In this article, I will cover the What Happens to an Annuity When You Die and analyze the impact of various types of annuities and payout selections on potential beneficiary payouts.
It is necessary to comprehend these various scenarios for planning retirement and an estate. Be it the accumulation phase or the payout phase, understanding the rules can help preserve an annuity’s value for heirs.
Overview
Annuities ensure a steady income flow during the retired phase of one’s life. But a common question that arises is: What happens to an annuity when you die?
The answer hinges on what kind of annuity you bought, the specific terms of the contract, and whether or not you named a beneficiary. We hope this guide clarifies all the potential outcomes that could arise following an annuitant’s death.
What Happens to an Annuity When You Die?
Understanding Annuities First
An annuity is a contractual agreement between one person, the annuitant, and an insurance company. Under this agreement, the person either pays a one-off lump sum or pays a series of payments. In exchange, the insurer will pay the individual periodically, either starting immediately or at a later agreed-upon date.
Annuities come in several types which include: immediate or deferred, fixed or variable. Nevertheless, payouts and death benefits will depend on the contracts held.
What Happens Upon the Death of the Annuitant?
Whether an annuity is in an accumulation or payout phase influences what happens after the annuitant dies. The insurance firm usually pays a death benefit during the accumulation phase, which is often either the value of the annuity or the total contributed amount.
In the payout phase, results differ depending on the selection made. A life-only annuity is terminated instantly, but some, such as period certain or joint-and-survivor options, may continue payments to some or all named beneficiaries for a certain time. In the absence of a named beneficiary, the annuity proceeds typically revert to the estate which may attract probate fees.
Common Annuity Payout Options and Their Death Implications
Life-Only Annuity
This option annuitant specific payments perpetually until his/her death. After death, all payments cease, irrespective of the total amount that was contributed into the annuity.
Death Implication: No benefits are passed to the surviving heirs. All remaining funds are forfeited to the insurer.
Life with Period Certain Annuity
Annuitants receive payments for the remainder of their life, but payments for a specified duration are guaranteed (e.g. a decade or two).
Death Implication: Payments will continue to a named beneficiary, in case the annuitant dies prior to specified duration.
Joint and Survivor Annuity
This option is for a couple, where either of the annuitants or the named surviving annuitant can receive payments for as long as either of the two is alive.
Death Implication: Following the death of the annuitant, the surviving spouse or joint annuitant will continue receiving payments for a defined period which is a reduced amount (50, 75 percent of the original payout).
Refund Annuity
This guarantees that the total payments paid out will be less than the original investment, the difference is paid to a predetermined beneficiary.
Death Implication: Heirs are entitled to the residual funds which may be disbursed as a single full payment or as a series of payments over time.
Tax Implications for Beneficiaries
Generally, while inheriting an annuity, beneficiaries will have to file taxes on the profits as regular income, not as capital gains.
The original premium or principal amount remains untaxed. For a lump-sum payout, the entire taxable amount for that annuity must be reported for that year, which may increase the beneficiaries tax bracket.
A tax liability spread over time is better to take through installment payouts. A spouse can take over the annuity tax-deferred, but non-spouse beneficiaries must withdraw the entire annuity within five to ten years, paying taxes on the profits while withdrawing the funds.
Planning Tips to Maximize Annuity Value After Death
Select Best Payout Schemes
Select from available payout plans: joint-and-survivor, period certain, or refund annuity. These should allow for continued income or death benefits for beneficiaries.
Regular Beneficiary Naming and Updating
- Always list primary and contingent beneficiaries of the plan.
- An update should occur post-life changing events such as marriage, divorce, or death of the beneficiary to prevent delays in probate processes.
Consider Spousal Continuation Options
- If married, select a contract that allows for uninterrupted tax-deferred growth of the attached annuity for a designated spouse post-death.
Employ Optional Death Benefit Riders
Uses optional death benefit riders to enhanced death benefits, or guarantees the minimum death benefits to heirs.
Learn About Taxes
Along with the estate planner, consider strategizing with a financial planner to minimize tax burdens when passed to the beneficiaries.
Relate to the Estate Plan
Strengthen estate plans with well-coordinated annuities for seamless and efficient transfer of planned wealth.
Conclusion
What occurs after the death of the annuitant depends on the contract stipulations, the selected payout option, and if a beneficiary has been designated. Annuities differ in how they handle payments after death; some offer no payments while others continue payments, and some refund payments.
With the proper planning, such as selecting the correct type of annuity, adjusting beneficiary designations, and understanding the tax ramifications, you can ensure that the annuity fits the ceaser’s needs while fulfilling both retirement and legacy planning objectives.
Careful consideration of how the annuity is integrated into the estate plan enables you to secure your financial legacy while offering substantial assistance to the survivors.
