Who's Who in an Annuity
All annuity contracts share the same basic DNA. The following sections describe the participants who have a hand in all the annuities you'll run across.
The owner of an annuity is just that — the owner. This person
- Pays the premiums
- Signs the application
- Agrees to abide by the terms of the contract
- Decides who the other parties of the contract will be
- Can withdraw money or even sell the annuity (depending on the type of contract or the stage it's in)
- Is liable for any taxes that are due
Two people can own an annuity contract jointly. The owner should be a person, but it can also be a trust that represents the interest of a person. If one owner dies, the joint owner, like a copilot, takes the helm. A corporation can't own an annuity.
Depending on the contract, the owner may be able to change the annuitant (see the following section) after buying the annuity. The owner can pass ownership over to someone else, but a taxable event (where the owner ponies up the income taxes on the contract's gains) may result. That is, the owner may have to shell out the income taxes on the contract's gains.
The annuitant is the person on whose life expectancy the annuity payments will be calculated. If and when the owner decides to start taking a guaranteed lifetime income from the annuity, the size of the (typically monthly) annuity payments is based on the annuitant's age and life expectancy — not the owner's.
For instance, if the owner is 68 years old but the annuitant is his 65-year-old wife, then the insurance company will assume that it will make monthly payments to her for about 19 years, which is the life expectancy of a 65-year-old woman. (Keep in mind, however, that insurance companies may base annuity payments on the life expectancies of annuity purchasers, who tend to live longer than average.)
In most annuity contracts, however, the owner and the annuitant are the same person. In fact, if they are not the same person, and one of them dies, trouble can result.
A beneficiary is the person designated to receive assets upon someone else's death. When filling out an annuity contract application, the owner names his own beneficiary and also the annuitant's beneficiary. The owner and the annuitant can be each other's beneficiary (which simplifies matters); no one can be his or her own beneficiary.
The insurance company that issues the contract and puts itself on the hook for any guarantees in the contract is the issuer.
Always look for an issuer that's rated Excellent, Superior, or Very Good by the ratings agencies, such as A.M. Best and Fitch. A high rating suggests — but doesn't guarantee — that the issuer will fulfill its promises and that you'll get your money back.