Make
Sure You’ve Structured Your Annuity Correctly to Thwart the Unexpected
An annuity can benefit more than just one
person. You, the owner, can name an annuitant and beneficiaries of your
annuity. You have a lot of control over what happens to your annuity after you
pass on. The following steps will help you structure your annuity so the right
assets go to the right people.
Name Names
You must
name the key participants, the people you want to receive your death benefits,
of your annuity in your contract, almost like you’re drawing a will. No one can
read your mind, and assumptions will not be made. So make sure you’ve provided
for your loved ones by specifically naming the key participants, because the
annuity contract is legally binding.
There are
four main roles that you’ll need to fill in your annuity contract.
- Contract
owner. This would be you. You take out the annuity; you
decide what goes where and to whom. You are the Big Cheese. There can be
joint contract owners, also: Big Cheeses, so to speak.
- Annuitant.
If you decide to turn your annuity into income (after you retire, for
example), the annuitant’s life expectancy is factored into the payments
made from the annuity. An annuitant is often the contract owner, or a
spouse of the contract owner. There can also be joint annuitants.
- Contract
owner’s beneficiary. This annuity role receives the
accumulated value of the annuity, which is the initial premium plus
interest minus any fees or withdrawals made from the annuity at the time
of the contract owner’s passing.
- Annuitant’s
beneficiary. This person receives something called a
“death benefit,” which could be the same as the accumulated value or it
could be a different amount, but it is usually predetermined at the time
you sign your annuity contract.
Think
carefully about these roles, and be specific about who you want to fill them.
You can never be sure what the future holds, and if disaster should strike, you
want your annuity to go to the right people.
Annuitant-Driven
Contracts vs. Owner-Driven Contracts
There is
a very small difference between these two types of annuity contracts, but that
means it could be easily missed. Before signing, find out which annuity
contract you’ve got.
- Annuitant-Driven Contracts insure
that the annuitant’s beneficiary receives the “death benefit” when the
annuitant passes. When the owner passes, the owner’s beneficiary receives
the “contract value,” which could be less than the “death benefit.”
- Owner-Driven Contracts insure that
the owner’s beneficiary receives the “death benefit” in the event of the
owner’s passing.
Either
one of these contracts could be right for you. Make your decision carefully,
and be sure to fully understand the differences. Ask as many questions as you
need to.
Understand “Death Benefits”
Death
benefits guarantee that, if your assets should outlive you, your annuity
insurance company will pay out at least the original amount of your annuity.
There are a few different kinds of death benefits you can opt for, but some may
come with an added fee.
- Standard Death Benefit. This is
the “least generous” annuity option, but generally comes without any extra
fees. It could be fixed as soon as your insurance company receives proof
of the owner or annuitant’s passing, or it could change until one of the
named annuity beneficiaries files a claim, a dispute.
- Return of Premium Death Benefit.
In this case, the annuity contract offers your annuity beneficiaries
either the contract’s current market value or the sum of all the annuity
contributions (like interest on the annuity), whichever one is a larger
amount. This one usually comes with a fee.
- Stepped-Up Death Benefit. With
this option, the insurance company monitors and records your annuity
contract’s balance annually on the purchase date. Your annuity beneficiary
will receive the highest of those annual values. This option comes with a
fee.
Considering
what will happen with your annuity if you pass away before the payout date is
never fun—no one likes to think about their mortality. But understanding the
different death benefit options and how they work will insure that you make the
right choice for those you leave behind.