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Terms and Video Explanations

Every industry has specific words and phrases they use that most people are not familiar with. In many cases, wrong decisions are made due to the misinterpretation of industry terminologies. This page should help you better understand a number of terms that are used in the financial services industry.

Accumulation Value:

The original premium plus any interest or bonus credited.

Annual Reset:

Crediting methods measuring index movement over a one-year period. Positive interest is calculated and credited at the end of each contract year and cannot be lost if the index subsequently declines. An annual reset structure preserves credited gains and treats negative index periods as years with zero growth.

The person upon whose life expectancy a life income is based upon annuitization.

The process of converting an annuity investment into a series of periodic income payments. Annuities may be annuitized regularly, over a long or short time period, or in some cases, in one single payment.

Annuity Income Payments:
One of the most important benefits of deferred annuities is your ability to use the value built up during the accumulation period to give you a lump-sum payment or to make income payments during the payout period. Income payments can be made monthly, quarterly, or annually.

  • There are various types of irrevocable income payout options available: (Annuitization)
  • Life Only- The company pays income for your lifetime. It does not make any payments to anyone after you die. This payment option usually pays the highest income possible.
  • Life Annuity with Period Certain or just Period Certain-The company pays income for as long as you live and guarantees to make payments for a set number of years even if you die. This period certain is usually 10 or 20 years. If you live longer than the period certain, you will continue to receive payments until you die. If you die during the period certain, your beneficiary gets regular payments for the rest of that period.
  • Joint and Survivor-The company pays income as long as either you or your beneficiary lives. You may choose to decrease the amount of the payments after the first death. You may also be able to choose to have payments continue for a set length of time. Because the survivor feature is an added benefit, each income payment is smaller than in a life-only option.


Index values may either be measured from a start point to an end point (point-to-point) or values between the start point and end point may be added up, divided by the number of periods used, and this average becomes the end point. Index values may be averaged over the days, weeks, months, or quarters of the period.


Bonds are long-term debt issued by a company or government, similar to an IOU.  When a business wants to expand, they issue bonds at various interest rates and sell them to the public. Investors purchase the bonds and the company will pay back the original principal plus interest due by a set date or maturity date. Bonds are subject to market risk and credit risk

Call Option:
Gives the option buyer the right to buy an underlying security or index at a specified price on or before a given date.


The maximum interest rate that will be credited to the annuity for the year or period, or the maximum growth upon which interest will be calculated. The Cap usually refers to the maximum interest credited after applying the participation rate or yield spread. Example: If the equity index had an increase of 12%, and you had an annual cap of 8%, then the interest credited to your account would be 8%, which was your cap.

Cash Surrender Value:

The minimum amount the annuity owner receives if the contract is surrendered.

Certificate of Deposit (CD):
A bank investment derivative product without a minimum guaranteed interest rate, tax-deferral, or lifetime income options.

Compound Interest:
Interest is earned on both the original principal and on previous interest. If you are only looking at a few periods, there is not much difference between the effects of simple and compound interest. However, the effects of compound interest become proportionately greater with each passing period.

Contract Fee:
A flat dollar amount charged either once or annually.

Crediting Methods:
The formula used to determine the excess interest that is credited above the minimum interest guarantee.

Credit Risk:

An investor’s risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Another term for credit risk is default risk. To simplify this, make sure that the companies that you are investing in or purchasing from are able to pay their bills; otherwise the company may go out of business. Credit risk may ultimately cause you loss of principal and interest.

Current Interest Rate:
The current rate is the rate the company decides to credit to your contract at a particular time.  The company will guarantee it will not change for some time period. The initial rate is an interest rate the insurance company may credit for a set period of time after you first buy your annuity. The initial rate in some contracts may be higher than it will be later. This is often called a bonus rate.

Death Benefit:
In some annuity contracts, the company may pay a death benefit to your beneficiary if you die before the income payments start. The most common death benefit is the contract value or the premiums paid, whichever is greater.

Deferred Annuity:

An annuity whereby at least a year will elapse between when the premium or premiums are paid and the annuity is annuitized with a stream of income produced.

Defined Liquidity:
Unlike stocks or bonds, index annuities have defined liquidity. Regardless of how the market performs, you usually know exactly what your surrender value is at any time.

Index Universal Life:
Shares the coverage and premium flexibility of other universal life policies, but the crediting of interest is linked to an equity index.

European-Style Option:
May only be exercised on its expiration date. An American-style option may be exercised at any time before it expires.

Excess Interest:
Interest credited to the annuity contract above the minimum guaranteed interest rate. In an index annuity the excess interest is determined by applying a stated crediting method to a specific index.

To use an option to buy or sell the underlying security or index.

Fixed Annuity:
A contract issued by an insurance company guaranteeing a minimum interest rate with the crediting of excess interest determined by the performance of the insurer’s general account. Index annuities are fixed annuities.

The minimum participation rate or minimum cap that could be applied at future renewals. The floor is also the minimum index-linked interest rate you will earn. The most common floor is 0%. A 0% floor assures that even if the index decreases in value, the index-linked interest that you earn will be zero and not negative. All fixed annuities have a minimum guaranteed value.

Free-Look Provision:
Many states have laws which give you a set number of days to look at the annuity contract after you buy it. If you decide, during that time, that you do not want the annuity, you can return the contract and get all your money back. This period is often referred to as a free-look or right to return provision.

Free Withdrawals:

Withdrawals that are free of surrender charges; however, loss of excess interest or premature distribution penalties could apply.

GMIB | GWB | LIBR value: Guaranteed Minimum Income Benefit or Guaranteed Withdrawal Wenefit or Lifetime Income Benefit rider refers to a value in the contract that is separate from the contract value/accumulation value. This value grows separately from your accumulation value, and is unable to be cashed in, other than taking lifetime income payments from it. The LIBR account generally has a fixed growth factor, which grows annually, until you activate the lifetime income feature. At the time of activation, the benefit value will stop growing at the declared rate as payments for lifetime income have started.

Immediate Annuity:
An immediate annuity will produce income payments, starting no later than one year after you pay the premium. You usually pay for an immediate annuity with one payment.


The underlying external benchmark upon which the crediting of excess interest is based; a measure of the prices of a group of securities.

Matching the performance of a specified group of annuities. Indexing does not attempt to beat the market, but to be the market.

Market Index Securities:
A security promising a guarantee of principal if held to a 5- or 7-year maturity with upside index potential.

Market Risk:  Video Explanation
The possibility to lose past interest credits or even principal (in an annuity). The original principal and credited interest of an index annuity are not subject to market risk. Even if the index declines, the annuity owner would receive no less than their original principal back if they decided to cash in the policy at the end of the surrender period. Unlike a security, index annuities guarantee the original premium and the premium is backed by the insurance company that issues the contract.

Margin/Spread/Administrative Fee: Video Explanation
In some annuities, the index-linked interest rate is computed by subtracting a specific percentage from any calculated change in the index. This percentage, sometimes referred to as the “margin”, “spread”, or “administrative fee”, might be instead of, or in addition to, a participation rate. Example: If the index change was 10% and the fee was 2.5%, your interest credit for the year would be 7.5% after applying the fee.

Market Risk:

Risk that the value of a portfolio will decrease due to the change in value of market risk factors. Four standard market risk factors are stock prices, interest rates, exchange rates, and commodity prices.

Market Value Adjustment:
The issuing insurance company may make a Market Value Adjustment (MVA) on amounts withdrawn or surrendered from the contract in excess of a the free withdrawal amount (most annuities will allow free withdrawals of 10% of the accumulation value or the interest earned in the contract). It may result in either an increase or a decrease to the amount withdrawn or surrendered. A MVA will be made only when a Surrender Charge is deducted. Generally, If interest rates are higher at the time of excess withdrawals or surrender, than when the contract was purchased, a negative MVA will apply. If interest rates are lower at the time of withdrawal than when the contract was purchased, a positive MVA will apply. The MVA will not reduce the amount surrendered below the Minimum Guaranteed Contract Value.

Maturity Date:
The maturity date is the longest one can keep annuity interest deferred before it must be taken out. Maturity dates usually occur when the annuitant celebrates their 80th or 90th birthday.

MEC (Modified Endowment Contract):

Cumulative premiums paid during the first 7 years of the life contract exceed the amount needed to provide a paid-up policy based on 7 level annual premiums. The test that is used is called the 7-pay test. Any distributions from a MEC, loans and withdrawals, are taxed as ordinary income when received, but death benefits are generally received income tax-free. Once a policy has failed the 7-pay test, it becomes a MEC and remains a MEC for the lifetime of the contract, even if exchanged for another policy.

The way index movement becomes interest crediting is calculated. There are currently 40 different methods used to determine how index movement becomes interest credited.

Minimum Guaranteed Value:

The minimum guaranteed interest rate is the lowest rate your annuity will earn. Say the annuity guaranteed 3% a year based on 100% of the premium. This means that at the end of a seven-year term, the minimum guaranteed rate would be $1.23 for every $1 of premium. If the external index increased so that the index annuity interest crediting method resulted in a 30 cent interest gain for the entire period, the annuity contract would credit 30 cents – not 30 cents plus 23 cents. If the calculated index gain was zero for a year, the typical index annuity would not credit the minimum guarantee of 3% for that specific year; the contract would record 0% interest.

Non-Qualified Money:

Money which taxes have already been paid “after tax” or “post tax” dollars. Non-qualified money is typically kept in checking, money market, and savings accounts. Because some of the money has previously been taxed, any credited interest on the contract will be taxed at ordinary income tax bracket in the year of the distribution, however, will eventually have return of original capital, and therefore will not be fully taxable.

A contract which conveys to its buyer the right, but not the obligation, to buy or sell something at a specified price on or before a given date. After the given date, the option ceases to exist. Insurers typically buy options to provide the index linkage for the excess interest potential. Options may be American-styled, where they may be exercised anytime prior to the given date, or they may have to be exercised only during a specified window. Options that may only be exercised during a specified period are European-style options.


A paramedical exam is a personal interview with you to collect information about your medical history. This information allows underwriting to perform a comprehensive evaluation of your current health. The exam can include recording of height and weight, and blood pressure and pulse. Additionally, the exam may include collection of blood and urine, oral fluid, and EKG or X-ray depending on underwriting guidelines. You will need the names and dosage of medications that you are taking, names of doctors or clinics that you have visited in the past 5 years, and will need a picture ID for the examiner.

P/E Ratio:
Tells how many years worth of earnings a share of stock is selling.

Participation Floor:
A crediting factor minimum guarantee.

Participation Rate:

Participation rate decides how much of the increase in the index that would be used to calculate index-linked interest. Example: if the participation rate is 80%, and the equity index had a 10% increase, you would receive 80% of the 10% gain, which results in an 8% return.

A crediting method measuring index movements from an absolute initial point to the absolute end point for a period. If an index had a starting value of 100 and a period ending point of 120. A point-to-point method would record a positive index movement of 20, or a 20% positive movement (120-100/100). Point-to-point usually refers to annual periods, but can also measure on a monthly basis.


Is the process by which legal title of property is transferred from the decedent’s estate to the beneficiaries. Since you can’t take it with you, the court decides who gets it. If a person dies with a will, the probate court determines if the will is valid, hears any objections, orders creditors be paid, and supervises the process to the terms of the will. If a person dies without a will, probate court appoints a person to receive all claims against the estate, pays creditors, and distributes any remaining property in accordance with state law. The typical cost to probate an estate is in the range of 3% to 7% of the total estate value.

Put Option:
Gives the buyer the right to sell an underlying security or index at a specified price on or before a given date.

Return Floor:
Another way of saying minimum guaranteed return.

RMD (Required Minimum Distribution):

The amount of money that an owner of a traditional IRA is required to take out by April 1, following the year that he or she reaches the age of 70.5 and by December 31 for following years. IRA owners are responsible for taking the correct amount of RMD on time every year, or face stiff penalties for not doing so.

Rule of 72:

Formula for determining approximately how many years it takes a sum to double at a given rate. 72 is divided by the return percentage and the answer is approximately the time it takes money to double at that rate.

Simple Interest:
Interest is only earned on the original principal.

Standard & Poor’s 500 (S&P500®):
Most-widely-used index annuity external index. The index does not include reinvested dividends of the underlying stocks.

Stock Plan:
A stock plan is a form of employee compensation that provides your employees with either stock or a cash amount based on the performance of your company's stock. There are several types of stock plan, including employee stock ownership plans (ESOPs), restricted stock plans, stock appreciation rights (SARs), stock option plans, employee stock purchase plans.

Stretch IRA:
Is a method of extending the duration of tax deferral benefits of an IRA to a succession of beneficiaries beyond the original designated beneficiary. It is simply a wealth transfer method that allows you to stretch your IRA over several future generations.

Strike Price:
The specified share price or index value at which the shares or interest may be bought or sold. If the strike price of a call option is less than the current market price of the underlying security, the call is said to be in-the-money. Conversely, if the strike price of a call option is greater than the current market price, it is out-of-the-money and would not be exercised.

Surrender Charges:

A charge imposed for withdrawing funds or terminating the annuity contract usually within a specified number of years. The charge is usually expressed as a declining percentage of the total contract value.

Surrender Value:
The minimum amount the annuity owner receives if the contract is surrendered.

Tax Deferral Part 1 - Tax Deferral Part 2:

Annuities grow tax deferred, which means that interest grows without being subject to income taxes annually, until you access the money. When the money is accessed, it is taxed at your ordinary income tax bracket, which is typically lower later in life at retirement age. Interest withdrawn previous to age 59.5 is subject to an additional IRS penalty.

Tax Qualified Money:

Is earned income that can be contributed to a tax deferred account typically used for retirement. IRAs and 401(k)s are examples of qualified retirement accounts. These accounts accumulate for a number of years without being taxed, until the money is distributed. Because the money has never been taxed, distributions are fully taxable at the earned income tax bracket the distribution occurs. At age 70.5 you will be required to take RMD’s, required distributions that the IRS states.

The index term is the period over which index-linked interest is calculated; the interest is credited to your annuity at the end of a term. Terms are generally from one to ten years, with seven years being most common.

Term Average Highest Anniversary:
A crediting method where a rolling annual average of a monthly index value is calculated and the highest averaged anniversary value used as an end point. It is not a high water mark methodology.

1035/Tax Free Exchange:

Section 1035 of the IRS code states that one annuity may be exchanged for another annuity without a taxable event. You will hear these terms when dealing with non-qualified money.

Term End Point:
Crediting methods measuring index movements over a greater timeframe than a year or two. The opposite of annual reset method, also referred to as term point-to-point method. If the index valued started at 100, and were at 150 at the end of the period, the positive index movement would be 50% (150-100/100). The company would credit a percentage of this movement as excess interest. Index movement is calculated and interest credited at the end of the term and interim movements during the period are ignored.

Term High Point (High Water Mark):
A type of term end point structure that uses the highest anniversary index level as the end point. Example: the index starting value is 100, and reaches a value of 160 at the end of a contract year during the period, and ended the period at 150. A term high point method would use the 160 value- the highest contract anniversary point reached during the period, as the end point and the gross index gain would be 60% (160-100/100). The company would then apply a participation rate to the gain.

Universal life:
You may pay premiums at any time, in any amount (subject to certain limits), as long as the policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at a declared interest rate, which may vary over time.

Universal variable life:
A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value goes up or down based on the performance of investments in the subaccounts.

Variable Annuity:
A contract issued by an insurance company offering separate accounts invested in a wide variety of stocks and bonds. The investment risk is borne by the annuity owner. Variable annuities are considered securities and require appropriate securities registration.

Typically used with term high point methods, a portion of any gain is locked in each year and this vested portion is available for withdrawal.

Variable life:
As with whole life, you pay a level premium for life. However, neither the death benefit nor cash value are predetermined or guaranteed; they fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. You select the subaccounts in which the cash value should be invested.

Whole life:
You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed (subject to claims paying ability of the issuing company). Your only action after purchase of the policy is to pay the fixed premium.

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