
Income Base
Used with deferred annuities that offer an income rider. The income base is the amount that guaranteed lifetime withdrawal benefits are based.
Income Base Bonus
If offered, an income base bonus adds a percentage of the original contribution (premium) to the initial income base.
Income Gap
An income gap exists if your monthly income does not cover your essential expenses in retirement. A safe money strategy would use Social Security benefits, any pension benefits and annuities to fill an income gap.
Income planning
Income planning is a critical subset of retirement planning that focuses on the income you’ll need in order to live the life you want in retirement. Income planning identifies your needs, wants, and wishes in retirement and matches your sources of income with your projected budget. A properly designed income plan should address longevity, inflation, market volatility, and taxes.
Income Rider
The income rider (guaranteed lifetime withdrawal benefit) guarantees a retirement income for life even if the annuity runs out of money.
Income Rider Multiplier
Increases to an income rider base that can increase based on the performance of the annuity's underlying indexes.
Index Crediting Method
The method used to determine how interest is credited to fixed index annuities. The most common crediting strategies are caps, participation rates, and spreads.
Inflation adjusted income
An inflation-adjusted payment option has the potential to increase income over time based on changes to the CPI-U index.
Inflation Risk
Inflation risk is the risk that your income will not keep up with the increasing costs of maintaining your lifestyle.
Joint annuitant
A joint annuitant is an added person, usually a spouse, who can lengthen a guaranteed payout period by providing guaranteed payments over two lives instead of one.
Level income
A level income payment does not change and is guaranteed for life.
Life With Cash Refund Annuity
A life with cash refund option would make a monthly or annual payment for as long as the annuitant lives. However, if the annuitant dies before all of the premium has been paid in income, then the difference would be paid to the beneficiary as a lump sum.
Life With Installment Refund Annuity
A life with installment refund annuity will pay an amount for as long as the annuitant is alive. However, if the annuitant dies before the original premium is paid out, then the policy would continue to make payments until all premium received has been distributed to the payee or the owner’s beneficiary.
Life With Period Certain Annuity
A life with a period certain annuity will pay a specific amount on a monthly or annual basis for as long as the annuitant is alive but also guarantee that a certain amount or number of payments will be paid if the annuitant dies early.
Lifetime Income
Annuities offer lifetime income that can guarantee that you never run out of money.
LIFO
LIFO means Last In, First Out tax treatment. The tax treatment for withdrawals from deferred annuities issued after XXXX are taxed last in first out, meaning that earnings in the annuity contract are withdrawn first - and subject to income taxation - before the cost basis is withdrawn tax free. Immediate annuities are not subject to LIFO tax treatment due to the exclusion ratio.
Longevity Credits
Longevity credits allow insurance companies to make annuity payments to those that live longer than normal at the expense of those who die early. Mortality credits are created when people die sooner than expected and don't receive as many income payments as they would have if they had lived their full life expectancy. That money goes into a pool that will then pay lifetime income to those people who live longer than their life expectancy, thus creating longevity credits.
Longevity Risk
Longevity risk is the chance that you outlive your money.
Multi-year Guarantee Annuity (MYGA)
A fixed interest deferred annuity that offers a guaranteed interest rate for a specified period of time.
Nursing Home Waiver
Nursing home waiver allows annuity owners to receive annuity funds without surrender penalties if confined to a nursing home facility.
Participation Rate
A participation rate is a percentage of total index gain that would be credited to the policy at the end of a crediting term.
Pension Buyout
A pension buyout occurs when a company wants to relieve itself of future pension obligations (and costs) of a pension plan by offering a lump sum to participants in the plan. Many companies will offer a lump sum that should represent the present value of future income payments for the employee to manage. So the retiree, or soon to be retiree has a retirement nest egg either through IRAs, 401ks or a pension buyout that they need to provide income for their retirement. If the person wants to start a lifetime income within one year, they should consider what a SPIA could do for them. And that’s providing a guaranteed reliable income for themselves or themselves and a spouse for as long as either of them is alive.
Period Certain Annuity
The simplest type of immediate annuity is a period certain annuity. These can have a term as low as 5 years or for 30 years or more. The buyer gives a lump sum to an insurance company, and in return they will receive an annual or monthly payment for the term they chose. The payments are fully guaranteed to the payee (usually the owner) for the term selected. If the payee dies during the term, any remaining payments continue to be paid to the owner’s beneficiary until all remaining payments have been made. Payments end at the end of the term and the contract is completed.
Positive Zero
When the index value inside a fixed index annuity is higher at the end of the crediting term, you get credited with some of the gain. When the index value is lower at the end of the crediting term, you receive what I call a Positive ZERO - you did not make any money but you not only did not make money that year, but you keep what you already earned.
Premium Bonus
Some annuities offer a premium bonus based on a percentage of premium paid into the annuity at policy issue. The premium bonus is immediately credited to the contract's accumulated value. Most annuities that offer a premium bonus include a vesting schedule that allows the premium bonus to be credited to the cash surrender value over a number of years.
Primary Insurance Amount (PIA)
The Primary insurance amount is the Social Security benefit a person would receive if he/she elects to begin receiving retirement benefits at his/her normal retirement age.
Protected Lifetime Income
Protected lifetime income is income in retirement that you can count on for the rest of your life. Protected income provide a floor of safe, guaranteed income to meet essential spending needs. Protected income includes Social Security and pensions. Annuities are a key component in creating protected lifetime income.
Roll-up Rate
A rollup rate on the fixed index annuity refers to the percentage increase that the income base is guaranteed to grow and is guaranteed at policy issue.
Roth Conversion
A Roth conversion is the process of repositioning your assets in a Traditional IRA or qualified employer sponsored retirement plan (QRP), such as a 401(k), 403(b), or governmental 457(b) to a Roth IRA.
Roth IRA
A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. Instead of receiving a tax deduction, your contributions and earnings can grow tax-free, and you can withdraw them tax-free and penalty free after age 59½ and once the account has been open for five years.
Rule of 100
The Rule of 100 determines the percentage of stocks you should hold by subtracting your age from 100. If you are 60, for example, the Rule of 100 advises holding 40% of your portfolio in stocks
Rule of 72
The Rule of 72 is a simplified formula to determine how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, equals a rough estimate of how many years it will take for the initial investment to double.
Spread
A spread is an interest crediting method used with fixed index annuities. A insurance company will declare a spread for a crediting term. The indexed interest is determined by subtracting a percentage from any gain (spread) the index achieves in a specified period. For example, if an annuity has a spread of 3% and the index increases by 7%, then the annuity is credited 4% interest for the crediting period.
Stacked Rollup Rate
An income base in a fixed indexed annuity is one factor used to determine lifetime income benefits. In addition to a level rollup rate, some annuities offer a stacked rollup rate. In return for a lower guaranteed rollup rate, the insurance company agrees to add or “stack” all of the client’s interest/index credits on top of the guaranteed amount. This could potentially net a much higher roll-up than a fixed roll-up rate.
Suitability
Protected lifetime income is income in retirement that you can count on for the rest of your life. Protected income provide a floor of safe, guaranteed income to meet essential spending needs. Protected income includes Social Security and pensions. Annuities are a key component in creating protected lifetime income.
Surrender Charges
A surrender charge is a penalty that an annuity owner pays if they terminate their policy before the end of a specified term or withdraw more than a free withdrawal provision. Surrender charges are in place to help insurance companies design better products knowing there are penalties for early withdrawals. This allows companies to offer higher interest rates and higher caps and participation rates on annuities.
Systematic Withdrawal Plan (SWP)
A systematic withdrawal plan (SWP) is a scheduled withdrawal on a regular basis based on a fixed amount or a percentage of the asset being withdrawn. A SWP is often used for retirement. The primary drawbacks to systematic withdrawals is exposure to market risk, may generate less income in a down market and does not protect against running out of money.
Tax Deduction
A tax deduction is an amount that is subtracted from a taxpayer’s income before taxes are calculated. Taxpayers may use the standard deduction or may itemize deductions if allowable itemized deductions exceed the standard deduction.
Tax Deferral
Tax deferral allows funds in certain plans like annuities and qualified accounts like IRAs to earn interest, dividends, or other capital gains without taxation until the funds are withdrawn. This allows money to earn interest on the principal, earn interest on the interest, and earn interest on what would otherwise be paid in taxes.
Temporary Life Annuity
A temporary life annuity makes a guaranteed number of payments for a specific term however if the payee dies before the end of the term, the payments stop. Because there is now a mortality factor involved, the premium required to make the payment would be slightly less than a period certain.
Triple Compounding
Triple compounding through tax-deferral allows money to earn interest on the principal, earn interest on the interest, and earn interest on what would otherwise be paid in taxes.
Variable Annuity
A variable annuity is a financial product that offers the potential to grow your money through various investment options called sub-accounts but also participates in market losses. Variable annuities, like all annuities offer the option of receiving protected income. TIAA Cref introduced the first variable annuity in 1952 for school teachers and grew in popularity after the introduction of mutual funds. A variable annuity is like a basket of mutual funds, called sub-accounts, inside of an annuity wrapper. It’s the annuity wrapper that gives the funds tax deferral and income benefits. The great news about variable annuities is that when the funds do well, you do well. But when the funds lose money, you also lose money. The other knock on variable annuities are their high fees.
Waivers
Waivers are optional benefits that provide benefits or you or your beneficiary.