What Happens If I Die Before I Begin To Receive Payments From My Annuity?
In the unfortunate event of the contract owner’s death before income payments begin, the beneficiary may receive a death benefit from the annuity.
In some contracts, the death benefit will be based on the account value. Other contracts use the surrender value or other applicable contract value to calculate the death benefit. What if you have a spouse? Does he or she have inherent rights?
If your spouse is the surviving joint owner or sole beneficiary, then he/she may have the ownership rights with all rights and privileges of the original owner, as allowed by IRS regulations.
Doing your annuity homework? Start with our free comparison guide and the 7 questions to ask any advisor. Ready for real numbers? Talk to a licensed advisor in your state — we serve all 50 states.
How Annuity Death Benefits Are Paid to Beneficiaries
When a beneficiary inherits an annuity, they typically have several options for receiving the death benefit rather than being forced into a single lump-sum payment. Common choices include taking the full value as a lump sum, spreading distributions over five years (known as the five-year rule), or electing to receive payments over the beneficiary’s own life expectancy. Each option carries different tax implications, since the earnings portion of an inherited annuity is generally subject to ordinary income tax in the year it is received.
Non-spouse beneficiaries face stricter IRS rules than surviving spouses. While a spouse can continue the annuity contract as if it were their own — preserving tax deferral and delaying distributions — a non-spouse beneficiary must begin taking distributions within a defined timeframe. Stretching payments over a longer period can reduce the annual tax burden, but this strategy requires careful coordination with a licensed advisor and the issuing insurance company.
It is also worth noting that some annuity contracts include enhanced death benefit riders, which may guarantee that your beneficiary receives at least the total premiums you paid in, even if the account value has declined due to market performance or withdrawals. These riders typically come with an additional annual cost, so comparing contracts with and without this feature is an important step before purchasing.
Keeping your beneficiary designations current is equally critical. An outdated or missing designation can complicate the claims process, potentially sending proceeds through probate rather than directly to your intended recipient. Review your annuity contract’s beneficiary information after major life events such as marriage, divorce, or the birth of a child.