Annuity Beneficiaries: Inheriting an Annuity at Death (2023)

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. 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 Is An Annuity Death Benefit?

An annuity death benefit is a payment made to the beneficiary of an annuity contract holder upon their death. The death benefit generally equals the annuity value at the contract holder’s death. If the contract holder dies before they have started receiving payments from their annuity, the beneficiary will receive a lump-sum payment. If the contract holder dies after receiving payments (annuity start date), the beneficiary will generally continue receiving those payments or nothing.

Who Gets An Annuity After Death?

The surviving spouse will receive the payments after the first spouse’s death if the annuity is set up as a survivorship annuity. If there is no surviving spouse, then the beneficiaries named in the annuity contract will receive the payments.

What Happens to an Annuity When You Die?

An annuity is an excellent way to save for retirement. It protects you from the risk of living too long, and it can also protect you from market risks. Lottery winners, retirees, and structured settlement owners often use an annuity because it helps them know how much money they will have now and in the future.

Lump-Sum

Standard death benefits from deferred annuities payable to a designated beneficiary are a choice of a lump sum or a series of payments.

Some deferred annuities offer an enhanced death benefit as a life insurance alternative to increase the inheritance for the beneficiaries.

Annuity Payouts

The payments will typically stop if the annuity owner announces their contract and dies. But some annuitized payouts have a death-benefit provision that allows the owner to designate a person to receive the remaining payments.

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 begins, 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 401(k) plans or IRAs, are generally subject to income tax when the death benefits are paid out. Non-qualified 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 401(k) 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.
Non-qualified annuities: Non-qualified 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.

Annuity Death Benefits At A glance

	Variable Annuity	Fixed Index Annuity	Fixed Annuity	Immediate Annuity	Deferred Income Annuity
Principal Protection	No	Yes	Yes	Yes	Yes
Access To Principal	Yes	Yes	Yes	No	No
Control Over Money	Yes	Yes	Yes	No	No
Tax-Deferred Growth	Yes	Yes	Yes	No	No
Guaranteed Growth	No	Yes	Yes	No	No
Guaranteed Income	Yes	Yes	Yes	Yes	Yes
Inflation Protection	Yes	Yes	No	Yes	Yes
Death Benefit	Yes	Yes	Yes	Yes/No	Yes/No
Long-Term Care Help	Yes	Yes	Yes	No	No

Which Annuities Guarantee A Death Benefit

Fixed, fixed indexed, and long-term care annuities guarantee a death benefit if there is a balance at the time of death.
Because variable annuities are investment-based, there is a risk of losing money due to poor market performance; thus, a death benefit is not guaranteed.
A death benefit is not guaranteed if a life-only settlement option is chosen when annuitizing an annuity.

Annuities With And Without Death Benefits

Death Benefit	No Death Benefit
Fixed Annuity	Medicaid Annuity
Fixed Indexed Annuity	Immediate Annuity (Life Only Payout)
Variable Annuity	Deferred Income Annuity (Life Only Payout)
LTC Annuity	Longevity Annuity (Life Only Payout)
Registered Annuity

Annuity Inheritance Payout Options

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.

Annuitant vs. Owner

Annuity Owner

An annuity owner is not always the same person as the annuitant. For example, the insurance company refers to the purchaser of an annuity as its owner. The owner creates the annuity terms with the company, designates beneficiaries, can sell an annuity, and has automatic rights over it.

Co-Owners

Sometimes there are co-owners of an annuity. One co-owner will have the rights to the agreement if the other owner dies. Co-owners are typically limited to spouses only.

When setting up the terms of your annuity agreement, the owner can select another person to be the annuitant.

The Annuitant

The annuitant is the person on who the contract is based. It is common for annuity owners to name themselves annuitants.

If the annuitant is not a contract owner and dies before the contract owner, the contract owner becomes the annuitant. Likewise, if the owner is not natural, the annuitant is deemed the owner.

When annuity owners name a younger person as the annuitant, they can stretch out payments and extend their tax liability.

Choosing a Beneficiary

Owners can choose their beneficiaries as long as they are not irrevocable beneficiaries. The primary beneficiary will receive payments or lump-sum distribution if the owner dies.

A predetermined list of beneficiaries from an annuity can ensure the money is given to them based on a percentage or amount. Minors can not touch their inherited annuity until they reach legal adult age.

Designated beneficiaries are protected from probate, the legal process of distributing a deceased person’s estate.

If an annuity owner doesn’t tell the insurance company who inherits it, it will go through probate. This is expensive and time-consuming. Sometimes, the annuity’s death benefit is forfeited to the insurance company instead of any actual 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.

Spouse vs. Non-Spouse Beneficiaries

Spousal Beneficiaries

Many annuities allow a spouse to decide what to do with the annuity after the owner dies. The spouse can choose to have the annuity in their name, assuming that they meet all of the requirements and obligations of the original agreement and delay any tax consequences. They will collect all remaining proceeds, payments, and benefits and decide who should receive them.

When the other spouse dies, a spouse takes over the annuity and becomes the annuitant. This provision is called a spousal continuation. The surviving spouse can keep their tax-deferred status and have stability for a long time.

Joint and survivor annuities also allow someone to take over the contract in a stream of payments rather than one lump sum.

Non-Spousal Beneficiaries

A non-spouse can also become a beneficiary and only access the inherited annuity’s death benefit from the annuity owner’s initial agreement.

Are Inherited Annuities Taxable?

Is an annuity death benefit taxable? Inherited annuities 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.
Non-Qualified Inherited Annuity Death Benefits: Only interest earned is taxable income.

Spouses Can Avoid The Tax Bill Upfront

If the spouse is the primary beneficiary and elects the spousal continuance provision, the contract continues as if the surviving spouse owned the original contract. It maintains its tax-deferred status, meaning the beneficiary owes no immediate taxes.

Spreading The Taxes For Non-Spousal Beneficiaries

Non-spousal beneficiaries can withdraw the proceeds over five years. Since the taxes are only owed when withdrawing income, the beneficiary can prevent falling into a higher tax bracket.

Another option is to elect annuity payments paid over the beneficiary’s life expectancy.

How To Avoid Paying Taxes On An Inherited Annuity

You can’t altogether avoid paying taxes when you inherit an annuity. But there are things you can do to minimize the tax hit.

Spousal continuance: A surviving spouse can continue the annuity and avoid paying the taxes simultaneously.
Bonus annuities: A beneficiary can reinvest the inheritance with a deferred annuity that offers a premium bonus. The bonus will offset the taxes owed.
Enhanced Death Benefits: An living annuity owner can now purchase an annuity with an enhanced death benefit to offset their beneficiary’s future taxes when they die.
Joint Payout: A living annuity owner can elect a joint payout to continue paying the surviving spouse an income for the rest of their life. Payouts are tax-free if the contract is a Roth IRA Annuity.

Inherited Annuity: Things To Consider

Negative Tax Consequences

In most cases, the annuity contract owner and annuitant don’t have to be the same person or entity. However, there are potential negative tax consequences if the Owner and Annuitant differ. For example, an Owner is a natural person, the annuitant dies before the owner, and the beneficiary is less than 59 ½ years old.

Annuity Loans

Suppose you borrow against an existing policy to pay premiums on a new policy. In that case, death benefits payable under your existing policy will be reduced by the amount of any unpaid loan, including unpaid interest.

The Beneficiary is a Minor

Suppose an annuity owner names a child the primary or contingent beneficiary under that owner’s state’s Uniform Transfers to Minors Act. In that case, the child’s money will be placed in a custodial account for that child’s benefit to a certain age.

Suppose a person dies and leaves money to a child directly or names that child as a beneficiary of a life insurance policy or a retirement account (annuity). In that case, a court must appoint a property guardian to manage that child’s money at age eighteen.

Every state has its own set of rules, so please check with the state.

Restricted Beneficiary Payouts

A contract owner can control the distribution to beneficiaries by electing a Beneficiary Designation with a Restricted Payout.

What Is A contingent Beneficiary?

A contingent beneficiary is a person or entity named in a life insurance policy or annuity contract to receive benefits if the primary beneficiary dies before the insured. The contingent beneficiary typically only receives benefits if the primary beneficiary dies before the insured.

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.

Helpful Tip: If you need a cheap service to set up your entire estate plan, we recommend:

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 the 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 will also need to specify the type of payout you want your beneficiary to receive. For example, you can have them receive the annuity payments in a lump sum or installments. Finally, you must specify what should happen to the payments if you die before the annuity is fully paid out. Once you have taken all these steps, you can pass your annuity to your heirs.

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 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.

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