1035 Exchange— a tax-free method of exchanging an existing life insurance or annuity policy for a new policy with a different company. This procedure is often exercised when it is beneficial for the policy owner to move to a more favorable contract that offers rates or features they don’t currently have in their existing plan (1035 refers to the tax code number).
2-Year Treasury Note— fixed-interest security issued by the US government that can mature in two years.
3-Month London Interbank Offered Rate (LIBOR)— a three-month average of the London Interbank Offered Rate (LIBOR) is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market.
5-Year Constant Maturity Treasury Rate— an index published by the Federal Reserve Board, based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a five-year maturity.
A
Account Value— the gross value of an annuity, prior to adjustments from any applicable loans, Market Value Adjustments, premium taxes, or Surrender Charges.
Account Value Bonus— a feature that credits a bonus to the Account Value of the life insurance or annuity contract. While this bonus may be subject to a vesting schedule or recapture charge, it would generally be accessible in the event of a cash surrender, at some period of the contract.
Accumulate at Interest— a dividend option that is often available on participating whole life insurance products, where the dividends are left on deposit with the insurer to earn additional interest.
Administration Charge— a fee on some annuities, which is charged to cover administrative expenses that are associated with servicing the contract.
Advanced Sales Solutions— a product objective, used in pricing cash value life insurance policies, where the primary focus of the product is providing a solution that addresses a specific need, often tax-related.
Afternoon (PM) London Gold Market Fixing Price— price per ounce for gold determined daily at 15:00 GMT by a brief conference call among the five members of the London Gold Pool (Scotia-Mocatta, Barclays Capital, Deutsche Bank, HSBC and Société Générale). The London spot fix price is the price fixed at the moment when the conference call terminates.
A.M. Best Rating— an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations, as provided by the firm A.M. Best.
Annual Step-Up— a common feature on optional Guaranteed Lifetime Withdrawal Benefit riders, which raises the Benefit Base to the greater of the Benefit Base or the Account Value each year.
Annualized— a rate of interest recalculated as an annual rate.
Annuitant— the individual or entity that receives the benefits of an annuity.
Annuity Linked TVI Index— an index that is linked to the Trader Vic Index via the application of a volatility control overlay. The Trader Vic Index is designed to capture both rising and falling price trends by taking long and short positions on a monthly basis on 24 futures markets across the commodity, fixed income and foreign exchange asset classes.
Annuitization Bonus— a feature that credits a bonus to the life insurance or annuity contract, contingent upon annuitization. This bonus cannot be accessed in the event of a cash surrender; it solely increases the value upon which payments are calculated, in an annuitization arrangement.
Annuitize— to change all or a portion of the annuity contract from a cash accumulation period to the periodic distribution of funds.
Annuity— a contract in which an individual agrees to pay premiums to an insurance company and receives, in exchange, a regular stream of income payments from the issuer either now or at some time in the future.
Automatic Premium Loan (APL)— a type of Non-Forfeiture Option offered on cash value life insurance policies, which uses the cash value of the life insurance at the time of lapse, to pay the premium due; loan interest will continue to accrue, despite an APL.
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B
Bailout Provision— an annuity contract provision that enables the contract owner to surrender the annuity contract, usually without a surrender charge applying, if renewal interest rates or Caps fall below a pre-established level.
Bank— financial institutions in which the institution accepts demand deposits and makes commercial and/or consumer loans; the vast majority are regulated by the federal government as depository institutions. Includes credit unions.
Barclays Capital Aggregate Bond Index— formerly the “Lehman Aggregate Bond Index,” this is a broad base index, maintained by Barclay’s Capital, which is used to represent investment grade bonds being traded in the United States.
Base policy— the primary coverage that pays out upon the death of the insured.
Beneficiary— the person or legal entity that receives the annuity Death Benefit upon the death of the contract owner or annuitant.
Benefit Base— the secondary “shadow fund” value on an annuity’s optional Guaranteed Lifetime Withdrawal Benefit rider; the value upon which the annuitant’s Guaranteed Withdrawal Payments are based. This is a separate value from the Account Value, and it is only available by taking Guaranteed Withdrawal Payments.
Benefit Base Bonus— a feature that credits a premium bonus directly to the Benefit Base of the optional Guaranteed Lifetime Withdrawal Benefit rider. This bonus cannot be accessed in the event of cash surrender; it solely increases the “shadow fund” value, upon which Guaranteed Withdrawal Payments are calculated.
Broker/Dealer— as defined by the SEC Act of 1934, a broker is “any person engaged in the business of effecting transactions in securities for the account of another.” A dealer means “any person engaged in the business of buying or selling securities for his own account.” Accordingly, a broker/dealer trades for his or her own account and for the accounts of others. Broker Dealers include large regional broker dealers and wirehouses which are full-service national or independent FINRA firms.
Buffer Modifier— a feature on Structured Annuities, which indicates whether market losses are covered up to a specified limit, or covered after a specified loss amount.
C
Cap Rate— the maximum interest rate that will be used in the crediting calculation on an Indexed Annuity. Note that indexed crediting methods may also use a Participation Rate or a Spread Rate.
Career Agents— insurance agents who primarily sell the products of a single insurance company in return for support from that company (in the form of benefits, financing, office space, staff, supervision, and/or training), in addition to relatively modest commissions.
Cash— a dividend option that is often available on participating whole life insurance products, where the dividends are paid to the policy owner as cash (most frequently in the form of a check).
Cash Accumulation— a product objective, used in pricing cash value life insurance policies, where the primary focus of the product is accumulating cash values.
Cash Surrender Value— the amount that an insurance policyholder is entitled to receive should he or she discontinue the coverage.
Certificate of Deposit (CD)— a receipt issued by a bank for a cash deposit for a specified period of time at a fixed rate of interest. Upon maturity, the bank pays the depositor the principal plus all accumulated interest.
Combo Products— Long term care benefits that are combined with another type of insurance; life insurance or annuities. See also Hybrid Products and Linked Benefit Products.
Commission Override— the amount of commission that is paid to a marketing organization for any independently-contracted salesperson’s Fixed or Indexed Annuity production.
Compound Interest— a type of interest crediting whereby interest is credited on the principal payment, in addition to the interest itself.
Consumer Price Index (CPI)— a time series measure of the price level of consumer goods and services in the United States.
Consumer Price Index- Urban (CPI-U)— the government’s method of measuring the buying habits of approximately 80 percent of the non-institutional population of the United States.
Contract Owner— the individual or entity that applies for, and purchases, an annuity contract and is responsible for funding the annuity.
Crediting Method— a premium allocation option on an Indexed Annuity, which determines the formula for crediting interest on the annuity contract.
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D
Death Benefit— the annuity benefits that are paid to the beneficiary upon the death of the Contract Owner or Annuitant.
Death Benefit—a product objective, used in pricing cash value life insurance policies, where the primary focus of the product is providing the most life insurance per dollar spent.
Deferred Annuity— an insurance product whereby at least a year will elapse between when the lump sum or series of premium(s) are paid, and the annuity is transitioned into a stream of income through annuitization. Deferred annuities can be Fixed, Indexed, or Variable in nature.
Deferred Income Annuity (DIA)— an income annuity that defers income payments for several years.
Direct Recognition— a method of treating dividends on cash value life insurance policies, whereby the amount of the dividend credited to the policy is impaired by any existing loan balance.
Direct Response— policies are sold by direct marketing (via email, internet, mail, or phone) and by salaried employees (who may be paid incentives or bonuses, but not commissions).
Dividends— a non-guaranteed element of a participating policy, which is considered a return of premiums paid; policy owner’s share in the insurance company’s divisible surplus with a dividend on a life insurance contract, unlike dividends that are earned from ownership of stock.
Dow Jones Industrial Average (DJIA)— a stock indicator calculated each trading day that tracks the market value of 30 leading industrial stocks.
Dow Jones – UBS Commodity— a broadly diversified index that allows investors to track commodity futures through a single, simple measure. As the index has grown in popularity since its introduction in 1998, additional versions and a full complement of subindices have been introduced. Together, the family offers investors a comprehensive set of tools for measuring the commodity markets.
Dow Jones World-Ex. U.S. Index— a stock index that represents 95 percent of European market capitalization at the regional level, 95 percent of all other developed markets at the country level and 95 percent of emerging markets as a group.
Due Diligence— research conducted by insurance salespeople and other financial advisors on the legal and economic soundness of an investment or product.
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E
Enhanced Death Benefit— a provision that provides an annuity Death Benefit that is greater than the full Account Value on the contract.
Exclusion Ratio— regarding payments from an immediate annuity or annuitization, part of each payment the Annuitant receives is considered to be a return of principal, which is not taxed. The remaining portion of the payment consists of interest earnings and is taxable. The Exclusion Ratio determines the taxable and nontaxable portions of each payment.
Euro Stoxx 50— a market capitalization-weighted index of 50 blue-chip stocks from the countries that participate in the European Monetary Union.
Executor— the person named in a will to carry out the decedent’s wishes for the distribution of his or her assets; the executor fulfills his or her duties under court supervision.
Expenses— charges on a Universal Life policy that an insurance company imposes to cover costs it has incurred for administering a policy.
Extended No-Lapse Guarantee— a benefit that guarantees that some life insurance policies will not terminate, regardless of interest rate performance, as long as a stated premium level is paid.
Extended Term Insurance (ETI)— a type of Non-Forfeiture Option offered on cash value life insurance policies, which uses the cash value of the life insurance at the time of lapse, to purchase term insurance, at the same Face Amount, for as long a period as possible.
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F
Face Amount— the amount of life insurance that a policy owner purchases; the actual death benefit paid on a death claim could differ from the face amount due to policy riders, death benefit options, loans, loan interest, and withdrawals.
Fee-Based Annuity— an annuity product that is sold through an arrangement where the salesperson is compensated via a flat fee, as opposed to a commission percentage.
FIFO to LIFO— in 1982 the tax treatment of annuity distributions changed from first in, first out (“FIFO”), meaning your principal came out first, then interest, to last in, first out (“LIFO”) meaning interest is distributed before principal.
Final Expense— a product objective, used in pricing cash value life insurance policies, where the primary focus of the product is providing insurance to cover final expenses, such as burial incidentals, funeral costs, etc.
Financial Industry Regulatory Authority (FINRA)— the nonprofit self-regulatory organization of brokers and dealers in the over-the-counter securities business, under the supervision of the SEC.
Fixed Account Rate— the interest rate declared by the insurance company for an optional crediting method on a Fixed, Indexed, or Variable Annuity; this method performs similarly to a Fixed Annuity.
Fixed Annuity (FA)— a contract issued by an insurance company that guarantees a minimum interest rate with a stated rate of excess interest credited, which is determined by the performance of the insurer’s general account. A Fixed Annuity is considered a low risk/low return annuity product.
Fixed Interest Rate— an interest rate, declared by an insurance company, that is credited to an annuity or life insurance contract.
Fixed Loan Interest— a type of policy loan interest where the interest rate does not fluctuate during the loan period and is a fixed amount that is declared by the insurance company.
Flexible Premium Deferred Annuity (FPDA)— an annuity contract which is acquired with a premium payment, in which an individual receives, in exchange, a regular stream of income payments from the issuer at some time in the future, while maintaining the ability to continue making additional payments into the contract until that time.
Floor— the minimum amount of interest that is credited to an annuity each year.
Forced Asset Allocation Model— when an insurance company forces an Indexed or Variable Annuity purchaser to allocate their premiums among the available crediting methods, according to criteria that are pre-determined by the issuing insurance company.
Free Look Period— an annuity contract provision that varies by state, and dictates that the contract owner has approximately 10 to 20 days to examine the annuity contract immediately after purchase, with the option of returning it to the insurer for a full refund.
Free Withdrawal Provision— an annuity contract provision that grants the annuity owner the right to withdraw a portion of the annuity’s Account Value (typically 10%) during the accumulation period without incurring a Surrender Charge.
FTSE 100— a market-weighted index of the 100 leading companies traded in Great Britain on the London Stock Exchange. The full name is Financial Times-Stock Exchange 100 Share Index.
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G
General Account— an investment portfolio used by an insurance company for investment of premium income. This portfolio generally consists of safe, conservative, guaranteed investments, such as real estate and mortgages.
Gold Commodity— the index that provides gold rates for the members of The London Gold Market Fixing Limited consist of Barclays Capital, Scotia Mocatta, Deutsche Bank, Societe Generale, and HSBC Investment Banking Group.
Guaranteed Death Benefit— a product objective, used in pricing cash value life insurance policies, where the primary focus of the product is providing a death benefit that is guaranteed for a specified time period.
Guaranteed Lifetime Withdrawal Benefit (GLWB)— a rider, endorsement, or additional feature embedded in, or accompanying a Fixed or Indexed Annuity, which guarantees annual withdrawals at a specified level (based on the annuitant’s age), regardless if the contract’s Account Value falls to zero.
Guaranteed Minimum Accumulation Benefit (GMAB)— a rider, endorsement, or additional feature embedded in, or accompanying a Fixed or Indexed Annuity that guarantees that the Account Value of the annuity will grow by a minimum specified percentage over a period of time.
Guaranteed Minimum Death Benefit (GMDB)— a rider, endorsement, or additional feature embedded in, or accompanying a Fixed or Indexed Annuity that guarantees that the annuity Death Benefit payable will be no less than a specified amount.
Guaranteed Minimum Income Benefit (GMIB)— a rider, endorsement, or additional feature embedded in, or accompanying a Fixed or Indexed Annuity, which guarantees a minimum annuitization amount, regardless of the annuity’s performance.
Guaranteed Minimum Withdrawal Benefit (GMWB)— a rider, endorsement, or additional feature embedded in, or accompanying a Fixed or Indexed Annuity, which guarantees annual withdrawals at a specified level (based on the annuitant’s age)- until a return of the premiums paid on the policy- regardless of the annuity’s performance.
Guaranteed Withdrawal Payments— the lifetime income payments that the Annuitant receives under any optional Guaranteed Lifetime Withdrawal Benefit rider on their Fixed or Indexed Annuity.
Guarantee Period— the number of years that the interest rate is guaranteed on a Multi-Year Guaranteed Annuity.
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H
Hang-Seng— a market-weighted index of 33 stocks making up approximately 70% of the market value of all stocks traded on the Stock Exchange of Hong Kong.
Heaped Commissions— a commission structure where Fixed and/or Indexed Annuity compensation is paid up-front to the salesperson in a lump sum. This commission is typically paid at the time the annuity contract is issued to the Annuitant, and is based on the amount of premium paid into the contract. Generally, heaped commissions will pay a greater percentage commission than other commission structures.
Hybrid Index— an index that is comprised of at least one index plus a secondary component, such as cash, stock(s), or mutual fund(s); are often volatility-controlled and proprietary.
Hybrid Products – Long term care benefits that are combined with another type of insurance; life insurance or annuities. See also Hybrid Products and Linked Benefit Products.
I
Illustrated Rate— a hypothetical rate, which the insurance carrier believes to be a realistic expectation of future performance based on current Indexed Life rates, that is used to illustrate future policy values on an Indexed Universal Life or Indexed Whole Life policy. Illustrated rates are not guaranteed and usually based on past performance of an index, which is not indicative of future policy performance.
Illustrated Rate Lookback Method— the method that an insurance carrier uses to determine their Indexed Life illustrated rate (i.e. 20-Year Lookback); while most carriers look at the past performance of the index upon which they are basing their indexed crediting method, some choose not to use a lookback at all and to simply select a rate which they believe is reasonable to them.
Immediate Annuity— an insurance product whereby a lump sum premium is paid and the annuity is transitioned into a stream of income through annuitization within one year from the date of purchase. Immediate annuities can be Fixed, Indexed, or Variable in nature.
Immediate Income Annuity— an income annuity that commences income payments within the first year, a.k.a. Single Premium Immediate Annuity (SPIA).
Increasing— an optional death benefit option (DBO) on a Universal Life policy, whereby the amount of death benefit paid to the Beneficiary is the Face Amount of the policy plus the Account Value of the policy (less any applicable loans, loan interest, and withdrawals); also referred to as Option B or Option 2.
Independent Agent— agents who sell the products of multiple insurance companies, often through one or more brokerage general agencies or marketing organizations that are paid an override on the agents’ production through the firm; agents may also be contracted agent-direct, and not be using an intermediary at all. In exchange for very limited support from the insurance companies, the agents are paid relatively competitive commissions.
Independent Marketing Organization (IMO)— an establishment that serves as a distributor of many carrier’s insurance products, and may perform many of the functions traditionally provided by an insurance carrier (recruiting/licensing of agents, marketing, and sales support). Typically these services are provided to independently contracted agents, in exchange for a percentage of their commission.
Index— statistical composite that measures changes in the economy or in financial markets, often expressed in percentage changes from a base period or from the previous month.
Indexed Annuity (IA)— a contract issued by an insurance company that has a minimum guarantee where crediting of any excess interest is determined by the performance of an external index, such as the Standard and Poor’s 500® index. An Indexed Annuity is considered a moderate risk/moderate return annuity product.
Indexed Universal Life (IUL)— a permanent type of unbundled, flexible life insurance that builds cash value, and earns interest based on the performance of an external index such as the S&P 500 ®; Indexed Universal Life has guaranteed cash values and provides lifetime coverage on the insured as long as premiums are paid, or there are sufficient cash values.
Indexed Whole Life (IWL)— a permanent type of interest-sensitive life insurance that builds cash value, and earns interest based on the performance of an external index such as the S&P 500 ®; Indexed Whole Life has guaranteed cash values and provides lifetime coverage on the insured as long as premiums are paid, or there are sufficient cash values.
Indices— the plural form of the word ‘index’.
Individual Retirement Account (IRA)— an arrangement that allows people with earned income to deposit a portion of that income in a tax-deferred savings plan. An IRA can be established and funded at any time between January 1st of the current year, up to and including the date an individual’s income tax return is due (generally, April 15 of the following year), not including extensions.
Interest Rate Bonus— a feature that credits an additional bonus interest rate to the base crediting rate on an annuity or life insurance contract.
Interest Multiplier— a feature on some annuities and life insurance contracts, where the interest is multiplied by a factor, to determine the amount credited to the contract.
Interest-Sensitive Whole Life— a permanent type of life insurance that is inflexible and builds cash value as long as premiums are paid, and earns a declared rate of interest, as opposed to dividends; Whole Life has guaranteed cash values and provides lifetime coverage on the insured as long as premiums are paid, or there are sufficient cash values.
Insolvency— when an insurance company does not have the assets to pay the claims that are being made against it by its policyholders.
Insured— the person whose life is insured against dying on a life insurance policy.
Insurable Interest— being in a position to suffer a loss, should the insured person die. Insurable interest is a requirement for applying for life insurance on any person other than one’s self (in whom you automatically have an insurable interest.)
iShares Barclays Capital U.S. Aggregate Bond Index— a bond fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the total United States investment-grade bond market, as defined by the Barclays Capital U.S. Aggregate Bond Index.
iShares MSCI Hong Kong Index Fund— a bond fund that seeks to measure the performance of the Hong Kong equity market. It is a capitalization-weighted index that aims to capture 85% of the (publicly available) total market capitalization. Component companies are adjusted for available float and must meet objective criteria for inclusion in the Index, taking into consideration unavailable strategic shareholdings and limitations to foreign ownership. MSCI reviews its indexes quarterly.
iShares MSCI ACWI Index— a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 45 country indices comprising 24 developed and 21 emerging market country indices. The developed market country indices included are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The emerging-market country indices included are Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
iShares MSCI Hong Kong Index— a free float-adjusted index that lists every security in the Hong Kong market.
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J
Joint Annuitant— an individual who is named in the contract with the Annuitant, whose age and life expectancy are also used in the calculations to determine what the annuity payments will be.
Joint Owner— a person who shares ownership of an annuity contract and would have the same right as the contract owner to approve any decisions made about the contract.
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L
Lehman Brothers Aggregate Bond Index— an index of U.S. Treasury bonds and notes, and government-agency bonds (excluding mortgage-backed securities).
Level— the default death benefit option (DBO) on a Universal Life policy, whereby the amount of death benefit paid to the Beneficiary is the Face Amount of the policy (less any applicable loans, loan interest, and withdrawals); also referred to as Option A or Option 1.
Levelized Commissions— a commission structure where Fixed and/or Indexed Annuity compensation is paid to the salesperson over a period of years as opposed to all (heaped) up-front. This commission is typically paid at the time the annuity contract is issued as well as on a limited number of subsequent policy anniversaries. Generally, levelized commissions will pay a lesser percentage commission than a heaped commission structure, but over a longer period of time.
Limited Premium— a life insurance Premium Type that requires premiums to be paid only for a limited period of time; i.e. 10 years or 20 years.
Linked Benefit Products – Long term care benefits that are combined with another type of insurance; life insurance or annuities. See also Hybrid Products and Linked Benefit Products.
Loan – a provision on some annuity and life insurance contacts, which provides a credit vehicle for which a sum of money is lent to the purchaser, in exchange for future interest payments and/or the future repayment of the principal amount borrowed to the insurance company.
Loan Interest Reduction— a dividend option that is often available on participating whole life insurance products, where the dividend’s cash value is used to reduce the amount of any interest due on any outstanding policy loans.
Loan Reduction— a dividend option that is often available on participating whole life insurance products, where the dividend’s cash value is used to reduce the principal amount on any outstanding policy loans.
Long Term Care (LTC) Kicker— a feature on some optional Guaranteed Lifetime Withdrawal Benefit riders, which enhances the Guaranteed Withdrawal Payment amount, in the event that the annuitant meets the insurance company’s criteria for long term care benefits. Note: LTC Kickers do not qualify for preferential tax treatment under the Pension Protection Act.
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M
Marketing Organization (a.k.a. AFMO, FMO, IMO)— an establishment that serves as a distributor of many carrier’s insurance products, and may perform many of the functions traditionally provided by an insurance company (recruiting, licensing, and education of agents, marketing, and sales support). Typically these services are provided to independently contracted insurance agents, in exchange for a relatively small percentage of their commission.
Market Value Adjustment (MVA)— feature that is often attached to deferred annuities, which could increase or decrease the Cash Surrender Value of an annuity if more than the penalty-free amount is withdrawn or the contract is surrendered during the Surrender Charge period. In general, if interest rates are lower at the time of withdrawal than at the time the contract was issued, the annuity’s Cash Surrender Value will be increased (market value adjusted). If interest rates are higher at the time of withdrawal than at the time of issue, the Cash Surrender Value will be reduced.
Maturity Date— the latest date at which an annuity must be converted to income payments (or annuitization).
Maximum Rollup Period— the maximum number of years that the Rollup on an optional Guaranteed Lifetime Withdrawal Benefit rider will be credited to the Benefit Base on the annuity contract.
MEC— Modified Endowment Contract, in 1988 the Internal Revenue Code was amended to stipulate that if a policy was over-funded (whether at issue or at a later date), it would be a MEC; any distribution representing the gain from the policy would be taxed thereafter. The seven-pay test was established to place limits on the amount of premiums that can be paid within a seven-year period for MEC testing.
Minimum Guaranteed Surrender Value (MGSV)— the secondary guarantee on a Fixed or Indexed Annuity, which guarantees a minimal value to be paid to the annuitant in the event of death, surrender, or non-performance of the index (in Indexed Annuities). Note that the NAIC has mandated that MGSVs on annuities cannot credit anything less than 1% interest on 87.5% of the premiums paid on the annuity. However, as much as 3% interest can be credited on 100% of the premiums paid on the annuity, dependent on the 5-Year Constant Maturity Treasury Rate and the annuity’s design. Note that there is a direct inverse correlation between the richness of the annuity’s MGSV and the potential for gains on the contract.
Monthly Expense Charge (Per 1,000)— a type of charge on Universal Life policies, which is charged for every $1,000 of insurance applied for (hence the name “Per 1,000 charge”); normally varies by age, sex, and issue class.
Mortality and Expense (M&E) Risks Charge— this fee only applies to Variable Annuities. In most cases, the “M&E” pays for the guaranteed death benefit, ensures that the expense risks charged on the contract won’t increase, covers a guaranteed interest rate paid on one type of Variable Annuity subaccount, and may cover the overhead expenses the insurer incurs with the annuity contract.
Mortality Charges— charges on a Universal Life policy that cover the cost of the life insurance coverage, a.k.a. Cost of Insurance charges or COIs.
MSCI EAFE— an index recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises the MSCI country indices that represent developed markets outside of North America: Europe, Australasia, and the Far East.
MSCI Emerging Markets— a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
Multi-Year Guaranteed Annuity (MYGA)— a type of Fixed Annuity where the credited interest rate is guaranteed for longer than a one-year period.
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N
NASDAQ— National Association of Securities Dealers Automated Quotation. The automated quotation system for the Over-the-Counter (OTC) market, shows current bid-ask prices for thousands of stocks.
NASDAQ-100— a modified capitalization-weighted stock market index of 100 of the largest non-financial companies listed on the NASDAQ.
National Association of Insurance Commissioners (NAIC)— the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia, and five U.S. territories.
National Association of Securities Dealers (NASD)— a nonprofit self-regulatory organization of brokers and dealers in the over-the-counter securities business, under the supervision of the SEC.
New Money— a method that insurance companies use to price cash value life insurance and annuities, where the credited rate is determined, based on the rates available for premiums paid that day.
New Money Rates— when an insurance carrier credits rates, for premiums paid that day, based on the insurance carrier’s current investments; generally more attractive and a better choice when rates are going up; less predictable and subject to change.
Nikkei 225— a stock market index for the Tokyo Stock Exchange
No Lapse Guarantee— a product objective, used in pricing cash value life insurance policies, where the primary focus of the product is providing a death benefit that is guaranteed to the insured’s age 100, or longer.
Non-Direct Recognition— a method of treating dividends on cash value life insurance policies, whereby the amount of the dividend credited to the policy is not impaired by any existing loan balance.
Non-Forfeiture Options— selections that are provided to cash value life insurance policy owners, which will provide them with at least a portion of their life insurance benefits, should the policy lapse.
Non-Forfeiture Provision— benefits that prevent a cash value policy from lapsing due to non-payment of premiums.
Non-Qualified Annuity— a type of annuity that has no contribution limit and no required minimum distributions at age 70 1/2 (unlike qualified). It can be funded with after-tax dollars from any source and is available to any annuity purchaser.
Non-Participating— a life insurance policy type that does not receive dividend payments from the life insurance company, as a result of not being entitled to share in the surplus earnings of the insurer.
Non-Rolling Surrender Charge— in a flexible premium deferred annuity, the stated length of the surrender charge term will start the day the initial premium deposit is received. Future deposits will not change the point at which all of the funds are penalty-free.
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O
One-Year Term Insurance— a dividend option that is often available on participating whole life insurance products, where the dividend’s cash value is used as a single premium purchase for one year of term life insurance, which increases the amount of the death benefit paid on the policy.
Option A Death Benefit— an option on a Universal Life insurance contract that pays out only the face amount of the policy (Also referred to as a Level Death Benefit option, or Option 1).
Option B Death Benefit— an option on a Universal Life insurance contract that pays out the face amount of the policy as well as the cash value; note that insurance charges are adjusted accordingly (Also referred to as a Increasing Death Benefit option, or Option 2).
Option C Death Benefit— an option on a Universal Life insurance contract that pays out the face amount of the policy as well as the premiums paid; note that insurance charges are adjusted accordingly (Also referred to as a Return of Premium Death Benefit option, or Option 3).
Options— calls (puts) that give the holder the right to buy (sell) 100 shares of stock within a specified period at a specified price.
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P
Paid-Up Additional Insurance (PUA)— a dividend option that is often available on participating whole life insurance products, where the dividend’s cash value is used to purchase additional whole life insurance, without paying additional premiums on the supplemental amount of coverage; this dividend option increases the amount of the death benefit paid on the policy, in addition to increasing the policy’s Cash Surrender Value; PUAs earn dividends themselves, which compounds their value, over time.
Partial Surrender— an insurance provision on Universal Life contracts that grants the owner the right to withdraw a portion of the cash value; will proportionately reduce the death benefit and the cash value of some contracts as well.
Participating— a life insurance policy type that receives dividend payments from the life insurance company, as a result of being entitled to share in the surplus earnings of the insurer; dividends are considered a return of premiums paid from a tax standpoint; whole life insurance is the most common type of participating life insurance policy.
Participating Fixed Rate Loan Interest— a type of policy loan interest where the interest rate does not fluctuate during the loan period and is a fixed amount that is declared by the insurance company; many cash value life insurance policies use Participating Fixed Rate Loan Interest credit interest on the full value of the policy, including any monies that are loaned-against.
Participation Rate— the percentage of positive index movement that will be used in the crediting calculation on an Indexed Annuity. Note that indexed crediting methods may also use a Cap Rate or a Spread Rate.
Payor— the person or entity that pays the premiums on a life insurance policy.
Penalty-Free Withdrawals— the annual amount that an annuitant is permitted to withdraw from their annuity’s value, without Surrender Charges being imposed. This amount is typically expressed as a percentage and is most commonly 10% of the annuity’s Account Value.
Per 1,000 Charges— expense charges on a Universal Life policy that an insurance company imposes for a stated number of years, to cover costs it has incurred for administering a policy; these charges normally vary by age, sex, and issue class.
Percent (%) of Fund Charge— expense charges on a Universal Life policy that an insurance company deducts from the Account Value of a life insurance policy to cover costs it has incurred for administering a policy.
Performance Triggered Declared Rate— company-declared rate if the growth of the index is zero or positive.
Period Certain— an income option offered by an immediate annuity where the contract owner can select to receive periodic payments for a specified period of time. The payout amount is determined by the contract value and the length of the period selected.
PIMCO U.S. Advantage Index— a comprehensive U.S. bond market index, offering exposure to interest rate swaps, inflation-protected securities, investment-grade corporate bonds, and securitized instruments such as mortgage-backed securities.
Policy Fee— expense charges on a life insurance policies, which an insurance company imposes on an annual or monthly basis to cover costs it has for administering a policy.
Policy owner— the person or entity who owns a life insurance policy and has the ability to make changes to the policy.
Portfolio— a method that insurance companies use to price cash value life insurance and annuities, where the credited rate is determined, based on the weighted average of past New Money rates.
Portfolio-Based Rates— when an insurance carrier credits rates based on their investment portfolio; generally more conservative, but a better choice when interest rates are headed down because of the broad portfolio with varying maturities.
Preferred Loans— a common feature on cash value life insurance policies, where after a specified number of years, the amount of interest credited to the policy is equivalent to the amount of interest charged on any existing policy loans.
Premature Withdrawal— taking cash out of an annuity before the Contract Owner reaches the age of 59 1/2. Subject to a 10% federal tax penalty, in addition to any income taxes that may be due, and possible policy Surrender Charge from the insurance company.
Premium Bonus— a feature offered on Fixed, Indexed, and Variable Annuities where the insurance company issuing the annuity credits the Account Value of the contract with a stated percentage of additional money on the day the policy is issued (and often on subsequent policy anniversaries). Note that annuities with Premium Bonuses have relatively lower rates and higher/longer Surrender Charges than annuities without Premium Bonuses.
Premium Load— expense charges on a Universal Life policy that an insurance company imposes each time a premium is paid to cover costs it has incurred for administering a policy.
Premium Mode— the frequency in which a life insurance policy owner makes their premium payments; the most common premium modes are annual, semi-annual, quarterly, and monthly billings; depending on the type of life insurance, less frequent premium modes may offer a discounted billing amount, as opposed to more frequent premium modes.
Premium Reduction— a dividend option that is often available on participating whole life insurance products, where the dividend’s cash value is used to reduce the amount of the premium due on the policy.
Premium Tax— a tax on annuity premium payments that some states impose on insurance companies.
Premium Type— the type of premiums that are required on a life insurance policy; available Premium Type options would include ‘Flexible Premium,’ ‘Limited Premium,’ ‘Single Premium,’ or ‘Structured Premium.’
Principal— the total amount the Contract Owner has invested in an annuity, not including interest earned.
Prospectus— a written document federal regulations require to be given to any prospective Variable Annuity purchaser, before the sale. It describes the investment objectives of any separate accounts, past performance of subaccounts, as well as any fees or expenses.
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Qualified Annuity— an annuity that is purchased to either fund or distribute funds from a tax-qualified plan. In most instances, premiums paid can reduce current income taxes and the accumulations are tax-deferred.
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Rainbow Crediting Method— an indexed crediting method that performs a lookback over the crediting period, and subsequently credits a specified percentage based on the performance of the better-performing indices. For example, an insurance carrier offers indices A, B, and C on an annual point-to-point multiple index crediting method. The best performing index over the one-year period gets 75% weighting in the crediting calculation; the next-best performing index gets 25% weighting, and the least-best performing index gets zero credit. The insurance company then applies a Participation Rate, Cap, or Spread to any potential indexed gains at the end of the term.
Recapture Charge— a feature used on Fixed, Indexed, and Variable Annuities with Premium Bonuses, whereby a portion of the Premium Bonus is forfeited in the event of withdrawal in excess of the penalty-free amount, during a specified period.
Reduced Paid-Up (RPU) Insurance— a type of Non-Forfeiture Option offered on cash value life insurance policies, which uses the cash value of the life insurance at the time of lapse, to purchase as much paid-up insurance as possible.
Registered Indexed Annuity— an Indexed Annuity that has been filed with, and classified as, a security with the Securities and Exchange Commission.
Registered Investment Advisor (RIA)— registered representatives who act as a fiduciary and collect fees on the assets they manage.
Renewal Rates— the credited interest rates (or participation rates, caps rates, or spread rates on an indexed insurance product), which are applied to a life insurance or annuity policy, once it is inforce; Renewal Rates can be higher or lower than the rates that were in effect at the time the policy was sold.
Required Minimum Distribution (RMD)— IRA’s and qualified plans both have certain “required” distributions. For IRA’s, you must begin to withdraw funds by April 1st of the year following the calendar year you attain age 701/2. For qualified plans, withdrawals must begin by April 1st of the year following the latter of, (a) the year you reach age 701/2, or (b) the year you retire.
Return-of-Premium (ROP) Option— an annuity feature that guarantees a return of the premiums paid in the contract to the annuity purchaser, at any time.
Rider (a.k.a. Endorsement)— an optional benefit that is added to the base annuity contract, which changes the annuity’s terms or conditions. On a life insurance policy it is an endorsement that either limits policy benefits, or adds supplemental benefits to the policy and becomes a part of the insurance contract.
Risk-Averse— a client or investor who will not assume a given level of risk unless there is an expectation of adequate compensation for having done so.
Rolling Surrender Charge— in a flexible premium deferred annuity, each deposit will have its own independent Surrender Charge schedule. (i.e. with a 5-year Surrender Charge, each deposit will start the 5-year period the day the money is received by the company). Therefore, different amounts of the annuity will be free of Surrender Charge at different times.’
Rolling Target Premiums— a common feature on all types of Universal Life insurance, where if the premium amount paid by the policy owner is less than the target premium amount, the salesperson will be paid full commissions until the target premium is satisfied.
Rollover— funds from an IRA or qualified retirement plan that are moved to another of the same type, or to an IRA, preserving its tax-deferred status.
Rollup— a common feature on optional Guaranteed Lifetime Withdrawal Benefit riders, which guarantees that the GLWB’s Benefit Base will grow by a specified percentage, as long as the annuity contract is held in deferral and Guaranteed Withdrawal Payments are not taken. This percentage is not a bonus or a guaranteed annual return on the base annuity contract; it can only be realized if the Annuitant holds the policy in deferral. The Rollup is generally limited to a specified number of years.
Rollup Period— the initial number of years that the Rollup on an optional Guaranteed Lifetime Withdrawal Benefit rider will be credited to the Benefit Base.
Rollup Period Reset— a provision on many optional Guaranteed Lifetime Withdrawal Benefit riders, which allows the purchaser to re-start the Rollup Period, so that the Annuitant can continue to take advantage of any Rollup for a longer period. Typically these resets can only occur over a specified duration, such as once every five years in the contract.
Rule of 72— a simple method for approximation of the number of years it takes an investment to double at a given compound interest rate; divide the interest rate into 72.
Russell 2000 Index— an index that measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
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S&P MidCap 400 Index— an index that provides investors with a benchmark for mid-sized companies. The index covers over 7% of the U.S. equity market and seeks to remain an accurate measure of mid-sized companies, reflecting the risk and return characteristics of the broader mid-cap universe on an ongoing basis.
S&P 500 Composite Index (S&P 500)— market value index of stock market activity covering 500 leading stocks.
S&P 500 Daily Risk Control 5% Total Return— an index that relies on the existing S&P 500 methodology and overlays mathematical algorithms to control the index risk profiles at specific volatility targets. The indices dynamically rebalance exposure to maintain 5%, 10%, 12%, or 15% volatility targets.
S&P 500 Daily Risk Control 10% Total Return— an index that relies on the existing S&P 500 methodology and overlays mathematical algorithms to control the index risk profiles at specific volatility targets. The indices dynamically rebalance exposure to maintain 5%,10%, 12%, or 15% volatility targets.
S&P 500 Global Broad Market Index (BMI)— an index comprised of the S&P Developed BMI and S&P Emerging BMI, is a comprehensive, rules-based index measuring global stock market performance. The S&P Global BMI represents the only global index suite with a transparent, modular structure that has been fully float-adjusted since 1989.
S&P GSCI— formerly the “Goldman Sachs Commodity Index,” this index serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time.
Savings Bond— a non-transferable U.S. government bond issued in denominations from $50 to $10,000. They are sold at discount with their effective interest pegged to Treasury securities. Income from savings bonds is exempt from state and local income taxes and federal income tax is deferred until redemption.
Second-to-Die Insurance— a type of life insurance plan that does not pay out until the second insured person on the policy passes away, also known as survivorship life. Often, the death benefits from these plans are meant to be used to pay outstanding taxes.
Securities and Exchange Commission (SEC)— federal regulatory and enforcement agency that oversees public investment trading activities.
Separate Account— insurance company’s investment portfolio that supports Variable Annuities, Variable Life, and Variable Universal Life; is kept separate from the insurance company’s regular investment accounts.
Simple Interest— a type of interest crediting whereby interest is only credited on the Principal payment, not on the interest accrued.
Single Premium Deferred Annuity (SPDA)— an annuity contract that is acquired with a single premium payment, in which an individual receives, in exchange, a regular stream of income payments from the issuer at some time in the future.
Single Premium Immediate Annuity (SPIA)— an income annuity that commences income payments within the first year, a.k.a. Immediate Income Annuity.
Solvency— when an insurance company has the assets to pay the claims which are being made against it by its policyholders.
Specimen Contract— a generic sample annuity contract.
Spousal Continuation— a standard feature on optional Guaranteed Lifetime Withdrawal Benefit riders, which allows the spouse of the Annuitant to continue the Guaranteed Withdrawal Payments under their own name, once the Annuitant has passed away.
Spread Rate (a.k.a. Asset Fee, Margin)— a deduction that comes off of the positive index growth at the end of the index term in the crediting calculation on an Indexed Annuity. Note that indexed crediting methods may also use a Cap Rate or a Participation Rate.
Stacking Rollup— a feature on optional Guaranteed Lifetime Withdrawal Benefit riders, which guarantees that the GLWB’s Benefit Base will grow by a specified percentage, as long as the annuity contract is held in deferral and Guaranteed Withdrawal Payments are not taken. The specified percentage amount on a Stacking Rollup is relatively less than a traditional Rollup, due to the additional feature of offering a secondary component for growth of the Benefit Base, which is based on the fixed and/or indexed gains on the base policy. This percentage is not a bonus or a guaranteed annual return on the base annuity contract; it can only be realized if the Annuitant holds the policy in deferral. The Stacking Rollup is generally limited to a specified number of years.
Standard and Poor’s Rating (S&P Rating)— an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations, as provided by the firm Standard and Poor’s.
Standard Policy Form State Approval— when a state insurance division approves the exact version of the annuity policy form that is filed by the insurance company, to be sold within that state. Typically, the majority of states within the nation approve the Standard Policy Form.
State Guaranty Funds— each of the 50 states has enacted legislation to protect the contract owners of that state, should an insurance company be faced with insolvency. Most state guaranty funds assess their admitted insurers an extra charge to cover any insurance company insolvencies within the state. Different states have different limits of protection. All guaranty associations are funded by insurance companies and administered by the states.
Street Level Commission— the maximum advertisable commission that can be paid to a salesperson on a Fixed or Indexed Annuity product. (i.e. a marketing group cannot run a promotion in a magazine, saying that the commission paid on an annuity is greater than the street level amount) Salespeople may be paid more or less than street level; typically the amount paid is based on the salesperson’s level of annuity production and his/her clients’ annuity premiums paid.
Structured Annuity (SA)— a contract issued by an insurance company that has a guaranteed floor on market losses, and where crediting of any excess interest is limited and determined by the performance of an external index, such as the Standard and Poor’s 500® index. A Structured Annuity is considered a moderate risk/moderate return annuity product.
Structured Premium— a life insurance Premium Type that requires a specific premium amount to be paid, on a specified schedule.
Structured Universal Life (SUL)— flexible premium adjustable life insurance with a limited negative floor, and limited excess interest that is determined by the performance of an external index, such as Standard and Poor’s 500, and/or external subaccounts.
Subaccount— the investment portfolios offered in Variable Annuity and Variable Universal Life contracts where premiums may be allocated.
Suitability Review— a review performed by an insurance salesperson in the course of recommending the proper amount of risk that one should take if they purchase an annuity and whether a particular annuity product is appropriate for purchase.
Surrender Charge— a penalty imposed by the insurance company for withdrawing funds from an annuity or a life insurance contract prematurely; usually applies during the first 7 -10 years for annuities and applies during the first 9-20 years for life insurance.
Surrender Charge Waiver— a feature on Fixed, Indexed, and Variable Annuities that permits the Annuitant to withdraw a portion of their annuity’s value, without Surrender Charges being imposed, in the event of certain triggers. Typical triggers providing a waiver of Surrender Charges include death, disability, nursing home confinement, terminal illness, and unemployment.
Sweep— how frequently an indexed life insurance carrier allows an indexed life policy’s account value to be directed to an indexed strategy for an indexed bucket to be created; may differ from daily to annually, depending on the company.
T
Target Premium— the amount of premium paid on a Universal Life policy, which is fully commissionable to the salesperson; one of two components of the commission paid to salespeople on all types of Universal Life insurance.
Tax-deferral— when taxes on earnings are postponed until any earnings are withdrawn from the annuity.
Tax-Sheltered Annuity (TSA)— a retirement annuity sold only to public school teachers and employees of hospitals, colleges, and other organizations offering qualified retirement plans under section 403(b) of the U.S. Internal Revenue Code.
TEFRA— The Tax Equity & Fiscal Responsibility Act of 1982, was the first legislation to stipulate the required difference between a policy’s face amount and the cash value in its definition of life insurance contracts.
Term Life Insurance— temporary life insurance that does not build cash value, and where premiums increase after each term renews (if it is renewable); provides a benefit that is payable only in the event that the insured dies during the policy term and the policy is also in force.
Trail Commissions— a commission structure where regular commissions are paid, based on the annuity’s Account Value, and made payable to the salesperson after the annuity contract is issued. Trail commissions are usually offered in addition to some form of heaped commission. An annuity may offer a number of trail commission options, each varying in the amount of heaped and trail commission paid. Trail commissions are typically paid on a monthly or quarterly basis and may begin as early as month two of the contract. Relative to other commission structures, trail commissions will pay a much lesser percentage commission.
Traditional Fixed Annuity (FA)— a contract issued by an insurance company that guarantees a minimum interest rate with a stated rate of excess interest credited, which is guaranteed for one year, determined by the performance of the insurer’s general account. A Fixed Annuity is considered a low risk/low return annuity product.
Traditional Universal Life (UL)— flexible premium adjustable life insurance with a declared rate of excess interest.
Two-Tiered Annuity— an annuity where the interest rate credited to the annuity during the accumulation phase is competitive against comparable products that are not two-tiered, and benefits are contingent upon annuitization. If the owner does not stay, their contract will be assessed an applicable Surrender Charge and be retroactively credited with lower interest rates back to the inception of the contract (i.e. the contract owner gets one tier of interest rates by staying with the contract through annuitization and another, lower tier of rates if he or she does not). Comparing the annuitization rates as well as the rates while in the accumulation phase is advisable on Two-Tiered Annuities.
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U
Underwriting— the process of assessing how much risk someone or something presents to an entire group when applying for life insurance.
Universal Life (UL)— a permanent type of unbundled, flexible life insurance that builds cash value, and earns interest rather than dividends; Universal Life has guaranteed cash values and provides lifetime coverage on the insured as long as premiums are paid, or there are sufficient cash values.
U.S. 10-Year Swap Rate— a benchmark published daily by the United States Federal Reserve, which represents the borrowing rate between the most credit-worthy U.S. financial institutions and large corporations.
U.S. 10-Year Treasury Bond— a marketable, fixed-interest U.S. government debt security with a maturity of ten years.
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Variable Annuity (VA)— a contract issued by an insurance company where crediting of any interest is determined by the performance of underlying investment choices that the annuity owner selects. A Variable Annuity is considered a high risk/high return annuity product.
Variable Life (VL)— a permanent type of Whole Life plan where cash values and death benefits fluctuate based on the investment performance of stocks, bonds, mutual funds, and other investments; provides lifetime coverage on the insured as long as premiums are paid, or there are sufficient cash values. Very few insurance carriers offer Variable Life today; it must be sold via a prospectus like the more widely sold Variable Universal Life.
Variable Loan Interest (VLI)— a type of policy loan interest that fluctuates, and is based on an external index such as Moody’s Corporate Bond Yield Average; many cash value life insurance policies use VLI credit interest on the full value of the policy, including any monies that are loaned-against.
Variable Universal Life (VUL)— a permanent type of unbundled, flexible life insurance that builds cash value, and earns interest based on the performance of stocks, bonds, mutual funds, and other investments; Variable Universal Life has no guaranteed cash values but does provide lifetime coverage on the insured if performance warrants.
Variation State Approval— when a state insurance division approves a modified version of the Standard Annuity Policy Form, to be sold within their state.
Vesting Schedule— a feature used on Fixed, Indexed, and Variable Annuities with Premium Bonuses, whereby a timetable is presented for when the annuitant gains ownership (or nonforfeitable rights) in the Premium Bonus on the annuity contract.
W
Wealth Transfer— a product objective, used in pricing cash value life insurance policies and annuities, where the primary focus of the product is providing a vehicle for transferring assets to beneficiaries upon death.
Weighting Multiple Index Crediting Method— an indexed crediting method that applies a stated percentage weighting to each of two or more indices offered on the crediting method over the crediting term. Potential indexed gains will be credited based on those weightings at the end of the period, based on the performance of each index. For example, an insurance company offers indices A, B, and C on a monthly averaging multiple index crediting method. Index A will receive a weighting over a three-year period of 40%; Index B will receive a weighting of 35%; Index C will receive a weighting of 25%. The carrier then applies a Participation Rate, Cap, or Spread to any potential indexed gains at the end of the term.
Whole Life (WL)— a permanent type of life insurance that is inflexible and builds cash value as long as premiums are paid, and may earn dividends; Whole Life has guaranteed cash values and provides lifetime coverage on the insured as long as premiums are paid, or there are sufficient cash values.
