Indexed annuities: key terms

Accumulation Period

The time between the first premium payment on a fixed indexed annuity and when the payout begins. During this time, the premiums paid into the contract "accumulate" with interest.

Accumulated Value

The value of the annuity. The accumulated value may differ from the amount an annuity owner may receive if he or she surrenders the annuity.

Cap

The upper limit on the amount of an index's gain in value that will be credited to the annuity value.

Compounding Interest

The type of interest that is earned on both the original principal amount and on the interest accumulated from earlier periods.

Exclusion Ratio

The percentage of each annuity payment from an annuitization or single premium immediate annuity (SPIA) that is excluded from taxes. Annuity providers use IRS guidelines for life expectancies are used to calculate this ratio.

Fixed Annuity

Under the terms of a fixed annuity, the annuity provider agrees to pay a guaranteed minimum interest rate to the annuity. There is no market risk to the annuity owner's premium.

Fixed Indexed Annuity

A fixed indexed annuity offers the same type of minimum interest rate guaranteed by a traditional fixed annuity, but has the potential to pay additional interest depending upon the performance of an external measure, typically a market index.

Market Value Adjustment (MVA)

Some annuity contracts have a market value adjustment (MVA) provision. An MVA applies to withdrawals in excess of the free amount during the annuity's withdrawal charge period. In general, if interest rates in the market are higher than, or the same as, when an individual purchases an annuity, the MVA is negative, which reduces the cash surrender value. Conversely, if interest rates are lower than when the annuity was purchased, the MVA is generally positive, which may increase the cash surrender value.

Participation Rate

For a fixed indexed annuity, the participation rate is the amount of an index's gain that will be credited to the policy value.

Premium Bonus

An annuity provider may credit an additional amount to an annuity contract owner's initial premium in the form of a premium bonus. This bonus increases the contract's accumulated value immediately. A premium bonus may have a vesting schedule or recapture schedule, which means that a surrender or withdrawal in excess of a free withdrawal amount may result in forfeiting all or a portion of the premium bonus.

Surrender Charge

A surrender charge can be charged to an annuity contract owner when he or she withdraws a portion of or the entire contract's accumulated value during the surrender charge period.

Surrender Value

The cash amount a contract owner is entitled to collect upon terminating the annuity contract prior to maturity or death. The surrender value consists of the accumulated value minus any surrender charges and the application of a market value adjustment.

Tax Deferred

Description of a fixed indexed annuity's tax status. Interest credited to an annuity is generally not taxed as earned income until it is withdrawn.