Owner-driven vs. Annuitant-driven Fixed Annuity Contracts

A very common question is what is the difference between owner-driven and annuitant-driven contracts?  Annuitant-driven contracts are currently more common; however there are becoming more and more owner-driven fixed annuities.  The primary difference is in how the contracts are treated upon the death of either the annuitant or owner.
In an owner-driven fixed annuity contract, the death of the contract owner or joint-owner (however the account is specified) will trigger payout of the death benefit to the designated annuitant.  This can come in the form of a lump sum distribution, an annuitization, life expectancy payments, or spousal continuation.

In an annuitant-driven fixed annuity, the death of the owner triggers the account annuitant receiving the contract value and not the death benefit (though the insurance company may specify otherwise).  The account value could be less than the expected death benefit.  When the contract annuitant dies, the beneficiary will then receive the death benefit associated with the account.

In annuitant-driven accounts, the death of the owner and not the death of the annuitant can trigger both the five-year deferral rule and the spousal continuation.

For example, consider a couple that decides to purchase two separate annuity accounts.  They decided to cross-own the accounts, where the husband owned and was beneficiary of one account with the wife as annuitant, and the wife owned the other account and was beneficiary with the husband as the annuitant. The children were established as contingent beneficiaries.  When the wife dies in this example, the account in which the wife owned and was beneficiary automatically goes to the children as contingent beneficiaries.  Because the husband is no longer associated with the account, a tax liability is suddenly enacted.

In this case, it would have been more beneficial to have the owner changed to the annuitant.  The husband should be owner and annuitant on one account, and the wife owner and annuitant on the other account.  If it is established this way, the couple will be able to elect the spousal continuation.  However, there are circumstances in which this wouldn't apply.  As with any financial product, it is important that read the prospectus of the contract and work with a professional that handles these types of products and problems daily.  Owner-driven and annuitant-driven fixed annuity contracts have subtle and minor differences that can make a huge difference in the outcome of your contract's execution.