Annuity Beneficiaries and Death Benefits

If an annuitant purchases a death benefit rider for their annuity, they can designate one or several beneficiaries for their annuity who receive the remainder of their funds after death.

What Happens to an Annuity When You Die?

An annuity is an economic tool used to accrue monetary interest, secure investments and anchor financial futures of annuity owners. Annuities have a slew of benefits, so much so that lottery winners, retirees and structured settlement recipients use annuities to create a financial cushion, so they own something with the potential to provide money for the present, future and even after their death.

Annuities can be transferred to a designated benefactor following an annuitant’s death.

Annuity owners work with insurance companies to create custom contracts specifying whether money will be leftover and, if so, who will inherit it. After an annuitant dies, insurance companies distribute any remaining payments to beneficiaries in a lump sum or stream of payments. It’s important to include a beneficiary in the annuity contract terms so that the accumulated assets are not surrendered to a financial institution if the owner dies.

Similar to setting up a life insurance policy, owners can mold the terms of their annuity agreement to support their loved ones. The amount of remaining payments left after the annuity owner dies depends on the annuity agreement details, including the type of annuity purchased and inclusion of the death benefit clause.

Annuity Owners vs. Annuitants

It’s important to clarify that annuity owners and annuitants are not always the same. Insurance companies refer to the annuity purchaser as its owner. The owner creates the annuity terms with the insurance company, designates beneficiaries, can sell the annuity and has automatic rights over the agreement. There can be co-owners of an annuity, so if one owner dies, the other will maintain the rights of the agreement. Co-owners are typically spouses.

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While finalizing terms of the annuity agreement, the owner has the option of including an annuitant. It is common for the annuity owner to name themselves as the annuitant. However, sometimes an annuity owner elects to name a younger representative as the annuitant to stretch out payments and extend the tax liability.

If a retired annuity owner names his son as the annuitant, benefits are paid out based on the son’s life expectancy. In the unfortunate event the son dies before all assets have been disbursed, the beneficiaries will receive any remaining benefits.

Owners are often annuitants, and the monthly or quarterly annuity payments are calculated by the annuitant’s life expectancy.

A beneficiary is the person who will receive investments after an annuitant’s death. An owner cannot be his own beneficiary. If there is no beneficiary of an annuity contract, remaining funds are surrendered to the issuing bank or financial institution.

Choosing a Beneficiary

Only an owner can designate beneficiaries, and only the owner or annuitant’s death can trigger any beneficiary action. The owner can change beneficiaries at any time as long as the contract does not require an irrevocable beneficiary to be named. They can also choose multiple beneficiaries and a contingent beneficiary – people designated to receive payments if the primary beneficiary dies before the owner.

Annuity Beneficiary Taxes

Beneficiaries owe income tax on the difference between the principal paid into the annuity and the amount the annuity is worth when the annuitant dies. If they choose a lump sum, beneficiaries must pay owed taxes immediately.

Beneficiaries can be people or organizations.

A list of beneficiaries divides the inheritance into equal shares and distributes it by percentages. Minors designated as beneficiaries can’t access their annuity inheritance until they reach the age of majority (18). By including a beneficiary in an annuity contract, owners also protect heirs from probate, the legal process of dividing a deceased person’s estate using a will. Going through probate involves court costs and time waiting. When owners fail to name beneficiaries, the annuity can go through probate and assets may be forfeited to the issuing insurance company. Owners who are married should not assume their annuity automatically passes to their spouse. Often they go through probate first.

Owners can also assign a trust to receive any remaining payments. However, because payments going to trusts are not based on life expectancy (as they are when payments are transferred to a beneficiary), the money must be paid out within five years.

Spouse vs. Non-Spouse Beneficiaries

Many policies permit a spouse to choose what to do with the annuity after the owner dies. A spouse can choose to change the annuity contract into their name, assuming all rules and rights to the initial agreement and delaying immediate tax consequences. They will have the ability to accept all remaining payments, any death benefits, and choose beneficiaries, depending on the terms of the contract. The spouse then becomes the new annuitant.

When a spouse becomes the annuitant, the spouse takes over the stream of payments. This is known as a spousal continuation. This clause allows for the surviving spouse to maintain a tax-deferred status and secure long-term financial stability. Joint and Survivor annuities also allow for a named beneficiary to take over the contract in a stream of payments, rather than a lump sum.

A non-spouse can also become a beneficiary; however, they will not have the ability to change the terms of the annuity contract. A non-spouse only has access to the designated funds from the annuity owner’s initial agreement.

Annuity Beneficiary Options

Annuity owners provide a sum to beneficiaries that is predetermined by the type of death benefit written into the annuity contract. Primary death benefit options include standard, return of premium and riders.

Standard Death Benefit

This particular benefit has the least value, and the owner pays no extra costs for it. The insurance company pays beneficiaries the value of a contract minus any fees and withdrawals. The contract value is determined by the day the insurance company receives proof of the annuitant’s death, or when the beneficiary files a claim. For some variable annuities, this benefit can decrease in value. For example, a beneficiary might report the annuitant’s death on a date when stocks aren’t performing well.

Return of Premium

This benefit has a higher value, and may cost an additional 0.05 percent a year while some contracts include this death benefit at no extra cost. With the return of premium benefit, either the market value of the contract or the sum of all contributions minus fees and withdrawals determines the inherited amount. The insurance company pays whichever is greater.

Stepped-up Death Benefit Rider

Some insurance companies add a fee of 0.20 percent or more a year for this benefit. The insurance company determines the value of a contract at each anniversary of the annuity’s purchase. It pays the beneficiary the highest amount recorded minus any fees and withdrawals.

Additional Riders

For variable annuities, owners can pay for an additional rider. Some contracts charge 0.25 to 0.50 percent a month for this perk. The insurance company takes the highest value of the asset for the month (as it changes with market fluctuations) and then pays benefits based on that value.

Death Benefits by Type of Annuity

While different death benefits impact the total available for beneficiaries, the type of annuity (fixed, variable, immediate or deferred) changes how much the insurance company pays them. There are general guidelines for determining the benefits for variable and fixed annuities. For most variable annuities, beneficiaries receive at least the original amount the owner contributed. For fixed annuities, the beneficiary receives the present value of payments.

For some immediate annuities, like a lifetime immediate income annuity without term certain, the insurance company keeps the money when the owner dies. However, the annuitant can purchase a refund option or period certain rider and remaining payments then go to a beneficiary.

For deferred annuities, the amount paid depends on whether the payments are in the accumulation or payout phase. Annuities in the accumulation phase pay beneficiaries the total amount contributed to the account. Once the annuity is in the payout phase, the beneficiary subtracts payments already made to the annuitant.

With the extensive varieties of annuity options available and the customizable nature of contracts, the size of an inheritance greatly varies. Annuity owners can prepare for the future of a spouse or other beneficiary by comparing their options with an insurance expert.

Death Benefit Payout Options

Beneficiaries typically have three main options to receive annuity payments after the owner’s death:

  1. Lump Sum Distribution – beneficiaries receive the designated funds as a lump sum amount.
  2. Non-Qualified Stretch – beneficiaries receive minimum payments stretched over their life expectancies.
  3. Five-Year Rule – beneficiaries can withdraw amounts during a five-year period or withdraw the entire sum in the fifth year.

Beneficiaries that happen to be surviving spouses have an additional option to continue on with the initial agreement as the new owner and annuitant.

Page Sources

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  2. Dias, Jr., C. (2016, June). What are the distribution options for an inherited annuity? | Investopedia. Retrieved from
  3. Lambert, G. (n.d.). Deciphering Deferred Annuity Designations. Retrieved from
  4. Pechter, K. (n.d.). Who's Who in an Annuity - dummies. Retrieved from
  5. What Are the Tax Consequences to the Annuity Beneficiary? -- The Motley Fool. (n.d.). Retrieved from
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