What happens to an annuity when you die

What your annuity pays when you die depends on whether payments had begun. If you die while the contract is still growing (the accumulation phase), your named beneficiary generally receives a death benefit, commonly at least the account value and sometimes more. If you had already turned the contract into lifetime income, what is left depends entirely on the payout option you chose: a life-only annuity leaves nothing, while a period-certain, refund or joint-and-survivor option continues to pay someone.

This guide covers the contract mechanics. The beneficiary's choices and deadlines are in annuity beneficiaries and inherited annuity options, and the tax treatment in how annuities are taxed.

Before payouts begin: the death benefit

Deferred annuities usually pay a death benefit to the beneficiary named in the contract. Common formulas:

• Account value. The beneficiary receives the contract's current value. In many fixed and indexed contracts surrender charges and any market value adjustment are waived at death, though you must confirm that in the contract.
• Return of premium. The greater of the account value or the premiums paid, reduced by withdrawals. This protects against a market drop in variable and index-linked annuities.
• Enhanced benefits. Some variable annuities offer a step-up to the highest anniversary value or a minimum growth "roll-up," usually for an extra annual charge. These benefits depend on the contract's terms and are reduced by withdrawals, sometimes by more than the dollar amount withdrawn.

A lifetime income rider such as a guaranteed lifetime withdrawal benefit riders normally does not create a death benefit. The rider's guaranteed "benefit base" is a calculation for income, not cash the beneficiary can claim. Read the contract language; the cash value is what passes.

Death benefits go to the named beneficiary outside the will and typically skip probate. If no beneficiary is named, or the named person has died, the money may go to the estate or follow contract defaults, which can delay payment and add court costs. See how to choose a life insurance beneficiary and primary vs contingent beneficiaries.

Owner versus annuitant

In a non-qualified annuity, the owner and the annuitant (the person whose life measures the contract) can be different people. Contracts differ on whether the death of the owner, the annuitant or either triggers the death benefit. If your spouse is the beneficiary and also a joint owner, spousal continuation rules can apply. Make sure the contract's ownership matches your intentions.

After payouts begin: payout options

When you convert the contract to income (annuitization), you choose how payments end. Examples:

Life-only pays the largest monthly amount because the insurer keeps what remains of people who die early, which funds payments to people who live long. Giving up that feature, to protect heirs, reduces the payment. Use annuity payout calculator to see how rates differ among options. Once chosen, the option is generally irrevocable.

A hypothetical example

Say a 70-year-old owner puts $200,000 into a deferred annuity, and by death the account is worth $240,000, with no withdrawals.

• Under an account value death benefit, the beneficiary receives $240,000.
• If a market-linked contract had instead fallen to $185,000, a return-of-premium benefit would pay $200,000.
• Taxable gain in the first case is $40,000; the $200,000 is a return of the original after-tax investment (the cost basis). The beneficiary pays ordinary income tax on the gain as it is distributed.

The numbers are invented for illustration.

How a death benefit is taxed

Annuity death benefits are not like life insurance proceeds. Life insurance death benefits are generally income-tax-free, but the gain in a non-qualified annuity is taxable to the beneficiary as ordinary income, and there is no step-up in basis at death. For an annuity in an IRA or other retirement plan, the entire amount is typically taxable as pre-tax money is withdrawn.

Two federal timing rules apply to inherited annuities. For non-qualified contracts, 26 U.S.C. §72(s) generally requires full distribution within five years of death, unless the beneficiary takes payments over life or life expectancy starting within one year, and a spouse can usually continue the contract as the new owner. For qualified annuities in retirement accounts, the SECURE Act's 10-year rule applies to most non-spouse beneficiaries for deaths after 2019, with exceptions for "eligible designated beneficiaries." A missed required distribution carries an excise tax, 25% (10% if corrected within two years) under current law. The IRS explains details in its required minimum distribution FAQs.

The annuity's value may also count toward your estate for federal estate tax, though 2026's exclusion is $15,000,000 per person according to the IRS.

Steps for beneficiaries

1. Get certified copies of the death certificate.
2. Contact the annuity company's claims department with the contract number and ask for the claim packet.
3. Ask which options are available and what each means for tax before choosing.
4. Do not let the company simply roll the proceeds into a new account without understanding the choices.
5. For a lost contract, try the NAIC locator and state unclaimed property: how to find a lost life insurance policy covers the process, which is similar.

Key takeaways

• Before payouts begin, the beneficiary typically gets the account value or a larger enhanced benefit, outside probate if a beneficiary is named.
• After payouts begin, the payout option determines whether anything is left: life-only leaves nothing; period-certain, refund and joint-and-survivor options do.
• Riders for income usually do not add to the death benefit.
• Gains are taxable to beneficiaries with no basis step-up, unlike life insurance proceeds; timing rules differ for qualified and non-qualified contracts.
• Check the contract and ownership structure now so the death benefit works as you intend.