Annuity Features and Benefits
Expert-defined terms from the Advanced Certificate in Annuity Investments course at London School of Planning and Management. Free to read, free to share, paired with a globally recognised certification pathway.
Annuity Features and Benefits #
Annuity Features and Benefits
Annuities are financial products that offer a guaranteed income stream for a spe… #
Understanding the features and benefits of annuities is crucial when considering them as an investment option. Below are some key terms related to annuity features and benefits:
1. **Accumulation Phase** #
The period during which the annuity owner makes premium payments to the insurance company. The funds accumulate and grow tax-deferred until the annuitization phase begins.
2. **Annuity** #
A contract between an individual and an insurance company where the individual pays a premium or a series of premiums in exchange for regular payments in the future.
3. **Annuity Owner** #
The individual who owns the annuity contract and receives the payments from the insurance company.
4. **Annuity Period** #
The length of time over which the annuity payments are made. This can be for a fixed period, such as 10 or 20 years, or for the lifetime of the annuitant.
5. **Annuity Payout Options** #
The different ways in which annuity payments can be distributed to the annuitant. Common options include life-only, joint and survivor, period certain, and lump sum.
6. **Annuity Riders** #
Additional features or benefits that can be added to an annuity contract for an extra cost. Riders can provide benefits such as enhanced death benefits, inflation protection, or long-term care coverage.
7. **Deferred Annuity** #
An annuity where the annuitant delays receiving payments until a future date. During the accumulation phase, the funds in the annuity grow tax-deferred.
8. **Immediate Annuity** #
An annuity where the annuitant starts receiving payments immediately after purchasing the contract. This type of annuity is often used for retirement income.
9. **Joint and Survivor Annuity** #
An annuity payout option that provides income for two individuals, usually spouses, for their lifetimes. When one annuitant dies, the other continues to receive payments.
10. **Life #
Only Annuity**: An annuity payout option that provides income for the annuitant's lifetime only. Payments cease upon the annuitant's death, regardless of how much has been paid out.
11. **Period Certain Annuity** #
An annuity payout option that guarantees payments for a specific period, such as 10 or 20 years. If the annuitant dies before the period ends, payments continue to a beneficiary.
12. **Qualified Annuity** #
An annuity funded with pre-tax dollars, typically through a retirement account such as an IRA or 401(k). Taxes are deferred until withdrawals are made.
13. **Non #
Qualified Annuity**: An annuity funded with post-tax dollars. Taxes are deferred on the earnings until withdrawals are made.
14. **Surrender Charge** #
A fee charged by the insurance company if the annuity owner withdraws funds or surrenders the contract before a specified period, usually 5-10 years.
15. **Tax #
Deferred Growth**: The earnings on the funds in an annuity grow tax-deferred until withdrawals begin. This can help the funds grow faster than in a taxable account.
16. **Death Benefit** #
A feature of some annuities that guarantees a minimum payment to the beneficiary upon the annuitant's death. The amount can be a return of premium or a specified percentage of the account value.
17. **Guaranteed Minimum Income Benefit (GMIB)** #
A rider that guarantees a minimum level of income from the annuity, regardless of market performance. This can provide income security in retirement.
18. **Guaranteed Minimum Withdrawal Benefit (GMWB)** #
A rider that guarantees the annuity owner a minimum level of withdrawals, usually a percentage of the premium paid, regardless of market performance.
19. **Inflation Protection** #
A feature that adjusts the annuity payments for inflation to help maintain purchasing power over time. This can be important for long-term income needs.
20. **Long #
Term Care Rider**: A rider that allows the annuity owner to access a portion of the annuity funds for long-term care expenses without surrender charges or penalties.
21. **Principal Protection** #
Annuities with this feature guarantee that the initial premium paid by the annuitant will be protected, even if the investments in the annuity lose value.
22. **Riders** #
Additional features that can be added to an annuity for an extra cost. Riders can customize the annuity to fit the annuitant's specific needs and goals.
23. **Systematic Withdrawal** #
A method of receiving income from an annuity where the annuitant receives regular payments over a specified period, rather than a lump sum.
24. **Tax Efficiency** #
Annuities can provide tax advantages, such as tax-deferred growth and the ability to spread tax liabilities over time, making them a popular choice for retirement planning.
25. **Variable Annuity** #
An annuity where the value of the investments in the account fluctuates based on market performance. Variable annuities offer the potential for higher returns but come with more risk.
26. **Fixed Annuity** #
An annuity where the insurance company guarantees a fixed rate of return on the funds in the account. Fixed annuities provide stability and predictability of income.
27. **Indexed Annuity** #
An annuity where the interest rate credited to the account is tied to a specific index, such as the S&P 500. Indexed annuities offer the potential for higher returns than fixed annuities.
28. **Lifetime Income** #
Annuities are designed to provide a regular income stream for the rest of the annuitant's life, ensuring financial security during retirement.
29. **Market Risk** #
The risk that the value of the investments in the annuity will decrease due to market fluctuations. Variable annuities are subject to market risk.
30. **Withdrawal Penalty** #
A fee charged by the insurance company if the annuitant withdraws funds from the annuity before a specified period, typically 5-10 years.
Understanding the features and benefits of annuities is essential for making inf… #
Annuities offer a range of options to customize the contract to meet individual needs and goals, such as lifetime income, death benefits, inflation protection, and tax advantages. By carefully considering these features and benefits, investors can choose the annuity that best aligns with their financial objectives and risk tolerance.