Understanding the Dangers of Annuities - Rodgers & Associates
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Understanding the Dangers of Annuities

I recently met with a prospective client who had a signif­icant portion of their financial assets in annuity contracts. All contracts listed both husband and wife as joint owners and joint annui­tants, and their children as benefi­ciaries. They believed the contracts would belong to the surviving spouse if one of them died and would be paid out to their children upon the second death. They were in for a big surprise.

All deferred annuity contracts issued after January 18, 1985 must pay out the death benefit upon the death of either owner. There are basically two types of annuity contracts – annuitant driven and owner driven. Annuitant driven contracts must also pay the death benefit upon the death of the annuitant. This couple would have had a nasty surprise when the first spouse died and a large part of their joint assets were paid out to the children.

Whenever possible, the owner and annuitant should be the same person and the spouse listed as primary benefi­ciary, the children listed as contingent benefi­ciaries. Most contracts will give the benefi­ciary various payment options allowing the tax impli­ca­tions to be controlled. An annuity that is owned by a trust gets even trickier. Generally, a deferred annuity owned by a non-natural person will trigger payment of the death benefit upon the death of the annuitant. However, if the trust owning the contract is a grantor trust, some insurance companies will pay the death benefit when the grantor dies. The law is not clear. The best way to deal with this situation is to get a written confir­mation from the issuer of the contract explaining their policy in this situation.

I strongly encourage anyone who owns a deferred annuity to be certain they under­stand what happens to their contract upon death. Annuities are complex financial contracts. For more infor­mation about annuities and their potential pitfalls, see my May 2011 and June 2011 newsletter.