What happens to an annuity when you die depends on who you named as beneficiary, the type of annuity and whether payments had already started. In most cases the account value passes straight to your beneficiary, outside of probate.
- Spouse: can usually keep the contract going as their own, with no tax due until they take money out.
- Child or other heir: takes the death benefit as a lump sum, over five years or as payments, and owes income tax on the gain. Heirs of IRA annuities usually have 10 years.
- No beneficiary named: the money goes to your estate and through probate.
- Income annuity already paying: depends on the payout option. Life-only payments stop, while period-certain, refund and joint options keep paying.
Get this wrong, and your heirs could face unnecessary taxes, delays, or lose the remaining value altogether. Here’s a complete breakdown of how annuity death benefits work, what your beneficiaries will actually receive, and the decisions you need to make now.
What Is an Annuity Death Benefit?
An annuity death benefit is the amount paid to your named beneficiary when you, the annuity owner or annuitant, die before the contract is fully paid out.
Most deferred annuities (fixed, fixed indexed, and variable) include a standard death benefit equal to the greater of the account value or the total premiums paid, minus any withdrawals. Some contracts enhance this with riders that lock in a higher guaranteed amount.
How the Standard Death Benefit Is Calculated
Say Robert, age 65, puts $200,000 into a fixed indexed annuity. Over seven years, his account grows to $267,000. If he dies, his beneficiary receives $267,000, the full account value.
Now flip the product. Say Robert had instead put the $200,000 into a variable annuity and the subaccounts fell, leaving the contract at $185,000 when he dies. A standard return-of-premium death benefit steps in, and his beneficiary still receives the full $200,000 rather than the lower account value.
That floor is a core feature of most deferred annuities. A fixed indexed annuity like Robert’s first contract cannot lose value to index declines in the first place, because of its 0% floor. There, it is withdrawals and rider charges that pull the account value down, not the market.
Enhanced Death Benefit Riders
Some annuity contracts offer optional riders that increase the death benefit beyond the standard calculation. Common enhancements include:
- Annual death benefit step-up: The death benefit locks in the highest account value on each contract anniversary
- Guaranteed minimum death benefit (GMDB): Guarantees a minimum growth rate (e.g., 3% annually) applied to the death benefit base
- Return of premium: Ensures beneficiaries receive at least the original deposit, even after withdrawals
These riders typically cost 0.25%–0.75% of the account value annually. Whether they’re worth it depends on your health, your account size, and how much you’ve already withdrawn.
How Does Beneficiary Designation Work for Annuities?
Your beneficiary designation on an annuity is a contract-level instruction, and it supersedes your will entirely.
That’s not a minor detail. If your will says your estate goes to your three children equally, but your annuity names only your oldest child as beneficiary, the oldest child gets the full annuity. The will doesn’t override it.
Primary vs. Contingent Beneficiaries
Every annuity owner should name both:
- Primary beneficiary: First in line to receive the death benefit. Can be one person, multiple people (with percentages), a trust, or a charity.
- Contingent beneficiary: Receives the benefit only if the primary beneficiary dies before you or disclaims the inheritance.
Without a contingent beneficiary, the death benefit flows to your estate if your primary beneficiary predeceases you, triggering probate and potentially higher taxes.
Naming Multiple Beneficiaries
You can split the death benefit across multiple people. For example, Linda, age 68, names her two daughters as 50/50 primary beneficiaries on her $300,000 fixed annuity. Each daughter receives $150,000 (plus any growth) upon Linda’s death.
If one daughter predeceases Linda and no contingent is named, the surviving daughter typically receives 100%, but this varies by carrier. Always confirm the per-stirpes vs. per-capita rules in your specific contract.
What Happens to an Annuity With No Beneficiary?
If you die without a named beneficiary, or your named beneficiary has already died, the annuity’s death benefit goes to your estate.
This creates three problems:
- Probate: The asset must pass through the court process, which takes months and costs money
- Accelerated taxation: Estate beneficiaries must typically distribute the entire balance within five years, compressing taxable income
- Loss of stretch options: Individual beneficiaries can sometimes spread distributions over their life expectancy; estates cannot
Say a $250,000 annuity with $100,000 of gain passes through an estate. The whole $100,000 of gain must be reported within five years, instead of being spread over an heir’s lifetime.
The fix is simple: review your beneficiary designations today. It takes 15 minutes and costs nothing.
How Are Annuity Death Benefits Taxed?
Annuity death benefits are not tax-free, but the tax treatment depends on how the annuity was funded. For the full picture on living owners too, see are annuities taxable.
Non-Qualified Annuities (Funded With After-Tax Money)
The beneficiary pays ordinary income tax on the gain, the difference between the death benefit and the original premium (cost basis).
Example: Carol funded a non-qualified annuity with $150,000. At her death, the account value is $230,000. Her son inherits $230,000 but owes income tax on $80,000 of gain, which is $17,600 at a 22% federal rate.
The $150,000 cost basis passes tax-free. Only the earnings are taxable. If the heir takes lifetime payments instead, the exclusion ratio splits each payment into a tax-free and a taxable part.
Qualified Annuities (Funded With Pre-Tax Money, IRA, 401k Rollover)
The entire death benefit is taxable as ordinary income because no taxes were paid going in. A $300,000 inherited IRA annuity means $300,000 of taxable income for the beneficiary, spread over the timeline set by the 10-year rule.
The Step-Up in Basis Does NOT Apply
Unlike stocks or real estate, annuities do not receive a step-up in cost basis at death. The gain your annuity accumulated over 20 years is fully taxable to your beneficiary. This is one of the most misunderstood aspects of annuity inheritance.
Estate Tax Considerations
Annuity values count toward your taxable estate. The federal estate tax exemption is $15 million per person in 2026 (up from $13.99 million in 2025), and it is now adjusted for inflation each year.
Most readers won’t hit that threshold. State estate taxes kick in much lower, though, such as Oregon ($1 million) and Massachusetts ($2 million).
What Are the Payout Options for Annuity Beneficiaries?
When a beneficiary inherits an annuity, they typically have several options for receiving the money. The right choice depends on their tax situation, age, and financial needs.
Lump Sum Distribution
The beneficiary receives the entire death benefit at once. Simple and immediate, but potentially the most tax-inefficient option, since all gains are recognized in a single tax year.
If David inherits a $400,000 non-qualified annuity with $160,000 in gains, taking a lump sum would result in $160,000 of ordinary income in one year. That could push him into the 32% or 35% bracket.
Five-Year Rule
The beneficiary must withdraw the entire balance within five years of the owner’s death, but can take distributions on any schedule within that window. This allows some income-spreading across tax years.
Stretch Annuity (Life Expectancy Payments)
Non-spouse individual beneficiaries of a non-qualified annuity can take distributions over their life expectancy, sometimes called “stretching” the annuity. This spreads taxable income over many years and keeps more money growing tax-deferred.
The payments must begin within one year of the owner’s death. IRA annuities follow the 10-year rule instead for most heirs.
Annuitization Over Beneficiary’s Life
Some contracts allow the beneficiary to annuitize, converting the death benefit into a stream of payments over their lifetime. This provides guaranteed income but surrenders access to the lump sum.
Does Annuity Type Affect What Beneficiaries Receive?
Yes, significantly. Here’s how the four main annuity types handle death benefits differently.
Fixed Annuities and MYGAs
A fixed annuity or MYGA (Multi-Year Guaranteed Annuity) pays the full account value to beneficiaries, including all accumulated interest. There’s no market risk, so the death benefit is predictable.
Example: Susan, age 62, buys a 5-year MYGA at 5.50% with $100,000. If she dies in year three, her beneficiary receives approximately $117,000, the $100,000 principal plus three years of compounded interest.
Fixed Indexed Annuities (FIAs)
Fixed index annuities credit interest based on a market index (like the S&P 500) with downside protection. The death benefit equals the full account value, including any index credits earned. The account value at death is what’s paid.
Variable Annuities
Variable annuities invest in subaccounts that fluctuate with the market. The death benefit could be lower than the original premium if markets dropped, unless a GMDB rider is in place. This is the one annuity type where beneficiaries can receive less than what was originally invested (without a rider).
Immediate Annuities (SPIAs) and Income Annuities
This is where things get complicated. Once you annuitize, converting your premium into a guaranteed income stream, the death benefit depends entirely on the payout option you selected at purchase.
| Payout Option | What Beneficiary Receives |
|---|---|
| Life only | Nothing, payments stop at your death |
| Life with period certain (e.g., 10 years) | Remaining payments if you die within the period |
| Joint and survivor | Payments continue to surviving spouse |
| Cash refund / installment refund | Remaining premium balance returned to beneficiary |
| Life with lump sum death benefit | Specified lump sum paid regardless of when you die |
Choosing “life only” on a $200,000 SPIA and dying in year two means your heirs receive nothing. A refund or period-certain option pays a little less each month but protects your heirs, so compare both quotes before you buy.
See what a SPIA would pay you for life
SPIA payouts depend on your age, your premium and the payout option you pick. Estimate it in our immediate annuity calculator, or request a quote with current carrier figures for your age and state, in writing.
Surviving Spouse Rules: What’s Different?
A surviving spouse has more flexibility than any other beneficiary, and using those options correctly can save tens of thousands in taxes.
The Spousal Continuation Option
When a spouse is named as the primary beneficiary, they can typically continue the annuity contract as if it were their own. This means:
- No immediate tax event
- Continued tax-deferred growth
- The ability to name new beneficiaries
- Access to the same withdrawal provisions
This is the most tax-efficient option for most surviving spouses and should be the default choice unless there’s a compelling reason to take a lump sum.
Qualified Annuities and Spousal Rollover
For qualified annuities (IRA-based), a surviving spouse can roll the inherited annuity into their own IRA. This resets the Required Minimum Distribution (RMD) clock to the spouse’s own age, potentially deferring distributions for years.
A 60-year-old widow inheriting her husband’s $350,000 IRA annuity can roll it into her own IRA. Because she was born after 1959, her RMDs don’t start until age 75, so the account can grow tax-deferred for 15 more years. That’s a meaningful advantage non-spouse beneficiaries don’t have.
Inherited IRA Annuities: The 10-Year Rule
If your annuity sits inside an IRA or other retirement plan, most heirs other than a spouse must empty it by the end of the 10th year after the year you die. This rule came from the SECURE Act of 2019 and ended the lifetime “stretch” for most heirs of retirement accounts.
Who Is Exempt From the 10-Year Rule?
The IRS calls these heirs “eligible designated beneficiaries.” They can still take payments over their own life expectancy (see the life expectancy tables):
- Your spouse
- Your minor child: only until age 21, when the 10-year clock starts
- A disabled or chronically ill heir
- An heir not more than 10 years younger than you, such as a sibling close in age
Do Heirs Have to Take Withdrawals Every Year?
It depends on whether you had already started your required minimum distributions (RMDs).
- You died before your RMDs began: the heir can take money on any schedule, as long as the account is empty by the end of year 10.
- You died after your RMDs began: the heir must also take a withdrawal each year in years 1 through 9, then empty the account in year 10. The IRS final rules require this starting in 2025.
Example: Tom dies in 2026 at age 78 and leaves a $200,000 IRA annuity to his 50-year-old daughter. She must take a withdrawal every year starting in 2027 and empty the account by December 31, 2036.
Non-Qualified Annuities Follow Different Rules
The 10-year rule does not apply to annuities bought with after-tax money. Under the tax code’s annuity rules, a non-spouse heir must either:
- Take everything within five years of the owner’s death, or
- Take payments over their life expectancy, starting within one year of the death
Common Mistakes That Cost Beneficiaries Money
These errors show up repeatedly, and most are completely preventable.
Forgetting to Update Beneficiaries After Life Events
Divorce, remarriage, the death of a named beneficiary, any of these can leave your annuity going to the wrong person. Annuity carriers are legally required to pay whoever is named on the contract, regardless of your current wishes or relationships.
Review beneficiary designations every two to three years, or after any major life event.
Naming a Minor Child as Direct Beneficiary
Minors cannot legally receive large sums of money directly. If a minor is named as beneficiary, a court-appointed guardian must manage the funds until the child reaches adulthood, a costly, time-consuming process. Instead, name a trust as beneficiary, with a trustee who can manage the funds responsibly.
Naming Your Estate as Beneficiary
Some people do this intentionally for estate planning reasons, but most do it by accident (or by default when no beneficiary is named). Passing an annuity through an estate means probate, compressed distribution timelines, and no ability to stretch distributions.
Taking a Lump Sum Without Tax Planning
Beneficiaries who inherit large annuities often take a lump sum because it feels simpler. But a $300,000 lump sum distribution could generate $100,000+ in taxable income in a single year. A quick conversation with a CPA before making the election can save thousands in taxes.
Missing the One-Year Deadline for Lifetime Payments
A non-qualified annuity heir who wants payments over their lifetime must start them within one year of the owner’s death. Miss it, and the five-year rule usually applies instead. Beneficiaries should contact the carrier soon after the death, since each contract sets its own claim forms and default option.
Review your beneficiary designations now so your family knows exactly what happens to an annuity when you die.
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FAQ
Q: Does an annuity go through probate if I have a named beneficiary? No. A properly named beneficiary on an annuity bypasses probate entirely. The death benefit passes directly to the beneficiary once the carrier processes the death claim.
Q: Do beneficiaries pay taxes on an inherited annuity? Yes, on the part that was never taxed. For a non-qualified annuity, the heir owes ordinary income tax on the gain above what the owner paid in. For an IRA annuity, the whole amount is taxable because no tax was paid going in.
Q: What is the 10-year rule for an inherited annuity? Most non-spouse heirs of an IRA or other retirement plan annuity must empty it by the end of the 10th year after the owner’s death. If the owner had already started required minimum distributions, the heir must also take a withdrawal each year. Spouses, minor children, disabled or chronically ill heirs, and heirs not more than 10 years younger are exempt.
Q: Can I name a trust as my annuity beneficiary? Yes, and it’s often a smart move for people with minor children, blended families, or complex estates. The trade-off is that trusts are taxed at compressed rates, so gains may be taxed faster than if an individual inherited directly. Work with an estate attorney to structure this correctly.
Q: What happens to an annuity in a divorce? Annuities are typically considered marital property and may be divided in a divorce settlement. A Qualified Domestic Relations Order (QDRO) is used for qualified annuities; non-qualified annuities require a different transfer process. Some states automatically revoke an ex-spouse’s beneficiary status, but not all do, so update your beneficiary designations right after a divorce.
Q: Can a beneficiary keep the annuity instead of cashing it out? Often, yes. A spouse can usually continue the contract as their own, and a non-spouse heir of a non-qualified annuity can take payments over their life expectancy if they start within one year. Availability varies by carrier and contract, so ask about this option before making any election.
Q: Is the annuity death benefit included in the deceased’s taxable estate? Yes. The full value of the annuity counts toward the gross estate for federal estate tax purposes, even though it passes outside of probate. The federal exemption is $15 million per person in 2026, but state estate taxes can apply at much lower amounts.
Sources & Citations
- IRS: Retirement Topics, Beneficiary
- IRS: Publication 590-B, Distributions from IRAs
- IRS: Internal Revenue Bulletin 2024-33, Final Required Minimum Distribution Regulations (T.D. 10001)
- IRS: Notice 2024-35, Final RMD Rules Apply Starting 2025
- IRS: Retirement Plan and IRA Required Minimum Distributions FAQs
- Cornell LII: 26 U.S. Code § 72(s), Distributions Required on Death of the Holder
- Cornell LII: 26 U.S. Code § 1014(c), Basis of Property Acquired From a Decedent
- IRS: Publication 575, Pension and Annuity Income
- IRS: What’s New, Estate and Gift Tax ($15 million for 2026)
- Investor.gov (SEC): Variable Annuities
The information in this article is for educational purposes only and does not constitute tax or legal advice. Consult a licensed agent, CPA, or estate attorney before making decisions about annuity beneficiary designations or inherited annuity distributions.
