What the terms in an annuity contract mean

A fixed annuity guarantees a minimum interest rate while you are paying in, and guarantees the payout.

An indexed annuity pays interest based partly on how a market index performs. The interest credited is guaranteed never to be less than zero.

A variable annuity puts your money into a menu of investment options, called subaccounts, that resemble mutual funds. There is no limit on losses or gains.

Accumulation phase

The years when you pay money into the annuity and it builds up.

Payout phase (annuitization)

The period when the insurer makes income payments to you from what has built up.

Surrender charge

A charge for taking money out, or ending the contract, during the surrender period. The SEC’s example is a charge of 7% in the first year after a payment, 6% in the second, 5% in the third, and so on.

Surrender period

The years after you buy during which the surrender charge applies. The SEC says it typically lasts six to eight years, sometimes as long as ten.

Free withdrawal

The amount you can take out each year without a surrender charge. The SEC gives 10% of the contract value a year as an example.

Mortality and expense risk charge (M&E)

A yearly charge in a variable annuity, set as a percentage of your account value. The SEC says it is typically around 1.25% a year.

Administrative fee

A charge for record keeping and running the account: either a flat yearly fee, such as $25 or $50, or a percentage of your account value, typically around 0.15% a year.

Underlying fund expenses

The fees of the funds your money is invested in inside a variable annuity. They come on top of the insurer’s own charges and are taken from the funds’ returns.

Rider

An optional feature you pay extra for, such as a guaranteed lifetime withdrawal benefit, a guaranteed minimum income benefit or an extra death benefit.

Participation rate

In an indexed annuity, the share of the index’s gain credited to you. The SEC’s example: at 75%, a 10% index gain is credited as 7.5%.

Cap rate

The most your contract can earn, however much the index rises. The SEC’s example: with a 7% cap and a 12% index gain, 7% is credited.

Spread, margin or asset fee

A set percentage taken off any gain in the index. The SEC’s example: with a 3% spread and a 9% index gain, 6% is credited.

Floor

A limit on how much of the contract value you can lose. The SEC’s example: with a 10% floor and a 12% fall in the index, you lose 10%, before any surrender charge.

Free look period

The days after you buy when you can cancel the contract. FINRA says it generally ranges from 10 to 30 days, and the SEC notes the length can depend on the state.

Growth inside an annuity is not taxed until you take money out. The SEC says a withdrawal before age 59½ may bring a 10% tax penalty.

The tax code allows a direct exchange of one annuity for another without tax, called a 1035 exchange. The SEC and FINRA both note that an exchange can mean paying surrender charges on the old contract and starting a new surrender period on the new one.