What Happens to an Annuity When I Die?

What Happens to an Annuity When I Die?

People who own annuities have something that not only can take care of their financial needs, but also provide money even after their death. In addition to benefits for owners, an annuity can be a valuable inheritance for beneficiaries, like spouses, or other persons. Certain benefits can become available to beneficiaries when a contract owner passes away. 

As the contract holder, you may setup your annuity in ways that will take care of your loved ones, even when you are not with them anymore. The amount of money available after your death will depend on the type of death benefit offered by the specific annuity you have. Let’s get into more details of what happens to an annuity when someone passes away.

The Role of the Annuitant — Understanding Why It’s Important

Before we go into further detail, it’s important to understand that the terms “annuitant” and “annuity owner” are not the same. The purchaser of an annuity contract is referred to as the annuity owner by the insurance company. On the other hand, the annuitants are the persons chosen by the owner to receive payments. The contract owner can also be the annuitant, but that is not a mandatory requirement. A common example of this is when someone buys an annuity and designates their spouse as the annuitant.

The death of the annuitant is the triggering event, or when the parts of the contract applying to beneficiaries go into effect. How the money is given to the beneficiaries depends on a number of factors. Whether the annuity is an immediate or a deferred contract, the payout option and the inheritance proportions the annuity owner specifies, among other conditions, will be important.

What Happens to My Annuity When I Pass Away?

In almost all cases, when the annuitant deceases, the balance within the contract is given to a specified beneficiary. Beneficiaries may receive this balance in either a series of payments or a lump-sum payment. The beneficiary designation usually names the beneficiary, including if it’s more than one party, and the percentage of the balance they will inherit. This is among the terms which the annuity owner pre-determines before the contract actually starts.

The insurance company may require the beneficiary to receive the death benefit as a series of payments. In contracts requiring the death benefit to be paid over time, it’s not unusual for the death benefit to be paid over a 5-year or a 10-year period. Some insurance companies will give the beneficiary the option of receiving the death benefit in a lump sum. Note, some contracts may come with some cost for taking a lump-sum benefit all at once.

Another important note is taxes may apply, and a lump-sum benefit can greatly increase income tax liability. By working with a knowledgeable financial professional, you can find annuity contracts which may offer you flexibility with these options.

What Happens If It’s an Immediate or a Deferred Annuity?

Immediate and deferred annuities can have different ways of how a beneficiary receives their inheritance. For example:

  • Some immediate annuities will actually pay the remaining balance to the insurance company.
  • However, that applies only to a few contracts, like immediate annuities with a life-only payout option. Most people don’t choose this type of contract.
  • When buying an immediate annuity, people can purchase a refund option or a period certain rider. This strategy will give remaining payments to their beneficiary upon the annitant’s death.
  • For deferred annuities, it depends on whether the deferred annuity is in the accumulation or distribution phase.
  • Contracts in the accumulation stage will give beneficiaries the accumulation value of the contract (total premium in the contract plus interest earned).
  • Say, in a deferred contract, the annuitant had already been receiving payments before their death.
  • This would put the deferred contract in the distribution stage.
  • In that case, the insurance company will substract the payments already made to the annuitant from the balance for the beneficiary.

The Role of Beneficiaries

Sure, the annuity owner specifies the beneficiary before the contract starts. But they may also change the beneficiary to someone else, unless the contract requires specification of an irrevocable beneficiary. It’s also possible to elect multiple beneficiaries, or even a contingent beneficiary. A contingent beneficiary would receive the benefits should the contract owner outlive the primary beneficiary.

Depending on the number of beneficiaries specified by the owners, the inheritance could be divided into equal shares. Minors can be designated as a beneficiary. But they can access their inheritance only after reaching the age of eighteen.

Inclusion of beneficiaries in the contract brings yet another estate planning advantage: the ability to avoid probate. Probate can be time-consuming and cost as much as 3-7% of an estate’s value. If you fail to designate a beneficiary, it’s possible that your annuity contract may undergo this legal procedure. For this reason, married annuity owners must not assume that their available benefits will pass on automatically to their spouses. Without designation of their spouse as a beneficiary, it’s not unusual for the contract to have to go through probate first.

Options for a Surviving Spouse

In many annuity contracts, a spouse has the freedom to decide what he or she wants to do with the annuity after the owner’s death. The most common option is to receive all remaining payments and extra benefits resulting from the contract holder’s death. The spouse may also become the annuitant.

If the spouse decides to become the annuitant, they take over the contract. This process is commonly referred to as spousal continuation, and it ensures long-term financial stability for a surviving spouse. The money stays in the contract. There may also be no requirements for the death benefit as a lump sum or payments over time.

Types of Annuity Death Benefits

There are a variety of death benefit options available in today’s annuity market. These options include:

Standard Death Benefit: The owner doesn’t pay any extra cost for this. A standard death benefit has the lowest value among all death benefit options. The insurance carrier pays inheritors after it has deducted applicable fees and withdrawals from the accumulation value.

Return of Premium: Though this death benefit offers a higher value, it is included in some contracts for no added cost. However, in some cases, there may be a nominal charge for this. The inheritance amount is determined by deducting fees and withdrawals from the contract’s market value or the sum of all paid premiums.

Stepped-up Death Benefit Rider: This benefit is offered by insurance companies typically by charging a 0.2% annual fee. The contract value is determined by the company at each anniversary of the purchase date of the annuity. The beneficiary receives the highest recorded amount after withdrawals and fees have been subtracted.

Additional Riders: Owners with some contracts, like variable annuities, have the option of paying an extra 0.25%-0.5% per month for an additional ste-up. Benefits are paid by the insurance company based on the highest asset value for a certain month. While variable annuities are outside the focus of this article, we mention it because you may come across it during your annuity research process.

Ready for Personal Guidance?

While death benefit options are important, they are just one part of an annuity contract. It’s prudent to work with a knowledgeable financial professional — someone who guides in your best interest and can help you find an annuity strategy that’s right for you.

When you are ready for personal attention, financial professionals stand ready to help you. Use our “Find a Financial Professional” section to connect with someone directly. And should you need a personal referral, call us at 877.476.9723.

Next Steps to Consider

  • Start a Conversation About Your Retirement What-Ifs

    retirement planning services next steps

    Start a Conversation About Your Retirement What-Ifs

    Already working with someone or thinking about getting help? Ask us about what is on your mind. Learn More

  • What Independent Guidance
    Does for You

    independent vs captive advice

    What Independent Guidance
    Does for You

    See how the crucial differences between independent and captive financial professionals add up. Learn More

  • Stories from Others
    Just Like You

    safe money working with us

    Stories from Others
    Just Like You

    Hear from others who had financial challenges, were looking for answers, and how we helped them find solutions. Learn More

Proud Member