Annuities are complex products designed to meet a number of complex needs. For many, they are the lynchpin in a secure retirement. For many others, they are shrouded in mystery: How do they work, who do they work for, and when should they be purchased?
To answer these questions well, you need clear, concise definitions to a complete annuity glossary. Here, we’ve collected a shortlist of terms that may very well come up in conversations with clients. How many of them do you know?
annuity certain: An annuity that pays a specified amount for a definite and specified period of time, such as 5 or 10 years, with remaining payments going to a designated beneficiary if the annuitant dies before the end of the specified period.
annuity certain, life: An annuity payable for a specified minimum number of periods or, if longer, for as long as the annuitant lives; a combination of an annuity certain and a life annuity.
cash refund annuity: A cash refund annuity pays a lump-sum cash benefit to a beneficiary if the annuitant dies before a recovery of premiums paid. The lump-sum cash benefit is equal to the difference between the total amount paid by the purchaser over the total annuity payments received before the annuitant’s death.
consideration: Consideration is an essential element of a binding contract. In an annuity contract, the policyowner’s consideration is the money that an individual pays to an insurance company in exchange for a financial instrument that provides a stream of payments for a given length of time; the insurance company’s consideration is the promise(s) contained in the contract. An annuity consideration may be made as a lump sum or as a series of gradual payments.
delivery of policy: Delivery is, in general and nonlegal terms, the presentation of the policy to the policyowner. Actual delivery is legally determined by the intent of the parties and, therefore, does not necessarily require that the policy physically change hands. For instance, a conditional binding receipt (or, at times, verbal acknowledgement) may constitute delivery.
flexible premium annuity: An annuity that allows the owner of the contract to vary premium payments (within limits) from year to year.