You do more than save for retirement when you buy an annuity. You also provide financial security for your loved ones if something happens to you. So what happens to an annuity when the annuitant dies? That is where having death benefits on your annuity comes into play. Before the annuity matures, your beneficiaries will receive the death benefit if you die. This guide will discuss the death benefit and how it works. We will also answer some of the most common questions about annuity death benefits.
- What Happens To An Annuity When You Die?
- Do Annuities Have Beneficiaries?
- Annuity Death Benefits
- Choosing a Beneficiary
- Why Buy An Annuity With Enhanced Death Benefits?
- How Do You Know If An Annuity Has A Death Benefit?
- Understanding Annuity Beneficiaries:
- Passing Down A Stream of Payments or No Death Benefit:
- Passing Down A Lump Sum Death Benefit
- Death Benefits Before and After Annuitization
- Are Annuity Death Benefits Taxable?
- How Are Annuity Death Benefits Taxed?
- Consider Life Insurance Instead Of Annuities
- Annuity Payout Options For Beneficiaries
- Spousal vs. Non-Spousal Beneficiaries
- Is An Annuity Death Benefit Taxable?
- How To Find A Missing Annuity Death Benefit
- Next Steps
- Have a Question About Annuity Death Benefits?
- Frequently Asked Questions
- Related Reading
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 without probate – 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?
| Variable Annuity | Fixed Index Annuity | Fixed Annuity | Immediate Annuity | |
|---|---|---|---|---|
| Principal Protection | No | Yes | Yes | Yes |
| Access To Principal | Yes | Yes | Yes | No |
| Control Over Money | Yes | Yes | Yes | No |
| Tax-Deferred Growth | Yes | Yes | Yes | No |
| Guaranteed Growth | No | Yes | Yes | No |
| Guaranteed Income | Yes | Yes | Yes | Yes |
| Inflation Protection | Yes | Yes | No | Yes |
| Death Benefit | Yes | Yes | Yes | Maybe |
| Long-Term Care Help | Yes | Yes | Yes | No |
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 with enhanced death benefits:
- Enhanced Death Benefits are life insurance alternatives with no medical underwriting.
- In some cases, a retiree could withdraw Required Minimum Distributions (RMD) and preserve most if not all of their original investment for estate planning.
- Others purchase these riders to reduce tax obligations for their beneficiaries.
| Annuity | Type | Rating | Rider Fee |
|---|---|---|---|
| Americo LibertyMark | Indexed | A | 0.30% |
| Athene Accumulator | Indexed | A | 0.95% |
| Pacific Life Index Dimensions | Indexed | A+ | 0.40% |
| Fidelity & Guaranty Prosperity Elite | Indexed | A- | 1.5% |
| Great American Legend III | Indexed | A | 0.95% |
| Americo ClassicMark | Indexed | A | 0.30% |
| Great American Safe Return | Indexed | A | 0.95% |
| Nationwide New Heights | Indexed | A | 0.50% |
| Athene Agility | Indexed | A | None |
| Great American Custom 10 | Indexed | A | 0.90% |
| Great American Legend 7 | Indexed | A | 0.95% |
| Pacific Indexed Foundation | Indexed | A+ | 0.40% |
| Allianz 222 | Indexed | A | None |
| Americo FutureMark (Legacy) | Indexed | A | None |
| Global Atlantic Choice Accumulation II | Indexed | A | 0.50% |
| Nassau Personal Protection Choice | Indexed | B+ | 1.15% |
| Athene BCA 2.0 | Indexed | A | 0.85% |
| Columbus Life AccountMax | Fixed | A+ | 0.35% |
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.
| Dies Before Annuitization | Dies After Annuitization |
|---|---|
| Lump-Sum Distribution | Series of Payments |
| Spousal Continuance | No Death Benefit |
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 circumstances 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 circumstances.
- 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 circumstances 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
Is a survivor annuity death benefits taxable?
Survivor death benefits are taxable and taxed as the surviving spouse receives income payments.
Who will receive the annuity benefits if the annuitant dies during accumulation?
If the annuitant dies before the payout period, their beneficiary will receive the amount paid into the plan or the cash value, whichever is greater.
What happens if the annuitant dies before the annuity start date?
If the annuitant dies before the annuity start date, the beneficiary will receive a lump-sum payment of the total premiums paid into the annuity. If the annuitant dies after the annuity start date, the beneficiary will generally continue to receive payments.
Do you lose your annuity when you die?
The answer to this question depends on the type of annuity you have. If you have a life annuity, your payments will end when you die. However, if you have a certain annuity term, your payments will continue for the specified number of years, even if you die before that period ends. Deferred annuities will pay out a lump sum to your beneficiaries upon death. So, it depends on your annuity and what will happen to it when you die.
Can an annuity be passed on to heirs?
Yes, an annuity can be passed on to heirs. However, some rules and regulations must be followed to do so. First, you will need to name a beneficiary for your annuity. This can be done when you first purchase the annuity or after that. You must also specify the type of payout you want your beneficiary to receive.
Are annuities part of an estate?
No, annuities generally avoid probate and are not part of an estate. After you die, your beneficiaries must contact the annuity company to start receiving payments. The company will then typically send out the payments within a few weeks. Your beneficiaries will receive a lump sum payment if you have a deferred annuity. This usually happens within a few months after your death.
How long does a beneficiary have to claim an annuity?
There is no set time frame for a beneficiary to claim an annuity. However, it is typically best to do so as soon as possible. This will ensure that the payments are received promptly and that any issues can be dealt with quickly.
Who pays taxes on annuity at death?
The beneficiary pays the taxes on the annuity at death.
Can annuity beneficiaries be contested?
Yes, annuity beneficiaries can be contested. However, it is essential to note that this is a complex process and should only be done with the help of a qualified annuity loss attorney. Therefore, if you are considering contesting an annuity beneficiary, you should first speak to an attorney to see if it is viable for your situation.
Is an annuity death benefit the same as life insurance?
An annuity death benefit pays out a set amount to your beneficiaries when you die. This is different from life insurance, which pays out a death benefit based on the face value of your policy. With an annuity, you are essentially investing in your own life, and the death benefit is meant to cover any outstanding costs or debts you may have. Annuity death benefits are taxable, and life insurance proceeds are tax-free.
Are annuity death benefits taxable?
Annuity death benefits are taxable to annuity policy beneficiaries.
What happens if the annuity owner dies while the annuity is still in the accumulation stage?
The primary beneficiary will inherit the annuity account balance in a lump sum.
What’s the difference between a designated and non-designated beneficiary?
A designated beneficiary is a human being, such as a spouse or child. A non-designated beneficiary is an entity, like a charity, trust, or estate.
When an annuity is written, whose life expectancy is taken into account?
An annuity’s payouts are typically based on the annuitant’s life expectancy, the individual whose life the annuity contract is structured around.
Are annuities protected from creditors in California?
In California, annuities are generally protected from creditors to a certain extent, especially if they are part of an IRA or other qualified retirement plan. However, this protection can vary depending on the specific circumstances, such as the type of debt and annuity, so consulting with a legal professional is advisable.
At what point does the beneficiary of an annuity acquire rights in the contract?
The beneficiary to an annuity typically acquires rights in the contract upon the death of the annuitant or owner, depending on the contract’s terms. Their rights are generally limited to receiving benefits defined in the contract, such as continuing payments or a lump sum, as stipulated in the agreement.
When does an annuity not pay a death benefit?
An annuity doesn’t pay the beneficiary when the annuitant outlives the fund, selects a life-only plan, or exhausts the annuity before passing away.
What is a guaranteed minimum death benefit?
A Guaranteed Minimum Death Benefit is a protective feature typically found in particular life insurance policies and variable annuities. Its primary function is to ensure that, no matter how your investments perform, your beneficiaries will receive at least a predetermined minimum amount upon your death.
Can a beneficiary of a fixed-period annuity change how they receive their money?
The payment method to a beneficiary is typically set by the terms of the original annuity contract and cannot be changed.
How long can an annuity beneficiary receive payments?
Beneficiaries receive payments for the term specified in the annuity contract, which could be a fixed period or for life.
How long do I have to cash in an annuity after the annuitant’s death?
The timeframe to cash in an annuity varies but often falls between 1 and 10 years per contract terms and state laws.
What happens if an annuity beneficiary is incapacitated?
If a beneficiary is incapacitated, a legal guardian or someone with power of attorney will manage and receive the annuity payments on their behalf.
When must a beneficiary take payment from an annuity?
A beneficiary must start taking payments from an annuity as specified in the original contract, which could be immediately after the annuitant’s death or after a certain deferral period.
Which annuities avoid probate?
The two types of annuities that can avoid probate are joint annuities and beneficiary annuities. Joint annuities are purchased by two individuals and provide a guaranteed income stream for the rest of their lives.
What happens if an annuitant dies during the distribution period?
If an annuitant dies during the distribution period, the remaining funds in the annuity may be passed on to a designated beneficiary. The beneficiary can receive the funds as a lump sum or continue receiving regular distributions. The specific options and tax implications will depend on the terms of the annuity contract and applicable laws.
What happens to interest earned if the annuitant dies?
When an annuitant dies, the interest earned on the annuity is handled differently based on the type of annuity. In most cases, with a fixed period or joint and survivor annuity, the interest continues to be paid out to the surviving beneficiaries. However, with a life annuity, the interest typically stops, and no further payments are made.
Do I have to pay taxes on an inherited annuity of my deceased father?
Yes, taxes may need to be paid on an inherited annuity from a deceased father. The tax liability depends on various factors, including the value of the annuity, the individual’s tax bracket, and any applicable tax exemptions or deductions. It is advisable to consult with a tax professional for accurate guidance tailored to the specific situation.
What is a non-spouse inherited annuity?
A non-spouse inherited annuity refers to a retirement account passed on to a beneficiary who is not the deceased’s spouse. This type of annuity requires the beneficiary to take distributions, either as a lump sum or spread over their life expectancy. Non-spouse inherited annuities are subject to different tax rules compared to spousal beneficiaries.
Do all annuities have a death benefit?
Yes, some annuities offer a death benefit, but not all. A death benefit is a feature that ensures a payout to the annuitant’s beneficiary if they pass away before the annuity payments are exhausted. However, the availability and terms of the death benefit may vary depending on the specific annuity contract.
Related Reading
- 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
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