What Happens to an Annuity When You Die?

Planning for the future involves understanding what happens to your financial assets after you’re gone. Annuities, which provide regular income payments during retirement, are a common investment vehicle, but what happens to an annuity when you die? The answer depends largely on the type of annuity you own and the specific provisions outlined in your contract. Some annuities simply terminate upon death, while others continue payments to beneficiaries or offer death benefit options. The way your annuity is structured can significantly impact your estate planning and the financial security of your loved ones.

For help with annuities, estate planning and any other financial issues, consider working with a financial advisor.

What Happens to an Annuity When You Die?

The short answer is that it depends on the type of annuity you own. However, it also depends on the payout options’ structure and the death benefit terms.

When you purchase an annuity, you’re purchasing an insurance contract. During the initial accumulation phase, you make premium payments toward the annuity. During the distribution phase, the annuity makes payments back to you. Payouts can begin almost right away, as with an immediate annuity, or begin at a later date, as with a deferred annuity.

Regardless of whether you have an immediate or deferred annuity, the goal may be the same: to provide an income stream. Your annuity contract can include death benefit terms spelling out what happens to your annuity after your death. Specifically, you can name a beneficiary whom you’d like to receive any remaining annuity payments. In that sense, an annuity is similar to life insurance, in that you can provide a death benefit for a named beneficiary.

Types of Annuity Payouts

Whether your annuity offers that option depends on the type of annuity you have. Here’s a quick look at how different annuities compare when it comes to death benefits:

Single life or life only annuity: You receive lifetime payments from the annuity. However, it doesn’t pay any survivor benefits.
Life annuity with period certain: Annuity payments extend over a minimum time period, such as 10, 15 or 20 years. If you pass away during that time, any remaining payments go to your named beneficiary.
Joint and survivor annuity: Both you and your spouse receive annuity payments for the duration of your lives. A named beneficiary can continue receiving payments if you and your spouse pass away.

If you have a single life or life only annuity, there would be no death benefit for someone else to receive. However, you do have the choice of purchasing an annuity that includes provisions for a beneficiary.

It’s also worth noting that choosing the period certain option or purchasing a joint and survivor annuity directly affects your payment amount from an annuity. With a joint and survivor annuity, for example, annuity payments are divided between two people. If you pass away first, your spouse would continue receiving payments, but you would have received a lower payment amount during your lifetime.

Who Can Be an Annuity Beneficiary?

If your annuity contract allows you to name a beneficiary, there are a few things to keep in mind when deciding who to include. First, you can choose one beneficiary only or name more than one individual you’d like to receive a percentage of any remaining annuity payments. That’s an option you might choose if you have multiple children whom you’d like to benefit from the annuity.

Second, you can typically name anyone to be a beneficiary, although you should check with your annuity issuer for any exclusions. That means you can name your spouse, adult children or other family members as beneficiaries. Minors aren’t eligible to access death benefits from an annuity until they become legal adults. You could also assign a beneficiary status to charitable organizations or a trust you’ve established as part of your estate plan.

Annuity Death Benefit Payouts

Once you’ve chosen one or more beneficiaries for your annuity, they can decide how to receive annuity payments when you pass away. Generally, an inherited annuity pays out in three ways:

Lump sum: Annuity beneficiaries can opt to take one lump-sum distribution and receive the entire amount remaining in the annuity in a single payment.
Five-year withdrawal: Using the five-year rule, beneficiaries can spread out withdrawals over a five-year period or wait until the fifth year to withdraw the entire amount remaining in the annuity.
Nonqualified stretch: If your annuity includes a nonqualified stretch clause, the beneficiary would continue receiving payments for the rest of their life expectancy.

With a certain period annuity, the beneficiary would receive the same payment you were receiving during your lifetime. If you have a joint and survivor annuity, your spouse would continue receiving regular payments for life.

Annuity Beneficiaries and Taxes

Beneficiaries must pay taxes on any death benefits they receive from the annuity. How the taxes add up depends on the beneficiary and the annuity’s structure. For example, a spouse may opt to continue receiving annuity payments. In this case, they would still enjoy tax-deferred status. The IRS taxes distributions from the annuity only as they’re received.

On the other hand, say you’ve named your adult child as beneficiary. They may take out all of the remaining money in the annuity in one lump sum. However, they’d owe taxes on the full amount right away. In other words, there’s a trade-off you and your beneficiaries are making. The longer payments are spread out, the longer the beneficiary can spread out taxation. Taking a lump sum gives them access to all of the money at once but it involves a more immediate tax bite.

Bottom Line

Understanding what happens to an annuity when you die is crucial for effective estate planning. The fate of your annuity depends largely on the specific type you own and the beneficiary designations you’ve established. For immediate annuities, payments may cease upon death unless you’ve selected options like “period certain” or “joint and survivor” that continue payments to beneficiaries. To ensure your annuity aligns with your legacy goals, regularly review your beneficiary designations, understand the specific terms of your contract and consider consulting with financial and estate planning professionals.

Financial Planning Tips

Consider talking to a financial advisor about whether it makes sense to include an annuity in your retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you already have an annuity, consider what it means from an estate planning perspective. For example, your goals for estate planning might include minimizing estate or inheritance taxes or avoiding probate. Consider consulting an estate planning attorney or a tax professional to reach your goals. You may also want to include your beneficiaries in the discussion. As a result, they’ll know what type of payout they can expect from the annuity. Also, they’ll know how that will affect their tax situation.