Which Type of Annuity Settlement Stops When the Annuitant Dies?
Navigate annuity settlement choices to understand how payment duration is impacted by the annuitant's death.
An annuity settlement is the method an annuitant chooses to receive income payments from their annuity contract after it has accumulated value. These payout options determine the duration and structure of the payments. Selecting a settlement option converts the annuity’s accumulated value into a predictable income stream.
Annuity Payout Options Designed to Cease at Death
Some annuity payout options are structured so that payments stop entirely upon the annuitant’s death. One such option is the “Life Only” annuity, also known as a Straight Life Annuity or Single Life Annuity. This choice provides the highest regular payments for the annuitant’s lifetime because the insurer’s obligation ends completely upon their death. No death benefit is paid to a designated beneficiary with this option. This payout is suited for individuals without dependents or those who have provided for heirs through other financial means.
Another option where payments can cease at death involves a “Life with Period Certain” annuity, specifically if the annuitant lives beyond the guaranteed period. This option guarantees payments for the annuitant’s entire life, but includes a specified minimum payment period, such as 10 or 20 years. If the annuitant dies after this guaranteed period has ended, payments cease. This structure ensures income for the annuitant’s lifetime, but the death benefit component is limited to the guaranteed period.
Annuity Payout Options Designed for Continued Benefits
Other annuity payout options ensure that benefits continue beyond the annuitant’s death. A “Period Certain Only” annuity, also called a fixed-period annuity, guarantees payments for a predetermined number of years, regardless of the annuitant’s lifespan. If the annuitant dies before this period concludes, the remaining payments are transferred to their named beneficiary for the remainder of the guaranteed term. This option offers predictability and a defined payout duration.
The “Cash Refund Annuity” and “Installment Refund Annuity” options ensure that beneficiaries receive any unrecovered portion of the original premium. With a cash refund annuity, if the annuitant dies before receiving payments equal to their initial investment, the difference is paid as a lump sum to the beneficiary. Conversely, an installment refund annuity pays this remaining balance to the beneficiary in a series of regular installments until the original premium amount has been fully returned. These refund features provide a safety net, ensuring the annuitant’s investment is not entirely forfeited upon early death.
A “Joint and Survivor Annuity” is commonly chosen by couples, as it provides income payments for the lifetime of two annuitants. Payments continue as long as at least one of the individuals is alive. Upon the death of the first annuitant, payments typically continue to the surviving annuitant, often at a reduced percentage (e.g., 50%, 75%, or 100%) of the original amount. The earnings portion of inherited annuity payments is generally taxable as ordinary income to beneficiaries, though specific tax treatment can vary based on whether the annuity was qualified or non-qualified. Surviving spouses may have additional options, such as continuing the contract or spreading payments over their own life expectancy.