Contingent Annuity: All You Need To Know (Educate Yourself)

Contingent Annuity – An annuity is a financial product that provides a steady stream of income to an individual, usually during retirement. An annuity can be purchased from an insurance company or a financial institution, and it can offer various features and benefits depending on the type and terms of the contract. One of the features that some annuities offer is the option to name a contingent annuitant, who is a secondary beneficiary who will receive the annuity payments after the primary beneficiary passes away.

In this article, we will explain what a contingent annuity is, how it works, what are its pros and cons, How to buy it, comparison to other annuities, etc.

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What Is a Contingent Annuity?

A contingent annuity is a type of annuity that is contingent on someone either being alive or deceased. It is commonly seen in the case of life insurance and pensions. A contingent annuitant, on the other hand, is a secondary annuitant who receives payments only in the case of the primary annuitant’s death. When an annuity includes a contingent annuitant, its payments will continue until both the primary and secondary annuitants are deceased.

A contingent annuity can be thought of as a joint-and-survivor annuity, which is a type of annuity that pays income to two or more beneficiaries for as long as they live. A joint-and-survivor annuity can have different payout options, such as:

• 100% joint-and-survivor: The same amount of income is paid to both beneficiaries for life.
• 50% joint-and-survivor: The income is reduced by 50% when the first beneficiary dies, and the remaining amount is paid to the second beneficiary for life.
• Other percentages: The income can be reduced by any percentage between 0% and 100% when the first beneficiary dies, depending on the contract.

A contingent annuity can also be thought of as a life-with-period-certain annuity, which is a type of annuity that pays income for life or for a specified period, whichever is longer. For example, a life-with-10-years-certain annuity will pay income for life, but if the beneficiary dies within 10 years of starting the payments, the remaining payments will go to a contingent beneficiary for the rest of the 10-year period.

How Does a Contingent Annuity Work?

A contingent annuity works similarly to other types of annuities, except that it has an additional beneficiary who will receive payments after the primary beneficiary dies. The process of buying and receiving a contingent annuity can be summarized as follows:

• The buyer of the annuity, also known as the owner or contract holder, pays a lump sum or a series of payments to the annuity provider in exchange for future income payments.
• The owner names one or more beneficiaries who will receive the income payments from the annuity. The primary beneficiary is usually the owner himself or herself, or their spouse or partner. The secondary beneficiary is usually their child, relative, or friend, who is also known as the contingent annuitant.
• The owner chooses the type and terms of the annuity, such as when the payments will start and end, how often they will be paid, how much they will be paid, and what percentage of the income will go to the contingent annuitant after the primary beneficiary dies.
• The owner also chooses other features and benefits that may be available with the annuity, such as inflation protection, death benefit, surrender option, or riders that provide extra coverage or guarantees.
• The annuity provider invests the money paid by the owner and pays out income to the beneficiaries according to the contract. The income payments are usually fixed and guaranteed, but they may vary depending on the performance of underlying investments or market conditions if the annuity is variable or indexed.
• If the primary beneficiary dies before or after the payments start, the contingent annuitant will receive payments for life or for a specified period, depending on the contract. If both beneficiaries die before receiving all their payments, any remaining balance may go to their heirs or to the annuity provider.

Examples of Contingent Annuities

There are different types of contingent annuities that can suit different needs and preferences. Here are some examples:

Life Annuity

A life annuity is a type of contingent annuity that pays income for the remaining lifetime of the annuitant. The payments stop when the annuitant dies unless there is a contingent annuitant who will receive the payments after the primary annuitant’s death. A life annuity can provide income security and longevity protection for retirees.

Joint-and-survivor annuity

A joint-and-survivor annuity is a type of contingent annuity that pays income to two or more beneficiaries for as long as they live. The payments may be reduced by a certain percentage when the first beneficiary dies, depending on the contract. A joint-and-survivor annuity can provide income for spouses or partners who want to ensure their financial well-being after one of them passes away.

Life-with-period-certain annuity

A life-with-period-certain annuity is a type of contingent annuity that pays income for life or for a specified period, whichever is longer. For example, a life-with-10-years-certain annuity will pay income for life, but if the beneficiary dies within 10 years of starting the payments, the remaining payments will go to a contingent beneficiary for the rest of the 10-year period. A life-with-period-certain annuity can provide income for beneficiaries who want to guarantee a minimum number of payments regardless of their lifespan.

Deferred contingent annuity

A deferred contingent annuity is a type of contingent annuity that pays income only when a specified event or condition occurs, such as when an underlying investment portfolio is depleted. The payments may start at a predetermined age or date, or they may be triggered by the value of the portfolio falling below a certain level. A deferred contingent annuity can provide income for investors who want to protect their income in case their investments run out.

How to Buy a Contingent Annuity

Buying a contingent annuity is similar to buying any other type of annuity, but it requires some additional steps and considerations. A contingent annuity is not a common or widely available product, so finding a suitable provider and contract may be challenging. Here are some tips on how to buy a contingent annuity:

Define your financial goals and needs

Before shopping for a contingent annuity, you should have a clear idea of why you want one and what benefits you expect from it. For example, do you want to protect your income in case your investment portfolio runs out? Do you want to leave a legacy for your spouse or children? How much income do you need and for how long?

Compare different providers and products

Once you have defined your goals and needs, you should research different providers and products that offer contingent annuities. You can use online tools, such as annuity calculators or comparison websites, to compare the different features and costs of various contracts. You can also consult with a financial advisor or an insurance agent who specializes in annuities.

Check the provider’s reputation and financial strength

Before buying a contingent annuity from a provider, you should check their reputation and financial strength. You can look up their ratings from independent agencies, such as A.M. Best or Moody’s, which assess their ability to meet their obligations to policyholders. You can also check their customer reviews and complaints from online sources or regulatory agencies.

Review the contract details and terms:

Before signing the contract, you should review the contract details and terms carefully. You should pay attention to the following aspects:

• • The amount and frequency of the payments: How much will you receive and how often? Will the payments be fixed or variable? Will they be adjusted for inflation or not?
  • The trigger event and conditions: When will the payments start? What event or condition will trigger the payments? How will the value of your investment portfolio be measured and verified?
  • The beneficiary designation: Who will be your primary and contingent annuitants? How much will they receive after your death? Can you change or revoke your beneficiary designation?
  • The fees and charges: What fees and charges will you pay for the contract? How will they affect your returns and payments? Are there any surrender charges or penalties for early withdrawals?
  • The guarantees and riders: What guarantees and riders are included in the contract? What additional benefits or protections do they offer? How much do they cost?

Ask questions and seek advice

If you have any questions or doubts about the contract, you should ask the provider or your advisor for clarification. You should also seek advice from an independent professional, such as a lawyer or an accountant, who can help you understand the legal and tax implications of buying a contingent annuity.

Contingent Annuity vs. Other Types of Annuities

A contingent annuity is a type of annuity that is contingent on someone either being alive or deceased. It can be compared and contrasted with other types of annuities.

What Are The Advantages And Disadvantages Of A Contingent Annuity?

A contingent annuity has some advantages and disadvantages for both owners and beneficiaries. Some of them are:

• Advantages for owners:

  • They can provide income security and peace of mind for themselves and their loved ones in retirement.
  • They can reduce their taxable income by deferring taxes on their annuity earnings until they receive payments.
  • They can customize their annuity to suit their needs and preferences by choosing different options and features.

• Disadvantages for owners:

  • They may pay higher fees and commissions than other types of investments.
  • They may lose access to their money once they buy the annuity, as most annuities have surrender charges or penalties for early withdrawals.
  • They may receive lower returns than other types of investments, as annuities are generally conservative and low-risk.

• Advantages for beneficiaries:

  • They can receive a steady and reliable source of income for life or for a specified period after the primary beneficiary dies.
  • They can avoid probate and estate taxes on their annuity payments, as they are transferred directly to them by the annuity provider.
  • They can benefit from any additional features or benefits that the annuity may offer, such as inflation protection, death benefit, or riders.

• Disadvantages for beneficiaries:

  • They may pay income taxes on their annuity payments, as they are considered ordinary income by the IRS.
  • They may receive lower payments than the primary beneficiary, as the annuity may reduce the income by a certain percentage when the primary beneficiary dies.
  • They may not be able to change or cancel their beneficiary designation, as most annuities have irrevocable beneficiaries.

Here are the key differences between a perpetuity and a contingent annuity:

Perpetuity

• Guarantees payments for an indefinite period of time.
• The payments are typically made for as long as the annuitant lives.
• The payments are typically not indexed to inflation.
• The payments are typically lower than the payments from a contingent annuity.

Contingent annuity

• Guarantees payments for as long as the annuitant lives, but only if they live past a certain age.
• This type of annuity is often referred to as a “life annuity with a period certain.”
• The payments are typically indexed to inflation.
• The payments are typically higher than the payments from perpetuity.

Here’s a table that summarizes the key differences between a perpetuity and a contingent annuity: