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January 26, 2011 at 07:00 PM
A recent survey found that 39% of Americans who have given thought to their financial retirement plan have no sources of guaranteed income besides Social Security.
Non-qualified annuities can be beneficial financial products in providing guaranteed income in retirement and mitigating a client’s risk of outliving their assets. However, the rules governing these products can be complicated and a mistake can have grave consequences. This column will examine some common mistakes and the remedies to keeping your annuity business healthy.
Read the contract carefully
Probably the most common and easiest to avoid mistake is assuming that all annuity contracts are the same. Annuity contracts vary. Some are owner-driven, while others are annuitant-driven. The same scenario with different annuity contracts can have dramatically different results.
Remedy – Read and understand the annuity contract that is being sold. Many problems can also be avoided by naming the same person as the owner and annuitant. 
Know the beneficiary arrangement
One feature that makes annuities attractive is their ability to bypass the probate process upon the death of the owner. This can only happen if a beneficiary is named on the annuity contract and if that beneficiary is not the client’s estate.
If the owner’s estate is named as the beneficiary or if no beneficiary is named, the annuity’s death benefit will flow through the estate of the owner and be distributed according to the provisions of the decedent’s will or state law under the court-supervised probate process. This may not be what the owner wants, since the distribution of the annuity proceeds will be subject to the estate’s creditors, publicity, and costs associated with probate.
Remedy – Name specific people as beneficiaries, such as a spouse, children, other family members and/or friends. Because they have “life expectancies” they have the opportunity to take the annuity death benefit over their life expectancies instead of as a lump sum.
If the spouse is named as the sole primary beneficiary, then he or she can exercise his or her right to continue the contract under the spousal continuation rules. Trusts and charities may also be named as beneficiaries. But since they have no life expectancy the death benefit must be paid out in 5 years.
Do you have a contingent beneficiary?
If a primary beneficiary is named, that is not the estate, the annuity’s death distribution can avoid probate and meet the on-death distribution goals of the owner. Where does the distribution go if the primary beneficiary dies before the owner? That depends. Without a contingent beneficiary, the annuity death benefit may be subject to probate.
