There are questions surrounding annuities policy in life insurance. Life insurance is a big deal in any household. Without it, you’d have to worry about your loved ones. There are many options to choose from when it comes to buying life insurance. Our experts answer some questions revolving around this topic annuities.
Question – What happens to the money paid to the insurance company when the annuitant dies?
Answer – A pure life annuities policy is one in which the continuation of payments by the insurer is contingent upon the continuing survival of one or more lives. The remaining consideration (premium) paid for the annuity that has not been distributed (including accrued interest) is fully earned by the insurer immediately upon the death of the annuitant. This is why annuities payable for the life or lives of one or more annuitants frequently include a minimum payment guarantee. In other words, many annuities include both life and fixed period or refund elements so that if death occurs prematurely, the annuitant and the annuitant’s survivors will recover a total of at least some minimum amount. Therefore, each annuity payment where a minimum guarantee has been purchased is composed of: (1) return of principal; (2) interest or earnings on invested funds; and (3) a survivorship element.
If an annuitant dies before having recovered the full amount guaranteed under a refund or period-certain life annuity, the balance of the guaranteed amount is not taxable income to the refund beneficiary—until the total amount received tax-free by the annuitant plus the total amount received tax-free by the beneficiary equals the investment in the contract. From that point on, all additional amounts received are ordinary income.26
Question – What is a temporary life annuities policy?
Answer – A temporary life annuity is one which provides for fixed payments until the earlier of the death of the annuitant(s) or the end of a specified number of years. To compute the annuity exclusion ratio, expected return is found by multiplying one year’s annuity payments by a multiple from the appropriate IRS annuity table.23
Question – 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.28 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 annuities policy, it is critical to understand whether a contract is owner-driven or annuitant-driven when structuring the setup of owners, annuitants, and beneficiaries.
Learn more about annuities policies here.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM