Annuity beneficiary payout options: What happens to my annuity when I die?

When you purchase an annuity, you could receive a guaranteed source of income in retirement. This type of insurance contract provides the option to elect guaranteed payments for life or a specified term of years.

But what if you pass away before you tap your annuity payments—or if you purchased an annuity with payouts guaranteed for a certain number of years that you never reach? Depending on your contract, some value could pass on to your loved ones, to help support your family after your death.

Let's explore the annuity beneficiary payout options and the different scenarios that could unfold, depending on your type of annuity, its payout structure and your chosen beneficiary.

Generally, what your beneficiaries receive in a death benefit will depend on whether you pass away while you're in the accumulation phase of your annuity or in the annuitization phase. In the annuitization phase, beneficiaries only will receive a death benefit if you elected a payout with a guaranteed period and that period has not been met upon death.

Let's consider some common annuity death benefits and how they might pay out:

If there is a death benefit, a beneficiary may elect to take the full benefit in a lump sum payout.

In lieu of a lump sum payout, a beneficiary may elect a settlement option. For example, non-spouse IRA beneficiaries may elect a 10-year guaranteed payout stream. Beneficiaries on other annuities may have even longer payout options available.

If the annuity owner dies after annuitization, whether or not there is a death benefit depends on the annuitization option. If the annuity owner elected a life income, there is no death benefit payable to beneficiaries. On the other hand, if the annuity owner elected a life income with a 20-year guarantee period, there will be a death benefit payable to beneficiaries if the owner dies before the 20-year period ends. If there is a death benefit, a beneficiary may continue the payments for the remaining guarantee period. Otherwise, the beneficiary may speed up the payments or take a cash lump sum.

12_Deferred Income Annuity_Black40.png

When does an annuity make sense for you?

A key benefit of your annuity is receiving an income stream in retirement, but there are many more ways to tailor the advantages. 


Learn more about how annuities work

Earnings on annuities grow tax-deferred, and the funds are taxed when a person receives payments from the annuity. If you pass away, your beneficiaries have options on how they receive the death benefit. They also have certain rules to follow.

The annuities will be taxable to your beneficiaries depending on the type of payout and how the annuity was purchased: either as a qualified or nonqualified annuity.

• Qualified annuities are purchased with pre-tax dollars inside a retirement account like an IRA. Because the money used to purchase the annuity wasn't taxed, the entire death benefit will be taxed to the beneficiary.
• Nonqualified annuities are purchased with after-tax money, so death benefit may be only partially taxable.

With those factors in mind, here's a closer look at your beneficiaries' payout options and the tax impact.

Your beneficiaries may decide to take your annuity's death benefit in one payment, called a lump sum. That may be a good option if they need a sizable chunk of money right away, like a down payment on a house.

If they take a lump-sum payout, however, they must declare the entire taxable payment as income that year. This can be a tax-inefficient payout choice, especially if the payment bumps the beneficiary into a higher tax bracket.

Instead of a lump-sum payment, your beneficiaries may opt to take your annuity's death benefit as a series of payments, called a settlement option. With this option, your beneficiaries receive the money over a period of time. They can use it to gradually pay down debt, build an emergency fund or jumpstart their own retirement account. Like the payments, tax liability is spread out over multiple tax years, which usually results in a lower total tax bill.

If your beneficiaries don't take your annuity's death benefit as an immediate lump sum, be aware that they must abide by the 10-year rule applicable to most non-spouse beneficiaries. This requires that they withdraw the entire balance of a qualified annuity within 10 years of your death. They either can take periodic payments during the 10-year period (and pay taxes each year) or wait and withdraw the entire sum in the 10th year (and pay taxes on the larger lump sum).

With nonqualified annuities (contributions were made with after-tax dollars), the IRS allows your beneficiary to stretch payments out over a period not extending beyond their life expectancy. Be aware, though, that this isn't an option if your beneficiary is a trust or charity.

For a qualified annuity, contributions were made with pre-tax dollars existing within an IRA, your beneficiaries may have time to take money from the account, usually up to 10 years from the owner's death. Spouses and certain other beneficiaries may have additional options.

When setting up your annuity, you have a variety of choices when it comes to naming your beneficiaries. The possible types of payouts and their tax treatment could influence your decision.

• Spouse. If your spouse is a joint owner of your annuity, they can continue to receive the scheduled payments after you pass away. This also is true if they're your beneficiary. If they receive your death benefit, they can have it paid out over their lifetime or take it as a lump sum. If qualified, they will be taxed on the entire amount as it is withdrawn from the contract. If nonqualified, they are taxed on the difference between what you paid for the annuity and the amount of the death benefit.

• Non-spouse. You may name your child or children, a sibling, other relative or loved one as your beneficiary. A non-spouse beneficiary is taxed as if the money they receive is ordinary income.

• Trust. You can designate a trust, such as a living trust, as the owner of your annuity. In that case, the annuity pays out to the trust, and the trust distributes those payments to beneficiaries according to the terms of the trust. Because the annuity is not owned by a person, tax-deferral benefits are lost, and income from it is treated as ordinary income. If the trust is irrevocable, the annuity is taxed at the trust income tax rate, which is generally higher than your personal income tax rate. The IRS rules about annuities and trusts are very detailed and complex. A legal or tax professional can help you understand how best to use a trust with an annuity.

• Charity. If you designate a charity as your beneficiary, it receives the funds tax-free.

• Estate. In some cases, if you don't name a beneficiary for your annuity, it goes to your estate. You also could set up your annuity with your estate as beneficiary. In either case, it then must go through probate. When deciding between an annuity beneficiary vs. a will, it's likely simpler to leave the annuity to a beneficiary than to have it distributed through a will.

There are so many ways to tailor an annuity to suit your life goals now and your family's goals down the road. Those options call for careful planning—and regular updating of your beneficiaries. Contact a Thrivent financial advisor to talk through all of your options and ensure your annuity provides what's needed for you and your loved ones.