Understanding Annuities: A Recap 

Annuities are financial contracts between an individual and an insurance company. The insurance company agrees to provide regular payments to the annuitant, either for a specified period or for the rest of their life. Annuities come in various forms, including: fixed, variable, and indexed annuities, each with distinct features. 

The Fate of Annuities Upon the Annuitant’s Death 

Immediate Annuities and the Single Life Option 

If the annuitant chooses a single life annuity, the payments cease upon their death. This option maximizes the income during the annuitant’s lifetime but does not provide for a surviving spouse or beneficiaries. 

If there is no residual value, the insurance company retains any remaining funds. This means there is no money passed on to heirs or beneficiaries unless a specific death benefit or guarantee period is attached to the annuity.

Joint and Survivor Annuities 

Some annuitants opt for joint and survivor annuities, which provide payments not only for their lifetime but also for the life of a designated beneficiary, typically a spouse. Upon the annuitant’s death, the surviving spouse continues to receive payments, albeit potentially at a reduced rate. The annuitant must carefully consider the survivorship option when purchasing the annuity, as it directly impacts the financial well-being of the surviving spouse. 

Death Benefits and Residual Value 

In certain annuities, a guaranteed period may be selected (e.g., 10, 15, or 20 years). If the annuitant passes away within this period, the payments continue to a designated beneficiary until the end of the guaranteed period. 
 
Depending on the terms of the annuity contract, there may be a residual value or death benefit payable to beneficiaries. This is often expressed as the difference between the total premiums paid and the annuity payments received. 

Variable Annuities and Investment Implications 

Variable annuities are tied to the performance of underlying investments. The potential downside of this type of annuity is that, upon the annuitant’s death, the value of the annuity may be determined by the market performance of these investments. 
 
On the upside, beneficiaries of variable annuities may have options such as receiving the accumulated value as a lump sum, taking systematic withdrawals, or annuitizing the contract to receive periodic payments. 

Tax Considerations 

Inheriting an annuity may have tax implications for beneficiaries. Understanding the tax treatment of death benefits, especially in the context of variable annuities, is crucial for effective financial planning. In some cases, beneficiaries may have the option to stretch tax deferral by taking distributions over their life expectancy, minimizing the immediate tax impact. 

Estate Planning and Maximizing Legacy 

Naming Beneficiaries Strategically 

Annuity owners should strategically designate primary and contingent beneficiaries in order to make sure their money doesn’t go to waste. For example, contingent beneficiaries come into play if the primary beneficiary predeceases the annuitant. 
 
Additionally, understanding the difference between per stirpes and per capita designations is crucial. The former ensures that the deceased beneficiary’s share is passed on to their heirs, while the latter divides the share equally among surviving beneficiaries. 

Estate Tax Considerations 

The value of an annuity may contribute to an individual’s estate for estate tax purposes. Estate planning strategies, such as irrevocable trusts, may be employed to mitigate potential tax liabilities. As with any major financial decision, engaging with (estate planning) professionals can provide valuable insights into optimizing the legacy passed on to heirs while minimizing tax exposure. 

 
Conclusion: Crafting a Legacy Beyond 

 Navigating the complexities of what happens to a person’s annuity when they pass away involves a nuanced understanding of annuity types, survivorship options, and estate planning strategies. As individuals embark on the journey of securing their financial future through annuities, thoughtful consideration of these factors ensures that the legacy they leave behind aligns with their intentions. 

Seeking the guidance of financial advisors, estate planners, and legal professionals is paramount in creating a comprehensive strategy that transcends the annuitant’s lifetime, leaving a lasting impact on generations to come. 

If you’re receiving annuity payments and are interested in turning them into a lump sum, contact us today to get the process started.*  

Sources

Kurt, D., “What Is an Annuity? Definition, Types and Tax Treatment.” Investopedia. June 15, 2022. 

Haithcock, S., “How The Stock Market Affects Annuities.” The Annuity Man. August 2, 2021.  

Egan, J. & Tepper, T., “Guide To Annuity Taxes.” Forbes. August 22, 2023. 

Lake, R., “Per Stirpes vs. Per Capita in Estate Planning.” SmartAsset. December 30, 2020. 

* Sales of annuity payments are subject to insurance company approval and other conditions which can take 30-60 days to complete. All transactions are at our sole discretion.