Annuity Glossary — 60+ Contract Terms Defined in Plain English

Quick take: Annuity contracts are written in a vocabulary designed by actuaries and lawyers, not by anyone trying to help you decide. Most buyer regret traces back to three or four words that sounded like they meant one thing and legally meant another — benefit base, bonus, cap rate, and market value adjustment. This page defines every term you are likely to meet in an annuity illustration or contract, in the order the alphabet puts them.

Definitions here describe how these terms are used across the industry generally. Your contract controls. Where a definition below and your carrier's contract language disagree, the contract wins — that is exactly why it is worth reading before you sign.

The five terms that cause the most regret

If you read nothing else on this page, read these. In second-opinion reviews of contracts people have already signed, these five account for nearly every "I didn't know it worked that way" conversation:

1. Benefit base — it is not your money. It is a number used to calculate an income payment.
2. Cap rate — it resets. The cap you were shown applies to the first crediting period, not to the life of the contract.
3. Market value adjustment — it can make an early exit cost more than the surrender charge alone.
4. Premium bonus — usually vests over time and is usually recaptured if you leave early.
5. Roll-up rate — it grows the benefit base, not the cash value. A "7% roll-up" is not a 7% return.

Jump to a letter

A · B · C · D · E · F · G · I · J · L · M · N · P · Q · R · S · T · V · W · Numbers

A–Z annuity glossary

A

• Account value (also contract value, accumulation value): The actual money in your annuity before any surrender charge or MVA is applied. This is the number that grows with credited interest and shrinks with withdrawals and rider charges. It is not the same as benefit base and not the same as cash surrender value.
• Accumulation phase: The period during which the contract grows and no income payments are being made. Ends when you annuitize, begin rider withdrawals, or surrender.
• A.M. Best rating: A financial-strength rating assigned to an insurance carrier by A.M. Best, on a scale running from A++ down through D. It measures the carrier's ability to pay claims. It is not a rating of the product, the interest rate, or the sales practice.
• Annual point-to-point: An indexed crediting method that compares the index value on your contract anniversary to its value one year earlier. Movement in between does not count. See also monthly average.
• Annual reset: The feature that locks in each year's credited interest permanently and re-sets the index starting point at each anniversary. It is why a negative index year cannot claw back prior credits in a fixed indexed annuity.
• Annuitant: The person whose age and life expectancy the contract's income guarantees are measured against. Often but not always the same person as the owner.
• Annuitization: Irrevocably converting the account value into a stream of guaranteed payments. Once you annuitize, you generally give up the lump sum permanently in exchange for the payments. Distinct from taking GLWB rider withdrawals, which do not require giving up the account value.

B

• Benefit base (also income base, protected income value, PIV): A bookkeeping number used solely to calculate guaranteed income under an income rider. It is not cash. You cannot withdraw it, surrender for it, or leave it to heirs as a lump sum. A contract can simultaneously show a benefit base far above its account value — the gap is not money you own. This is the single most misunderstood item in the product category.
• Bonus (premium bonus, interest bonus): A credit the carrier adds to the contract at issue, expressed as a percentage of premium. Bonuses are real but almost never free — they are typically funded by lower caps, longer surrender periods, higher rider charges, or all three. Check whether the bonus applies to the account value, the benefit base, or both.
• Bonus recapture (vesting schedule): The provision that takes back all or part of a premium bonus if you surrender before the bonus has fully vested. A 10% bonus with a ten-year vesting schedule is worth 10% only to a buyer who stays ten years.
• Buffer: In a RILA, the first slice of index loss the carrier absorbs. With a 10% buffer, a 7% index loss costs you nothing and a 25% index loss costs you 15%. Compare to floor, which works in the opposite direction.

C

• Cap rate: The maximum interest an indexed strategy can credit in a crediting period, no matter how far the index rises. With a 9% cap, a 20% index gain credits 9%. Caps are declared, not fixed — the carrier resets them at each anniversary within a contractual minimum. See how cap rates work and where they stand.
• Cash refund: An immediate-annuity option that pays any unrecovered premium to your beneficiary as a lump sum if you die before the payments have returned your original deposit. Buying it lowers your monthly payment.
• Cash surrender value: What you would actually receive today if you terminated the contract — account value minus any surrender charge, minus or plus any MVA, minus unvested bonus. This is the honest number.
• COLA rider: A cost-of-living adjustment that increases income payments by a fixed percentage each year (commonly 1–5%), or occasionally by a published inflation index. It is paid for with a materially lower starting payment.
• Commutation: A provision in some income annuities allowing you to convert remaining guaranteed payments back into a lump sum. Many SPIAs do not offer it; where it exists it is usually limited to the period-certain portion.
• Cost basis: The after-tax money you put into a non-qualified annuity. Basis comes back to you tax-free; everything above it is taxable as ordinary income. In a qualified annuity funded entirely with pre-tax dollars, basis is generally zero.
• Crediting method: The formula that translates index movement into interest credited to your contract — annual point-to-point, monthly average, monthly sum, trigger/step rate, and others. The method matters as much as the cap; two contracts with identical caps and different methods do not produce identical results.

D

• Death benefit: What the contract pays your beneficiary. In most fixed and indexed annuities this is the account value with no surrender charge applied. Enhanced death benefit riders pay more, for a fee.
• Deferred annuity: Any annuity whose income phase begins more than twelve months after purchase. MYGAs, FIAs, RILAs and variable annuities are all deferred annuities.
• DIA (Deferred Income Annuity): You pay a premium now and lifetime income starts on a date you choose years in the future. Sometimes marketed as a "longevity annuity." Because the carrier holds your money longer and fewer buyers survive to the start date, the payout per dollar is higher than a SPIA bought at the same age. See also QLAC.

E

• Enhanced death benefit rider: An optional rider that pays beneficiaries more than the plain account value — often the benefit base, or premium grown at a stated rate. Carries an annual charge and typically pays out over five years rather than as a lump sum. Read the payout mechanics, not the headline.
• Exclusion ratio: For a non-qualified immediate annuity, the fraction of each payment treated as a tax-free return of your cost basis rather than as taxable income. Under current law the exclusion applies until your full basis has been recovered; payments after that point are fully taxable. It is why the after-tax value of a SPIA bought with non-qualified money is higher than the headline payout suggests.

F

• FIA (Fixed Indexed Annuity): A fixed annuity whose interest is linked to an external index, with a 0% floor and a ceiling imposed by a cap, participation rate, or spread. You are not invested in the index and receive no dividends. Principal is protected from index loss, not from surrender charges, MVA, or rider fees. Full explanation of how an FIA works.
• Fixed account: The non-indexed option inside an indexed annuity, crediting a declared interest rate. Nearly always available; nearly never mentioned in the sales presentation.
• Floor: The worst credited return a strategy can produce. A fixed indexed annuity has a 0% floor — a bad index year credits zero, not a loss. A RILA with a floor limits your loss to a stated percentage. Compare to buffer.
• Free look period: A window after delivery during which you can cancel the contract and get your premium back. Length is set by state law and by the contract, commonly ten to thirty days, and is often longer for buyers over a certain age or for replacement contracts. How the free look period actually works.
• Free withdrawal (penalty-free withdrawal): The amount you can take each year without triggering a surrender charge or MVA. Commonly 10% of account value annually after year one, but terms vary widely — some contracts allow interest only, some nothing in year one, some 5%. This provision, not the surrender schedule, determines your real liquidity.

G

• GLWB (Guaranteed Lifetime Withdrawal Benefit): An income rider that guarantees you can withdraw a set amount every year for life, continuing even if the account value is exhausted — without annuitizing. You keep access to whatever account value remains. Costs an annual rider charge deducted from the account value. Compare GLWB riders side by side.
• GMIR (Guaranteed Minimum Interest Rate): The lowest rate the contract can ever credit, stated in the contract. On indexed products the analogous guarantee is a minimum cap or minimum participation rate — often far below the initial rate you were shown. Read it, because it is the only crediting number the carrier cannot change.
• State guaranty association: The state-level backstop that covers annuity benefits if a carrier becomes insolvent. Coverage limits are set by each state and commonly run around $250,000 in present value of annuity benefits per owner per carrier, with some states higher. It is not FDIC, it may not be used in advertising, and splitting large purchases across carriers is the standard way to stay inside the limit. California's limits and how the fund works.

I

• Immediate annuity: See SPIA.
• Income rider: An optional add-on that guarantees future lifetime income, priced as an annual charge and tracked against a separate benefit base. Most modern income riders are GLWBs. Two questions decide whether one is worth buying: what is the annual charge, and is it deducted from account value or benefit base.
• Index: The external benchmark an indexed strategy tracks. Beyond the S&P 500 price index, many contracts offer proprietary volatility-controlled indices built for the annuity market. Index credits in an FIA are based on price movement and do not include dividends.
• IRS early-withdrawal penalty: A 10% federal penalty on the taxable portion of annuity withdrawals taken before age 59½, on top of ordinary income tax. Separate from and additional to the carrier's surrender charge. Exceptions exist, including substantially equal periodic payments under §72(q) or §72(t).

J

• Joint and survivor: An income option covering two lives, continuing payments until the second death. Often written as joint and 100% survivor, or reduced forms such as joint and 50% or joint and 66⅔% survivor, where the payment drops after the first death. Covering two lives always produces a lower starting payment than covering one.

L

• Life only (straight life): The income option that pays for as long as the annuitant lives and stops at death, with nothing to beneficiaries. It produces the highest payment per dollar of premium of any option, because nothing is held back to fund a refund guarantee.
• LIBOR / SOFR: Reference interest rates. LIBOR was the long-standing benchmark until it was phased out — the remaining USD panels ceased in June 2023 — and SOFR (Secured Overnight Financing Rate) is its principal U.S. replacement. Older annuity and funding-agreement documents may still reference LIBOR with fallback language pointing to SOFR. If a contract you are reviewing references LIBOR, ask the carrier in writing which successor rate now applies.
• Liquidity rider (enhanced withdrawal rider): An optional rider that raises the free-withdrawal percentage or shortens the surrender period, in exchange for a lower cap or an explicit fee.

M

• Mortality & expense charge (M&E): An annual asset-based charge, primarily found in variable annuities, covering the carrier's insurance guarantees and administrative costs. It is deducted from subaccount value and is separate from underlying fund expenses and rider fees. Fixed and indexed annuities generally do not carry an explicit M&E charge — the carrier's margin is built into the cap or spread instead.
• Monthly average: A crediting method that averages the index value at twelve monthly points and compares that average to the starting value. Averaging dampens both good and bad years and usually credits less than annual point-to-point in a steadily rising market.
• MVA (Market Value Adjustment): An adjustment applied to withdrawals above the free amount during the surrender period, tied to how interest rates have moved since your contract was issued. If rates have risen, the MVA is typically negative and increases your exit cost; if rates have fallen, it can be positive and reduce it. An MVA stacks on top of the surrender charge — it does not replace it. Full explanation of MVA mechanics.
• MYGA (Multi-Year Guaranteed Annuity): A fixed annuity that credits a single guaranteed rate for a stated term — commonly three, five, seven or ten years. The closest thing in the annuity world to a CD, with tax deferral on non-qualified money and no FDIC insurance. MYGA buyer's guide · CD versus annuity comparison.

N

• Non-qualified annuity: Funded with after-tax money outside a retirement plan. Growth is tax-deferred; withdrawals come out gains-first (LIFO) and the gain portion is taxed as ordinary income. Has a cost basis, and therefore an exclusion ratio if annuitized. Not subject to RMDs.
• Nursing home / confinement waiver: A contract provision waiving the surrender charge if the owner is confined to a qualifying facility for a stated period, typically after the first contract year. Terminal illness waivers work similarly. Availability varies by state — confirm it exists in your state's version of the contract rather than in the brochure.

P

• Participation rate: The percentage of index gain the strategy credits. At a 60% participation rate, a 10% index gain credits 6%. Contracts may apply a participation rate alone, or a participation rate together with a cap or spread. Cap versus participation rate, compared.
• Payout factor: The dollars of monthly income an income annuity pays per $1,000 of premium, at a given age, gender where permitted, and income option. It is how immediate annuities are actually priced and the only clean way to compare quotes across carriers. Current SPIA payout comparison.
• Period certain: A guarantee that payments continue for a minimum number of years regardless of death — "life with 10-year certain" pays for life, but if the annuitant dies in year four the beneficiary receives payments through year ten. Adding a certain period lowers the payment.
• Premium: The money you pay into the contract. Single-premium contracts accept one deposit; flexible-premium contracts accept ongoing deposits.

Q

• QLAC (Qualified Longevity Annuity Contract): A DIA bought inside an IRA or qualified plan that is excluded from the RMD calculation until income begins, no later than age 85. SECURE 2.0 removed the old percentage-of-balance cap and set a flat dollar limit indexed for inflation — confirm the current-year figure before funding one. How QLACs work · QLAC versus CD.
• Qualified annuity: Funded with pre-tax retirement money (IRA, 401(k) rollover, 403(b)). Generally has no cost basis, so the entire withdrawal is taxable, and it is subject to RMDs. Note that an annuity inside an IRA adds no tax deferral — the IRA already provides it. Buy one for the income guarantee, not for the tax treatment.

R

• Renewal rate: The rate, cap, or participation rate a carrier declares for the periods after the first. A carrier's renewal-rate history — how it has treated existing policyholders versus new buyers — is more predictive of your outcome than the first-year rate you are quoted.
• Rider charge: The annual fee for an optional benefit, usually a percentage deducted from the account value. Watch the base it is calculated on: a charge assessed against a growing benefit base but deducted from the account value can consume the account value faster than the quote implies.
• RILA (Registered Index-Linked Annuity): Also called a buffered or structured annuity. Trades some downside protection — a buffer or floor rather than a 0% floor — for a higher upside cap than an FIA. You can lose money in a RILA. It is a registered security, sold with a prospectus, and requires a securities-licensed representative. RILA pros and cons.
• RMD (Required Minimum Distribution): The annual amount the IRS requires you to withdraw from tax-deferred retirement accounts. Under SECURE 2.0 the starting age is 73, scheduled to rise to 75 in 2033. Applies to qualified annuities, not to non-qualified ones. Annuities and RMD strategy.
• Roll-up rate: The guaranteed annual percentage increase applied to the benefit base during deferral, common on income riders. A "7% roll-up" grows a number used to compute income — it is not a 7% return on your money and you cannot withdraw it. Roll-ups typically stop after a set number of years or when income begins.

S

• SPIA (Single Premium Immediate Annuity): You hand over a lump sum and income payments start within twelve months, guaranteed for life or for a chosen term. The simplest product in the category and the one with the fewest ways to be misled — the trade is that the money is generally gone as a lump sum. Honest SPIA pros and cons.
• Spread (margin, asset fee): An amount subtracted from index gain before crediting. With a 2% spread, a 10% index gain credits 8%. Functionally a third way — alongside caps and participation rates — for the carrier to keep part of the index return.
• Surrender charge (withdrawal charge, contingent deferred sales charge): A percentage deducted from withdrawals above the free amount during the surrender period, usually declining each year. It exists so the carrier can invest your premium in long-dated bonds without being forced to sell early. How surrender charges are calculated.
• Surrender period: The number of years the surrender charge applies — commonly three to fourteen years. The correct question is not "how long is it" but "what do I plausibly need this money for before it ends."
• Systematic withdrawal: Scheduled periodic withdrawals from the account value, usually within the free-withdrawal limit. Unlike annuitization or a GLWB, nothing guarantees the money will not run out.

T

• Tax deferral: Interest inside a non-qualified annuity is not taxed as it is credited; tax is due when money comes out, at ordinary income rates. Deferral is genuinely valuable in a taxable account and adds nothing inside an IRA.
• Trigger rate (step rate, performance-triggered): A crediting method that pays a stated fixed rate whenever the index is flat or up by any amount, and zero when it is down. Attractive in mildly positive years, capped hard in strong ones.

V

• Variable annuity: An annuity whose value is held in market subaccounts that can lose principal. A registered security sold with a prospectus. Carries an M&E charge, fund expenses, and rider fees. Distinct from an FIA, which cannot lose value to index movement. Fixed versus variable, compared.
• Vesting: The schedule on which a premium bonus becomes permanently yours. Until fully vested, some or all of it is subject to recapture on surrender.
• Volatility-controlled index: A proprietary index built to hold volatility near a target level, typically by shifting between equity exposure and cash or bonds. Lower volatility makes options cheaper for the carrier, which is what funds the high or uncapped participation rates these strategies advertise. Most have short live track records, and backtested illustrations are not performance.

W

• Waiver of surrender charge: Any contract provision that suspends the surrender charge on a defined event — nursing home confinement, terminal illness, disability, or death. Availability and definitions vary by state.
• Withdrawal charge: Another name for the surrender charge.

Numbers

• 1035 exchange: A transfer under IRC §1035 that moves one annuity contract into another without triggering current income tax, carrying your cost basis across. It does not waive the surrendering carrier's surrender charge or MVA, and it starts a new surrender period on the receiving contract. Step-by-step 1035 exchange guide.
• 59½: The age at which the 10% federal early-withdrawal penalty on the taxable portion of annuity distributions generally stops applying.
• §72(q) / §72(t): The Internal Revenue Code provisions allowing penalty-free pre-59½ distributions taken as substantially equal periodic payments — §72(q) for non-qualified annuities, §72(t) for qualified accounts. Breaking the schedule retroactively reinstates the penalties.

How to use this glossary when you are reviewing a real contract

Four questions answer most of what a buyer needs to know, and every one of them is a term on this page:

1. What is my cash surrender value in each of the next ten years? Not account value. Not benefit base. The number you would actually receive.
2. What is the guaranteed minimum cap or participation rate? The initial rate is a marketing decision. The minimum is a contractual promise.
3. What is the total annual charge, and what is it deducted from? Add up every rider charge.
4. If I need money in year three, what does it cost me? Surrender charge plus MVA plus bonus recapture plus, if you are under 59½, the 10% penalty.

If an agent cannot answer all four in writing from the contract and the disclosure statement, you do not yet have enough information to sign. See the Goldstein Complexity Index for how these features stack up into products that buyers routinely misunderstand, or browse all annuity reviews.

Quick FAQ

Q: What is the difference between account value and benefit base?
A: Account value is your money. Benefit base is a number used to calculate income under a rider. You can withdraw the first and not the second. A statement showing both is not showing you two piles of money.

Q: Can a cap rate go down after I buy?
A: Yes. Caps are declared at each anniversary and can be reset down to the contractual minimum. Ask for the carrier's renewal-rate history on older contracts, not just the current cap on new ones.

Q: Is a 10% bonus free money?
A: No. A bonus is funded by some combination of lower caps, longer surrender periods, and higher fees, and it is usually recaptured if you leave before it vests.

Q: Does an MVA replace the surrender charge?
A: No — an MVA is applied in addition to the surrender charge. In a rising-rate environment the two together can make an early exit considerably more expensive than the surrender schedule alone suggests.

Q: Are annuities FDIC insured?
A: No. Annuities are backed by the issuing carrier's claims-paying ability, with a state guaranty association as a backstop subject to state limits.

Q: Does a 1035 exchange avoid surrender charges?
A: No. A 1035 exchange defers the tax. The old carrier still applies its surrender charge and MVA, and the new contract starts a new surrender period.

---

---

Disclosure

This review reflects publicly available product materials and approximate rates as of the date stated above. Annuity rates, caps, participation rates, payout factors, crediting methods, and long-term care benefit structures change frequently — typically monthly. Always confirm current values against the most recent carrier disclosure document and the actual contract before purchasing. This article is general information for educational purposes; it is not a personalized recommendation, solicitation, or offer of any specific product. Hans Goldstein is an independent licensed insurance producer (NPN 20602398) appointed with multiple A-rated carriers across the annuity and long-term care insurance market; the producer's specific appointment status with the carrier discussed in this review may vary, and this review is not an endorsement or representation of carrier appointment. No compensation has been received from any carrier in connection with the publication of this review. Always read the actual contract and consult a licensed advisor before purchasing any annuity or long-term care insurance product. Past index performance does not predict future credited interest. Annuities and hybrid life+LTC policies are long-term contracts with surrender charges; they are not suitable for funds you may need before the end of the surrender period. AM Best ratings and tax treatment are subject to change. Tax discussion of IRC §7702B, §1035, and the Pension Protection Act of 2006 reflects law as of 2026 and is subject to change.