Annuities sound like a simple investment at first: You place your money with an insurance company, and in turn they eventually pay out a retirement income. But, in practice, many variables affect how money is paid into and out of the annuity contract. Some of those options revolve around whether the owner of the contract is also the annuitant.
Annuities differ from most other investments because, at bottom, they're an insurance contract. Life insurance policies are designed to provide a lump sum of money when you die, while annuity products provide a regular income while you're living. The two products rely on a similar underwriting process, which assesses a person's likely lifespan based on a large body of statistics amassed over the decades by the insurance industry. The contract is based on the health and life expectancy of a specified person, who is called the annuitant. The owner might or might not be the same person.
The owner of the contract is the person who arranges and pays for the annuity. With retirement annuities, the owner and the annuitant are typically the same person. If Joe pays into the contract, Joe receives the retirement income from it. Because the owner is the person who funds the contract, he or she is also responsible for any tax-related repercussions. However, in many cases a contract is structured so that the owner and annuitant are different. This is often to provide suitable retirement plans for both a working and a non-working spouse, in which the working spouse receives the benefit but the working spouse remains the owner of the contract.
The annuitant and owner can be different for other reasons. For example, you might have an elderly parent whose retirement income isn't adequate. You might choose to purchase an annuity to supplement her income, which makes her the annuitant while leaving control of the contract in your hands as the owner. If you're the parent of a child who's dependent because of medical issues or a disability, purchasing an annuity contract with your child as the annuitant can provide a stable, lifetime income to help offset the costs of care.
Differences at Termination
When the annuity's owner dies, the assets held in the contract are usually paid out to the owner's named beneficiary, which makes them taxable to the beneficiary. If the annuitant is the owner's surviving spouse, ownership transfers to the spouse instead, allowing the survivor to continue building an estate. This only holds true if the surviving spouse is the only beneficiary named under the contract. If children or others are named as beneficiaries, that benefit is lost. The annuity contract's language makes specific provisions for paying out to the annuitant's beneficiaries, and that determines how the benefits are taxed. The laws change regularly, so professional advice can be useful.
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