Families, fiduciaries, guardians or conservators who are marshaling annuity assets may be unsure where to start.  As there are various types of annuities and many annuity companies, the process can be a bit overwhelming.  Here are five tips to point you in the right direction.

Identify the annuity’s owner, annuitant, and beneficiary

Annuity contracts will have both an owner and an annuitant, but they are not the same thing.  An annuity owner is an individual who has signed and funded the annuity contract.  The annuitant is the person who is intended to receive the annuity payments. Insurance companies will use the annuitant’s gender, age, and estimated life expectancy to calculate the annuity payment schedule.

Most of the time when attempting to marshal annuity assets, you’ll find the owner and the annuitant are the same, because the owner of the annuity wants a steady stream of income later in life. This owner and annuitant information should be at the top of the statement and easily identifiable.

Annuities may also have a beneficiary assignment. If an annuity has a death benefit, or will be making payments past the life of the annuitant, there needs to be a beneficiary on the account so that the insurance company knows who should receive the proceeds after the annuitant’s passing.  The beneficiary may be an individual or an estate. The beneficiary is entitled to the death benefit, if there is one. 

In some cases, if the contract has already been annuitized for a specific payout period, then the beneficiary would receive the remaining payouts over time. Statements do not always show beneficiary assignments, so you might need to call the insurance company to find out this information.

Identify the type of annuity. 

When marshaling annuity assets, it is important to understand if an annuity is fixed or variable because that will determine what flexibility remains with the annuity investments.  Reviewing the annuity statement should give you clues.

How to Identify

If the statement specifies an income payment option for a certain period, it is most like a fixed annuity.  There might also be terms like “fixed account” that will help you in identifying. Variable annuity statements will have the words “variable annuity” somewhere in the fine print.  They also will show changing values and the various investments of the variable annuity.

Fixed vs Variable

Annuities come in two types, fixed or variable.  A fixed annuity is normally funded from a lump sum deposit and guarantees the annuitant a stream of income for a specific term using a fixed rate of return. 

Fixed annuities may be for a period of time or for the lifetime of the annuitant.  A fixed annuity will not change, so the family member or fiduciary marshaling a fixed annuity will need to know who the payments should go to and where they should be deposited. 

If the fixed annuity is for the life of the annuitant, when the annuitant passes, payments stop.  However if the annuity will make payments for a certain period of time, such as 10 or 20 years, these payments will continue after the annuitant’s passing and it is up to the estate to make sure payments are paid out correctly and to the right location.

Variable annuities are different, their returns can vary due to the annuity’s underlying investments. Variable annuities have investment options, called subaccounts, and so it is important to determine whether the investments are taking the appropriate amount of risk.  In this case, much more analysis will need to be done to determine if the risk taken is appropriate for the annuitant; this might require financial planning and budgeting. 

For example, an annuity that was established many years ago and invested mostly in equities might be taking too much risk with the annuitant’s current age. In that case the owner/annuitant of the annuity would be better suited with a different equity/fixed income risk allocation.

Variable annuities can also be funded by lump sum payments, but they are different from fixed annuities in that the lump sum payment does not have to be immediately annuitized. In reality, only 5% of annuities are annuitized according to industry statistics

For variable annuities the insurance company will have a specific age at which the annuity must either be annuitized or liquidated. This age target can be different for each insurance company.  So it’s important to review whether the annuity has been annuitized or if it can still be surrendered. Once a variable annuity is annuitized, it can no longer be surrendered or transferred. 

Identify the contract issue date

The contract issue date is a key piece of information because most annuities have something called surrender periods.  If the annuity is liquidated during the surrender period, then a penalty is charged, sometimes as much as 7% of the account. 

Surrender periods can be between 5 and 7 years, and sometimes as high as 20.  Knowing the contract issue date will help you determine if the surrender period has expired and if there are any potential charges to liquidating or transferring an annuity. Contract issue dates are also important in terms of taxation, as annuities purchased before 1988 have different taxation rules.

Identify if the annuity is qualified or non-qualified

It is important to determine if the annuity asset is qualified or non-qualified. Most statements will specify this at the top of the statement. Qualified annuities are held in retirement accounts. Once the annuitant is over the age of 73, the IRS requires that funds be withdrawn from the annuity. This is known as a required minimum distribution, and if the distribution is not taken then the IRS charges a 25% penalty.

A non-qualified annuity is an annuity purchased with after tax dollars.  This means that any distributions will be taxed at ordinary income rates.  Non-qualified annuities can be exchanged into another annuity without tax impact through a process called a 1035 exchange. An owner may want to move to another annuity in order to reduce the underlying expenses. These types of exchanges are normally done after the annuity is out of its surrendered period, in order to avoid surrender penalties

Update information with the insurance company as needed. 

Having gleaned the above information from the annuity statement, it’s time to update information with the insurance company.  

If the annuitant is still alive but is lacking capacity, you will need to provide documents giving you authorization to act on behalf of the annuitant, such as letters of guardianship/conservatorship or durable power of attorney.  

Although you will need to send this information to the insurance company, it is helpful to talk to the insurance company’s customer support first to make sure you fill out the correct paperwork. Be sure to have the contract number and social security number of the annuitant.  The contract number can be found on the annuity statement.

If the annuitant is deceased, you will need to notify the insurance company in order to have the death benefit sent out.  This will involve sending the insurance company the death certificate.  In some situations, you may suspect there is an annuity and associated death benefits, but there is minimal paperwork.  

To check if a beneficiary is eligible for an annuity’s death benefits, you can use a tool on the National Association of Insurance Commissioners website. You will be asked to provide the beneficiary’s personal information as well as information to identify any outstanding contracts.  This information can be taken from the death certificate, and would include the social security number, legal first name, legal last name, date of birth and date of death. If an insurance benefit is found that matches the beneficiary, the insurance company is supposed to contact you directly, but the process could take up to 90 business days. 

Determine liquidity needs and make a plan

The advantages of an annuity is having an ongoing stream of income, but in some cases this might end up being a disadvantage. 

For variable annuities, surrendering an annuity or withdrawing funds could have large tax consequences. With fixed annuities, continued payments are set in stone and not adjusted for inflation which results in reduced purchase power.  This is why when marshaling annuity assets it’s important to take into account the financial needs of the annuitant and/or the estate and properly plan out what to do with the annuity.   

There might be a change in the annuitant’s circumstances due to health that will require the annuity to be liquidated. Or, there might be upcoming RMDs from the annuity that could end up putting the annuitant into a higher tax bracket.  Marshaling annuity assets is not just about updating information, but also about effectively using the annuity as an asset within the annuitant’s overall financial plan.

This process can be overwhelming due to the overall complexity of the annuity industry.  Prudent Investors has experience working with professional fiduciaries and individuals in analyzing annuity assets and providing financial planning recommendations.  If you need assistance with reviewing an annuity, please reach out to our team.


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Jared Ong

Jared Ong oversees portfolio management, trading and technology. He previously worked at the Capital Group as a business systems analyst where he was integral in improving the trade operations group’s equity, fixed income, and foreign exchange trade processes. A graduate from Brigham Young University, Jared holds a Bachelors in Music. In his spare time, he enjoys composing and arranging music.