Annuities are being used by tens of millions of Americans to create a lifetime retirement income stream. They can be confusing products and people tend to have a lot of questions related to annuity products. Recently, LifeHealthPro published the article “3 frequently asked questions about annuities,” a collaboration between Stephan R. Leimberg, Robert J. Doyle, Jr., and Keith A. Buck. Annuities are crucial for retirement planning because they are the only investments that guarantee income that you cannot outlive. They can also meet multiple needs because of the different features and riders available. The IRI found that annuities are still an important piece of the retirement planning puzzle, even with new increasing regulations from the Department of Labor. Here is a summary of 3 annuity questions that are often asked.
The first thing that people want to know about annuity products is where the money goes when the annuitant dies. If you have a pure life annuity, any remaining premium that you or a joint annuitant have not been paid out will stay with the insurance company. This is a risk that many people are not willing to take on, so many annuities offer the inclusion of a minimum payment guarantee. If the annuitant were to die early, there would be a predetermined minimum amount paid out to the beneficiaries. That guaranteed money is not considered taxable income for the beneficiaries, an added tax benefit of purchasing this type of annuity product.
Many people are curious about temporary life annuities. This type of annuity product pays out fixed payments to the annuitant until one of two things happens, either the annuitant dies or a set number of years goes by. You can compute your expected return by multiplying one year’s worth of annuity payments with your IRS annuity table factor. This will give you the annuity exclusion ratio. The time frame set for a temporary life annuity is predetermined at purchase.
Another question that often comes up in regards to annuity products is how annuitant-driven annuities are different than owner-driven annuities. This matters most when an annuitant dies during the deferred annuity product’s accumulation phase. Historically, most annuities were annuitant-driven. If an annuitant dies during the accumulation phase, the listed beneficiary would receive the death benefit. The death benefit stipulations really have no consequences if the owner and annuitant are the same person. But in some cases, the owner, annuitant, and beneficiary are all different people. If an annuitant dies and there is an enhanced death benefit, the owner of the annuitant-driven contract will get that enhanced death benefit. But if that owner dies, the beneficiary will receive the current contract value rather than the enhanced death benefit. It’s different with an owner-driven contract, something that is increasing in use. If the owner dies, the enhanced death benefit will be paid. If the annuitant dies, a new annuitant can just be added to the annuity product. It’s important to know whether your annuity is annuitant-driven or owner-driven.
Annuities have a lot of moving parts and options. It’s important to know the ins and outs of your individual annuity contract. Three things that people commonly want to know about annuities are what happens to the money upon death, details about temporary life annuities, and annuitant-driven versus owner-driven products.
Written by Rachel Summit