What Happens to Your Annuity When You Die?

Annuities make payments to you while you are alive, but what happens to your annuity when you die? It will depend on what type of payout and beneficiary options you purchase. In this article, we will go over the beneficiary options and taxation of your funds after you pass.

Payout Options

There are a few different payout/beneficiary options you can choose from when purchasing your policy. These include life only. With this option payments are made only as long as you are alive. Once you pass payments stop, despite however much or little money is left in your annuity. There is no beneficiary with these accounts. Second, these are period certain only. With this a beneficiary will receive payments for a set period, whether the annuitant is living or not.

Third is certain and life. With this payout option the beneficiary again makes payment to the beneficiary during a specific time. However, if the annuitant dies payment will continue to the beneficiary until the period ends. Fourth is an installment refund, with this your payout period is set based on your total benefit divided by your desired monthly payments. The payout will continue to your beneficiary until the period ends. Fifth is a cash refund. With this payout, if the annuitant dies, a lump sum is given to the beneficiary in the amount that is leftover in the annuity. Last is joint and survivor, this is for use by a couple. It allows the surviving spouse to receive payments for the rest of their life.

Taxes for Beneficiaries

Part of what happens to your annuity when you die is taxes. Annuities grow tax deferred. This means you do not have to pay taxes until you begin to take payments. How much of those payments are taxable will depend on the type of annuity you purchase. If you have a qualified annuity the annuity is funded with pretax dollars. This means the entire death benefit is taxable for your beneficiary. If you have a non-qualified only the gains are taxable to your beneficiary.

The type of beneficiary will also have an affect on taxation. If your beneficiary is a spouse and they inherit a qualified account the entire distribution is taxable as ordinary income. When the annuity is non-qualified the gains are taxable. If your beneficiary is any other person besides your spouse, they must withdraw the entire balance within 10 years of the death of the owner. Withdraws will be taxes as ordinary income. If your beneficiary is a trust, the tax rate that funds will be subject to is generally higher than the rate an individual beneficiary would have. If your beneficiary is a charity, funds can be distributed tax free.

Caring for Your Annuity When You Die

Knowing what happens to your annuity when you die can help you care for it now. Meet with a qualified insurance agent who can help you pick the right payout and beneficiary options for your situation.

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