What Will the Beneficiary Receive if an Annuitant Dies?

An annuity is a contract between an individual and an insurance company, established with a lump sum or series of payments. Its purpose is to provide a steady income stream, often for retirement. This arrangement allows assets to grow tax-deferred, with earnings taxed only upon withdrawal. Annuity terms specify how payments are distributed, including provisions for what happens upon the annuitant’s death. This article explains annuity death benefits and what a designated beneficiary can expect.

Understanding Annuity Death Benefits by Type

The death benefit associated with an annuity varies based on the contract type and any additional features purchased. The annuity’s structure determines how remaining funds are handled upon the annuitant’s passing.

For fixed annuities, the death benefit guarantees the return of the original principal or the accumulated contract value, whichever is greater. Variable annuities, which involve investments in sub-accounts, tie the death benefit to the account’s market value. Many variable annuities include a Guaranteed Minimum Death Benefit (GMDB) rider, ensuring beneficiaries receive at least the amount invested or a higher specified value, even if market performance declines.

Indexed annuities pay out the accumulated value as the death benefit, reflecting interest credits linked to a market index. Immediate annuities (SPIAs) have death benefits that depend on the chosen payout option. If a “life-only” option was selected, payments cease upon the annuitant’s death, and there is no death benefit for beneficiaries. If a “period certain” option was chosen, beneficiaries receive payments for the remainder of the guaranteed period if the annuitant dies prematurely.

Deferred annuities, including Deferred Income Annuities (DIAs) or Qualified Longevity Annuity Contracts (QLACs), pay the accumulated value to a beneficiary if the annuitant dies before payments begin. If death occurs after payments have started, the death benefit depends on the payout option selected, similar to immediate annuities. Optional death benefit riders can enhance the payout, such as a return of premium rider, ensuring beneficiaries receive at least the amount contributed, or a stepped-up death benefit, which periodically locks in market gains to increase the guaranteed payout.

Beneficiary Designations and Roles

Naming beneficiaries for an annuity contract directs how its value will be distributed after the annuitant’s death. A proper designation ensures the death benefit can bypass probate, allowing for a more efficient asset transfer. Without a named beneficiary, proceeds may become part of the annuitant’s estate and be subject to probate, which can be time-consuming and incur additional costs.

Annuity contracts allow for different types of beneficiaries. A primary beneficiary is the first individual or entity designated to receive the death benefit. If the primary beneficiary is deceased or cannot be located, the contingent, or secondary, beneficiary is next in line.

Beneficiary designations can also specify how proceeds are divided among multiple beneficiaries. A “per stirpes” designation means that if a named beneficiary predeceases the annuitant, their share passes to their direct heirs. In contrast, a “per capita” designation means the death benefit is divided equally among the surviving named beneficiaries, with no share passing to the heirs of a deceased beneficiary. Regularly reviewing and updating beneficiary designations is important, particularly after major life events such as marriage, divorce, the birth of a child, or the death of a previously named beneficiary.

Payout Options for Beneficiaries

Upon the annuitant’s death, beneficiaries have several choices for receiving the annuity’s death benefit. The selected payout method influences the timing of funds and their financial implications.

A common option is a lump sum payment, where the entire death benefit is paid out at once. This provides immediate access to funds. However, receiving a large sum may have immediate tax consequences, as the taxable portion could be subject to higher income tax rates.

Beneficiaries can also choose to annuitize the death benefit, converting it into a series of regular payments over a specified period or for their lifetime. This option provides a steady income stream and can help manage tax liability by spreading it out over multiple years. Various annuitization options exist, including payments for a fixed period or for the beneficiary’s life, sometimes with a guaranteed minimum number of payments.

For non-qualified annuities, a spousal beneficiary may continue the annuity in their own name, known as spousal continuation. This allows for continued tax deferral of earnings, delaying taxation until withdrawals are made. For non-spousal beneficiaries inheriting qualified annuities (e.g., those held within an IRA), the SECURE Act requires the entire balance to be distributed within 10 years of the original annuitant’s death. While this “10-year rule” limits tax deferral, beneficiaries can take periodic withdrawals over this decade.

Systematic withdrawals are another option, where the beneficiary takes periodic distributions from the annuity’s value without fully annuitizing it. This allows the beneficiary to control the timing and amount of withdrawals, while the remaining balance may continue growing tax-deferred. The choice among these payout options should be carefully considered based on the beneficiary’s financial situation and tax planning.

Taxation of Annuity Death Benefits

The tax treatment of annuity death benefits depends on whether the annuity was qualified or non-qualified. Tax implications vary significantly based on the funds used to purchase the annuity.

Non-qualified annuities are purchased with after-tax dollars. When a beneficiary receives a death benefit, only the earnings portion—the amount exceeding the original investment—is subject to ordinary income tax. The principal amount contributed is returned tax-free. There is no 10% early withdrawal penalty applied to distributions due to the annuitant’s death, regardless of the beneficiary’s age. If the beneficiary annuitizes the death benefit, an exclusion ratio may apply, allowing a portion of each payment to be received tax-free as a return of principal.

Qualified annuities, such as those held within an IRA or 401(k), are funded with pre-tax contributions. The entire death benefit from a qualified annuity is subject to ordinary income tax when distributed to the beneficiary. As with non-qualified annuities, the 10% early withdrawal penalty is waived when distributions are due to the annuitant’s death. The 10-year distribution rule for most non-spousal beneficiaries of qualified annuities under the SECURE Act requires full distribution and taxation of inherited funds within that period.

State income taxes may also apply. Unlike many other inherited assets, annuities do not receive a “step-up in basis” at the annuitant’s death. This means the taxable gain accumulated within the annuity does not disappear, and beneficiaries remain responsible for paying taxes on the earnings. Given the complexities, beneficiaries should consult a qualified tax professional.

Claiming Annuity Death Benefits

After the annuitant’s death, beneficiaries must follow a process to claim annuity death benefits. This section outlines the steps for initiating and completing the claim, ensuring funds are received.

The first step involves locating the annuity contract and any associated policy information. This documentation contains the policy number, the insurance company’s contact details, and specific annuity terms. Beneficiaries may find these documents among the annuitant’s personal records, in a safe deposit box, or with their financial advisor.

Once policy information is gathered, the beneficiary should contact the issuing insurance company. Contact information is found on the annuity contract or the company’s website. The insurer will provide instructions and forms for filing a death claim.

To process the claim, the insurance company requires documentation. A certified copy of the annuitant’s death certificate is mandatory. The beneficiary will also need to provide identification and the annuity policy number. Additional documents might be requested.

The beneficiary must complete the claim forms provided by the insurance company. These forms request information about the annuitant, the beneficiary, and the chosen payout option. Fill out these forms accurately and completely to avoid delays. Once all required forms and supporting documents are assembled, the claim package can be submitted to the insurance company via mail, an online portal, or through a financial advisor. After submission, beneficiaries should expect a processing period, which can vary depending on the insurer and claim complexity. The insurance company communicates the claim status and any follow-up questions during this time.