Immediate Annuity Glossary

Written by Hersh Stern Updated Sunday, October 13, 2024

Sometimes one of the biggest hurdles in retirement planning is learning the vocabulary. It’s quite possible your life experience has been rich and diverse – but maybe not full of conversations about financial planning. In fact, this is true for most people.

Here is a handy reference guide covering some of the terms you are likely to see most often while investigating immediate annuities:

Annuitant — This is the person who’s life the annuity payments will be based on. It is usually – but not always – the contract holder.

Annuity Owner — This is the person who holds the contract for the annuity. Often, this person is the annuitant.

Annuity Start Date — This is the date that the payments will begin.

Beneficiary — This is the person who will receive benefits from the annuity in the event of the death of the annuitant. Naming a beneficiary is an option that can be selected for some – but not all – types of immediate annuities.

Cost Basis — This is the principal that is used to purchase a non-qualified annuity (see below).

Death Benefits — With a typical immediate annuity, the insurance company's obligations under the annuity contract end with the death of the annuitant. However, some immediate annuities can be structured with provisions – or death benefits – for beneficiaries upon the annuitant’s death.

Exclusion Ratio — This is the formula that is used to calculate the percentage of annuity payments that the IRS regards as taxable.

Free-Look Period — Rules vary by state, but this is the length of time in which an annuity contract holder may cancel the annuity and have the funds returned.

Income Options — This term refers to the methods by which an annuitant can receive payments.

Issuer — This is the insurance company that holds the annuity contract.

Joint and Survivor Annuity — This is a type of immediate annuity that provides for two annuitants – most often spouses. Payments will continue as long as either annuitant is alive.

Life Annuity — This is another term for immediate annuity, recognizing the payments will continue for the life of the annuitant.

Life Expectancy — The amount of time that the insurance company (or the IRS when calculating taxes on an annuity) expects the annuitant to live.

Longevity Risk — The risk of outliving one’s assets. This risk is transferred to the insurance company with an immediate annuity.

Non-Qualified Annuity — This is an annuity that was purchased with funds that have already been taxed, such as from a savings account. As payments are made, the IRS exempts from income tax the percentage that it considers as principal.

Payments or Payouts — This is the series of payments the annuitant will receive from the insurance company.

Payout Phase — If an annuity is selected for a specific length of time (rather than the life of the annuitant), this would describe the amount of time that payments will continue.

Period Certain — This is another option that is available for some immediate annuities. It is a provision that guarantees payments will continue for a certain length of time, even if the annuitant should die.

Qualified Annuity — This is an annuity that was purchased with funds that have not yet been taxed. Examples of this would be money that is rolled over from an IRA or qualified retirement plan which provided tax deferral.

Single Premium Immediate Annuity or SPIA — This is another name for an immediate annuity.

Term Certain Annuity — This is a variation of an immediate annuity, providing income for a specified length of time.