An annuity is a contract between an annuity owner and an insurance company. However, while most other types of contracts involve only two parties, an annuity involves more because the contract’s rights and benefits are measured by the life of a third party, who is called the annuitant. In addition, because disbursement of annuity values can occur after the death of the contract owner or annuitant, another party is usually named in the contract: a beneficiary.
Simple Structuring is Best
Deciding who to name as the owner, annuitant, and beneficiary of an annuity is commonly referred to as “structuring the contract.” Usually, the structure of an annuity contract is kept fairly simple by naming the same individual as both owner and annuitant. If that individual dies, any remaining annuity value is paid to the beneficiary. This simple structure generally assures that the benefits of the contract flow to the parties that the purchaser intended.
Take Care with More Complex Structures
There are situations that call for the annuitant to be someone other than the owner of the annuity. In such cases, you must take care to ensure that various contingencies do not have unintended consequences. For example, let’s say that John is the owner of a deferred annuity that is still in the deferral period. His wife Mary is the annuitant, and his son Cory is the beneficiary. If Mary dies while John is still alive, would John want the value of the annuity to be paid immediately to Cory or kept under John’s control? You must know the answer to that question in order to structure the contract properly.
Variations in Contract Language: Owner-Driven and Annuitant-Driven Contracts
What can complicate the matter is that owner, annuitant, and beneficiary provisions vary somewhat from contract to contract. For example, under some contracts, John would automatically become the annuitant and the annuity would simply continue if Mary died while he was still alive. This would be the case under an owner-driven contract. Under other contracts, called annuitant-drive, the death benefit would immediately be paid to Cory, the beneficiary, and the contract would cease upon Mary’s death regardless of whether John was still living. There are other possibilities. Only by knowing the contract in question can you determine what rights and benefits pertain to the various parties under a particular annuity.
A complex structure may be appropriate in certain cases, but make sure you consider how all the contingencies will be handled under the contract in question. In most situations, the simple contract structure, with its more straightforward control and benefit flow, will be the most desirable way to structure the contract.
Last Updated: 9/23/2012 10:05:00 PM