What is an Annuitant?
An annuitant is the person whose age and life expectancy affect the size of the monthly payments to the owner of an annuity.
How Does an Annuitant Work?
An annuity is similar to a life insurance product, but there are important differences between the two. Under the terms of a life insurance policy, the insurer will generally make a payment upon the death of the insured. Under the terms of an annuity, the company makes its payments during the lifetime of the annuitant. And unless the annuity contract specifies a beneficiary, annuity payments stop upon the death of the annuitant.
The owner and the annuitant are usually the same person, and in some cases the annuity company requires them to be the same person. Most annuity payments stop upon the death of the annuitant -- called a "life-only."
Some annuities, however, allow the owner to name a beneficiary, who inherits whatever is left of the annuity after the annuitant dies.
For example, if you purchase an annuity from Company XYZ and name your older sister as the annuitant, the annuity payments are based on your sister's age and life expectancy. If you name your child as the beneficiary, he or she will inherit what is left of the annuity when the annuitant, your sister, dies.
In most cases, the beneficiary and the annuitant cannot be the same person unless the owner and the annuitant are separate people. Some insurance companies offer life-plus-five or life-plus-ten options, whereby the annuity payments go to the named beneficiaries for five or ten years after the annuitant’s death if the death is sooner than expected.
Why Does an Annuitant Matter?
Annuities may be good bets for some income investors, but their appropriateness depends on the investor’s financial goals, tax situation, and the types of annuities available.
Annuities generally involve paying a lump sum up from, then receiving periodic payments for a certain period of time. Inflation and interest rate expectations may affect the type of annuity an investor chooses, as will the investor’s wishes for his or her dependents and heirs.
Annuity taxation can be extremely confusing. For example, when a beneficiary inherits an annuity, he or she is taxed on the annuity’s gains at the ordinary tax rate instead of getting a step-up in basis as would be the case if he or she had inherited mutual fund shares. Thus, it is important to work with a tax attorney, estate planner or CPA to make sure you understand the terms of a particular annuity before investing.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
It seems like there's a never ending flow of filings that public companies are required to issue by the ...Read More →
Just because you have rich parents, it doesn't mean you're going to inherit a lot of money. Just ask J....Read More →
Many parents want to get a jump-start on college savings, and the smartest strategy depends on a family's own financial situation. Whether you can afford to set aside $25 per month or $28,000 per...Read More →