What Happens to Your Annuity When You Die

Your annuity's value goes to whoever you named as beneficiary, but the exact payout depends on the type of annuity you own and the options you chose when you bought it

When you die, your annuity does not straightforward disappear. The money in the account — or what remains of it — passes to the person or people you named as beneficiary on the contract. However, the way that money reaches them, and how much they actually receive, depends on three things: the type of annuity you purchased, whether you had already started taking payments, and which payout option you selected.

The most important thing to understand is that annuities are contracts between you and an insurance company. That contract spells out exactly what happens to the money when you die. If you chose a payout option that stops when you die, your beneficiary may receive nothing. If you chose an option that protects them, they may receive a lump sum or continued payments. The difference between these choices can be tens of thousands of dollars.

Key Takeaways

• If you die before taking any payments from your annuity, your beneficiary typically receives the full account value as a lump sum, minus any fees or surrender charges.
• If you die after you have started receiving annuity payments, what your beneficiary gets depends on which payout option you chose — some options pay nothing to beneficiaries, while others continue payments or pay out the remaining balance.
• A life-only annuity pays you for as long as you live but leaves nothing for your beneficiary; a joint-and-survivor annuity continues payments to your spouse or named beneficiary after you die.
• Annuity death benefits are not subject to probate, but they may be subject to federal estate tax if your total estate is large enough.
• You can change your beneficiary at any time while you are alive by contacting your insurance company and updating the annuity contract.

What happens if you die before taking payments

If you purchased an annuity but died before you started withdrawing money from it, your beneficiary receives the account value. This is usually paid as a single lump sum, though some annuity contracts allow the beneficiary to choose to receive payments over time instead.

The amount your beneficiary receives is the account value at the time of your death, reduced by any surrender charges if you had not yet reached the end of the surrender period. A surrender charge is a penalty the insurance company imposes if you withdraw more than a certain amount in any given year, or if you withdraw the full balance before a set number of years have passed. Surrender periods typically last five to ten years, though they vary by contract. If you die during the surrender period, your beneficiary may still owe this penalty — though some contracts waive it in the case of death.

This is the simplest scenario. Your beneficiary does not have to do anything except notify the insurance company of your death and provide a death certificate. The insurance company then processes the payout according to the contract terms.

What happens if you die after you have started taking payments

If you were already receiving annuity payments when you died, what your beneficiary receives depends entirely on the payout option you selected when you purchased the annuity. This is the most important decision you make when buying an annuity, because it determines whether your beneficiary receives anything at all.

The most common payout options are life-only, life with period certain, and joint-and-survivor. A life-only annuity pays you the highest monthly amount, but the payments stop when you die — your beneficiary receives nothing. This option makes sense only if you have no dependents and do not care what happens to the remaining money.

A life with period certain annuity guarantees payments for a set number of years — typically ten, fifteen, or twenty years. If you die before that period ends, your beneficiary receives the remaining payments in a lump sum or as continued monthly payments, depending on what the contract allows. If you die after the period ends, your beneficiary receives nothing. This option protects your beneficiary if you die early, but only for a limited time.

A joint-and-survivor annuity continues payments to your spouse or named beneficiary for the rest of their life after you die. The monthly payment is lower than a life-only annuity because the insurance company expects to pay out for a longer period. This option is common for married couples and provides the most protection for a surviving spouse.

How beneficiaries receive the money

When you die, your beneficiary does not receive the annuity payout through your will or through probate. Instead, the insurance company pays the beneficiary directly based on the contract you signed. This is called a non-probate transfer, and it means the money reaches your beneficiary faster than it would if it had to go through the court system.

Your beneficiary will need to contact the insurance company and provide a death certificate. The insurance company will then verify the death and process the payout. For a lump sum, this usually takes two to four weeks. For ongoing payments, the insurance company will set up a payment schedule according to the contract terms.

If your beneficiary is a minor, the insurance company may require that the money be placed in a trust or held by a court-appointed guardian until the beneficiary reaches adulthood. If you named multiple beneficiaries, the money is divided according to the percentages you specified on the contract.

Taxes on annuity death benefits

Annuity death benefits are generally not subject to income tax if the beneficiary receives them as a lump sum. However, if the beneficiary receives payments over time, the portion of each payment that represents earnings (rather than your original contribution) is subject to income tax. The insurance company will send a tax form to your beneficiary showing how much of each payment is taxable.

Annuity death benefits may be subject to federal estate tax if your total estate — including the annuity, your home, investments, and other assets — exceeds the federal estate tax threshold. This threshold changes each year and is currently very high, so most people do not owe estate tax. However, if your estate is large, your beneficiary may need to pay estate tax on the annuity value.

Your beneficiary should consult a tax professional or accountant to understand the tax implications of receiving the annuity payout. The insurance company can provide information about how much of each payment is taxable, but they cannot give tax information.

Changing your beneficiary

You can change your annuity beneficiary at any time while you are alive. Contact your insurance company and request a beneficiary change form. You will need to provide the new beneficiary's name, date of birth, and relationship to you. The change takes effect once the insurance company processes the form and updates your contract.

If you are married and your state requires spousal consent to change a beneficiary, you may need your spouse's signature on the form. Check your annuity contract or call the insurance company to find out whether this applies to you.

It is important to review your beneficiary designation periodically, especially after major life events like marriage, divorce, or the birth of children. If you do not update your beneficiary, the money will go to whoever you named originally, even if that person is no longer in your life.

What to do if you inherit an annuity

If you inherit an annuity from someone else, you have options for how to receive the money. You can take a lump sum payout, receive payments over a set period, or in some cases, continue receiving payments for the rest of your life. The options available to you depend on the type of annuity and the terms of the original contract.

If you inherit a deferred annuity (one that has not yet started paying out), you can usually take the full account value as a lump sum. If you inherit an when ready annuity or a deferred annuity that was already paying out, your options may be more limited. Some contracts allow only the named beneficiary to continue receiving payments; others allow you to take a lump sum instead.

Inherited annuities have special tax rules. If you are the surviving spouse, you may be able to treat the annuity as your own and delay taking payments. If you are not the spouse, you generally must take distributions over your life expectancy or over the remaining life expectancy of the person who owned the annuity. A tax professional can explain the rules that explore to your specific situation.

Frequently Asked Questions

Can I name someone other than my spouse as beneficiary?

Yes. You can name any person or organization as your beneficiary — a child, parent, friend, charity, or your estate. If you name multiple beneficiaries, you specify what percentage each one receives. The insurance company will divide the payout according to your instructions.

What if I die and my beneficiary is deceased too?

If your named beneficiary dies before you do, the money goes to your contingent beneficiary if you named one. If you did not name a contingent beneficiary, the money becomes part of your estate and is distributed according to your will or your state's intestacy laws, which means it goes through probate.

Do I have to name a beneficiary when I buy an annuity?

Yes. The insurance company requires you to name at least one beneficiary when you purchase the annuity. If you do not name anyone, the company will ask you to do so before the contract is finalized. You can change your beneficiary later at any time.

Will my beneficiary have to pay income tax on the annuity payout?

If your beneficiary receives a lump sum, there is no income tax. If they receive payments over time, the earnings portion of each payment is taxable as income. The insurance company will provide a tax form showing how much is taxable. Estate tax may explore if your total estate is very large.

Can my creditors claim my annuity death benefit?

This depends on your state's laws and the type of annuity. In many states, annuity death benefits are protected from creditors, meaning your beneficiary receives the full amount even if you had debts. However, this protection varies, so check with a lawyer in your state if you are concerned about creditor claims.