Insurance Continuing Education - Owning an Annuity
When the owner of an annuity enters into an annuity insurance agreement they must always understand all of the terms to the best of their ability. If there are additions, withdrawals, or a complete liquidation to be made, there may be restrictions or penalties.
The contract owner can be an individual, couple, trust, corporation, or partnership. The only requirement is that the owner must be an adult or legal entity. A minor can be the owner as long as the policy lists the minor’s custodian (example: “James Jones, as custodian for the benefit of Johnny Jones”). Since the contract owner controls this investment, the owner has total control, and can give the contract to anyone, or will give part or the entire contract to anyone or any entity at any time.
The most difficult party to an annuity for a person to fully understand is the annuitant. The best way to understand this party to an annuity would be to compare it to the functions of a life insurance policy. When a life insurance policy is issued, the person insured is named on the contract and continues as the insured until the owner of the policy either terminates the contract or does not make any required premium payments - or, of course, the insured dies.
With the annuity insurance, the terms remain in force until the annuity contract owner makes a change or the annuitant (the person named in the contract as annuitant) dies. Therefore, the annuitant resembles the insured in a life insurance policy. But with an annuity, the death of the annuitant does not necessarily mean the contract is about to terminate. Even though every annuity contract must designate an annuitant, the annuitant has no voice or control over the investment or its disposition. If the contract is a Variable Insurance Annuity, and if the annuitant dies, this may create certain insurance company guarantees.
Annuitants are often called the “measuring life.” This means that the length of time that the contract covers must have a specific time frame. The annuitant is then used as the time frame that is considered and referred to by the contract. Just like in life insurance, the annuitant has no voice or control over the contract. The annuitant can benefit from an annuity ONLY when it “annuitizes.” The annuitant, by itself, cannot make withdrawals or deposits, change the names of the parties to the agreement, or terminate the contract.
The person named as annuitant can be any person so designated by the annuity, with the only restriction being that is must be an actual living person under a specified age, and not a trust, business, corporation, etc. The maximum age of the proposed annuitant depends on the requirements of the insurance company - usually the annuitant must be under age of 75 when the contract is first executed. It is of prime importance that the investment (contract) stay in force after the annuitant reaches this maximum age.
Generally, the contract owner may change the annuitant at any time provided the annuitant is alive when the contact was originally executed. Some annuity contracts allow for the contract owner to name a co-annuitant. By naming a co-annuitant, the contract could last longer because any “forced” annuitization or the termination of the contract could possibly be postponed until the death of the second annuitant. The co-annuitant can be compared to a “second-to-die” life insurance policy, as the death of one annuitant will not force distribution of the annuity. Naming a co-annuitant means the death of one annuitant will not trigger a possible forced distribution.
Only a small number of insurers include a co-annuitant option as part of the insurance and annuity application.
Some annuity insurance contracts require a distribution or “orderly liquidation” of the funds, once the annuitant reaches a certain specified age - typically 80 or 85. The death of an annuitant may require liquidation within a specified period, usually five years.