Dictionary

The Fisher Agency

Danny Fisher, CLU, ChFC
President     1-800-822-1450

Financial Advisors Since 1975

13140 Coit Road, Suite 102  Dallas, TX 75240-5797

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Insurance Company
Insurance companies are the only financial institutions that may underwrite and issue annuity policies.  The department of insurance in each state must issue a license to the insurance company and their agents who solicit business in that state.  Anyone selling an annuity must be a licensed life insurance agent and be appointed by the insurance department with each company in every state in which they solicit business for that company.

Name of Annuity
Companies assign a marketing name to each of their annuities as a means of identification.

Policy Form Number
To be sold legally, an annuity must be filed with the department of insurance in each state in which sales are solicited.  The form number is the identifier by which each annuity is filed.   Policy features may vary by state.

Effective Annual Yield
Virtually every insurance company compounds and credits interest daily.  The rate shown is the effective annual yield after compounding the daily nominal rate.  Some companies pay a first year bonus on their interest to encourage new business.  The Effective Annual Yield (EAY) includes the bonus if it is Non-Forfeitable.  If the bonus is forfeitable for any reason, it is not included in the EAY as shown in the Fisher Annuity Index. 

Rate Bonus
Some annuities pay a bonus on the base rate.  For example, if the base rate is 6.00% and there is a 1.00% first year bonus, the EAY will be 7.00%.

Premium Bonus
Some annuities pay an upfront premium bonus.  For example, if the base rate is 6.00% with a 1.00% premium bonus, 7.06% will be shown as the Effective Annual Yield.

 Rate Bonus and Premium Bonus Comparison Chart

 

No Bonus2% Rate Bonus1% Rate Bonus and 
1% Premium Bonus

 Base Rate

6.00%6.00%6.00%

 Bonus Rate

02.00%1.00%

 Premium Bonus

001.00%

 Initial Amount Invested

$10,000$10,000$10,000

 Amount on Day 1

$10,000$10,000$10,100

 Amount After 1 Year

$10,600$10,800$10,807

 Effective Annual Yield for 1st 
 Year (EAY)

6.00%8.00%8.07%


Bonus Credited On
The annuity may pay a premium or rate bonus on different amounts. Some examples are: on the initial premium only, all new premium received in the first year only, or on all new premium received in all years.

Minimum Premium Amount
The minimum amount required to purchase an annuity varies by policy and company.  Although "minimum deposit amount" is a more accurate description and understood by more people, most insurance departments prohibit insurance companies from using the word ""deposit" in sales literature and require insurers to use the word "premium" for money placed in an annuity.

Initial Rate Period
The period of time, usually in years, that the company agrees to pay the initial rate.

Projected Average Yield
Average annual yield until surrender penalty expires.  For annuities that offer bonuses, this number represents the rate a non-bonus product needs to pay annually to produce the same yield over the surrender penalty period.

In our Top 10 pages, an italic  designation means the yields are not guaranteed.  For the MYGA or "CD-Type" annuities, the yields are guaranteed.

 No BonusWith BonusEquivalent Average Yield

Beginning Rate & Value

6%$10,000.006%+1% Bonus$10,000.006.19925%$10,000.00

 End of Year 1

6%$10,600.007%$10,700.006.19925%$10,619.92

Year 2

6%$11,236.006%$11,342.006.19925%$11,278.28

 Year 3

6%$11,910.166%$12,022.526.19925%$11,977.45

 Year 4

6%$12,624.776%$12,743.876.19925%$12,719.96

 Year 5

6%$13,382.266%$13,508.506.19925%$13,508.50

Projected Average Yield

6%6.19925%6.19925%


Minimum Rate Guarantee After Initial Period
This minimum rate guarantee serves two purposes:
1)  It provides a minimum interest rate a company may credit to an annuity after the initial rate period.  It is extremely rare for a company to ever pay the minimum interest rate.
2)  More importantly, it is the rate that insurance company actuaries use to calculate reserve requirements in order to meet state insurance laws.

Rate Subject To
After the initial rate period, the rate is subject to:

FLOAT: The rate may float, up or down, depending on the type of annuity, prevailing interest rates, and where the insurance company invested the money.

RANGE: Annuities with a bail-out clause will normally be found in this category. The bail-out rate is usually lower than the initial rate. It is a protection rate during a period of falling rates.  The rate normally floats within the range of the initial rate and the bail-out rate.

Most bailout rates are set on the annuity issue date.  For example, 1% below the initial crediting rate for the length of the surrender penalty period.  Some companies adjust the bail-out rate each year.  For example, 1% below the previous year rate.

FIXED: The rate is fixed during the time there is a surrender penalty. The rate will not go up or down during this time.  After the surrender penalty period, a new rate will be declared, normally the current rate offered on new money.

Annuity Funds Investment Type
The method used by the insurance company to set renewal rates after the initial rate period.

PORTFOLIO: Funds are pooled by type of annuity.  All annuities of the same type will earn the same rate, regardless of issue date, after the initial rate guarantee period.  Renewal rates may float up or down, depending on overall portfolio investment yield.

BANDED: Funds are pooled by rate and/or time period.  Old annuities, based upon the time period they were purchased, may earn a different rate from new annuities. The old rate may be higher or lower than new money.  Renewal rates will lag behind the market.  As interest rates go down, old money will generally earn more interest than new money.  Conversely, as rates go up, old money will earn lower interest than new money.  This can work to your advantage or disadvantage.

MYGA (aka "CD" Type): Multi-Year Guarantee Annuity: 100% of the value is available at the end of the initial guaranteed rate period or end of penalty period, whichever occurs first.  These annuities are also called "CD" type because 100% of the annuity value is available to be withdrawn at the end of the rate guarantee period.  Just like "Certificate of Deposits " in banks, at the end of the rate guarantee period, either the penalties expire completely or the policy owner will be given a window of time to renew it, remove it, or roll it over to a different annuity.

Free Annual Withdrawal Amount
The amount of money a policy owner may withdraw each policy year without incurring a surrender penalty. A few annuities are based on the calendar year. Some of the most common methods are:
1) 10% Account Balance: 10% of the current value, including principal and accumulated interest less previous withdrawals.
2) 10% Premium: 10% of all money deposited.
3) 100% Interest: All interest may be withdrawn.

Most companies have minimum withdrawal amounts, usually about $500 while maintaining a minimum account balance, normally about $5,000.

Free Withdrawals Per Year
The number of withdrawals allowed each policy year without incurring a penalty.  Most annuities allow for one free withdrawal per year.  Some allow more.  A few do not allow any free withdrawals.

Monthly Income Checks Available
Monthly income checks, usually for the monthly nominal interest earned, to the client or directly to the policyowners bank.  Income may also be sent by Electronic Funds Transfer with most companies.  The income may be started and stopped as the policyowner desires.  

Surrender Penalty
Penalty applied to any amount exceeding the Free Annual Withdrawal Amount or to multiple withdrawals within the same policy year if they are not allowed by the terms included in the policy.

In some cases, if the entire annuity is surrendered, the penalty will be applied to the full value of the annuity.

Some annuities include a Market Value Adjustment (MVA) if it is surrendered.
1) If the policy rate is higher than current rates on new money, a positive adjustment may be made in the cash value.  Therefore, if rates go down after the purchase date, the penalty will be less than shown. 
2) If the policy rate is lower than current rates on new money, a negative adjustment is made in the cash value.  Therefore, if rates go up after the purchase date, the surrender penalty will be higher than shown 

Penalty Applied From Date Of
The date the clock starts running for early surrender penalties.

POLICY: The penalty period begins on the date of the policy, not from the date of future premiums, if any are made.  All single premium annuities use this method and most flexible premium annuities.

PREMIUM: Some flexible premium annuity penalties are based on date of deposit,  not the date of the policy.  They generally use the First In First Out (FIFO) method to determine if a penalty is applicable.

Action @ End of Penalty Period
At the end of the surrender penalty period, some annuities require the policy owner to take action or decide what to do with the annuity.

NONE: After the end of the penalty period, no action is required.  The policyowner may leave the money in the annuity.  The annuity will continue to earn interest as declared by the company.

RRR: The policyowner will have three options at the end of the penalty period:

1)
Renew - the company will declare a new interest rate, usually at the rate paid on new annuities.  The annuity will begin a new penalty period.  This is the default option unless the owner elects one of the following options.

2)
Remove - the annuity may be surrendered for its cash value. Income taxes will be incurred on the interest earnings in the year received.

3)
Rollover - the annuity may be "rolled over" or "transferred" to another annuity with the same or a different insurance company on a tax-free exchange basis.

ANNUITIZE: The annuity must be paid out over a period of time to escape surrender penalties.

Action @ End of Rate Period
At the end of the initial rate period, some annuities require the policy owner to choose either a new rate period offered by the company or remain with the same rate period if no action is taken.  Surrender penalties still apply either from the original policy date or begin again with the renewal.

Penalty Waived With Pay Out Over
Most companies waive the surrender penalty if the cash value is paid out over a period of time or annuitized, usually five years or longer.

Penalty Waived @ Death Of
Most annuities waive surrender penalties in the event of death of the annuitant or some waive penalties at death of the owner.  Some waive penalties at the death of owner or annuitant.  A few annuities do not waive penalties at death of the owner or annuitant.

Medical Waiver Bail-Out
Some annuities include a Bail-Out clause which waives early surrender penalties in some medical circumstances, such as total disability or nursing home confinement.   Typically, there is a 30 to 90 day confinement clause.

Sales & Maintenance Fees
There are no front-end sales charges with most annuities.  If $10,000 is deposited into an annuity, the full $10,000 will be earning interest.  100% of the money is at work.  However, a few annuities charge annual maintenance fees which  are very low, generally less than $30 per year. 

Additional Premiums Allowed
If additional premiums (deposits) are allowed to the same annuity, there will be a minimum amount stated in the policy, normally about $50 to $100.

SINGLE PREMIUM DEFERRED ANNUITY (SPDA): Only one premium is allowed to this type of annuity.  It is extremely rare for SPDA's to allow more than one deposit. If additional deposits are allowed, they must usually be made within the first policy year.

FLEXIBLE PREMIUM DEFERRED ANNUITY (FPDA): Policyowners may make additional deposits to their annuity in the future if they desire to do so. 

METHOD OF ADDING MONEY:
1) Monthly
a) Monthly Statements
b) Automatic Bank Draft
2) Quarterly
3) Semi-Annually
4) Annually
5) Irregular - at any time

Maximum Issue Age
The maximum age of the owner and/or annuitant at time of policy issue.  Usually, this is based upon attained age as of the last birthday, not nearest age.

Maximum Annuitization Age
The insurance company may declare the maximum age that the annuitant may attain without annuitizing or cashing in the annuity. There is no maximum annuitization age under current IRS Tax Codes for Qualified or Non-Qualified money.  Although, qualified money must begin distributions at age 70 , it does not have to be annuitized to do so.

Days Rate Held on Rollovers
If you rollover an existing annuity to a new annuity with a different insurance company, the new company will normally hold the rate for a period of time.  If the money is not received from the old company within that period, the new annuity will receive the rate in effect on the date the money is received.

Interest Rate History On New Premium
This is one of the best gauges to use when comparing companies.  The history shows how the rate for different annuities has varied on new money over the last few months.  The purpose of this information is to compare a company's rate to other companies for the same time period.

It is important to know if a company is normally competitive, or if they jump up with a high interest rate to buy money for some reason. It's just as important to know if a company consistently offers lower interest rates.  This could mean they really aren't serious annuity competitors, but devote their primary marketing efforts to other areas of the life insurance business. 

Tax Status of Annuity
Annuities may be purchased with two types of money:

NON-QUALIFIED: Purchased with After-Tax dollars.  Income taxes have already been paid on the principal.  Sometimes referred to as "just plain old money."

QUALIFIED: Purchased with Pre-Tax dollars.  Income taxes have never been paid on this money, such as an: IRA, TSA (403b), SEP, or Pension Plan.

Parties to the Annuity: All annuities will have three parties named in the annuity application:
1) OWNER: This is the person or organization that owns and is in control of the money in the annuity.  Whenever possible, it is always recommended that the owner and annuitant be the same person.  Joint ownership is normally not recommended.

2) ANNUITANT: Must always be a natural person and is used as the measuring life in "traditional" annuities, the most common form.

3) BENEFICIARY: Upon death of the annuitant (in the "traditional" form), the full value is paid to the stated beneficiary, normally without surrender charges.  In most cases, this avoids the delays, expenses, and frustrations of probate.  It's easy to change beneficiaries in the future as desired.

     a) Primary Beneficiary: The natural person (s) and/or organization (s) who will receive the proceeds.  Multiple beneficiaries may be named to share as directed.

     b) Contingent Beneficiary: The natural person (s) and/or organization (s) who will receive the proceeds if the primary beneficiary dies before the annuitant. Multiple beneficiaries may be named to share as directed.

If there are multiple beneficiaries, specific percentages may be applied to each one.  

Two important beneficiary descriptions are:
     1 - To Share Equally or Survivor:  If a named beneficiary predeceases the owner/annuitant, the remaining beneficiaries share equally.

     2 - To Share Equally PER STIRPES (by line of descent):  If a named beneficiary predeceases the owner/annuitant, the children of that beneficiary will receive his/her share.  If that beneficiary does not have any children, the remaining beneficiaries will share the proceeds proportionately.

Option: 
CONTINGENT OWNER: The person or organization that inherits the "policy" at the death of a natural person owner.  Sometimes called the Owner's Beneficiary.

Types of Annuities: 

IMMEDIATE ANNUITY: An irrevocable decision is made immediately as to when income will begin, under which income option, and the frequency of receiving payments.

DEFERRED ANNUITY: The decision on selecting an income option, beginning date, and frequency of receiving payments is deferred to the future. Some of the income options are:
1) Interest Only
2) Fixed Period Certain - No Life Contingency
3) Fixed Period Certain - With Life Contingency
4) Life Only - With NO Period Certain

Types of Annuities by Registration Requirements:

VARIABLE: The value of the annuity is variable and can be compared to a mutual fund with multiple investment options.  The appreciation or depreciation of this type is totally dependent on market conditions.  The policy owner accepts all investment risks inherent in this type of annuity. It is possible to lose principal in a variable annuity.

FIXED: The principal is fixed and is guaranteed not to vary in value due to market conditions.  It will increase in value as interest earnings accumulate.  The insurance company accepts all investment risks in fixed annuities and guarantees the safety of the principal and earned interest credited to the policy owner.

INDEXED: This type of annuity combines the basic elements of both variable and fixed annuities.  The annuity interest earnings are variable because they are linked to a percentage of increase in an index, such as the Standard & Poor's 500 Composite Stock Price Index (S & P 500).  This percentage is called the Participation Rate and may be guaranteed for the term of the annuity or adjusted each year.  The principal is fixed because the annuity offers a 100% money-back guarantee at the end of each term.

If the S & P 500 Index goes up, so do interest earnings.  If it declines, the insurance company guarantees the principal and the policy owner accepts the risk of an unknown interest yield based on the growth or decline of the S & P 500 Index.  

Indexed annuities are found in a special section of the Fisher Annuity Index.