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Glossary
Plain-English definitions of key terms used in CDA contracts, regulatory documents, and retirement income planning.
A
- Annuity
- A contract issued by an insurance company that provides a series of payments in exchange for a premium or series of premiums. Annuities are used primarily for retirement income planning. They may be immediate (payments begin right away) or deferred (payments begin at a future date).
- Annuity Wrapper
- An informal term for a contingent deferred annuity (CDA) or similar insurance overlay product. The insurance guarantee is "wrapped around" an existing investment account without requiring the investor to transfer assets into an annuity contract.
B
- Benefit Base
- A notional (not real) dollar figure used to calculate the guaranteed withdrawal amount under a CDA or variable annuity with a GLWB rider. The benefit base is not the same as the account value; it may be higher if step-up provisions have locked in market gains. The benefit base does not represent a cash value that can be withdrawn.
C
- Contingent Deferred Annuity (CDA)
- An insurance contract that provides a guaranteed lifetime income benefit applied as an overlay on non-insurance investment assets held in the policyholder's own account. The guarantee is "contingent" on the account being depleted to zero. Unlike a variable annuity, the underlying assets are not transferred to the insurance company.
D
- Deferred Annuity
- An annuity contract in which the income payments are deferred to a future date. During the accumulation phase, the contract value grows (either at a fixed rate, indexed to a market index, or through investment in sub-accounts). A CDA is a type of deferred annuity in the sense that the insurance obligation is deferred until the account depletes.
F
- Fixed Indexed Annuity (FIA)
- An annuity contract in which the interest credited is linked to the performance of a market index (such as the S&P 500), subject to a cap, floor, or participation rate. The principal is protected from market losses. FIAs are regulated as insurance products, not securities.
G
- Guaranteed Lifetime Withdrawal Benefit (GLWB)
- A rider or feature of an annuity contract (or CDA) that guarantees the contract holder can withdraw a specified percentage of the benefit base each year for life, even if the account value reaches zero. The GLWB is the most common form of lifetime income guarantee in CDAs and variable annuities.
- Guaranteed Minimum Withdrawal Benefit (GMWB)
- A rider or feature that guarantees the contract holder can withdraw a minimum amount each year, typically until the total withdrawals equal the benefit base. A GLWB is a type of GMWB that extends the guarantee for the contract holder's lifetime, regardless of how long they live.
I
- Income Rider
- An optional add-on to an annuity contract that provides a guaranteed income benefit, typically a GLWB or GMWB. Income riders are common in variable annuities and fixed indexed annuities. In a CDA, the income guarantee is the core feature of the contract rather than an optional rider.
- Insurance Overlay
- See: Annuity Wrapper, Contingent Deferred Annuity. An insurance guarantee applied on top of an existing investment account, without requiring the transfer of assets to the insurance company.
L
- Lifetime Income
- Income that is guaranteed to continue for the recipient's lifetime, regardless of how long they live. Lifetime income products address longevity risk: the risk of outliving one's assets. CDAs, traditional annuities, and Social Security are examples of lifetime income sources.
M
- Managed Account
- An investment account managed by a professional investment manager or registered investment adviser on behalf of the account owner. Managed accounts are a common vehicle for CDA overlays, as the assets remain in the investor's name and under professional management.
O
- Overlay
- In the context of CDAs, an overlay refers to an insurance guarantee that is applied on top of an existing investment account. The overlay does not change the ownership or structure of the investment account; it adds an insurance layer that provides income protection if the account is depleted.
S
- Separate Account
- In a variable annuity, the separate account holds the investment sub-accounts. Assets in the separate account are legally segregated from the insurance company's general account and are not subject to the insurer's creditors. CDAs do not use a separate account; the assets remain in the investor's own account.
- Step-Up
- A provision in a CDA or variable annuity that allows the benefit base to be increased (stepped up) to the current account value on specified dates (e.g., annually on the contract anniversary), if the account value exceeds the current benefit base. Step-ups lock in market gains and can increase the guaranteed income amount.
- Surrender Charge
- A fee charged by the insurance company if the contract is terminated (surrendered) during the surrender charge period, which typically lasts 7–10 years from the contract issue date. Surrender charges decline over time and eventually reach zero. Terminating a CDA during the surrender charge period may result in a significant fee.
V
- Variable Annuity (VA)
- An annuity contract in which the contract value varies based on the performance of investment sub-accounts chosen by the contract holder. Variable annuities are regulated as both insurance products and securities. They often include optional riders such as GLWBs. Unlike CDAs, variable annuities require the transfer of assets into the insurer's separate account.
- Volatility Management
- An investment strategy designed to reduce the variability of returns in a portfolio. CDA contracts often require the underlying account to be invested in volatility-managed strategies (e.g., risk-controlled funds) to limit the insurer's exposure to large, rapid market declines. Volatility management may reduce both downside risk and upside potential.
W
- Withdrawal Rate
- The percentage of the benefit base that the contract holder is guaranteed to withdraw each year under a GLWB or GMWB. For example, a 5% withdrawal rate on a $500,000 benefit base guarantees $25,000 per year for life. Withdrawal rates vary by product, age at first withdrawal, and contract terms.