Life insurance is used to create an estate for an individual if he or she dies too soon. A deferred annuity, however, can provide protection against the possibility that an individual will live too long and outlive his or her accumulated assets. The term “annuity” derives from a Latin term meaning “annual” and generally refers to any circumstance where principal and interest are liquidated through a series of regular payments made over a period of time. A “deferred” annuity is an annuity in which both the income, and any taxes due on growth inside the contract, are pushed into the future, until they are actually received by the owner.1 A commercial2deferred annuity is a special type of policy issued by an insurance company. In a typical situation, the policyowner contributes funds to the annuity. The money put into the policy is then allowed to grow for a period of time. At a future date, the policy may be “annuitized” and the accumulated funds paid out, generally through periodic payments made over either a specified period of time, or the life of an individual, or the joint lives of a couple.
Parties to an Annuity
There are four parties involved in a typical annuity.
1. Insurance company: This is the issuer of the annuity.
2. Policyowner: This is the individual or entity that contributes the funds. The policyowner typically has the right to terminate the annuity, to gift it to someone else, to withdraw funds from it, and to change the annuitant or beneficiary. Depending on the type of annuity, a policyowner may have other rights as well.
3. Annuitant: This is the individual whose life is used to determine the payments during annuitization. An annuity will remain in force unless terminated by the owner, or as a result of the death of the owner, or the annuitant dies.
4. Beneficiary: This is the individual or entity that receives any proceeds payable on the death of the annuitant or the policyowner, depending on whether the annuity is “annuitant driven” or “owner driven.”A single individual may be the policyowner, annuitant, and the beneficiary. In other situations, these roles may be held by different individuals or entities.
1Under federal law, the deferral of income tax on growth inside the policy is available only to natural persons; the taxdeferral is generally not permitted if the annuity owner is a non-natural person such as a trust or corporation. 2A private annuity is an agreement between individuals, usually exchanging a valuable asset (such as a business) for a lifetime income. The party promising to pay the annuity is someone who is not in the business of issuing annuities.