Is the Annuitant the Beneficiary of an Annuity?
Clarify the relationship between an annuity's annuitant and beneficiary. Understand key roles and ensure your contract aligns with your financial goals.
Annuities are financial contracts designed to provide a steady income stream, often during retirement, and involve specific parties that play distinct roles. Understanding these roles helps ensure the contract aligns with personal financial goals. The configuration of these roles impacts how payments are made and how remaining funds are distributed upon death.
Understanding the Key Roles in an Annuity
An annuity contract typically involves three main parties: the owner, the annuitant, and the beneficiary.
The owner is the individual or entity who purchases the annuity, holds the contractual rights, and has the authority to make decisions, such as designating beneficiaries or making withdrawals. This individual is also responsible for funding the annuity.
The annuitant is the person whose life expectancy dictates the terms of the annuity and who receives the income payments once the annuity begins its payout phase. While the owner and annuitant are often the same person, they can be different individuals.
The beneficiary is the person or entity designated by the annuity owner to receive any remaining contract value or death benefit upon the annuitant’s death. Beneficiaries can be individuals, multiple people, trusts, or charitable organizations.
Annuitant as the Primary Beneficiary
An annuity owner often names themselves as both the annuitant and the primary beneficiary. This setup is chosen when an individual purchases an annuity for their own retirement income. In this scenario, payments are directed to the annuitant throughout their lifetime, providing a regular income stream.
Upon the annuitant’s death, any remaining value or death benefit typically passes to contingent beneficiaries named in the contract. This ensures financial protection extends beyond the annuitant’s lifetime, provided a death benefit provision was included. Payout options for contingent beneficiaries, such as a lump sum or continued installments, depend on the annuity’s terms and chosen death benefit structure.
Naming a Different Beneficiary
An annuity owner can also designate a primary beneficiary who is someone other than the annuitant. This arrangement might be selected for specific financial or estate planning objectives, such as when an individual buys an annuity on their own life but names a child as the primary beneficiary. In such cases, the annuitant continues to receive income payments during their lifetime, as their life expectancy still governs the payout schedule.
Upon the annuitant’s death, the annuity’s value or death benefit transfers directly to the named primary beneficiary. This direct transfer can bypass the probate process, allowing for efficient asset distribution. The annuity contract’s specific terms, including any riders or death benefit options, determine the exact amount and method of payout to this non-annuitant beneficiary.
Key Considerations for Beneficiary Designations
Naming beneficiaries is a fundamental aspect of managing an annuity. Designating both primary and contingent beneficiaries is important to ensure the annuity funds are distributed as intended, especially if the primary beneficiary predeceases the annuitant or is unable to receive the benefits. A contingent beneficiary serves as a backup, receiving the death benefit if the primary beneficiary cannot.
When multiple beneficiaries are named, the owner can specify how assets are distributed using “per stirpes” or “per capita” designations. “Per stirpes” ensures that if a named beneficiary dies, their share passes to their descendants, keeping the inheritance within that family branch. Conversely, “per capita” distributes shares equally among the surviving named beneficiaries, potentially excluding descendants of a deceased beneficiary if not explicitly named.
Regularly reviewing and updating beneficiary designations is important, particularly after major life events such as marriage, divorce, birth of a child, or the death of a named beneficiary. Outdated designations can lead to unintended consequences, potentially causing delays in asset distribution or even diverting funds to unintended recipients. Failing to name any beneficiary can result in annuity proceeds going through probate, a legal process that can be time-consuming and incur additional costs before funds reach the rightful heirs.