Annuity Beneficiaries: Inheriting an Annuity at Death (2023) (2024)

What Happens To An Annuity When You Die?

When an annuitant dies, what happens to the annuity depends on its terms:

• Life Annuity: Payments stop upon death.
• Joint Life: Payments continue to a surviving partner.
• Certain Period: Payments to beneficiaries for a set time.
• Deferred Annuity: Sum paid to beneficiaries.

Specifics vary by contract.

Do Annuities Have Beneficiaries?

Yes, annuities do have beneficiaries. Any annuity contract allows the owner to name a beneficiary. The significance of having a beneficiary on an annuity is that it offers an efficient way of transferring wealth withoutprobate– a significant advantage for those wishing to avoid the often lengthy and expensive legal process.

Annuity Death Benefits

An annuity death benefit is the amount paid to the beneficiaries when the annuity holder dies. It ensures that the holder’s investment benefits their loved ones, even if they pass away before receiving all their annuity payments (lump sum or a series of payments).

Which Annuities Have A Death Benefit?

Choosing a Beneficiary

Annuity owners are free to select their beneficiaries, barring irrevocable ones, ensuring that upon their death, the chosen primary beneficiary receives the proceeds as continued payments or a lump sum. They can allocate specific percentages or amounts to various beneficiaries safeguarded from the lengthy and costly probate process. However, minors must wait until they are of legal age to access their portion. If the owner fails to designate beneficiaries, the annuity may enter probate, potentially resulting in the forfeiture of the death benefit to the insurance company, negating the intended financial legacy.

Why Buy An Annuity With Enhanced Death Benefits?

Below are a few reasons why people purchase annuities withenhanced death benefits:

• Enhanced Death Benefits are life insurance alternatives with no medical underwriting.
• In some cases, a retiree could withdrawRequired Minimum Distributions (RMD)and preserve most if not all of their original investment for estate planning.
• Others purchase these riders toreduce tax obligations for their beneficiaries.

Trusts As The Beneficiary Of Annuity

Owners can also assign a trust to receive any death; the proceeds must be paid out within five years. The trust can be the annuity owner if the trustee is named the owner and the trust is the primary beneficiary.

How Do You Know If An Annuity Has A Death Benefit?

Most annuities offer a death benefit, which is the remaining account balance transferred to a beneficiary if the annuitant dies before the funds are exhausted.

Review the contract’s terms, specifically sections labeled “death benefit” or similar phrases, or consult your financial advisor for clarity to determine if an annuity has a death benefit.

Understanding Annuity Beneficiaries:

An annuity contract allows the holder to designate beneficiaries, individuals, or entities set to receive the proceeds upon the annuitant’s death. These beneficiaries are typically categorized as primary and contingent.

• Primary Beneficiaries: These individuals are first in line to receive the death benefits. The annuitant can designate one or several primary beneficiaries and stipulate the percentage of assets each should receive. In the event of the annuitant’s passing, assets transition directly to them, bypassing probate.
• Contingent Beneficiaries: These are essentially backup beneficiaries, stepping in to receive the benefits if the primary beneficiary is deceased, unable, or unwilling to accept the inheritance. They ensure that the annuity proceeds remain within the annuitant’s chosen circle, even if the original plan goes awry.

Passing Down A Stream of Payments or No Death Benefit:

• Stream of Payments: Some annuities are set up to provide a guaranteed stream of income for a certain period or for life, known as “annuitization.” If the annuitant passes away before the end of the income period, the remaining payments may continue to the beneficiary. This scenario is common with certain types of annuities that feature a “period certain” annuitization, guaranteeing payments for a specific number of years, regardless of the annuitant’s lifespan.
• No Death Benefit: If the annuity is set up as a “life-only” or “straight life” annuity, the payments stop upon the death of the annuitant, with no benefits passing to beneficiaries. This setup offers higher payments but doesn’t provide after-death benefits. It’s chosen by those who prioritize maximum income over leaving a financial legacy.

Passing Down A Lump Sum Death Benefit

Deferred annuities are different because they accumulate savings rather than paying out immediately. For these, the death of the annuitant triggers options for the beneficiaries:

• Lump-Sum Payment: Beneficiaries of deferred annuities typically have the option to receive the entire account balance in one lump-sum payment. This approach provides immediate access to money, but it’s important to consider tax implications, as the lump sum could significantly increase the beneficiary’s taxable income for the year.
• Spousal Continuance: If the beneficiary is the spouse of the deceased, they may have an additional option called “spousal continuance.” This option allows the spouse to continue the annuity contract in their name, essentially stepping into the shoes of the deceased and maintaining the annuity’s tax-deferred status. They can then make decisions about when to start taking income, how much to receive, and, if desired, annuitize the contract.
• Non-Spousal Options: Non-spousal beneficiaries (like a parent) might also have the option to receive annuity payments over their lifetime or a set period, depending on the annuity contract’s terms. This approach can spread out the tax impact over several years.

Death Benefits Before and After Annuitization

Annuitization is typically an option with modern deferred annuities. Below are options for an annuity beneficiary of an inherited annuity before and after the annuity was annuitized.

If Annuitant Dies Before Annuization

If annuitants die before annualization, the beneficiaries will receive the annuity’s value in a lump sum or a series of payments.

If Annuitant Dies After Annuization

If an annuitant dies after annualization begins, the beneficiaries will receive either the remaining series of annuity payments or nothing, depending on the annuitant’s choice of an annuity payout.

Are Annuity Death Benefits Taxable?

Annuity death benefits are generally taxable, but the specific tax treatment will depend on the type of annuity and the circ*mstances of the death. Here are some factors to consider:

• Type of annuity: The type of annuity will determine whether or not the death benefits are taxable. Qualified annuities, held in tax-deferred retirement accounts such as 401k plans or IRAs, are generally subject to income tax when the death benefits are paid out. Nonqualified annuities, held outside of tax-deferred retirement accounts, may be subject to income or estate tax, depending on the circ*mstances.
• The beneficiary of the death benefit: The beneficiary of the death benefit will also affect the tax treatment of the death benefit. If the death benefit is paid to the policyholder’s estate, it may be subject to estate tax. The death benefit may be subject to income tax if paid to a named beneficiary.
• Amount of the death benefit: The death benefit amount may also affect the tax treatment. Generally, the excess amount may be subject to income tax if the death benefit exceeds the premiums paid into the annuity.

It is important to note that the tax treatment of annuity death benefits can be complex. Therefore, consulting with a financial advisor or tax professional is essential for guidance.

How Are Annuity Death Benefits Taxed?

Annuity death benefits are generally taxable, but the specific tax treatment will depend on the type of annuity and the circ*mstances of the death. Here is an overview of how annuity death benefits may be taxed:

• Qualified annuities: These are held in tax-deferred retirement accounts such as 401k plans or IRAs. If the policyholder dies and the death benefit is paid to the beneficiary, the beneficiary will generally be required to pay income tax on the death benefit. The tax rate will depend on the beneficiary’s tax bracket.
• Nonqualified annuities: Nonqualified annuities are annuities held outside of tax-deferred retirement accounts. If the policyholder dies and the death benefit is paid to the beneficiary, the tax treatment will depend on the beneficiary’s relationship with the policyholder. The death benefit may be tax-free. For example, if the beneficiary is the policyholder’s spouse. However, if the beneficiary is a non-spouse, the death benefit may be subject to income tax.
• Estate tax: If the death benefit is paid to the policyholder’s estate, it may be subject to estate tax. The estate tax rate is generally 40%, but there is a credit or exclusion that can reduce or eliminate the tax for most estates.

It is important to note that the tax treatment of annuity death benefits can be complex. Therefore, consulting with a financial advisor or tax professional is essential for guidance.

Consider Life Insurance Instead Of Annuities

Life insurance might be better if you leave money to your beneficiaries. You don’t have to take a medical examination in some cases. Instead, shop and compare life insurance policies to see how much they cost you each month. Coverage starts at $9.37 per month.

Related Reading: Get Life Insurance Quotes

Annuity Payout Options For Beneficiaries

If you inherit an annuity, you have four ways to get the money.

• Lump-Sum Distribution: A lump-sum distribution is when the beneficiary gets the remaining annuity’s value in one payment, similar to a CD.
• Nonqualified-Stretch Provision: Nonqualified annuity beneficiary options include a nonqualified stretch provision that will give beneficiaries the payments they are entitled to based on life expectancy.
• Five-Year Rule: An annuity’s beneficiary has five years to take out the proceeds. After that, they can take them out gradually or in a single lump sum anytime, as long as they withdraw all of the death benefits within five years of the annuitant’s death.
• Spousal Continuance: Spouses can be the new owner and annuitant of the deceased’s annuity and continue the contract.

Spousal vs. Non-Spousal Beneficiaries

When their partner dies, spousal beneficiaries can take over an annuity, keeping its benefits and tax rules. Non-spousal beneficiaries only receive the set death benefit and can’t continue the annuity. This difference is important for planning who gets your assets in the future.

Is An Annuity Death Benefit Taxable?

Annuity death benefits are taxable as ordinary income. When someone inherits an annuity, they owe taxes on the proceeds. If a beneficiary chooses to take the money immediately, they must pay the taxes immediately. But, of course, this is only if you choose a lump sum. On the other hand, if a beneficiary chooses to take the money over time, the taxes are not owed until the money is withdrawn from the annuity.

• Qualified Inherited Annuity Death Benefits: All of the death is taxable.
• Nonqualified Inherited Annuity Death Benefits: Only interest earned is taxable income.

How To Find A Missing Annuity Death Benefit

Beneficiaries can find lost death benefits from annuities by contacting the National Association of Insurance Commissioners. You can do this with a death certificate from the funeral home that conducted the burial or cremation. The process could take up to 90 business days. Be prepared to have as much personal information about the person who died, like their name, social security number, date of birth, etc.

Next Steps

Annuities can provide peace of mind for you and your loved ones. If something happens to you, they will receive the death benefit from the annuity. This money can help them pay for funeral costs or any other expenses. Contact us today for a quote on an annuity that will provide financial security for you and your family.

Have a Question About Annuity Death Benefits?

There are various types of annuity death benefits. Be sure to compare products and seek help from a licensed professional to help you find the best options for your needs.

Frequently Asked Questions

• Annuitant vs. Beneficiary: What’s The Difference?
• Primary vs. Contingent Beneficiary: What’s the Difference?
• What Happens To A 401K When You Die?
• How To Avoid Paying Taxes On An Inheritance
• The Best Annuity Death Benefits
• What is Spousal Continuance?
• How to Retire on $200,000 Inheritance
• How To Get No Medical Exam Life Insurance
• Best Annuity Rates

*Disclosure: Some of the links in this guide may be affiliate links. I may receive a commission at no cost to you if you purchase a policy. It helps us keep the lights on!