Annuities are the ungainliest of financial products -- an unlikely hybrid of investment and insurance with a convoluted structure. While other types of investments can offer higher returns and lower management costs, many financial advisors still appreciate annuities as a tool to address specific financial situations. Their insurance-based distinction between the owner and the annuitant provides the advisor with flexibility to address a variety of unique situations.
Parties to the Contract
An annuity is a life insurance policy turned inside-out, so it works as an investment. Instead of paying a lump sum when someone dies, it pays out an income while they live. There are up to four players in any annuity contract. The first is the company issuing the policy, usually a life insurance provider. The second is the person who owns the policy, logically known as the owner. The person who will receive the income from it is referred to as the annuitant. Finally, since the annuity is still a life insurance contract at bottom, beneficiaries can be named to receive the death benefit.
Owner and Annuitant
When you buy an annuity for your own retirement, you're both the owner and the annuitant. That's a simple, straightforward scenario. If you die, your beneficiaries or heirs collect the death benefit, and if you live you'll collect an income. However, sometimes it makes sense for the owner and annuitant to be different. For example, a parent might purchase an annuity to provide for a disabled adult child. In that case, the parent is the owner and the child is the annuitant. The owner might also be a trust or a company providing an employee benefit. Those situations are more complex.
The contract is described as owner- or annuitant-driven, depending which of those lives triggers several of the annuity's provisions. For example, if the owner of an owner-driven annuity dies, the annuitant receives a defined death benefit. It can be taken several forms, including a lump sum or a lifetime income. If the annuitant in an owner-driven contract dies, the owner can become the annuitant and enjoy the income. Alternatively, the owner can name a new annuitant and the contract continues unchanged.
If the contract is annuitant-driven, things are a bit different. On the death of the owner, the annuitant receives the contract's current values. That figure will vary widely, depending on how long the contract was in place and how much it had grown. When the annuitant dies, the annuitant's beneficiary receives the death benefit. Depending on the contract language, the owner of the contract might receive any remaining guaranteed payments or the contract might simply end with the death of the annuitant.
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