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Glossary of Financial Terms

When reading about insurance and financial products, you may encounter jargon and acronyms. This glossary of financial terms provides simple definitions and explanations of some commonly used terms.

We’re providing these definitions for informational and educational purposes only. They aren’t investment advice. Please discuss your specific situation or questions with an investment professional or go to the Financial Industry Regulatory Authority website for more information.

Actuary – A mathematician who calculates premiums, reserves, dividends, insurance, pension and annuity rates for insurance and financial services companies.

Annuitant – The person whose life is insured is the annuitant. The annuitant and the annuity owner may not be the same person.

Annuitization – The time you spend contributing to your annuity is the accumulation phase. The annuitization phase begins when you start receiving money from your annuity.

Annuity – This is an insurance contract issued by a life insurance company. It provides income at regular intervals for a defined period of time, such as a specific number of years or for life.

Asset Allocation – Spreading your investments between asset categories (i.e. stocks, bonds, cash or cash equivalents) may help minimize risk. This may help manage the risk of investing in part because these investment categories respond to changing economic and political conditions in different ways. Please keep in mind that the use of asset allocation does not guarantee returns or insulate you from potential losses.

Contract issue date – The date you sign paperwork to buy an annuity.

Contingent Deferred Sales Charge (CDSC) – An investment company may collect this fee if you withdraw money from your investment early in the contract. It compensates the company for the high cost they incur when setting up your account. The CDSC typically goes down over time and goes away altogether, when you reach to defined period for the contract.

Deferred annuity – You may use a deferred annuity if you want to potentially grow your assets that could provide a steady stream of income during retirement. When you purchase the annuity, you deposit money into it over a period of time and that money is invested. At a certain point, usually at retirement, you start receiving payments from the annuity, either in a lump sum or in installments.

Distribution (also called a withdrawal) – Money you take from your financial account, such as an IRA.

Fixed annuity – With a fixed annuity, the insurance company guarantees the rate of return and payout. Guarantees are subject to the claims-paying ability of the issuing insurance company.

Earnings - Money gained on the principal in your financial accounts, such as IRAs.

IRAs – IRAs or individual retirement accounts are accounts that you own and fund through your own contributions. Two common types of IRAs are:

• Traditional IRAs – You make contributions with pre-tax dollars and earnings are tax-deferred. This means that you don’t owe taxes until the funds are withdrawn – usually at retirement.
• Roth IRAs – You make contributions with after-tax dollars, so you don’t pay taxes on the money as it accumulates.

Immediate annuity – Win the lotto, inherit a large sum of money or sell a business? You can use an immediate annuity to convert a lump sum into payments for life or for a certain number of years. Payments begin immediately.

Principal - Money you’ve contributed to your financial account, such as an IRA.

Qualified/nonqualified – This identifies whether contributions are made with pre-tax or post-tax dollars. Qualified contributions come from money that hasn’t been taxed yet – like money withheld from your paycheck for your 401k. Nonqualified contributions come from money that has already been taxed – like the check you write for your Roth IRA.

Rider – You can often add an optional rider to your life insurance or annuity so it fits your personal situation. Riders offer additional coverage and protection on select products at an additional charge.

Single premium/single purchase payment – A single premium annuity is a deferred annuity that lets you put money into your annuity account only once, when you first purchase the product.

Variable annuity – This is a long-term investment product that provides a variable rate of return based on the performance of the investments that you select. A variable annuity is a contract between you and an insurance company and it’s sold by prospectus. While it may take some time, you should read the prospectuses. They describe risk factors, fees and charges that may apply to you. Variable annuities have fees and charges that include mortality and expense, administrative fees, contract fees, and the expense of the underlying investment options.

Withdrawal (also called a distribution) – A withdrawal is money you take from your financial account, such as an IRA. Distributions made prior to age 59½ may be subject to a 10% penalty tax. All taxable distributions at any age are subject to ordinary income tax and surrender charges may apply. You may incur fees or penalties when you make a withdrawal, depending on the type of product and whether the account is qualified or non-qualified.

Keep in mind

Neither Nationwide® nor our representatives provide tax or legal advice. You should consult with an attorney or other professional advisor for such advice.