To use an analogy, in a life insurance policy, the beneficiary has no “status” until the death of the named insured. In an annuity, the beneficiary has no “status” until the death of the annuitant. Similarly, the beneficiary of an annuity has no control of the policy and has no say in the management of the policy. The annuitant benefits from an annuity only when the annuitant dies.
The beneficiary can be either an individual, or a trust, corporation or partnership. There does not have to be any relationship between the beneficiary and the annuitant – indeed, they could conceivably be (but highly unlikely) total strangers. The application form used for an annuity allows the owner to state multiple beneficiaries, and to designate the percentage of each beneficiary if so desired.
Frequently, one spouse would be the owner of the contract, and the other spouse would be the beneficiary. With some companies, co-ownership is allowed, thereby allowing both spouses to be owners. They can be quite valuable in case the annuitant dies as the annuity proceeds would not go to a beneficiary as long as one of the spouses was still alive.
Generally, a single person (or widow or widower) will designate themselves as the owner of the contract and also the annuitant, naming another party as the beneficiary (such as a church, charity, etc.). By doing this, the person has complete control over the investment during their lifetime, and upon their death, the annuity proceeds will automatically pass to the intended heir.
Since the owner of the contract can change the beneficiary at any time, they do not need to notify a listed beneficiary that they have been so designated, or indeed, even tell them if they are removed as beneficiary.
MULTIPLE TITLES
When the original investment(s) is/are made, the owner(s), annuitant, and beneficiary(s) must be so stated. As stated above, only the annuitant has to be a natural person. The person can hold more than one “title.” For instance, they could be the contract owner and beneficiary of the same contract. It is also possible that the annuity owner, annuitant and beneficiary are the same person. It should always be remembered that a non-person entity (such as a corporation, partnership, living trust, etc.) can only be specified as contract owner and/or beneficiary. The annuitant must be a living individual under a certain age.
HOW THE CONTRACT IS “DRIVEN”
Most annuities are considered as “annuitant-driven,” i.e., if the annuitant reaches a certain age, died, or became disabled, certain provisions of the annuity would govern. Some of these provisions could waiver any penalties enacted by the insurer, or the death benefit, IRS penalty, and/or the required annuitization or distribution of the contract would go into effect, depending upon the situation of the annuitant (such as the contract owner dying, reaching a certain age, or becoming disabled). Some annuities state that certain provision can come into being if the owner, co-owner, or annuitant dies, reaches the age of annuitization, or becomes disabled. This flexibility makes the annuity more appealing in some circumstances./
WHEN DO BENEFITS BEGIN?
There are two basic types of annuities in respect to when benefits start (when the annuity “annuitizes”) – immediate and deferred.
IMMEDIATE ANNUITY –START PAYING NOW
With an immediate annuity, annuity payments will commence after a predetermined “period.” The period can be one year, for instance, in which case the first benefit payment will be one year after the purchase of the immediate annuity. Payments can be monthly, quarterly, semi-annual or annual. If the period is one month, annuity payments start one month after purchase.
DEFERRED ANNUITY-START PAYING LATER
With annuitization, the payment period is scheduled to begin at some future date. The period when the contract annuitizes, is called the maturity date. Conversely, for definition purposes, the period prior to the maturity date is called the accumulation period. Further, the period following the maturity date during which payments are made is the liquidation or distribution period.
If death occurs before the annuitization period as stated in the contract, the cash value paid to the annuitant’s beneficiary would equal the amount of premiums paid in. However, most contacts provide for payment to the beneficiary of at least the amounts paid in – plus interest and regardless of sales charges.
The purchaser of a Deferred Annuity is permitted to alter the date that payments are scheduled to begin but within certain conditions that are plainly stated in the annuity.
