Annuitant
An annuitant is a person who receives periodic payments from an annuity. An annuity is a financial product typically used as a retirement planning tool, designed to provide a steady income stream to the annuitant over a specified period of time or for the rest of their life. The annuity is funded either through a lump sum payment or a series of payments made by the annuitant before the payout phase begins.
Key Features of an Annuitant
- Income Receipt: The annuitant is the recipient of the annuity’s income payouts, which can be monthly, quarterly, annually, or at other specified intervals.
- Lifespan-Based Payments: The payments can continue for a fixed number of years or for the remainder of the annuitant’s life.
- Variety of Annuities: Annuitants can choose from various types of annuities, including fixed, variable, and indexed annuities, each providing different benefits and risks.
Examples
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Retirement Annuity: John, aged 65, purchases a life annuity with his savings. He becomes the annuitant and receives monthly payments for the rest of his life. When John passes away, if it’s a single-life annuity with no survivor benefits, the payments cease.
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Fixed Period Annuity: Sarah invests in an annuity that will pay her $500 monthly for 20 years. Even if Sarah passes away after 10 years, the remaining payments will be made to her beneficiaries for the remaining 10 years.
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Joint and Survivor Annuity: A couple, Jim and Lisa, purchase a joint and survivor annuity. As annuitants, they receive payments while both are alive. After the death of one spouse, the survivor continues to receive payments.
Frequently Asked Questions (FAQs)
What happens if the annuitant dies before the end of the payout period?
Depending on the type of annuity, payments may cease or continue to a named beneficiary. For example, a life annuity without survivor benefits stops upon the annuitant’s death, whereas a period-certain annuity might continue payments to the beneficiary for the remaining period.
Can an annuitant switch between different types of annuities?
Switching types is not typically possible once the annuity contract is in the payout phase. However, during the accumulation phase, some annuities might offer options to reallocate funds or switch plans, often with certain conditions or fees.
How are annuity payments to the annuitant taxed?
Annuity payments are taxed as ordinary income. The taxable amount depends on whether the annuity was purchased with pre-tax or post-tax dollars. For pre-tax annuities like those funded with 401(k) or IRA money, the entire payment is taxable. For post-tax annuities, only the earnings portion is taxable.
Can an annuitant be more than one person?
Yes, an annuity can cover multiple annuitants, such as a married couple under a joint and survivor annuity. Payments might continue to the surviving spouse even after one annuitant dies.
Are there any risks associated with being an annuitant?
Yes, there are risks such as inflation reducing the buying power of fixed payments, or the financial stability of the insurance company providing the annuity (though many are protected by state insurance guaranty associations).
Related Terms
- Annuity: A financial product offering regular payments, either immediately or deferred, for a specified period or for the annuitant’s lifetime.
- Immediate Annuity: An annuity where payments start almost immediately after a lump sum is paid.
- Deferred Annuity: An annuity where payments begin at a future date, providing a way to grow funds tax-deferred.
- Fixed Annuity: Provides guaranteed fixed payments over a period.
- Variable Annuity: Payments depend on the performance of underlying investments.
- Indexed Annuity: Returns are tied to a stock market index with a minimum guarantee.
Online Resources
- Investopedia - Annuity Definition
- NerdWallet - Annuities: What They Are and How They Work
- IRS - Retirement Topics - Annuity
Suggested Books for Further Studies
- “The Annuity Handbook: A Financial Professional’s Guide to Annuities” by Anthony Steuer
- “All About Annuities” by Gordon K. Williamson
- “Annuities For Dummies” by Kerry Pechter
- “Essential Retirement Planning for Solo Agers” by Sara Zeff Geber
- “Paychecks and Playchecks: Retirement Solutions for Life” by Tom Hegna
Accounting Basics: “Annuitant” Fundamentals Quiz
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