Annuitant

Introduction

An annuity is a finance product sold by an insurance company. It is a written agreement duly signed and agreed upon between the insurance company and the individual. The individual pays a certain amount of money initially or over time to the insurance company. In return, the insurance company promises to pay the individual a guaranteed income stream for a specific period or the rest of their life.

Regarding financial planning, annuities are often considered a great way to generate a steady income stream for retirement. This is a contract between an individual and an insurance company. The individual pays a premium for a guaranteed income stream. The person who receives this guaranteed income stream is known as the annuitant. But exactly is this concept? Let’s learn everything about annuitant in brief.

Meaning of Annuitant

The annuitant is the person who receives the payments from the annuity contract. However, the person who bought the contract may not always be the annuity receiver. It can be a spouse or a child or any related family members who gets to enjoy this income. The annuity owner has the control over the contract to add or remove the beneficiaries.

Annuitant Vs. Annuity Owner

There are some key differences between the annuitant and the annuity owner. The annuitant is the person who receives the payments from the contract. The annuity owner is the person who owns the contract. They are responsible for making the payments to the insurance company. The annuitant has no control over the contract and cannot change it. The annuity owner controls the contract and can change it as needed.

Annuitant Vs. Beneficiary

An annuitant is a person covered by an annuity contract and entitled to receive the payments from the respective insurance company. These payments are basically made to the annuitant for the rest of their life or a specified period. A beneficiary is a person who is supposed to receive the contract's proceeds upon the annuitant's death. The beneficiary may receive the payments in a lump sum or as ongoing payments.

Factors that influence annuity payments

• Age and Gender − The main factors which affect annuity are age and gender. The older the annuitant is, the higher the payments they will receive. Women are given lower amounts of payments as compared to men as they have a high life expectancy.

   Gender based payments for annuity 

• Annuity Type − Fixed, variable, indexed and immediate are the prevalent types of annuities. These annuity types have different pay-out structures, fees, and charges.

• Investment Performance − The performance of the investments used to fund the annuity can impact the payments. If the investments perform well, the annuity payments will be higher, and vice-versa.

• Taxation of Annuitants − The gain on annuity income is taxed and not the whole payment. But if it’s employer pension, the total value is taken into consideration.

  • Non-Qualified Annuities − These annuities are bought with after-tax dollars. The annuitant receives income payments from a non-qualified annuity. The portion of each taxable payment is determined by the exclusion ratio, which is calculated based on the annuitant's life expectancy and the original investment amount.

  • Qualified Annuities − These are annuities purchased with pre-tax dollars. When the annuitant receives income payments from a qualified annuity, the entire payment is generally taxable as ordinary income.

Types of Alternative Investments

• Variable Annuities − These are invested in various alternative avenues, such as stocks or bonds. When the annuitant receives income payments from a variable annuity, the portion of each taxable payment is based on the underlying investment performance. If there is an increase in the annuity, then the portion of each payment will be large; else, the portion of each payment will be small. Larger payments are taxable, while smaller payments are not.

Examples of Annuitants

• Retirees − Many retirees use annuities to get a stable income stream during their retirement years. 401(k) or an IRA can be purchased with their funds for a stable income.

• Lottery winner − Some may receive their winnings as an annuity rather than a lump sum. This allows them to receive a steady income stream over time instead of a large sum of money simultaneously.

• Settlement recipients − People who receive a settlement from a legal or insurance claim may receive the settlement as an annuity. This gives them a steady income stream over time, which can help cover expenses and provide financial stability.

• Spouses − Some annuities allow for the continuation of payments to a surviving spouse after the annuitant dies. In this case, the surviving spouse becomes the annuitant and receives the income payments.

Conclusion

Annuitants receive stable payments from the annuity contract. It is a financial product designed to provide a steady income stream over a specific period. The taxation of annuitants varies depending on different factors. The type of annuity, the annuitant's country of residence, and the source of the funds are used to make purchases. Understanding the taxation of annuities is difficult to understand, so most people hire a professional to help them.

FAQs

Q1. What is an annuitant?

Ans. An annuitant is an individual who receives stable payments from an annuity over a fixed timeline.

Q2. What is an annuity?

Ans. An annuity is a financial product. It is designed to provide a steady income stream over a fixed timeline or for a lifetime.

Q3. What types of annuities are there?

Ans. There are different types of annuities-

• Fixed annuities.

• Immediate annuities.

• Variable annuities.

• Deferred annuities.

Q4. How are annuitants taxed?

Ans. The taxation of annuitants can be variable on the type of annuity and the country where the annuitant resides. In the United States, non-qualified annuities are taxed. It is based on the exclusion ratio, while qualified annuities are taxed as ordinary income.

Q5. Can annuities be inherited?

Ans. In some cases, annuities can be inherited by a beneficiary. This option is variable depending on the country.