Many annuity contracts define the annuitant as the individual who is designated to receive income benefits under the contract. However, under some contracts, as well as in the tax law, the annuitant is defined as the individual upon whose life income benefits will be based – the benefits themselves may actually be paid to a different party.
Even under a contract that allows for a different payee, in the usual case it is anticipated that the annuitant will be the recipient of income benefits under the annuity. And even if benefits are paid to a different party, it is the annuitant who serves as the “measuring life” in reference to those benefits.
Must Be a Natural Person
The annuitant must be an individual (or in the case of joint annuitant, two individuals). If a trust, corporation, or other non-natural person were the annuitant, there would be no natural life by which to measure the benefits of the contract.
Role of the Annuitant
The role of the annuitant as the measuring life under an annuity contract is similar to the role of the insured under a life insurance policy. Just as it is the insured’s age which determines the premium rates for a life insurance policy, it is the annuitant’s age which determines the benefits payable under an annuity. And just as it is the insured’s death which triggers the payment of benefits under a life insurance policy, it is the attainment of a given age on the part of the annuitant that triggers the annuity starting date under an annuity. And just as the insured is usually also the owner of a life insurance policy, the annuitant is usually also the owner of an annuity, though there are exceptions.
Some contracts allow the owner to name joint or co-annuitants. However, having joint annuitants to a deferred annuity may unnecessarily increase the risk that unwanted changes will be made to the contract prior to the annuity starting date. This is because the risk of death for either of two people is higher than the risk of death for one person. Under some contracts, if the annuuitant dies, the value of the annuity would be paid immediately to the beneficiary. Under others, the owner could change the annuitant designation. But if the owner is not an individual, this change would be treated the same for tax purposes as the death of an owner, triggering required distributions from the contract (unless the spousal exception applies).
The increased risk of naming joint annuitants may be unnecessary because even if only one annuitant is named under a deferred annuity contract, a joint-and-survivor income option can be chosen at the annuity starting date. If a guaranteed lifetime income stream over the lives of two individuals is desired, this objective can be achieved without naming joint annuitants during the deferral period.
Taxation of Annuitant
It is generally the owner rather than the annuitant who is taxed on annuity payments. If the owner and the annuitant are the same person, of course, it is the owner/annuitant who is taxed.
However, even if the owner and annuitant are different persons, it is still with reference to the annuitant’s life that the exclusion ratio for the payment is calculated. The accompanying illustration depicts this tax treatment where the owner and the annuitant are different persons.
Also, you should be aware that some contracts provide that the annuitant will become the owner of the contract after the annuity starting date. In that case, the annuitant, as owner, would become liable for the tax on the income-taxable portion of those payments.
Death of Annuitant
The death of the annuitant, as the measuring life under the contract, causes major changes or in some cases even the cessation of the contract. Under an annuitant-driven contract, when the annuitant dies, the guaranteed death benefit is paid and the contract ceases.
Under an owner-driven contract, the annuity remains in force if the annuitant dies. The owner must name a new annuitant, or the contract may specify that the owner also becomes the annuitant. If there is a contingent annuitant, then the contingent annuitant becomes the annuitant; the owner typically may not name a new contingent annuitant. However, if it is a contingent annuitant who dies, not the primary annuitant, the owner may simply name a new contingent annuitant.
If the annuitant dies after the annuity starting date, the income option under which annuity payments are being made controls what happens next. Under a “life only” income option, payments cease. Under a “period certain” or “refund” payment option, the balance of any remaining guaranteed payments will be made to the beneficiary. Under a joint-and-survivor payment option, payments will continue to the surviving annuitant for the remainder of his or her life.
Last Updated: 9/23/2012 10:05:00 PM