Do I Need to Name Both an Annuitant and Beneficiaries For My Estate?
annuitant vs beneficiary
Rebecca Lake, CEPF®
7 min read
Adding an annuity to your financial plan is something you might consider if you’re hoping to generate additional streams of income for retirement. Annuities are contracts that allow you to exchange a current premium for future payments. If you’re not well-versed in annuity jargon, you might not understand the difference between being an annuitant and a beneficiary. Breaking down these terms is important when discussing how an annuity works. If you’re looking for an expert to help you with similar financial matters, consider working with a financial advisor.
What Is an Annuity?
An annuity is an insurance contract. When someone purchases an annuity, they pay a premium to the annuity company. The annuity company then agrees to make payments back to them beginning at a future date.
Immediate annuities can begin making payments as soon as 12 months after the contract is purchased. Deferred annuities may begin making payments years in the future. For example, you might purchase a deferred annuity at age 50, with payments scheduled to begin at age 60 or 65.
The annuity company is the insurance company that sells the contract. The contract owner also referred to as the annuity owner, is the person who gets to make decisions about the terms of the contract. That includes deciding whom to name as the annuitant and the beneficiary.
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What Is an Annuitant?
Annuity payments are determined by life expectancy. The annuitant is the person whose life expectancy is used to calculate payments. They’re also the person who receives payments from the annuity.
The annuity owner or contract owner and the annuitant can be the same person, or they might be different. When the annuity owner and the annuitant are the same people, they have the ability to:
Decide when payments begin and how long they’ll continue
Name beneficiaries or change beneficiaries
The contract owner is also responsible for paying premiums to purchase the annuity. If the annuitant is not the contract owner, they wouldn’t be able to do any of those things, but they wouldn’t be required to pay premiums either.
Since annuity payments are based on life expectancy, it can make sense for the annuitant to be a younger person. The longer they’re expected to live, the longer the annuity will make payments to them.
What Is an Annuity Beneficiary?
annuitant vs beneficiary
An annuity beneficiary is a person who receives a death benefit from the contract when the annuitant passes away. The amount received is usually determined by the remaining value of the annuity contract or the amount of premiums, minus any withdrawals made.
Neither the annuity owner nor the annuitant if they’re two separate people can also be the annuity beneficiary. It’s more common for the beneficiary to be a spouse or another close relative, though annuity owners can also name institutions, such as charitable organizations. They can also name multiple beneficiaries or contingent beneficiaries.
If there’s no beneficiary named to an annuity contract, then any money remaining in the contract may revert back to the insurance company. The annuity owner can sidestep that by naming their estate as beneficiary.
In that situation, any remaining funds would go to their estate. Their executor would then be responsible for dividing up the funds, along with other assets, among the annuity owner’s heirs.
Annuitant vs. Beneficiary: Which Is Better?
Annuitants and beneficiaries serve an important function in an annuity contract, but they aren’t the same. If you’re named as an annuitant or a beneficiary, it’s important to know what you’re entitled to from the contract.
Here are the advantages of being an annuitant:
You can receive guaranteed income payments from the contract during your lifetime.
If you’re also the annuity owner, you’ll have control over the terms of the contract and be able to name or change beneficiaries.
Being named an annuitant at a younger age can result in a longer payout window from the contract.
There are, however, some cons to being an annuitant if you’re not also the annuity owner. The biggest is the lack of control. If you’re not the owner, then you don’t have a say in how the contract works. Additionally, one thing to note for both annuitants and beneficiaries is that payments from an annuity are not tax-free.
When an annuity is purchased with pre-tax dollars, withdrawals made by an annuitant are subject to ordinary income tax at the time they’re made. Beneficiaries who inherit an annuity must pay income tax on the difference between the premium paid into the contract and any funds remaining at the time of the annuitant’s death.
Now, here’s what’s good about being the beneficiary of an annuity:
The death benefit from an annuity that has a named beneficiary is not subject to probate.
Spousal beneficiaries may be able to change the contract to their name and continue receiving payments during their lifetime.
Continuing the annuity as a spousal beneficiary can allow you to defer taxes on annuity payments.
Again, beneficiaries lack control over how the contract is drawn up. However, a spouse who takes over an existing annuity from their deceased spouse would be able to name new beneficiaries to the contract.
How to Choose an Annuitant vs. Beneficiary
If you’re purchasing an annuity, then you’ll need to decide who will be the annuitant and the beneficiary or beneficiaries. You may name yourself as the annuitant if you’d like to receive payments back from the contract once premiums are paid.
A spouse can be an obvious choice when naming an annuity beneficiary. If you’re unmarried, however, then you might choose to name one of your children, a sibling or another relative. You could also select a charity to receive the death benefit from your annuity.
The Bottom Line
annuitant vs beneficiary
Knowing the difference between an annuitant and a beneficiary is important if you’re considering purchasing an annuity. These insurance products can be complex and the more you understand going in, the easier it may be to decide what type of annuity to purchase based on your financial goals.
Retirement Planning Tips
Consider talking to your financial advisor about the pros and cons of annuities and what purpose they might serve when planning for retirement. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s free toolmatches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Should you purchase an annuity and then change your mind later, it’s important to know what that might cost you. Annuity companies can tack on a surrender fee if you decide to cancel your annuity early. Being aware of how much the fees, as well as the other annuity fees you might pay, can ensure there are no unwelcome surprises should you need to make changes to your retirement strategy later. You may also want to research different ways to get out of an annuity if you’re not sure whether you’ll keep the contract for the long term.
