Get The Annuity Structure Right: Owner, Annuitant, Beneficiary

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New York City

Did you know that, after the death of an annuity owner, a spouse is the only person who can continue the annuity contractif, that is, the spouse is the beneficiary?

The question got some play at an annuity meeting here because, according to two panelists, many financial advisors do not know that fact or its ramifications.

Not knowing the most effective annuity structure for a client can create a lot of problems later on, cautioned Steven E. Reed, who was one of the panelists. He spoke during a breakout session on contracts at the annual meeting of National Association for Variable Annuities, Reston, Va.

Specifically, if the advisor enters the wrong name or names in the contract for the owner, annuitant, and beneficiary, the outcome can be much different than the client intended, explained Reed, who is vice president and national sales manager for Scudder Investments Annuities and Life Division in Chicago.

For example, say a husband and wife are shown on the contract as joint owners, the husband is the annuitant, and the children are the beneficiaries. If the wife dies, Scudders advanced markets unit interprets Rule 72(s) and Rule 72(e)(4)(c) of the Internal Revenue Code to mean that:

The annuitys current value will go to the children, one-half of it as a taxable death benefit. The other half that goes to the children will be treated as a “gift” from the father and thus be subject to gift taxes. The father will also have to pay income tax on the inside buildup of his half of the payout, and, if he is not yet age 59 1/2, an early distribution penalty on this amount, too.

If such outcomes were not intended when the annuity was purchased, the survivors will likely blame the rep, and disputes will follow, Reed predicted. His message: “If your reps hurt clients on these contracts, and if the disputes go to arbitration, the reps will lose every time.” Worse, “a lot of the errors and omissions insurers dont pay in such disputes,” Reed said.

Reeds own companyScudderroutinely reviews how the contracts are structured, just to avoid such problems. In 25% to 40% of the cases, he said, “we find we can make the situation better for the clients.” Unfortunately, he added, in many cases, “the reps never get it.”

What to do about it? “Bullet-proof your annuities from the start. Get in front of the problem before it ever becomes a major issue,” he suggested.

Thats the best approach, agreed Kevin Loffredi, senior vice president at Contract Structure Corporation, an Oakbrook Terrace, Ill., firm specializing in contract structure reviews. “Its important that you structure these contracts correctly,” he said. “Sending out an incorrect contract is almost as bad as sending out a letter to clients that is not compliance-approved.”

A planner who once did such contract reviews as part of his work with clients, Loffredi now does the same thing for brokers, broker/dealers and insurance companies that send contracts into his firm for structural analysis. He reviews the structure to see what the likely outcomes might be, flags potentially troublesome structures, and reports back the findings to the client firms.

Seeing so many products has convinced Loffredi that “every single contract operates differently.” That is because products vary from carrier to carrier and design to design, and also because the unique situations of the clients vary widely, too, he said.

Do producers reject the findings? Far from it, Loffredi said. “Producers love it. They love the fact that someone is taking the time to look at what they set up for their clients.”

In addition, when the reviews spotlight possible areas to change, he said, producers view this information as giving them a good way to provide value added service to the clientby updating the contract arrangements. Even if it is just a beneficiary change, he said, it gives the producer a chance to talk to the client.

When the information is presented in a “non-threatening, informative way,” customers often welcome the contacts, and some make new purchases, too, Loffredi added.

Takeover brokers can also benefit from these reviews, he said. The product may not have been sold under the takeover brokers watch, he allowed, but “the takeover broker can still be held liable. Remember, anyone involved with handling the contract can be held liablethe rep, the broker/dealer, and the insurance company.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 21, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.