Parties to an Annuity Contract
Understanding the different parties to an annuity contract is essential for the licensing exam. Each party has distinct roles, rights, and responsibilities.
The Four Parties
An annuity contract typically involves four parties:
| Party | Role |
|---|---|
| Owner | Controls the contract and makes decisions |
| Annuitant | Person whose life determines annuity payments |
| Beneficiary | Receives remaining value if annuitant/owner dies |
| Insurance company (Issuer) | Guarantees the contract and makes payments |
The Owner
The owner (also called the contract holder) has control over the annuity contract.
Owner's Rights
| Right | Description |
|---|---|
| Name/change beneficiary | Designate who receives death benefit |
| Make withdrawals | Take money from the contract (subject to charges) |
| Surrender the contract | Cancel and receive surrender value |
| Change annuitant | Some contracts allow this before annuitization |
| Choose payout options | Select how income will be received |
| Transfer/assign ownership | Give the contract to another party |
Owner vs. Annuitant
The owner and annuitant are often the same person, but not always:
| Scenario | Owner | Annuitant |
|---|---|---|
| Individual retirement | Individual | Same individual |
| Spousal coverage | Spouse A | Spouse B |
| Business arrangement | Corporation | Key employee |
| Gift to child | Parent | Child |
Important Owner Considerations
- Owner controls all contract decisions
- Owner is responsible for tax consequences
- If owner dies before annuitization, the contract may terminate or pass to beneficiary
- Owner should have insurable interest in annuitant
The Annuitant
The annuitant is the person whose life expectancy determines the duration and amount of annuity payments.
Annuitant's Role
| Function | Description |
|---|---|
| Measuring life | Payments based on annuitant's life expectancy |
| Age factors | Annuitant's age affects payment amounts |
| Death triggers | Death of annuitant typically affects the contract |
Key Annuitant Facts
- Annuitant's age and gender (where permitted) affect payout rates
- Older annuitants receive higher periodic payments (shorter life expectancy)
- Annuitant must be a natural person (not a corporation)
- Some contracts allow the annuitant to be changed before annuitization
Annuitant vs. Owner at Death
| Who Dies | Contract Effect |
|---|---|
| Annuitant dies (not owner) | Contract may terminate; death benefit paid |
| Owner dies (not annuitant) | Contract may pass to beneficiary or terminate |
| Owner-annuitant dies | Death benefit paid to beneficiary |
Exam Tip: During the payout phase, if the annuitant dies, payments stop (unless a period certain or refund option was selected). The annuitant's life is what drives the payments.
The Beneficiary
The beneficiary is the person or entity designated to receive any remaining contract value or death benefit when the owner or annuitant dies.
Types of Beneficiaries
| Type | Description |
|---|---|
| Primary beneficiary | First in line to receive death benefit |
| Contingent beneficiary | Receives if primary predeceases owner/annuitant |
| Revocable | Can be changed at any time by owner |
| Irrevocable | Cannot be changed without beneficiary's consent |
When Beneficiaries Receive Benefits
| Situation | Beneficiary Receives |
|---|---|
| Owner dies during accumulation | Death benefit (typically account value) |
| Annuitant dies during accumulation | May receive death benefit per contract terms |
| Life annuity—annuitant dies | Nothing (payments stop) |
| Period certain—annuitant dies during period | Remaining guaranteed payments |
| Refund annuity—annuitant dies | Refund of remaining principal |
Beneficiary Designation Considerations
- Beneficiary receives proceeds income tax-free only for mortality gain
- Accumulated earnings are taxable to beneficiary
- Spouse beneficiaries have special options (spousal continuation)
- Estate as beneficiary may trigger immediate taxation
The Insurance Company (Issuer)
The insurance company issues the annuity contract and guarantees its obligations.
Insurer's Responsibilities
| Responsibility | Description |
|---|---|
| Guarantee payments | Make annuity payments as promised |
| Credit interest | For fixed annuities, credit stated interest rates |
| Manage investments | Invest assets backing the contract |
| Maintain reserves | Hold adequate reserves for future obligations |
| Process claims | Pay death benefits and handle withdrawals |
| Provide disclosures | Provide prospectus (variable) and contract documents |
Insurer's General Account vs. Separate Account
| Account Type | Used For | Owner's Risk |
|---|---|---|
| General account | Fixed annuities | Insurer bears investment risk |
| Separate account | Variable annuities | Owner bears investment risk |
Multiple Roles and Special Situations
When One Person Holds Multiple Roles
| Common Arrangement | Example |
|---|---|
| Owner = Annuitant = Beneficiary's spouse | Individual retirement annuity |
| Owner = Annuitant ≠ Beneficiary | Parent names child as beneficiary |
| Owner ≠ Annuitant | Business owns annuity on key employee |
Non-Natural Owner Rules
When a non-natural person (corporation, trust) owns an annuity:
- Tax deferral may be lost
- Earnings may be taxed annually
- Exceptions exist for certain trusts and qualified plans
Spousal Continuation
When the owner-annuitant dies and the spouse is beneficiary:
- Spouse may continue the contract as new owner
- Preserves tax deferral
- Avoids forced distribution
- Only available to surviving spouses
Key Takeaways
- The owner controls the contract; the annuitant's life determines payments
- Owner and annuitant are often the same person but can be different
- The beneficiary receives remaining value when owner/annuitant dies
- The insurance company guarantees contract obligations
- During the payout phase, payments are based on the annuitant's life
- Spousal continuation allows surviving spouses to take over the contract
- Non-natural owners may lose tax-deferral benefits
In an annuity contract, the party whose life expectancy determines the duration of payments is the:
Which party to an annuity contract has the right to make withdrawals, change beneficiaries, and surrender the contract?
If a non-spousal beneficiary inherits an annuity, they:
In a fixed annuity, investment risk is borne by the:
14.3 Annuity Phases
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