What Happens to an Annuity When You Die?
What Are Annuities?
Annuities are popular investment vehicles, especially among retirees and the elderly. For this reason, survivors commonly encounter annuities when dealing with the estate of a deceased loved one. A conventional annuity ensures a steady income stream for the beneficiary over a specified term or for their lifetime. Alternatively, “deferred” annuities allow the accumulation of investment gains until a later date triggers payments to the beneficiary. The payment amount is determined based on the age and life expectancy of the annuitant and the person for whom the annuity is established. Although annuities can be straightforward, the bevy of options and investment choices commonly make annuities a complex area to understand even for the most financially astute investors.
Inheriting an Annuity after the Annuitant’s Death
After the owner’s death, annuities become less complex. Each annuity includes a beneficiary designation, specifying a death beneficiary, typically identified on the initial application. The owner may change the beneficiary designation before death, and the confirmed beneficiary of record must be verified by the annuity company.
What Does the Beneficiary Receive after the Annuitant’s Death?
To determine what beneficiary gets, one must know whether the annuity was in the accumulation phase or payout phase at the annuitant’s passing.
The accumulation phase precedes regular payments to the beneficiary, while the payout phase involves regular payments (commonly monthly). If the annuity is in the accumulation phase, the beneficiary is entitled to a death benefit equal to the current annuity value or the sum of the paid premiums, if more. For annuities in the payout phase, there is no death benefit. Instead, the payout option outlined in the contract governs. Initial payout phase options include Life Only (payments cease upon the annuitant’s death), Life with Period Certain (payments may continue to the beneficiary if a guaranteed number of payments hasn’t been reached), and Joint and Survivor (payments continue to a designated surviving person, ending upon their death).
What are the Payout Options for Annuity Death Benefits?
For annuities not in the payout phase, a non-spouse beneficiary typically has three options:
Lump-sum distribution: The beneficiary receives the amount of distribution in a single payout.
Non-qualified stretch provision: Sometimes called the “life expectancy method,” this option provides regular payments for the remainder of the beneficiary’s life.
Five-Year Rule: When the beneficiary is an estate, trust, or charity, it has to pull the full value of the contract within five years of the annuitant’s death, either through incremental withdrawals or by lump sum distribution.
A beneficiary who is a spouse has the same three options and the added option of continuing the contract, with the surviving spouse becoming the new owner and annuitant.
If you have recently experienced the loss of a loved one or are seeking to get things in order for your own peace of mind, contact the Law Office of Greggory R. Walters for your probate and estate planning needs.