Understanding the Common Terms in Annuities

Annuities are popular financial products that can provide a steady income stream during retirement. However, the terminology associated with annuities can be complex and confusing. This guide aims to clarify some common terms used in annuities, helping Californians make informed decisions. Whether you are working with annuity financial planners or annuity advisors, understanding these terms will be crucial.


An annuity is a contract between an individual and an insurance company. In exchange for payments made over time or in a lump sum, the insurance company agrees to provide periodic payments to the individual at a later date, typically during retirement.


The annuitant is the person who receives the payments from the annuity. The annuity payments are often based on the annuitant’s life expectancy. In many cases, the annuitant is also the contract owner, but this is not always the case.


The beneficiary is the person or entity designated to receive the remaining annuity payments or death benefit if the annuitant passes away. It’s important to choose beneficiaries wisely and review them periodically, especially after significant life events.


The premium refers to the payments made by the contract owner to the insurance company. Premiums can be made as a single lump sum or as a series of payments over time. These payments fund the annuity and determine the future income stream.

Accumulation Phase

The accumulation phase is the period during which the annuity contract owner makes payments into the annuity. During this time, the money grows on a tax-deferred basis. The length and terms of the accumulation phase can vary depending on the type of annuity.

Distribution Phase

The distribution phase is when the annuity starts to pay out to the annuitant. This phase can provide a steady stream of income, which can be particularly beneficial during retirement. The duration and amount of payments depend on the terms of the annuity contract.

Deferred Annuity

A deferred annuity is one that starts making payments at a future date. This type of annuity allows the investment to grow over time before payouts begin. Deferred annuities are often used as a retirement planning tool.

Immediate Annuity

An immediate annuity begins payments almost immediately after a lump sum is paid to the insurance company. This type of annuity is typically used by individuals who need to start receiving income right away, such as those who are already retired.

Fixed Annuity

A fixed annuity provides regular, guaranteed payments. The interest rate on a fixed annuity is set at the time of purchase and does not change, providing a stable income stream. This option is ideal for those seeking predictable payments.

Variable Annuity

It allows the annuity holder to invest in a variety of sub-accounts, similar to mutual funds. The value of the annuity and the payments received can fluctuate based on the performance of these investments. This option offers potential for higher returns but comes with higher risk.

Indexed Annuity

An indexed annuity provides returns based on the performance of a specified market index, such as the S&P 500. While it offers some potential for growth, it also typically includes a cap on maximum returns and a guaranteed minimum return.


A rider is an additional feature or benefit added to an annuity contract. Common riders include guaranteed lifetime withdrawal benefits, long-term care benefits, and death benefits. Riders can provide extra security and flexibility but often come at an additional cost.

Surrender Charge

A surrender charge is a fee imposed if the annuity holder withdraws money from the annuity before a specified period. This charge decreases over time and is intended to discourage early withdrawals. It’s essential to understand the surrender period and charges before committing to an annuity.


Annuitization is the process of converting the accumulated value of the annuity into a series of periodic payments. This process can be tailored to provide payments for a fixed period or for the lifetime of the annuitant.


Understanding these common terms can empower Californians to make better decisions when considering annuities as part of their financial planning. Whether you are consulting with annuity financial planners or annuity advisors, having a clear grasp of the terminology will help you navigate the complexities of annuities and make choices that best suit your financial goals and retirement plans.

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