Example

Let’s take this scenario. You are the owner, age 86. You name your younger wife, age 85, as the annuitant. Your children are named beneficiaries. Your wife dies. The death benefit, if it is an annuitant-driven contact, is paid to your children. You have just lost your money. The moral to this story is the same story which is carefully weaved throughout this web-based training tutorial. This is not a job that we have. It is a profession. The profession of knowing how annuity contracts work.

The Beneficiary
There are 2 types of beneficiaries: Spousal and Non –Spousal. If the beneficiary is the spouse, the spouse may defer taxation of the death benefit if the spouse owner dies by continuing the annuity as the new owner, receive the entire death benefit and pay taxes on the pre-taxed dollars, annuitize, or withdraw dollars as desired.

On the other hand, a non-spousal beneficiary must receive the entire interest in the annuity within 5 years of the owner's death, or 2) before December 31st in the year following the year of death, the beneficiary may elect substantially equal payments over his/her own life expectancy

Now that we have discussed what happens when the owner dies, let's discuss what happens when the owner and annuitant are different and the annuitant dies (and the annuity contract terminates and provides for a death benefit to be paid to the beneficiary). It is our opinion that the beneficiary must receive the death benefit in a lump sum or under a life income or installment option. The latter option enables the beneficiary to enjoy the exclusion ratio on payments received with their cost being the decedent's cost. If this concerns you that the beneficiary may not be permitted to defer taxes on the death benefit when the owner and the annuitant are different and the annuitant dies (and a possible 10% excise tax penalty if annuity was issued after 4-22-87), we recommend that you simply make the owner and the annuitant the same person since distribution rules are more liberal if the owner dies.