Annuities involve persons or legal entities in capacities as owner, annuitant, beneficiary or payee. The same person can be both owner and the annuitant or the owner and the beneficiary. The general rules governing the treatment of non-trust property in 42 U.S.C. §1396r–5 state if payment of income is made solely in the name of the institutionalized spouse or the community spouse, the income shall be considered available only to that respective spouse unless the instrument furnishing the income specifically provides otherwise. Ownership and income information regarding investments can usually be found in the contracts, deeds, certificates or other instrument documentation.
For annuities, ownership interest in the income stream and the payments made from the annuity are typically considered the income of the annuitant listed in the contract, unless the contract allows an individual other than the owner or annuitant to receive the annuity payments as a payee; provided the payee is not acting as a fiduciary representative who receives, and manages the annuity payments on behalf of the annuitant such as in the capacity of:
- the participant’s designated power of attorney/attorney in fact,
- conservator, or
- public administrator.
- Annuity income is attributed to the “payee” only when no evidence is present to indicate the payee is receiving the annuity payments as a fiduciary representative of the owner/annuitant. Annuitant: Individual entitled to receive the payments from an annuity and whose life expectancy is used to calculate the income payment. This person holds the ownership interest in the income stream
- Beneficiary: An individual named in an annuity who is to receive the proceeds of the annuity on the death of the annuitant if the beneficiary is still alive at the time of the death of the annuitant.
- Contingent Beneficiary: The person/entity who will receive the remaining payments (a lump sum or periodic payments) after the annuity stops making payments to the primary beneficiary. This can be because the primary beneficiary has died or the annuity’s term has expired or any payment obligation to the primary beneficiary has been satisfied. The contingent beneficiary may also be called the remainder beneficiary or secondary beneficiary.
- Primary Beneficiary: The person/entity who will receive payments from the annuity upon the death of the annuitant. The person/entity who has first claim to the annuity assets is the primary beneficiary.
- Remainder Beneficiary: The person/entity who will receive payments (a lump sum or periodic payments) after the annuity stops making payments to the primary beneficiary. This can be because the primary beneficiary has died or the annuity’s term has expired or any payment obligation to the primary beneficiary has been satisfied. The remainder beneficiary may also be called the contingent or secondary beneficiary.
- Secondary Beneficiary: The person/entity who will receive the remaining payments (a lump sum or periodic payments) after the annuity stops making payments to the primary beneficiary. This can be because the primary beneficiary has died or the annuity’s term has expired or any payment obligation to the primary beneficiary has been satisfied. The secondary beneficiary may also be called the contingent or remainder beneficiary.
- Contract Owner: The person or entity that makes application for and purchases an annuity contract, or the person or entity to which ownership of the contract has been transferred. An owner could be an individual, couple, partnership, corporation, or trust.
- Joint Owner: An individual who co-owns an annuity contract with another person or legal entity. Both have the right to make and approve decisions relating to the contract.
- Joint Annuitant: A person named in an annuity contract in addition to the annuitant. This person’s age and life expectancy are used along with those of the annuitant to calculate the amount of annuity payments. The income considered available to a joint annuitant is determined by the joint annuitant’s proportional share.
EXAMPLE: Robert is a joint annuitant with his siblings, Anna, Marsha and Beverly on an annuity that pays out $2,000 per month. Each sibling has an equal ¼ (25%) share of the income stream. Robert’s share is $500 per month.
Additional terms used in evaluating annuities:
- Annuity Contract: A legal contract in which an insurer or other financial entity agrees to make periodic payments to a designated individual/entity either for life or over a specific period of time, beginning on a set date, in exchange for that individual’s/entity’s payments of premiums. There are two basic types of annuities: fixed annuities, which pay a fixed income backed by fixed dollar investment such as secure bonds and mortgages; and variable annuities, which vary in payment according to the value of stock and bond investments.
- Annuitization: The process of converting an annuity contract’s value into an income stream represented by periodic payments made over a specified period of time.
- Annuity Period: The length of time between income payments made under an annuity income plan; the time span may be monthly, quarterly, semi-annually, or annually.
- Stream of Income: The amount of remaining guaranteed payments from an annuity.
- Types of Annuities:
- Deferred Annuity: Is an annuity in which payments do not begin immediately. This is usually to allow for completing the purchase of the annuity in installments or to allow for a later decision on how the annuity will pay out.
- Fixed Annuity: An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract. The insurance company guarantees both earnings and principal. Payments may last for a definite period, such as 20 years, or an indefinite period, such as the lifetime of the annuitant or the lifetime of joint annuitants.
- Immediate Annuity: An annuity that begins periodic payments in the immediate next period. For example, an immediate annuity with a monthly payment schedule would begin making payments the month following the month of purchase.
- Irrevocable Annuities: If the terms of the contract do not allow the annuity to be surrendered or cashed-in with the issuer, it is considered irrevocable.
- Life Annuity: Payments continue during the life of the annuitant without regard to how long the annuitant lives.
- Period Certain Annuity: The period over which payments are guaranteed to be made to the person/entity named in the annuity contract, provided the annuitant lives for the entire period certain. If the annuitant dies before the period certain has expired, the beneficiary may receive the payments for the remainder of the period certain or may receive a lump sum.
- Revocable Annuities: If the terms of the contract allow for the annuity to be surrendered or cashed-in with the issuing company, the annuity is considered revocable.
- Retirement Annuities: A retirement annuity is one which meets the qualification tests of the Internal Revenue Code for tax purposes.
- Single Premium Annuity: An annuity purchased by making one single premium payment.
- Variable Annuity: A contract with an insurance company, under which the insurer agrees to make periodic payments, beginning either immediately or at some future date. A variable annuity contract is purchased by making either a single purchase payment or a series of purchase payments. A variable annuity offers a range of investment options. The value of the variable annuity will vary depending on the performance of the investment.
- Non-assignable: Owner cannot transfer or sign over title, rights, or interest to a third party.
- Start Date: The date on which the designated individual/entity begins receiving payments from the annuity.