Smart retirement planning can ensure your money lasts long enough to support both you and your family. Investors often add annuities to their retirement accounts because they can provide guaranteed income for life. 

But choosing annuities that have options for your beneficiaries can be essential for passing along your wealth. Depending on contract terms, payments may continue — or end — when you die. Also, depending on the phase of the annuity, beneficiaries may receive the contract value as a death benefit. 

This article explains how annuity death benefits work and their role in long-term financial planning.

What’s an annuity death benefit?

An annuity death benefit can ensure a payout to your designated annuity beneficiary (or beneficiaries) after your death. Recipients can be your spouse, other family members, and even an organization if you’d like. You have full control of who you name as a beneficiary. 

Depending on the contract type, and what part of the annuity phase the contract is in, the payment can be a lump sum or a continuation of withdrawals. Death benefits aren’t automatic — available options depend on the annuity type and chosen riders.

What’s an annuitant, and why does it matter?

Insurance companies typically use an annuitant’s life expectancy to calculate annuity payouts. In most cases, the annuitant also receives distributions — but not always.

Annuitants differ from owners and beneficiaries in the following ways:

• The annuitant is the individual whose life expectancy can affect the annuity payments' value and duration.
• The owner purchases an annuity contract, sets its structure, and names beneficiaries. They can also make changes during the contract's life.
• The beneficiary is the person (or people) who receive any remaining benefits when the annuitant dies.

The difference matters because the annuitant’s death often triggers the death benefit, even if the owner is someone else.

Types of annuity death benefit options

Insurance companies may offer optional riders that provide a death benefit. These some of the most common types and how they function:

• Standard death benefits typically pay out the annuity’s remaining contract value at the time of the annuitant’s death. The money goes directly to the named beneficiaries, who can usually take it all at once or spread it out in payments over time.
• Return of premium benefits may guarantee the difference between premiums paid into the policy and payments received if the annuitant dies before receiving all payments.
• Stepped-up benefits may offer beneficiaries the account’s highest value during a preset period. This can be especially useful for variable annuities, where the account value can rise and fall with market performance.
• Guaranteed increase benefits grow the original investment by a set percentage each year. When the annuitant passes away, the beneficiary can receive either the current account value or the boosted amount — whichever is greater.

Tax considerations for annuity death benefits

Annuities typically grow tax-deferred, meaning you don’t pay taxes on earnings until you withdraw money. When beneficiaries inherit an annuity, their tax implications can differ depending on how you invested:

• Non-qualified annuities are funded with after-tax money, so beneficiaries may only pay taxes on gains, not principal.
• Qualified annuities are funded with pre-tax dollars, so your annuity beneficiary typically pays income taxes on the entire payout.

What happens to an annuity when you die?

Annuity contract types and riders affect whether payments end at death or a beneficiary receives some benefit. Here’s how different annuity types typically handle death.

Single life and period certain annuities

Beneficiaries may not receive any refunds from these types of accounts — here’s the difference between them:

• Single life annuities: These types of annuities stop all payments upon the death of the annuitant, regardless of how long they received income. No additional money goes to a beneficiary or another annuitant, even if the total payments were less than the original investment or premium contributed.
• Period certain annuities: These investments make payments for a preset period, regardless of whether the annuitant is still alive. If payments remain when the annuitant dies, beneficiaries can receive the remaining payments.
• Life with period certain: These contracts blend the two previous annuity types. Insurers can guarantee payments for a specific timeframe, like 20 years. If the annuitant dies after 10 years, beneficiaries will keep receiving payments for 10 more. But if the annuitant doesn’t die, they’ll get distributions for the rest of their life.

Deferred annuities (pre-annuitization)

If you pass away before the annuity has started making payments, most contracts will pay out the current account value to your named beneficiary. Depending on the insurer's rules and tax considerations, the beneficiary can usually take a lump sum payment, receive funds in installments, or roll them into another investment.

Annuities with refund

With a refund provision, if the annuitant dies before receiving payments equal to the original investment or premiums paid into the contract, the remaining balance can go to the beneficiary or beneficiaries.

Long-term financial security for you and your family with Gainbridge

Annuities can provide financial security during your lifetime and peace of mind for your loved ones after you're gone. If you're ready to take control of your financial future, explore Gainbridge’s annuity options. We never charge hidden fees or commissions, so more of your savings can go to you and your family.

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‍This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.