Annuities definition - a contract between an insurance company and 3 parties whereby the insurance company is to provide benefits to the 3 parties in return for a premium paid. Who are the 3 parties to your annuity?
It's likely that until you have stumbled upon this post, you have never experienced an annuities definition as who needs to be named as each 'party.' There are generally four parties to an annuity contract: the insurance company, the owner, your annuitant, and the beneficiary. The contract may be owner-driven, annuitant-driven, or a combination of both. With the owner-driven annuity, death benefits tend to be paid when the owner passes away. The owner is typically the person who created the annuity investment - it's their cash. So the annuities definition of the owner is the one who puts up the payment and retains control and ownership over the contract.
And an annuitant-driven contract will pay the particular beneficiaries upon the loss of life of the annuitant. The annuitant is usually the just like the owner but not always. Circumstances are given below. In either sort, owner-driven or annuitant-driven annuity, the cash must be distributed when the seller dies, which may present unwanted consequences. So the annuities definition of the annuitant is the "measuring life," upon whose death payments are made to the annuitant's beneficiaries.
Why does it matter? Here you have the mechanics regarding an annuities definition as few realize, even the agents that market annuities. But let's take an example to see that the parties to an annuity is no trivial matter.
Let's say that you have an annuitant-driven annuity. You and your partner are joint owners (for example); your spouse is the annuitant, and your children (both under 59½) are the beneficiaries. What would happen in case your spouse dies? You might think you will keep control of the money along with everything will stay the same because you are the surviving owner. Completely wrong! The kids will get it-all of it, if it is in an annuitant-driven annuity. When the annuitant passes away, the annuitant's beneficiaries get the earnings. Then to make bad issues worse, you'll pay income tax from the tax-deferred growth and possibly annuity tax on any amount more than $13,000 that you pass to every one of your children. Plus your youngsters won't be too happy because they'll owe income tax on your own spouse's portion of the annuity's acquired. Is this the annuities definition you had in mind when you made your purchase?
What? No one explained annuities parties to you before? As we said, most of the people in the annuity business don't typically understand the tax, estate and gift aspects.
So how is your annuity contract structured? It should be set up in a way that can result in the least level of taxes and penalties for the death benefit, plus permit maximum flexibility on beneficiary distributions. As a general rule, once we understand this annuities definition, we always advise that the owner and the annuitant are the same man or woman. That way, the "measuring life" is the same person who has the same beneficiaries.
Many annuity owners have never had any annuities definition provided to them as to who should be the annuitant, owner, and beneficiary and how their living trust or estate plan might impact these choices. A simple annuity can quickly get complex. But it's wise to pay attention to these details to avoid a negative outcome at the worst time. And now that you have had annuities defined, you can do so.