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    Jennifer Schell

    Jennifer Schell

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    Jennifer Schell joined Annuity.org in 2022. She is a professional writer with more than three years of experience creating content for a variety of industries ranging from travel to tax accounting. She combines her strong writing skills and her passion for educating others to write engaging and informative financial content for Annuity.org.

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    Savannah Hanson, financial editor for Annuity.org

    Savannah Hanson

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    Savannah Hanson is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

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    Thomas J. Brock, CFA®, CPA
    Thomas Brock, CFA, CPA, expert contributor to Annuity.org

    Thomas J. Brock, CFA®, CPA

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    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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  • Updated: January 24, 2023
  • 23 min read time
  • This page features 13 Cited Research Articles
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APA Schell, J. (2023, January 24). Annuity Beneficiaries: Death Benefits & Payout Options. Annuity.org. Retrieved January 24, 2023, from https://www.annuity.org/annuities/beneficiaries/

MLA Schell, Jennifer. "Annuity Beneficiaries: Death Benefits & Payout Options." Annuity.org, 24 Jan 2023, https://www.annuity.org/annuities/beneficiaries/.

Chicago Schell, Jennifer. "Annuity Beneficiaries: Death Benefits & Payout Options." Annuity.org. Last modified January 24, 2023. https://www.annuity.org/annuities/beneficiaries/.

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Key Takeaways
  • Annuity contract terms do not always change when the primary annuitant passes away. Depending on the type of annuity purchased, it may continue paying out the same way it had done for the original annuitant. Spouses have more control over changing the terms of inherited annuities.
  • Taxes owed on an inherited annuity will depend on the payout structure and the status of the beneficiary. The original annuity contract dictates how payment streams are taxed. Lump sums are taxed immediately with the highest tax consequences.
  • Only the original annuity contract holder can choose their beneficiaries. Spouses of inherited annuities can update the list of beneficiaries. Minors cannot access their inherited annuity until they reach 18 years of age.

What Happens to an Annuity When You Die?

An annuity is a financial instrument that accrues interest on a tax-deferred basis and protects against market risk and longevity risk. Because annuities offer many benefits, lottery winners, retirees and structured settlement recipients use them to create predictable cash flow for the present, future and even after their death.

Depending on the terms of the contract, annuity payments will end after the death of the annuity owner. But annuities that have a death-benefit provision allow the owner to designate a beneficiary to receive the greater of either all the remaining money or a guaranteed minimum.

This means an annuity held by a parent, spouse or another loved one can be willed to a person named as a beneficiary.

Annuity owners work with insurance companies to create custom contracts that specify payout and beneficiary options. 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.

Like setting up a life insurance policy, owners can customize their annuity contract to support their loved ones. The number of payments remaining upon the death of the owner depends on the details outlined in the contract, including the type of annuity purchased and inclusion of the death benefit clause.

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Inherited Annuity Payout Options

Beneficiaries inheriting an annuity typically have three options for how to receive annuity payments after the contract owner’s death.

Common annuity beneficiary payout options
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Beneficiary Payout Options
  • Lump-Sum Distribution: A lump-sum distribution allows the beneficiary to receive the entire remaining value of the contract in one payment.
  • Nonqualified-Stretch Provision: When a nonqualified-stretch provision is included in the contract, the beneficiary receives payments based on his or her life expectancy.
  • Five-Year Rule: The five-year rule allows beneficiaries to withdraw incremental amounts during a five-year period or withdraw the entire sum in the fifth year.

With a joint-and-survivor annuity, a contingent annuitant, usually a spouse, has the option to continue with the initial contract as the new owner and annuitant.

Annuitant vs. Owner

It’s important to clarify that an annuity owner and an annuitant are not always the same person. 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 retain the rights of the agreement. Co-owners are typically spouses.

While establishing the terms of the annuity agreement, the owner has the option of naming a third party as the annuitant. The annuitant is the person on whose life expectancy the contract is based. It is common for the annuity owner to name him or herself 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.

Pro Tip
Owners are often annuitants, and the annuity benefit payments are calculated based on the annuitant’s life expectancy.

A beneficiary is the person who receives the death benefits, usually the remaining contract value or the amount of premiums minus any withdrawals, upon the annuitant’s death. An owner cannot be his or her own beneficiary.

If an existing annuity lacks a beneficiary, the remaining funds will be surrendered to the issuing bank or financial institution.

Infographic Describing an Annuitant vs. Beneficiary
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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.

Pro Tip
Beneficiaries can be people or organizations.

A list of beneficiaries ensures that the designated people and organizations receive the specified amount or percentage. Minors designated as beneficiaries can’t access their inherited annuity until they reach the age of majority (18).

Avoiding Probate

By designating a beneficiary in an annuity contract, owners also protect heirs from probate, the legal process of distributing a deceased person’s estate.

Probate is costly and time consuming. The process involves identifying and appraising the deceased person’s property, proving in court that their will is valid and paying any debts or taxes the deceased person owed.

The prolonged legal procedures of probate can result in hefty attorney and court fees, which are paid from estate property. This means you’ll have less money to leave to your beneficiaries once the probate process is complete.

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.

If you do name a beneficiary in your annuity contract, be they your spouse, child or other loved one, the value of your annuity can be passed on to that person without having to go through probate.

Annuity owners can also assign a trust to receive any remaining payments. However, because payments made to trusts are not based on life expectancy, the money must be paid out within five years.

Spouse vs. Non-Spouse Beneficiaries

Many contracts permit a spouse to determine 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 collect all remaining payments and any death benefits and choose beneficiaries. 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.

Inherited Annuity Tax

People inheriting an annuity owe income tax on the difference between the principal paid into the annuity and the value of the annuity at the annuitant’s death. How taxes are paid on an inherited annuity will depend on the payout structure selected and the status of the beneficiary. If they choose a lump sum, beneficiaries must pay owed taxes immediately.

The tax situation for the beneficiary is similar to that of the annuitant, in that taxes are not owed until the money is withdrawn from the annuity.

Are Inherited Annuities Taxable?

Inherited annuities are taxable as income. The beneficiary of a tax-deferred annuity may choose from several payout options, which will determine how the income benefit will be taxed.

If the beneficiary is the spouse of the annuitant, the spouse can change the contract into his or her own name. After a change in ownership, 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.

The spouse could choose to take an immediate lump sum. This is an option for other beneficiaries, as well. In this situation, the beneficiary will owe taxes on the entire difference between what the owner paid for the annuity and the death benefit. This is the option with the highest tax consequences for the beneficiary.

The beneficiary can also withdraw the money over a period of five years. At that time, he will owe taxes only on the increased value of the portion that is withdrawn in the year. This option makes it less likely that the beneficiary will fall into a different tax bracket. Going to a higher tax bracket means higher taxes.

An option with a lower tax exposure is to have the death benefits paid over the life expectancy of the beneficiary. This means that benefits will be paid out over a longer period of time.

If you choose to name a charity as your beneficiary, then the proceeds are free from income tax.

Reporting Inherited Annuity Income to the Government

Inherited annuity income should be reported to the Internal Revenue Service, as a general rule, the same way the plan participant would have reported it. However, there are exceptions to this.

According to the Internal Revenue Service, survivors under a joint and survivor annuity held by retirees must include these benefits in their gross income reported to the government. These benefits should be included in the same way the retiree would have included them in gross income.

The IRS advises: “If you receive guaranteed payments as the decedent’s beneficiary under a life annuity contract, don’t include any amount in your gross income until your distributions plus the tax-free distributions received by the life annuitant equal the cost of the contract. All later distributions are fully taxable. This rule doesn’t apply if it is possible for you to collect more than the guaranteed amount. For example, it doesn’t apply to payments under a joint and survivor annuity.”

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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 benefit has the least value, and the owner does not incur any extra costs. The insurance company pays beneficiaries the value of a contract less 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 are underperforming.

Return of Premium

Return of premium 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

A rider is a provision to a contract that can be added when the contract is created. In the case of annuity death benefit riders, there can be an annual fee over the life of the policy. The riders can be different, depending on the company that provided the annuity and the cost.

The specifics of the rider will be written in the annuity contract. The insurance company determines the value of a contract at each anniversary of the annuity’s purchase. With a stepped-up death benefit rider, the beneficiary is paid the highest value amount recorded less any fees and withdrawals, instead of the value of the annuity when the insurance company learns of the annuitant’s death. Some insurance companies add a fee of 0.20 percent or more a year for this benefit.

Additional Riders

For variable annuities, owners can pay for an additional rider. 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

Death benefits impact the total amount of money available for beneficiaries. The type of annuity — fixed, variable, immediate or deferred — determines 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, such as 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 a beneficiary would receive any remaining payments.

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 array 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 Benefits for Each Type of Annuity

Types of annuity death benefits
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Case Study Example

Here is an example of how someone might use an annuity to guarantee income for both them and their beneficiary.

Case Study Example - Vivian - Immediate Life Annuity with 20-Year Period Certain
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Purchasing an annuity with a period certain rider is one way to leave income payments to a beneficiary while setting yourself up for guaranteed lifetime income.

“You’re defining a certain number of years of payments taking place,” said Stephen Kates, Annuity.org expert contributor and Certified Financial Planner™. “If you outlive that, then you get lifetime payments. But if you don’t outlive that, your beneficiaries will receive the difference between how long you were alive and the end of that period.”

In the case study above, Vivian is looking for a way to turn her savings into guaranteed income for life. She also wants to leave some income for her beneficiary. By purchasing an annuity with 20-year period certain, Vivian can ensure that she’ll never run out of money, and her beneficiary is likely to receive payments after she passes away.

What’s the Best Thing To Do with an Inherited Annuity?

For many beneficiaries, receiving an inheritance is an incredible blessing. However, it can be challenging to find yourself in this position, especially if you lack financial planning and investing experience. The last thing anyone wants to do is squander the money received from a loved one.

The best course of action for an inherited annuity depends on where you are in life, said Bill Ryze, a certified Chartered Financial Consultant and a board advisor at Fiona. If you’re not yet nearing retirement, Ryze suggested utilizing the “stretch provision,” which allows beneficiaries to receive monthly, quarterly or annual payments based on your life expectancy.

For beneficiaries who are retired or at least 59½ years of age, Ryze said, “The wise thing to do when you inherit an annuity is to roll the annuity to an IRA because IRAs have more affordable fees and present alternative investment options.”

“When inheriting an annuity, the best thing to do is to speak with a financial advisor,” said Linda Chavez, an independent life insurance agent. “They will help you understand the different options available to you and make sure that you are making the best decision for your unique situation.”

A good advisor can help you establish a holistic plan that reflects consideration for your current financial position and future retirement needs. They can also help you implement an investment strategy that reflects your tolerance for risk, which is influenced by your time horizon, liquidity needs, tax position and legal situation.

As part of the process, the advisor will help you plan an optimal asset allocation, which will likely consist of some combination of stocks, bonds and alternative investments. Your strategy may also include annuities, which can provide a guaranteed stream of income in a relatively low-risk, hands-off manner.

Annuity Alternatives for Those Looking to Leave Money to a Beneficiary

Besides annuities, there are several other ways you can leave money to your heirs or beneficiaries. One of the most common alternatives for leaving money after you die is life insurance.

When you die, a life insurance policy pays out a death benefit to the person you designate as a beneficiary. The value of the benefit depends on the type of policy you purchase and how much you’re willing to pay in premiums.

You can also establish accounts to transfer money to your heirs without having to go through the execution of a will. The two most popular forms of these accounts are trust funds, which can hold assets such as investment accounts or real estate, and payable-on-death accounts, which are bank accounts that automatically transfer ownership to the beneficiary when the original owner passes.

Finally, your retirement account likely offers you the option to designate a beneficiary. Most retirement plans have a transfer-on-death designation that pays out the remainder of the account either in a lump sum or an annuity.

How Do I Find a Missing Policy or Annuity Contract of Someone Who Has Passed?

If you believe that your loved one had an annuity contract but are unable to find a record of it, you may be able to recover it.

“If your parents did not disclose their financial sources as beneficiaries, you can find missing or lost annuity contracts or death benefits by reaching out to the National Association of Insurance Commissioners,” Ryze said. The NAIC’s Policy Locator Service helps consumers locate life insurance policies and annuity contracts of deceased family members free of charge.

State insurance departments in Illinois, Louisiana, Michigan, New York, North Carolina and Oregon also provide free missing policy search services, according to the American Council of Life Insurers (ACLI). The ACLI also advises contacting your loved ones’ previous places of employment in case the policy was part of their employee benefits package.

Can You Inherit a Lottery Annuity?

If a Powerball or other lottery winner chooses to take the prize as an annuity over 30 years and dies before the 30 years have passed, what happens to the annuity?

The payments will continue until the end of the 30 years as determined by the lottery winner.

Each state has its own rules, but typically, lottery winners may choose a beneficiary to receive the remaining lottery payments. Most states allow only one beneficiary. If this is the case in your state and you wish to leave the money to more than one heir, you could have the lottery payments made to your estate for distribution to your heirs.

Just as the lottery winner would have to report the prize to the government and pay taxes, so, too, would your estate and any heirs who inherit the lottery winnings.

Frequently Asked Questions About Inherited Annuities

Do annuities pay a death benefit?
Annuity owners may have the option to add a death-benefit provision to their annuity contract so their beneficiary will receive a payout.
What happens to my annuity when I die?
It depends on the terms of your annuity contract. Payments may stop when you die, but if the contract includes a death-benefit provision, you can assign an annuity payout to a beneficiary who can receive the balance left in the annuity or a guaranteed minimum amount.
What happens if a beneficiary is not named for annuity benefits?
If no beneficiary is named, the payout of an annuity’s death benefit goes to the estate of the annuity holder, according to Chavez. It then becomes the estate’s responsibility to distribute the funds through probate.
How are annuities taxed at death?
A person who inherits an annuity has to pay income tax on the difference between the premium paid into the annuity and the amount still in it when the annuitant died. The amount of annuity taxation depends on how the particular payout for the annuity is set up.
Can annuity beneficiaries be contested?
If you believe that the annuitant’s choice of beneficiary shouldn’t be honored, due to undue influence or possible fraud, you can contest in a court of law, according to Ryze.
Can I sell an inherited annuity?
You can sell an inherited annuity, and you’ll have the option of selling the entire annuity or selling only a portion of your annuity payments.
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: January 24, 2023

13 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

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