Many of the important things in your life are out of your control, so there's great satisfaction in managing the things you can. Consider your retirement planning, for example. It won't always work out exactly as you want, but you exercise substantial control over how the money's invested and how much risk you choose to accept. Annuities even allow you to exert some control from beyond the grave, choosing one or more beneficiaries to receive any unused funds.
Annuities vs. Life Insurance
Annuities let you name a beneficiary -- just as your life insurance does -- because underneath the investment trappings they actually are an insurance product. The difference is that life insurance pays a lump sum at your death while annuities are intended to provide you an income while you live. Originally, any portion of the annuity you didn't use before passing away reverted to the insurance company. That was great for profits, but it was a tough sell with clients who'd worked all their lives to build an estate. To make annuities more marketable, insurers now offer the option of naming beneficiaries to receive any unused funds from your plan.
Choosing Your Beneficiaries
Your beneficiary can be anyone you choose, from a spouse or family member to a colleague, a charity or a trust. If you choose more than one beneficiary -- perhaps your spouse and a charity -- you can specify a percentage of the payout goes for each. If your beneficiaries are minors, they'll need to have a responsible adult appointed to receive benefits on their behalf. It's also prudent to choose contingent beneficiaries as a "Plan B" in case your main beneficiary dies before you or at the same time.
Non-Spousal Death Benefits
If you should die before exhausting the guaranteed funds in your annuity, your beneficiaries can handle the funds in a few different ways. One option is to receive the funds as a lump sum and reinvest it at their discretion. This requires careful thought, because the whole amount would become taxable as ordinary income for that year. More often, beneficiaries choose to spread the payments over time. Sometimes it's a five-year term, providing ample opportunity to reinvest the funds while minimizing the tax impact in each year. Beneficiaries can also choose to receive long-term income based on their projected life expectancy.
Spousal Death Benefits
If the beneficiary is your spouse, there are a few additional options. One is to simply assume ownership of the annuity, which continues unchanged. If it's a tax-sheltered or "qualified" annuity, your spouse could also roll it into another 403(b) or other qualified account. A qualified annuity also provides your beneficiary with some flexibility in receiving minimum distributions. Ordinarily they'd begin when the beneficiary reaches 70 1/2 years of age, but in this instance payments can be started on the date the plan's original owner would have been 70 1/2. If you and your spouse held a joint annuity, your spouse becomes the owner automatically and the plan continues unchanged.
Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.