What it means
An annuity contract has several distinct roles. The owner controls the contract and makes decisions about it, the annuitant is the measuring life for the payments, and the beneficiary receives any death benefit or remaining guaranteed instalments.
In many personal arrangements one person fills all three roles, which is why the distinction is easy to miss. In business and trust arrangements they are frequently separate, and getting the paperwork wrong can trigger unexpected tax or hand money to the wrong person.
The annuitant's age and, in some markets, health drive the pricing. An older annuitant has a shorter expected payment period, so the insurer can offer a higher annual amount for the same purchase price; an enhanced or impaired life annuity applies the same logic to serious medical conditions.
A joint and survivor annuity has two annuitants and continues until the second death. Because the expected payment period is longer, the annual amount is lower than a single life annuity bought for the same money.
The critical practical point is that payments generally stop on the annuitant's death unless a guarantee period or survivor provision was chosen at the outset. That is a decision made when the contract starts, and it usually cannot be revisited afterwards.
Naming matters for tax as well as for cash flow. In many jurisdictions the tax treatment on death depends on whether the owner, the annuitant or both have died, so trusts and companies buying annuities should take advice before completing the application.
In practice
Real-world examples.
Example
A retired teacher buys an immediate annuity and names herself as both owner and annuitant, with her daughter as beneficiary. When she dies during the ten-year guarantee period, the remaining instalments pass to her daughter.
Example
A family trust owns an annuity but names the grandmother as annuitant. The trustees learn that payments will cease on her death, so they add a twenty-year guarantee period before signing.
Example
A company funds a deferred compensation arrangement with an annuity naming a retiring executive as annuitant. Because the company is the owner, the tax treatment differs from a personally owned contract and the finance team documents it carefully.
Formula
Calculation
Annual payment = purchase price x payout rate for the annuitant's age and structure.
A 68-year-old annuitant uses $500,000 to buy a single life immediate annuity at a payout rate of 6.0%. The annual payment is 0.06 x $500,000 = $30,000, or $30,000 / 12 = $2,500 a month.
The same $500,000 bought as a joint and survivor contract, with a 64-year-old spouse as the second annuitant, is priced at 5.2% because payments are expected to run for longer. The annual amount falls to 0.052 x $500,000 = $26,000, or $26,000 / 12 = $2,166.67 a month.
The joint structure therefore costs $30,000 - $26,000 = $4,000 a year of income in exchange for continuing payments after the first death, which is the price of the survivor protection.
Adding a ten-year guarantee to the single life contract has a similar effect. At a payout rate of 5.6% the annual amount becomes 0.056 x $500,000 = $28,000, so the guarantee costs $2,000 a year but ensures that at least 10 x $28,000 = $280,000 is paid out in total whatever happens to the annuitant.Case study
Seen in the real world.
The following is an illustrative and fictional case. Marlow Bridge Trust, an invented family trust, bought a $500,000 immediate annuity to fund care costs for an elderly relative, naming her as annuitant and the trust as owner and beneficiary. The payout rate for her age was 6.0%, producing $30,000 a year.
Eighteen months in, the annuitant died. Because no guarantee period had been selected, payments stopped after $45,000 had been received, and the trust had no claim on the remaining capital. Had a ten-year guarantee been chosen at outset, the annual payment would have been lower, around 5.6% or $28,000, but the trust would have continued to receive instalments for the balance of the ten years.
The illustrative trustees rewrote their investment policy afterwards. Any future annuity purchase would require either a guarantee period or a second annuitant, and the reduced payout would be treated as an insurance premium rather than as lost income.
Watch out
Common mistakes.
- Assuming the annuitant and the owner are automatically the same person, which causes tax and control surprises when a trust or company owns the contract.
- Choosing the highest quoted payout rate without noticing that it comes from a single life contract with no guarantee period.
- Believing the annuitant's health cannot affect pricing, when enhanced annuities can pay significantly more for someone with a qualifying medical condition.
Questions
People also ask.
Can the annuitant be changed after the contract starts?
Generally no, because the pricing depends on that specific life; the owner and beneficiary can usually be changed, but the annuitant cannot.
What happens when the annuitant dies?
Payments stop unless the contract includes a guarantee period, a survivor benefit or a second annuitant, in which case the stated continuation applies.
Does the annuitant have to be a person?
Yes, because the contract needs a measuring life; an entity such as a trust can own the annuity but cannot be the annuitant.
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