What Happens to Your Annuity When You Pass Away?

Death is an inevitable part of life, and it’s essential to plan for what happens to your assets, including your annuity, after you’re gone. An annuity is a financial product that provides a steady stream of income, typically during retirement. However, the fate of your annuity upon your demise depends on several factors, including the type of annuity you have and the provisions outlined in your contract.

Understanding Annuity Death Benefits

When you purchase an annuity, you have the option to include a death benefit provision in your contract. This provision allows you to designate a beneficiary who will receive a payout upon your death. The amount of the payout depends on the type of annuity and the terms of your contract.

Types of Annuity Death Benefits

There are several types of annuity death benefits:

  1. Standard Death Benefit: This is the most basic type of death benefit. It pays your beneficiary the remaining account value of your annuity after deducting any fees or withdrawals.

  2. Return of Premium (ROP) Death Benefit: With an ROP death benefit, your beneficiary receives the greater of the account value or the total amount of premiums you paid into the annuity, minus any withdrawals.

  3. Stepped-Up Death Benefit Rider: This rider guarantees that your beneficiary receives the highest contract value recorded on any anniversary date, minus any withdrawals. It typically comes with an additional fee.

  4. Guaranteed Minimum Income Benefit (GMIB) Rider: A GMIB rider ensures that your beneficiary receives a minimum level of income, even if the account value has decreased due to market conditions or withdrawals.

  5. Guaranteed Minimum Withdrawal Benefit (GMWB) Rider: Similar to the GMIB rider, a GMWB rider guarantees a minimum level of withdrawals for your beneficiary, regardless of the account value.

It’s important to note that these riders often come with additional fees, so you’ll need to weigh the costs against the potential benefits.

Annuity Payout Options for Beneficiaries

If you’ve included a death benefit provision in your annuity contract, your beneficiary typically has three payout options upon your death:

  1. Lump-Sum Distribution: Your beneficiary receives the entire remaining value of the annuity in a single payment.

  2. Non-Qualified Stretch Provision: This option allows your beneficiary to receive payments based on their life expectancy, effectively “stretching” the annuity over their lifetime.

  3. Five-Year Rule: Your beneficiary can withdraw the entire annuity value over a five-year period or take a lump sum in the fifth year.

The payout option your beneficiary chooses will have tax implications, so it’s important to consult with a financial advisor or tax professional to understand the potential consequences.

Annuitant vs. Owner: Who’s Who?

It’s crucial to understand the difference between an annuitant and an annuity owner. The annuitant is the person whose life expectancy is used to calculate the annuity payments. The owner, on the other hand, is the person who purchases the annuity and has the rights to designate beneficiaries, make withdrawals, and make other decisions regarding the annuity.

In many cases, the owner and the annuitant are the same person. However, some annuity owners choose to name a younger person as the annuitant to extend the payout period and potentially receive higher payments.

Choosing and Updating Beneficiaries

Only the annuity owner can designate beneficiaries, and they can change or update beneficiaries at any time, as long as the contract doesn’t require an irrevocable beneficiary. It’s essential to review and update your beneficiary designations regularly, especially after major life events such as marriage, divorce, or the birth of a child.

Taxation of Inherited Annuities

The taxation of an inherited annuity depends on the payout option chosen by the beneficiary and the type of annuity (qualified or non-qualified). In general, inherited annuity payments are taxed as ordinary income, but there are specific rules and exceptions that apply.

If the beneficiary chooses a lump-sum distribution, they will owe taxes on the entire amount in the year it’s received. With the other payout options, the beneficiary will pay taxes on the portion of the payment that represents earnings or growth, while the part representing the owner’s contributions is generally tax-free.

It’s essential to consult with a tax professional to understand the tax implications of inheriting an annuity and to ensure you’re complying with all applicable laws and regulations.

Planning for the Future

Dealing with the death of a loved one is never easy, but having a well-structured annuity plan can provide financial security and peace of mind for your beneficiaries. By understanding the various annuity death benefit options and payout structures, you can make informed decisions that align with your financial goals and ensure your assets are distributed according to your wishes.

Remember, it’s always advisable to consult with a qualified financial advisor or estate planning professional to ensure your annuity and other assets are structured in a way that best meets your needs and those of your beneficiaries.

What Happens To An Annuity When You Die?


Does an annuity pay out on death?

If you have a lifetime annuity, usually the payments will stop when you die and the pension funds used to purchase the annuity are lost. However, different types of annuities are available for those who would prefer for a beneficiary to continue to receive payments in the event of their death.

Do beneficiaries pay tax on inherited annuities?

Are annuities taxable to beneficiaries? Yes, annuity beneficiaries must pay taxes on those funds, but instead of inheritance tax or estate tax, they pay regular income tax. Their tax payments depend on the annuity and the payout structure.

Does an annuity go away after death?

What happens to the money in an annuity after the owner dies depends on the type of annuity and its specific provisions. Some annuities stop payments when the owner dies, while others continue to pay out to a spouse or other beneficiary. The annuitant decides on the provisions at the time the contract is drawn.

What is the best thing to do with an inherited annuity?

Stretching the payments of an inherited annuity can be beneficial, as it sets up a reliable stream of income. This payout option also spreads out the tax burden of the annuity, so you won’t owe taxes on the entire value of the annuity at once.

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