Owner-Driven vs. Annuitant-Driven Annuities

Annuity contracts can be owner-driven or annuitant-driven. An owner-driven annuity contract ends upon the owner’s death, while an annuitant-driven contract ends with the death of the annuitant. The owner and the annuitant are not always the same person. Each of these structures can become more complicated if the annuity has multiple owners or annuitants.

Headshot of Jennifer Schell, writer for Annuity.org
  • Written By
    Jennifer Schell, CAS®

    Jennifer Schell, CAS®

    Financial Writer, Certified Annuity Specialist®

    Jennifer Schell is a professional writer focused on demystifying annuities and other financial topics including banking, financial advising and insurance. She is proud to be a member of the National Association for Fixed Annuities (NAFA) as well as the National Association of Insurance and Financial Advisors (NAIFA).

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    Stephen Kates, CFP®

    Stephen Kates, CFP®

    Principal Financial Analyst for Annuity.org

    Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

    Read More
  • Edited By
    Lamia Chowdhury
    Headshot of Lamia Chowdhury, editor for Annuity.org

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial editor at Annuity.org. Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

    Read More
  • Updated: April 23, 2024
  • 5 min read time
  • This page features 4 Cited Research Articles

Key Takeaways

  • Annuity contracts can be designed as owner-driven or annuitant-driven, which affects how long payments last.
  • The annuity owner is the person who signs the contract and provides the initial deposit, whereas the annuitant is the designated person who receives the payouts.
  • If the contract is owner-driven, the owner can become the new annuitant and continue receiving income after the annuitant’s death.
  • If the contract is annuitant-driven, the contract ends when the annuitant dies, even if the annuity owner is still alive.

Interested Parties in an Annuity Contract

An annuity contract usually involves four interested parties: the owner, the annuitant, the beneficiary and the insurance company that issues the contract.

The annuity owner pays the premium to purchase the annuity. The owner bears responsibility for any taxes due when the annuity pays out or is surrendered, and is the only one who can surrender the annuity contract. 

The owner also has the right to name the contract’s beneficiary. The beneficiary of an annuity contract receives a death benefit when the contract ends.

The annuitant is the person whose life expectancy the insurer uses to calculate an annuity’s income benefits. Some contracts may specify that the annuitant also receives the annuity’s payments, but this is not always the case.

In many annuity contracts, the owner and the annuitant are the same person, but sometimes they aren’t. In cases where one person owns the contract and another person is the annuitant, it’s important to consider whether your contract is owner-driven or annuitant-driven. The differences in these two contract structures can have a major impact on how long the annuity pays out income.

Annuities are designed to address lifetime income. It is important to consider both your personal and financial circumstances when deciding whether you want an annuitant-driven contract or owner-driven contract.

Owner-Driven Contract Structure

Owner-driven contracts are the most common structure for annuities. With an owner-driven contract, the annuity continues payments until the owner’s death. Even if the annuitant (whose life expectancy the payments are based on) passes away, an owner-driven annuity will continue as long as the owner lives.

The relationship between the owner and the annuitant can complicate how an owner-driven contract resolves. Some potential outcomes include:

  • If the owner and annuitant are the same person and that person dies, the contract terminates and the beneficiary receives the death benefit.
  • If the owner and annuitant are different people and the owner dies, the contract terminates and the beneficiary receives the death benefit.
  • If the owner and annuitant are different people and the annuitant dies, someone new takes over the role of annuitant and the contract continues.

A new annuitant can replace a deceased annuitant in an owner-driven contract. However, annuity providers might have different rules for who can become the new annuitant. 

In some annuity contracts, the owner automatically becomes the new annuitant in the contract. Other designs might allow the owner to select who they want to be the new annuitant. In this case, the owner usually has a limited window of time in which they can name the new annuitant; if the owner does not make a selection in that period, the owner becomes the new annuitant by default.

The owner-driven contract structure can involve further complications if the annuity has joint ownership. What happens when just one owner of the annuity passes away? Again, contract provisions vary, but usually, the surviving owner has the choice of either terminating the contract or taking sole ownership and continuing the annuity.

An owner-driven annuity places more control in the hands of the annuity owner. Some annuity purchasers may prefer this contract structure as a way to guarantee income for their entire lifetime even if they are not the contract’s annuitant.

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Annuitant-Driven Contract Structure

The other contract structure is known as an annuitant-driven annuity. The annuitant-driven design means that income payments from the annuity cease upon the death of the annuitant, the person whose age and life expectancy insurers use to calculate annuity income.

However, the death of the annuity owner can still trigger the termination of an annuitant-driven contract. IRS regulations stipulate that if the owner of an annuity contract dies, the insurer must distribute the contract’s value to the beneficiary within five years of the owner’s death. This is true even if the annuitant is still alive in an annuitant-driven contract.

All annuity contracts in which the owner is a trust, corporation or other non-person entity are annuitant-driven. Annuity contracts must have a natural termination, so the end of payments must be tied to a living person. Because the annuitant’s life expectancy determines payment amounts, the annuitant must always be a living person in any annuity contract.

Annuitant-Driven Contract With Multiple Annuitants

Some annuitant-driven contracts allow for a secondary annuitant, either as a joint annuitant or a contingent annuitant. Much like an owner-driven annuity with multiple owners, having multiple annuitants complicates the outcome of an annuitant-driven contract.

If the contract has a joint annuitant, also called a co-annuitant, the contract is measured over the lives of both people. Some annuitant-driven contracts may terminate after the first annuitant passes away, while others may not terminate until the last annuitant dies.

A contingent annuitant is a secondary person who only becomes involved in a contract after the primary annuitant’s death. In contracts with a contingent annuitant, the death of the primary annuitant does not trigger termination; instead, the contingent annuitant takes over as the primary annuitant and the contract continues.

Annuity contract structures can be complicated and involve many considerations, including whether they are annuitant-driven or owner-driven. If you’re thinking about purchasing an annuity, consider working with a financial advisor who can walk you through a contract to help you make the best choice for your situation.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: April 23, 2024
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