What Happens If I Die and Have An Annuity?

Shawn Plummer

CEO, The Annuity Expert

The vast and varied annuity market offers a spectrum of opportunities for those seeking a stable financial future. However, one question persistently resurfaces, predominantly from those taking their first plunge into the annuity pool: “If I buy an annuity, what happens when I die?” This guide aims to provide a comprehensive answer to this question, unraveling the specifics of immediate and deferred annuities, the mechanics of series of payments, lump sum options, and the often misunderstood concept of no death benefit.

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Remaining Balance is Passed Down in a Lump Sum

When you invest in an annuity, you expect regular payouts over a specified period. But life is unpredictable. So, what if you pass away before all your payments are made?

Example: Imagine you purchased an annuity worth $200,000 with a 10-year payout plan but sadly passed away in year 5. The remaining balance might be provided to your designated beneficiary in a lump sum, depending on the annuity’s terms.

What Happens If I Die And Have An Annuity

Certain Annuity Payouts Do Not Provide a Death Benefit

Understanding the kind of annuity you have is crucial. Some annuities, especially those with certain annuitization payouts, do not have death benefits. If you die, the payments might cease, leaving your beneficiaries nothing.

Example: Sarah purchased a life-only annuity that promises higher payouts than other annuities. But the catch is that once she dies, whether after two years or 20 years, the payments stop immediately, leaving no death benefit for her heirs.

If I Buy An Annuity, What Happens When I Die

Consider Annuities with Enhanced Death Benefits

With the evolving financial market, many insurance companies offer annuities with enhanced death benefits. These are designed to ensure your beneficiaries are cared for even after you leave.

Example: John chose an annuity with a stepped-up death benefit. This allows the benefit to be based on the highest attained value of the annuity on policy anniversaries. So, even if the market dips after its peak, his beneficiaries would still receive a payout based on the highest value.

What Happens If You Buy An Annuity And You Die

Spousal Continuance

For those who wish to ensure their spouses continue to benefit from the annuity even after their death, spousal continuance is an option worth considering. Here, the surviving spouse can continue the annuity, preserving its value and benefits.

Example: Jane and Robert purchased an annuity together. Jane passes away unexpectedly. With spousal continuance in their agreement, Robert can step into Jane’s shoes and continue to receive or even defer annuity payments, ensuring financial security.

Consider Buying Life Insurance

Annuities are fantastic tools for income. However, consider complementing your annuity with a life insurance policy for absolute peace of mind regarding your beneficiary’s financial well-being after your death.

Example: Alex, a father of two young kids, has an annuity. Knowing the potential limitations of annuities in the event of his death, he also opts for life insurance. This ensures that, no matter what, his children are provided for financially.

Next Steps

The world of annuities might seem complex, especially when considering the aftermath of one’s passing. But armed with knowledge and understanding, one can make informed choices. Whether it’s ensuring a lump sum balance passed down, choosing annuities with enhanced death benefits, considering the spousal continuance option, or supplementing with life insurance, it’s all about finding what works best for you and your loved ones. Remember, planning for the future is not just about the life we lead but also about ensuring comfort and security for those we leave behind.

You Buy An Annuity And Die

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If I buy an annuity and die, Do I have to list a beneficiary?

Listing a beneficiary is not mandatory, but is highly recommended. If you die without naming one, the annuity proceeds may go to your estate and be subject to probate, which can be time-consuming and costly. A named beneficiary typically receives funds more directly.

What happens to my annuity if it ends up in probate?

If your annuity ends up in probate, it becomes part of your estate and is subject to legal proceedings. Unlike direct transfers to named beneficiaries, this can delay distribution and expose the annuity to estate taxes and creditors. If there is no will, distribution will take place based on state law. This could delay awarding the annuity’s benefits to the intended recipient and may also result in additional legal costs.

How is a lump sum payout to my beneficiaries taxed?

Lump-sum payouts to beneficiaries from an annuity are generally subject to income tax on the earnings portion of the distribution. The principal, or the amount originally invested, is usually not taxed. Tax rules can vary, so consult a tax advisor for specific guidance.

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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