Annuity Death Benefits For Beneficiaries

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Types Of Beneficiaries

  • Primary Beneficiary: This individual or entity is first in line to receive the annuity death benefit. Naming a primary beneficiary helps avoid the probate process, allowing for a quicker and more direct transfer of assets.
  • Contingent Beneficiary: Should the primary beneficiary predecease the annuity owner, the contingent beneficiary will receive the benefits. This designation ensures there is a backup plan in place, providing additional security for your assets.

Death Benefit Options

  • Lump Sum Payment: This option allows beneficiaries to receive the entire remaining value of the annuity in a single payment. It provides immediate access to funds but may result in a significant tax burden.
  • Continued Payments: Beneficiaries can opt to receive the death benefits as continued annuity payments. This option can offer a steady income stream and might help spread out the tax liability over several years.
  • Spousal Continuance: If the beneficiary is the surviving spouse, they may choose to continue the annuity. This allows the spouse to defer taxes and continue growing the annuity’s value, benefiting from the original terms of the contract.
Annuity Beneficiary

Enhanced Death Benefits

Some annuities come with optional riders that provide enhanced death benefits. These riders can increase the payout to beneficiaries, similar to life insurance. Enhanced death benefits might include a guaranteed minimum payout or a percentage increase over the account value at the time of death. These riders come at an additional cost but can significantly increase the financial security provided to your beneficiaries.

Tax Implications

  • Ordinary Income Tax: Annuity death benefits are generally taxed as ordinary income for the beneficiaries. This means the amount received will be added to the beneficiary’s taxable income for the year, potentially pushing them into a higher tax bracket.
  • Spousal Benefits: When a spouse continues the annuity, they can defer taxes until they begin receiving distributions, which can provide significant tax planning advantages.
  • Non-Spousal Beneficiaries: Non-spousal beneficiaries must choose between a lump sum, paid out over 10 years, or continued payments. The choice can affect the tax treatment and the beneficiaries’ overall financial outcome.
Annuity Death Benefit

How We Can Help

At The Annuity Expert, we know dealing with the details of annuity beneficiary designations and death benefits can be daunting. The core problem is ensuring that your loved ones are financially secure and that they receive the maximum possible benefit from your annuity with minimal tax impact.

Symptoms of the Problem:

  • Confusion: Overwhelmed by the different beneficiary types and options.
  • Uncertainty: Unsure which death benefit option provides the best financial outcome.
  • Tax Concerns: Worried about the potential tax implications for beneficiaries.

Our team has 15 years of experience as an insurance agency, annuity broker, and retirement planner. We understand the stress and uncertainty you feel and are committed to helping you find the best solution at the lowest costs.

Annuity Death Benefits For Annuity Beneficiaries

What We Recommend

  • Step 1: Initial Consultation
    • Review your current annuity and beneficiary designations.
    • Understand your specific needs and goals.
    • Tailor advice to maximize your beneficiaries’ benefits.
  • Step 2: Customized Plan Development
    • Develop a customized plan with the best death benefit options and tax strategies.
    • Explain the benefits and drawbacks of each option.
    • Help you make an informed decision to secure your beneficiaries’ financial future.
  • Step 3: Implementation and Ongoing Support
    • Implement your chosen strategy.
    • Provide continuous support to ensure it aligns with your goals.
    • Monitor changes in tax laws and annuity regulations.
    • Keep your plan up-to-date for ongoing peace of mind.

Features And Benefits

  • Expert Consultation: Personalized advice for your unique situation.
  • Comprehensive Analysis: Thorough review of your annuity and beneficiary options.
  • Tax Strategies: Minimize tax liabilities for your beneficiaries.
  • Ongoing Support: Continuous monitoring and updates to your plan.

By not working with us, you risk your beneficiaries facing significant tax burdens and financial complications.

Partnering with The Annuity Expert ensures a secure financial future for your loved ones, reducing stress and providing peace of mind. You’ll feel confident and reassured, knowing your beneficiaries are well-protected.

Contact us today for free advice or a free quote.

What Happens To An Annuity When You Die

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Questions From Our Readers

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.

Can annuity beneficiaries be contested?

Annuity beneficiaries can be contested under certain circumstances, such as disputes over the validity of the beneficiary designation or claims of undue influence. Legal action may be required to contest beneficiary designations, and outcomes depend on state law and the evidence presented. Consult legal professionals for guidance in contested beneficiary situations.

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’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?

Annuity payouts are typically based on the annuitant’s life expectancy, the individual whose life the 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 for cashing in an annuity varies, but it often falls between 1 and 10 years, depending on 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?

Joint and beneficiary annuities are the two types of annuities that can avoid probate. Two individuals purchase joint annuities, which 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 annuity contract terms 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 depending on the type of annuity. In most cases, with a fixed-period or joint-survivor annuity, the interest continues to be paid out to the surviving beneficiaries. However, the interest typically stops with a life annuity, and no further payments are made.

What is a non-spouse inherited annuity?

A non-spouse inherited annuity refers to a retirement account passed on to a beneficiary 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.

Which type of annuity stops all payments upon the death of the annuitant?

A type of annuity that stops all payments upon the annuitant’s death is a life-only annuity. With this option, the annuity payments cease once the annuitant passes away, without any further benefits or payments being made to beneficiaries.

What are the annuity beneficiary payout options?

Annuity beneficiary payout options refer to how the funds from an annuity contract can be distributed to the beneficiary after the annuity holder’s death. These options typically include lump-sum payments, periodic payments, or the option to continue the annuity. The choice depends on the beneficiary’s preferences and financial goals.

What is a variable annuity death benefit?

A variable annuity death benefit is a feature offered by insurance companies that guarantees a minimum payout to the beneficiary upon the annuity holder’s death. This benefit provides financial security to loved ones and ensures the invested funds are not lost. Understanding the terms and conditions of the death benefit before investing in a variable annuity.

How are annuities taxed at death?

Annuities are subject to taxes upon the annuitant’s death. The tax treatment depends on whether the annuity is held in a qualified or non-qualified account. The funds are subject to income tax in a qualified account, such as a 401(k) or IRA. In a non-qualified account, the annuity’s earnings are taxed as ordinary income, while the original principal is not subject to taxation. It’s important to consult a tax professional for specific guidance on how annuities are taxed at death.

My friend passed away and put me down as the beneficiary for their annuity. What’s next?

First, you should contact the insurance company that issued the annuity to inform them of the annuitant’s passing. They will guide you through the process of claiming the annuity. This typically involves submitting a death certificate and completing claim forms. Once processed, you will receive the annuity benefits as specified in the contract, which could be a lump sum, regular payments, or other options based on the annuity’s terms.

If someone inherits a nonqualified annuity from their parents, do they pay taxes on the entire proceeds or just the gains of the annuity from the parent’s initial deposit?

Inheritance of a nonqualified annuity typically results in taxation only on the gains, not the entire amount. The original principal (the amount initially deposited by the parents) has already been taxed, so it’s not subject to taxes again upon inheritance. However, the earnings portion of the annuity — the interest or investment gains accrued over time — is subject to income tax.

My mother-in-law passed away last September. She had a variable annuity (traditional IRA) that was paid out to my wife and her sister (half each). The insurance company said no RMD was required. Yet, Turbo Tax is telling us an RMD was due. Help!

Understanding the Required Minimum Distributions (RMDs) for inherited IRAs can be complex, especially with changes introduced by the SECURE Act of 2019. If your mother-in-law passed away after 2019 and hadn’t reached the age of 73, the new RMD age, the rules generally require the entire balance of the inherited IRA to be distributed within 10 years. However, if she was already taking RMDs, the rules may differ. Given that TurboTax, a software that follows general IRS guidelines, might not account for the nuances of your specific annuity contract, it’s advisable to seek advice from a tax professional or financial advisor who is well-versed in estate and inheritance laws. They can offer tailored guidance for your particular circumstances.

If your deceased father had a non-qualified annuity with your mother as the beneficiary, and the annuity is transferred to her, will there be a step-up in basis on the account?

Typically, non-qualified annuities do not receive a step-up in basis at the death of the owner. When your mother, as the beneficiary, inherits the non-qualified annuity, she inherits it with the original cost basis, which is the amount initially invested in the annuity.

I inherited a qualified annuity. I know I have 10 years to withdraw all the funds, and I have been told I would not be required to take the RMD each year as long as the entire balance is withdrawn by the end of the 10 years. Is this correct?

Generally, this is correct under the rules that the SECURE Act established. For most non-spousal beneficiaries, the Act requires the entire balance of an inherited qualified annuity to be withdrawn by the end of the 10th year following the year of inheritance. Under these regulations, you are not required to take annual RMDs during this 10-year period. Instead, you can manage the withdrawals at your discretion as long as the entire account balance is withdrawn by the end of the 10-year deadline.

What happens when a beneficiary of an annuity passes away?

If an annuity’s designated beneficiary dies, the outcome depends on the specific terms of the annuity contract. Usually, if the annuity allows for secondary or contingent beneficiaries, the benefits will pass to them. If no such beneficiaries are designated or if they, too, have passed away, the annuity’s benefits typically revert to the annuity owner’s estate.

Does an annuity owner have to inform current beneficiaries that they are changing beneficiaries?

An annuity owner is not legally required to inform current beneficiaries about changes to beneficiary designations. The decision to change beneficiaries is typically at the annuity owner’s discretion and can be made without notifying the current beneficiaries.

If an annuity contract lists the beneficiary as The Estate of a family member, but that family member is still alive, is it payable to the person (since the Estate doesn’t exist)?

If an annuity contract lists “The Estate” of a living family member as the beneficiary, the annuity is not payable to that person directly while they are still alive. Since an estate technically doesn’t exist until a person has passed away, this beneficiary designation would only come into effect upon the death of the named individual.

Can the wife of someone who recently passed away change the beneficiary of an annuity from their daughter to herself?

Typically, once an annuity’s owner passes away, the designated beneficiary at the time of death is entitled to the benefits. The spouse cannot change the beneficiary after the owner’s death, even if the beneficiary is a minor. The annuity benefits should be directed to the named beneficiary, which, in this case, is the daughter. However, there may be specific provisions for managing the funds for a minor beneficiary. This often involves appointing a legal guardian or trustee to manage the funds until the child reaches adulthood.

If I owe back taxes, will my annuity be garnished when I die before my beneficiaries receive it?

Generally, no, as the beneficiaries are not responsible for your debts. However, it is best to consult a tax professional for a specific answer related to your case.

I have inherited an annuity that has been annuitized already. What options do I have?

Once a policy has been annuitized, there are likely not any options available.  You will continue to receive payments according to the contract schedule, but trying to get a lump sum or loan is likely not an option.

Are annuities inheritable?

Yes, in almost all cases, annuities can be inherited. The exception is if an annuity is structured with a life-only payout option through annuitization. This type of payout ceases upon the death of the annuitant and does not provide any residual value to heirs. For other types of annuities, beneficiaries can typically inherit the remaining value or continue receiving payments, depending on the terms specified in the contract.

Are life insurance annuities taxable?

Yes, life insurance annuities are generally taxable. When withdrawn, the annuity’s earnings are taxed as ordinary income. However, the principal amount (the initial investment) is not taxed.

What happens if a beneficiary is not named for annuity benefits?

If a beneficiary is not named for annuity benefits, the annuity proceeds typically go to the annuitant’s estate. The distribution will follow the probate process, which can delay payments and may have tax implications. This could also lead to the annuity losing some of its intended tax advantages.

Can you name a trust as the beneficiary?

Yes, you can name a trust as the beneficiary of an annuity. This can provide greater control over how the annuity benefits are distributed and can be part of an estate planning strategy to manage and protect assets.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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