3 frequently asked questions about annuities

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Question No. 3: What is the difference between an owner-driven and annuitant-driven contract?

Answer: The differentiation between owner-driven versus annuitant-driven contracts addresses the consequences of the death of an annuitant during the accumulation phase of a deferred annuity.

In the past, almost all contracts were annuitant-driven, but recently some contracts are occasionally owner-driven. It is important to read the details of the annuity contract to determine which type of contract is being evaluated or is in force.

Under the classic model of an annuitant-driven contract, if the annuitant were to pass away during the accumulation phase, the contract would pay the death benefit to the primary beneficiary of the contract. Any special death benefit provisions of the contract apply at the death of the annuitant. In situations where the owner and annuitant of the contract are the same person, this is not consequential. However, this can have substantial impact if the owner and annuitant are different people.

For example, let us assume that John Doe owns an annuitant-driven contract on his wife, Jane Doe. John Doe is the primary beneficiary, and John’s son Daniel is the contingent beneficiary. The annuity contract has a current value of $120,000, and the death benefit is $150,000. In the event that Jane dies, the enhanced death benefit of $150,000 will be paid to John. However, it is important to remember that all annuities, whether owner- or annuitant-driven, must pay out at the death of the owner. Therefore, we must contrast this with the result in the event that John Doe dies. If John Doe were to pass away, under an annuitant-driven contract, the enhanced death benefit would not be paid; the current value would be paid out, and Daniel would receive $120,000, not $150,000.

Alternatively, the results of an owner-driven contract reverse these results. Under an owner-driven contract, the death of the owner, John Doe, will cause a payout of the enhanced death benefit. A death of the annuitant, Jane Doe, simply creates an annuitant-less contract, and the owner will have the option of assigning a new annuitant.

Because of the radical differences in potential payouts at the death of the owner or annuitant, it is critical to understand whether a contract is owner-driven or annuitant-driven when structuring the setup of owners, annuitants, and beneficiaries.

See also:

Fiduciary rule could spur innovation

IRI study: Lifetime income providing financial security for retirees

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Editor’s Note: This excerpt was taken from Tools & Techniques of Life Insurance Planning, which delivers detailed information about the entire range of life insurance products that can be used by estate and financial planners in a wide variety of circumstances. It includes planning techniques for retirement income needs, estate and gift tax avoidance, estate liquidity needs, and long-term care planning.