The formation and validity of an annuity policy or contract is determined in the same way as a standard contract. The annuity policy must be supported by consideration (unless it is a charitable gift annuity or the annuity involves a bequest). The parties to the annuity contract must have legal capacity to contract. Annuity policies are construed as insurable contracts, and general canons of policy construction apply. Some states have codified certain canons of construction such as ejusdem generis and contra preferentum.
Generally, any person who has a right under an annuity contract may assign that right if assignment is not prohibited by a statute or by the contract itself. A prohibition in an annuity contract against assignability may be recognized as valid unless it conflicts with a state statute or is void as against public policy. Where an annuity contract attempts to limit assignability and such is permitted, the language must nonetheless be clear to avoid conflict. Some states recognize annuities as insurance contracts; thus, state insurance laws must be consulted and may dictate the circumstances under which assignment is allowed. Generally, an absolute assignment is viewed as a transfer of ownership that may require surrender of the contract. A collateral assignment that is made as security for a debt takes effect when the issuer receives written notice of the assignment, and surrender is generally not required.
The beneficiary of annuity usually refers to the person who receives benefits under the contract after the annuitant dies. The beneficiary typically receives the refund portion of the annuity contract. A beneficiary does not have any rights or ownership in the contract; the annuitant is usually the contract owner and generally has the right to change the beneficiary pursuant to the contract terms (unless an irrevocable beneficiary has been designated) without the beneficiary's consent. Even if the annuity contract owner or annuitant has not formally changed a beneficiary, the annuity can act in such a way to waive or divest the right to receive the annuity proceeds. If the beneficiary accepts a payment that purports to satisfy the issuer's obligations under the annuity, further payments could be barred because the acceptance may be viewed as an accord and satisfaction.
The timing and amount of income payment issues under fixed annuity contracts are rarely litigated because they are usually spelled out in the contract very clearly. Payment issues do arise in variable annuity contracts because the amount of the payments depends on the investment performance of the subaccount(s); thus, the amount of the payments cannot be specified. Another issue related to payments is the issue of apportionment. It is not uncommon for an annuitant to die between payment dates. Who is entitled to the annuity proceeds that accrued before the annuitant died but after the last payment date prior to the death? At common law, the last payment is not apportioned with minor exceptions involving familial support. The beneficiary gets the full proceeds on the next payment due date unless the annuity contract clearly provides otherwise. Because of the harsh result, case law and state statutes have limited the common law rule, broadened the exceptions, or adopted a rule of apportionment outright.
Surrender of the policy discharges the issuer's obligations. Statutory penalties may apply if the issuer wrongfully refuses to pay the surrender value of the contract within the time specified in the contract.
Copyright 2009 LexisNexis, a division of Reed Elsevier Inc.
