Annuity Death Benefits for Beneficiaries

Shawn Plummer

CEO, The Annuity Expert

What happens to an annuity when you die? Do annuities have death benefits? This guide will explain how annuities work for beneficiaries when an annuity owner dies. If you have an annuity contract, you can choose a beneficiary to receive the remaining payments or lump sum death benefit if you die. However, an inherited annuity is taxable. How it is taxed depends on the payout structure and whether you are the surviving spouse or someone else.

This guide will answer the following questions:

  • What happens to the money in an annuity when you die?
  • Who gets the money in an annuity when you die?
  • Do all annuities have a death benefit?
  • Are annuities inheritable?

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.


Standard death benefits from deferred annuities are 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

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

Death Benefit Before and After Annuitization

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

If Annuitant Dies Before Annuization

If an annuitant dies before annuitizations begin, the beneficiaries will receive either the annuity’s value in a lump sum or a series of payments.

If Annuitant Dies After Annuization

If an annuitant dies after annuitizations begin, 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 AnnuitizationDies After Annuitization
Lump-Sum DistributionSeries of Payments
Spousal ContinuanceNo Death Benefit

Annuities with Death Benefits

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Annuity Death Benefits At A glance

Fixed Index
Principal ProtectionNoYesYesYesYes
Access To PrincipalYesYesYesNoNo
Control Over MoneyYesYesYesNoNo
Tax-Deferred GrowthYesYesYesNoNo
Guaranteed GrowthNoYesYesNoNo
Guaranteed IncomeYesYesYesYesYes
Inflation ProtectionYesYesNoYesYes
Death BenefitYesYesYesYes/NoYes/No
Long-Term Care HelpYesYesYesNoNo

Annuities With And Without Death Benefits

Death BenefitNo Death Benefit
Fixed AnnuityMedicaid Annuity
Fixed Indexed AnnuityImmediate Annuity (Life Only Payout)
Variable AnnuityDeferred Income Annuity (Life Only Payout)
LTC AnnuityLongevity 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.

Nonqualified-Stretch Provision

A non-qualified stretch provision will give a beneficiary the payments they are entitled to based on life expectancy.

Five-Year Rule

The beneficiary or beneficiaries of an annuity have five years to take out the proceeds. They can take them out gradually or in a single lump sum anytime, as long as they withdraw all of the death benefits with five years of the annuitant’s death.

Spousal Continuance

Spouses have the option to 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.


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 you are 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 the annuity owner to name themselves as the annuitant.

If the annuitant is not a contract owner and dies before the contract owner, the contract owner becomes the annuitant. If the owner is not a natural person, the annuitant is deemed to be the owner.

Sometimes, when an annuity owner names a younger person as the annuitant, they can stretch out payments and extend their tax liability.

Choosing a Beneficiary

Owners can choose their beneficiaries at any time, as long as they are not irrevocable beneficiaries. If the owner dies, the primary beneficiary will receive payments or lumpsum distribution.

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

Designated beneficiaries are protected from probate, which is 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. In some cases, the annuity’s death benefit is forfeited to the insurance company instead of any true beneficiaries.

Trusts As The Beneficiary Of Annuity

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

Spouse vs. Non-Spouse Beneficiaries

Spousal Beneficiaries

Many annuities allow for 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, benefits and make decisions about who should receive proceeds.

A spouse takes over the annuity and becomes the annuitant when the other spouse dies. This 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?

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 all at once, they have to pay the taxes right away. This is only if you choose a lump sum.

If a beneficiary chooses to take the money over time, the taxes are not owed until the money is withdrawn from the annuity.

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 completely avoid paying taxes when you inherit an annuity. But there are things you can do to minimize the tax hit.

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

Inherited Annuity: Things To Consider

Negative Tax Consequences

The annuity contract owner and annuitant don’t have to be the same person or entity in most cases. However, there are potential negative tax consequences if the Owner and Annuitant are not the same. 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

If you borrow against an existing policy to pay premiums on a new policy, 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

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

If 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), a court will need to 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.

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.

Have a Question About Annuity Death Benefits?

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At The Annuity Expert, we strive to help you make confident financial decisions regarding annuities. Content provided is created by an independent licensed financial professional.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

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

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