Who inherits your annuity at death
Quick Definition: The beneficiary is the person or entity designated to receive the annuity's value when you die. During accumulation, beneficiaries typically receive the full account value without surrender charges. You can change beneficiaries anytime before death.
When you purchase an annuity, you name one or more beneficiaries who will inherit the contract value upon your death. Beneficiaries have no rights or claims to the annuity while you're alive.
During accumulation phase: Beneficiaries receive account value (minus any taxes owed). Surrender charges are typically waived at death.
After annuitization: Depends on payout option chosen. Life-only payments stop at death with nothing to beneficiaries. Period-certain or joint-life options continue payments.
Owner: John, age 72, has $250,000 FIA
Primary beneficiary: His wife Sarah
Contingent beneficiaries: His two children (50% each)
Scenario 1: John dies, Sarah is alive
→ Sarah inherits full $250,000
→ No surrender charges
→ She can continue the contract, take lump sum, or annuitize
→ Children receive nothing (contingent beneficiaries only activate if primary is deceased)
Scenario 2: John dies, Sarah predeceased him
→ Two children split $250,000 (each gets $125,000)
→ Same options: continue, lump sum, or annuitize
Primary Beneficiary: First in line to inherit. Receives 100% unless you specify percentages for multiple primaries.
Contingent Beneficiary: Receives assets only if primary beneficiary dies before you or disclaims inheritance.
Per Stirpes vs. Per Capita: How inheritance is divided if a beneficiary predeceases you. Per stirpes passes to their children; per capita divides among surviving beneficiaries.
When beneficiaries inherit an annuity, they typically have several choices:
1. Lump sum distribution: Take full value immediately, pay all taxes at once
2. Five-year rule: Withdraw all funds within 5 years (non-spouse beneficiaries)
3. Stretch provision (spousal): Spouse can continue contract as their own, deferring taxes
4. Annuitize: Convert to lifetime income stream
Spousal beneficiaries get special treatment:
Non-spousal beneficiaries:
Non-qualified annuities: Beneficiaries pay income tax on gains only (original premium is tax-free)
Qualified annuities (IRA): Beneficiaries pay income tax on full amount inherited (since contributions were pre-tax)
Death benefit itself is not subject to estate tax up to current exemption limits ($13.6M+ in 2024).
You can change beneficiaries anytime during accumulation phase. Simply contact insurance company, complete beneficiary change form, no taxes or penalties.
Important: Review beneficiary designations after major life events (marriage, divorce, birth, death). Annuity beneficiary designations override your will.
Beneficiaries inherit your annuity when you die. Spouses have the most flexibility, including continuing the contract. Non-spouses must distribute within 5 years or annuitize. Always keep beneficiary designations current—they override your will.