Annuity A–Z
Annuity A–Z explains the words you will meet in annuity contracts, sales illustrations and disclosure forms, in plain English and based on materials from regulators such as the SEC, FINRA, the NAIC and the IRS. It is general information, not financial, insurance, tax or legal advice, and it never rates or recommends any product or insurer. For help with your own situation, contact your state insurance department or talk with a licensed professional or tax adviser who has seen your full contract.
- 1035 exchange
- A swap of one annuity (or life insurance or endowment policy) for another without triggering tax at the time, named for the section of the federal tax code that allows it. IRS Publication 575 (for 2025 returns) says no gain or loss is recognized on an annuity-for-annuity exchange if the annuitant stays the same, and partial exchanges must move directly between insurers. A tax-free exchange can still restart a surrender charge period, so regulators urge a careful side-by-side comparison first.
- Related:ReplacementSurrender periodBuyout offer
- Accumulation phase
- The period in a deferred annuity when you pay in money and it grows before income payments begin. Depending on the type of annuity, growth comes from a declared interest rate, index-linked credits or the performance of chosen investment options, generally tax-deferred.
- Related:Deferred annuityAnnuitizationTax deferral
- Annuitant
- The person whose life expectancy determines the payout benefits of an annuity, as FINRA puts it. The annuitant is often, but not always, the same person as the contract owner, who pays the premium, makes withdrawals, changes beneficiaries and can surrender the contract.
- Related:AnnuityDeath benefitPayout option
- Annuitization
- Converting an annuity's value into a stream of regular income payments for life or for a set period. FINRA notes the decision is generally irrevocable: you give up control of the money in exchange for the insurer's promise of steady income, and in general you cannot withdraw from the account once payments start.
- Related:Payout optionAccumulation phaseImmediate annuity
- Annuity
- A contract with an insurance company: you pay a lump sum or a series of payments, and the insurer agrees to make periodic payments to you starting now or at a future date. Annuities can also offer tax-deferred growth and a death benefit, but every promise depends on the insurer's ability to pay.
- Related:Immediate annuityDeferred annuityFinancial strength
- Best interest standard (annuity sales)
- The rule in the NAIC Suitability in Annuity Transactions Model Regulation (#275, as revised in 2020) that an insurance agent recommending an annuity must act in your best interest without putting the agent's or insurer's financial interest ahead of yours. The model breaks this into care, disclosure, conflict-of-interest and documentation obligations, including making reasonable efforts to learn your age, income, financial situation, needs and goals before recommending anything. Each state decides whether and how to adopt it, so check with your state insurance department.
- Related:Regulation Best Interest (Reg BI)Material conflict of interestInsurance producer (agent)
- BrokerCheck
- FINRA's online tool for checking whether a broker is licensed and whether they have a history of complaints. It is especially relevant for variable annuities and RILAs, which are securities regulated by the SEC and FINRA; the SEC's Investor.gov offers a similar search that shows registration and any disciplinary history.
- Related:Insurance producer (agent)State insurance departmentRegulation Best Interest (Reg BI)
- Buffer
- A protection option in many registered index-linked annuities: the insurer absorbs index losses up to a set percentage, and you absorb any loss beyond it. In an example in the SEC's July 31, 2020 indexed annuity bulletin, a 10% buffer and a 12% index drop leave you with a 2% loss, before surrender charges or other adjustments.
- Related:FloorRegistered index-linked annuity (RILA)Cap rate
- Buyout offer
- An offer from an insurer to an existing variable annuity owner to add money to the contract value in exchange for giving up a benefit, or to increase the cash surrender value if the owner surrenders the contract. FINRA warns that accepting can mean losing benefits you have been paying for, and moving the money into a new annuity can bring a new surrender period and higher fees.
- Related:Living benefit1035 exchangeReplacement
- Cap rate
- The maximum return an indexed annuity or RILA will credit for a crediting period, no matter how much the index rises. If an index gains more than the cap, you receive only the cap; the SEC notes insurers commonly reserve the right to change caps and similar features periodically, so check how and when yours can change.
- Related:Participation rateSpread (margin or asset fee)Implicit costs
- Commission
- Pay that an agent or broker receives for selling an annuity or insurance policy, whether it comes from the insurer, an intermediary or you. The NAIC's best-interest model regulation requires agents to disclose the sources and types of cash and non-cash compensation they receive, and the SEC notes that contract fees may fund the seller's compensation, which can be higher for some products than others.
- Related:Material conflict of interestSurrender chargeBest interest standard (annuity sales)
- Death benefit
- The amount paid to your beneficiary if you die, typically before income payments begin. In many variable annuities it is the greater of the account value or a guaranteed minimum such as total purchase payments minus withdrawals; FINRA cautions that other annuity types may not provide any such guarantee, and some payout options stop entirely at death.
- Related:Stepped-up death benefitPayout optionRider
- Deferred annuity
- An annuity bought with a single payment or payments over time, where income starts at a future date rather than right away. The time in between is the accumulation phase, and most deferred annuities let you withdraw money before then, subject to possible surrender charges, adjustments and taxes.
- Related:Accumulation phaseImmediate annuitySurrender charge
- Early withdrawal tax (10% additional tax)
- An extra federal tax on the taxable part of most distributions taken before age 59½. IRS Publication 575 (for 2025 returns) applies this 10% additional tax to nonqualified annuity contracts as well as qualified retirement plans, with exceptions such as payments from an immediate annuity; it is in addition to regular income tax and any surrender charge.
- Related:Earnings-first ruleTax deferralSurrender charge
- Earnings-first rule
- The federal tax rule for withdrawals taken from a nonqualified annuity before income payments start: the money is treated as coming first from earnings, which are taxable, and only then from your original investment, which is not. IRS Publication 575 (for 2025 returns) describes this rule and a different ordering for investments made before August 14, 1982.
- Related:Qualified and nonqualified annuitiesEarly withdrawal tax (10% additional tax)Exclusion ratio
- Exclusion ratio
- The share of each annuity income payment that is a tax-free return of what you paid in, with the rest taxed as ordinary income. For nonqualified annuities, the IRS General Rule (Publication 939) bases it on your investment in the contract divided by your expected return, and calls the result the exclusion percentage; once your cost is fully recovered, later payments are generally fully taxable.
- Related:Qualified and nonqualified annuitiesAnnuitizationEarnings-first rule
- Financial strength
- An insurer's ability to keep paying claims and contract benefits over many years. The SEC stresses that every annuity guarantee is subject to the insurer's financial strength and claims-paying ability, so regulators suggest checking it before you buy; independent rating agencies publish financial strength ratings, and this site does not rate insurers.
- Related:Guaranty associationAnnuityState insurance department
- Fixed annuity
- An annuity that guarantees your money will earn at least a minimum interest rate during the accumulation phase, with the insurer setting any rate above that minimum. The SEC calls it the least risky of the main deferred annuity types, with the lowest potential return; FINRA notes the rate is often fixed for a number of years and then reset.
- Related:Fixed indexed annuityVariable annuityDeferred annuity
- Fixed indexed annuity
- An annuity that credits interest based partly on the performance of a market index over a set term, with credited interest that never falls below zero even if the index goes down. Gains are limited by features such as caps, participation rates and spreads, and the insurer credits the interest at the end of each term. Also called an indexed or equity-indexed annuity.
- Related:Cap rateParticipation rateRegistered index-linked annuity (RILA)
- Floor
- A protection option in some registered index-linked annuities that sets the most you can lose in a crediting period, with the insurer absorbing index losses beyond that point. In an example in the SEC's July 31, 2020 indexed annuity bulletin, a 10% floor and a 12% index drop limit your loss to 10%, before surrender charges or other adjustments.
- Related:BufferRegistered index-linked annuity (RILA)Cap rate
- Form CRS
- A short relationship summary that broker-dealers and investment advisers must give retail investors under SEC rules adopted alongside Regulation Best Interest. It is a useful document to ask for when a brokerage or advisory firm recommends a variable annuity or RILA, alongside the product's prospectus.
- Related:Regulation Best Interest (Reg BI)BrokerCheckCommission
- Free withdrawal amount
- The portion of the account value that many contracts let you withdraw each year during the surrender period without a surrender charge. The amount and rules vary by contract, and a free withdrawal can still be taxable and can reduce the value of death or living benefits.
- Related:Surrender chargeSurrender periodLiving benefit
- Free-look period
- A window after you receive a new annuity contract during which you can cancel it without a surrender charge. State law sets the length; as of October 2026, the SEC's Investor.gov says it is usually 10 to 30 days, and for a variable annuity the refund may be adjusted up or down for investment performance.
- Related:Surrender chargeState insurance departmentReplacement
- Guaranteed minimum income benefit (GMIB)
- An optional, extra-cost feature, usually on a variable annuity, that guarantees a minimum level of annuity payments even if investment losses leave too little in the account to support them. Like other contingent guarantees, it protects against an unlikely event, so you may pay for it without ever receiving a financial return from it.
- Related:Living benefitRiderGuaranteed minimum withdrawal benefit (GMWB)
- Guaranteed minimum withdrawal benefit (GMWB)
- An optional, extra-cost rider that guarantees you can withdraw up to a certain amount each year; some versions guarantee those withdrawals for life without annuitizing. The SEC warns that large withdrawals can significantly reduce the value of such benefits, and some features require you to use only certain investment options.
- Related:Living benefitGuaranteed minimum income benefit (GMIB)Rider
- Guaranty association
- A state-based safety net that steps in when a life or health insurer fails, continuing coverage and paying claims within limits set by state law. The NAIC's 2018 model act, for example, uses $250,000 in present value of annuity benefits per life, but each state sets its own limits and exclusions, and the model bars agents from using guaranty coverage as a sales pitch. Annuities are not guaranteed by the FDIC, SIPC or any other federal agency, so ask your state insurance department what coverage applies to you.
- Related:Financial strengthState insurance departmentAnnuity
- High-pressure sales tactics
- Persuasion techniques that FINRA lists as warning signs of investment fraud, such as promising returns that are "guaranteed" or "risk-free," offering a free meal or small favor in return for your business, claiming everyone else is buying, or insisting the offer will disappear unless you act today. Real offers will still be there tomorrow, so slow down, check the seller on BrokerCheck or with your state insurance department, and talk it over with someone you trust before signing.
- Related:BrokerCheckState insurance departmentFree-look period
- Immediate annuity
- An annuity bought with a single payment that starts paying income soon after purchase, typically within one year according to the SEC and NAIC as of 2026. It has no accumulation phase, and in general you cannot take your money back out once payments begin.
- Related:Deferred annuityAnnuitizationPayout option
- Implicit costs
- Costs that do not appear as a separate fee but reduce what your annuity earns, such as an insurer crediting less interest than it earns on your money, or caps, participation rates and spreads that limit index-linked gains. The SEC notes these can lower your return just as a direct fee would, even in a product marketed as having no fees.
- Related:Cap rateSpread (margin or asset fee)Mortality and expense risk charge (M&E)
- Indexing method
- The formula an indexed annuity or RILA uses to measure the index's change over a crediting period, which the SEC's July 31, 2020 bulletin says is typically twelve months. Point-to-point compares the index at the start and end of the period, while averaging compares an average of index levels during the period with the starting level; gains are usually measured without the dividends paid on the index's stocks.
- Related:Cap rateParticipation rateFixed indexed annuity
- Insurance producer (agent)
- The regulatory term for a person who sells, solicits or negotiates insurance, including annuities, either for one company (a captive agent) or for several (an independent agent). Producers must be licensed under state law and are overseen by state insurance departments; people who sell variable annuities or RILAs are also subject to FINRA oversight and can be looked up on BrokerCheck.
- Related:State insurance departmentBrokerCheckBest interest standard (annuity sales)
- Joint and survivor annuity
- A payout option that pays income for the life of the first annuitant and then continues paying a second annuitant, often a spouse, for the rest of their life. The survivor's payment may be the same as or different from the first annuitant's.
- Related:Payout optionAnnuitantAnnuitization
- Living benefit
- A collective name for optional insurance features you can use while alive, such as guaranteed minimum income or withdrawal benefits, typically sold as riders for an extra fee. The SEC warns that these features are complex, can restrict your investment choices and can shrink after large withdrawals, so ask how likely you are to actually use the benefit.
- Related:Guaranteed minimum income benefit (GMIB)Guaranteed minimum withdrawal benefit (GMWB)Rider
- Market value adjustment (MVA)
- A change to your annuity's value, often downward, when you withdraw or transfer money before the end of a guaranteed term; a related adjustment is called an interim value adjustment, and both RILAs and registered MVA annuities contain these contract adjustment features. The SEC notes these adjustments come on top of any surrender charge and can significantly lower your value; an annuity that pays a fixed rate but can apply this adjustment may be registered with the SEC as a registered MVA annuity.
- Related:Surrender chargeRegistered index-linked annuity (RILA)Prospectus
- Material conflict of interest
- Under the NAIC best-interest model regulation, a financial interest an agent has in selling an annuity that a reasonable person would expect to influence the impartiality of a recommendation. Agents must identify and avoid or reasonably manage and disclose such conflicts; compensation is handled through separate disclosure rules.
- Related:Best interest standard (annuity sales)CommissionRegulation Best Interest (Reg BI)
- Mortality and expense risk charge (M&E)
- An ongoing variable annuity fee, charged as a percentage of account value, that compensates the insurer for the insurance risks it takes on under the contract. The SEC notes profit from this charge is sometimes used to pay the seller's commission; it is separate from administrative fees, rider charges and the expenses of the underlying funds.
- Related:SubaccountRiderImplicit costs
- Participation rate
- The share of an index's gain that an indexed annuity or RILA credits to you. In an example in the SEC's July 31, 2020 bulletin, a 75% participation rate and a 10% index gain produce a 7.5% credit; a participation rate can be combined with a cap or spread, which lowers the credit further.
- Related:Cap rateSpread (margin or asset fee)Indexing method
- Payout option
- The way an annuity's income is paid once you annuitize, such as for your life only, for the lives of you and a survivor, or for a fixed period like a set number of years. FINRA cautions that, depending on the option, the insurer may not be obligated to keep paying your spouse or refund premiums to your estate after your death, even if you received only a few payments.
- Related:AnnuitizationJoint and survivor annuityDeath benefit
- Prospectus
- The detailed disclosure document for an annuity that is registered with the SEC, such as a variable annuity, RILA or registered MVA annuity. It describes the contract's features, fees, risks and investment options, and the SEC urges reading it, along with the contract itself, before you buy.
- Related:Variable annuityRegistered index-linked annuity (RILA)Form CRS
- Qualified and nonqualified annuities
- A qualified annuity sits inside a tax-advantaged retirement plan such as an IRA or 401(k), while a nonqualified annuity is bought on its own with after-tax money. Regulators note that holding an annuity inside a retirement plan adds no extra tax deferral, and the two are taxed under different IRS rules when money comes out.
- Related:Tax deferralExclusion ratioEarnings-first rule
- Registered index-linked annuity (RILA)
- A deferred annuity whose value rises or falls with a market index over a set term, within limits the insurer sets on both gains and losses. Unlike a fixed indexed annuity, you can lose money in a RILA, and it is a security registered with the SEC; it is sometimes called a buffer annuity.
- Related:BufferFloorFixed indexed annuity
- Regulation Best Interest (Reg BI)
- An SEC rule adopted June 5, 2019 that requires broker-dealers recommending securities, which include variable annuities and RILAs, to act in the retail customer's best interest without putting their own interests ahead. It is met through disclosure, care, conflict-of-interest and compliance obligations. The SEC's Investor.gov describes fixed and fixed indexed annuities as insurance products regulated by state insurance regulators, so recommendations of them fall under state insurance rules, such as a state's version of the NAIC best-interest model, rather than Reg BI.
- Related:Best interest standard (annuity sales)Form CRSBrokerCheck
- Replacement
- Buying a new annuity when an existing annuity or insurance policy will be surrendered, lapsed, reduced or otherwise ended as part of the deal. The NAIC's 2020 best-interest model regulation (#275) tells agents recommending a replacement to weigh new surrender charges and surrender periods, lost benefits, higher fees and whether you had another exchange within the preceding 60 months; FINRA advises switching only when it is better for you, not just for the seller.
- Related:1035 exchangeSurrender periodBest interest standard (annuity sales)
- Rider
- An amendment added to an insurance contract that adds or changes benefits, such as an enhanced death benefit or a guaranteed income feature. Riders on annuities usually carry their own fees, so the SEC suggests asking whether you need the feature and whether you could get the same protection more cheaply elsewhere.
- Related:Living benefitStepped-up death benefitGuaranteed minimum withdrawal benefit (GMWB)
- Spread (margin or asset fee)
- A percentage the insurer subtracts from an index's gain before crediting it to an indexed annuity; it may also be called a margin, asset fee or administrative fee. In an example in the SEC's July 31, 2020 bulletin, a 3% spread on a 9% index gain leaves a 6% credit.
- Related:Cap rateParticipation rateImplicit costs
- State insurance department
- The state agency that regulates insurance companies and agents and handles consumer questions and complaints; every annuity, including variable ones, falls under state insurance regulation. The NAIC website links to each state's department, which is also a good first call before you sign or if you think a sale was improper.
- Related:Insurance producer (agent)Guaranty associationBest interest standard (annuity sales)
- Stepped-up death benefit
- An optional, extra-cost death benefit that can lock in investment gains, for example by basing the guaranteed amount on the account value on a specified date rather than just purchase payments minus withdrawals. Its purpose is to keep a later market decline from shrinking what your heirs receive.
- Related:Death benefitRiderVariable annuity
- Subaccount
- An investment option inside a variable annuity, similar to a mutual fund, that invests in stocks, bonds, money market instruments or a mix. You also pay the subaccount's own management fees and expenses, on top of the annuity's contract charges.
- Related:Variable annuityMortality and expense risk charge (M&E)Prospectus
- Surrender charge
- A fee for withdrawing money or cancelling an annuity during the surrender period, sometimes called a contingent deferred sales charge. It is usually a percentage of the amount withdrawn that declines over several years, and it reduces both the value of and the return on your annuity.
- Related:Surrender periodFree withdrawal amountMarket value adjustment (MVA)
- Surrender period
- The set number of years after purchase, or after each payment, during which surrender charges apply. FINRA notes that surrender periods can last many years and that exchanging into a new annuity usually restarts the clock, so compare the schedule with how soon you might need the money.
- Related:Surrender charge1035 exchangeShare class (variable annuity)
- Tax deferral
- Not paying income tax on an annuity's interest or investment gains until you withdraw money, receive income payments or a death benefit is paid. When gains do come out, they are taxed at ordinary income rates rather than capital gains rates, and inside an IRA or 401(k) an annuity adds no extra tax deferral.
- Related:Qualified and nonqualified annuitiesEarly withdrawal tax (10% additional tax)Exclusion ratio
- Variable annuity
- An annuity whose value rises and falls with the investment options, usually mutual fund subaccounts, that you choose. There is no built-in limit on gains or losses, it carries explicit fees at both the contract and fund level, and it is registered with the SEC as a security.
- Related:SubaccountMortality and expense risk charge (M&E)Living benefit