Most annuities include a death benefit, but what it pays depends on the type you own and when you die

Yes, nearly all annuities sold today come with a death benefit. The amount your beneficiary receives is not the same across all annuities, though. It depends on whether you bought a fixed annuity, variable annuity, or indexed annuity; whether you have already started taking payments; and how long you owned the contract before you died.

The death benefit is the amount your named beneficiary gets when you pass away. For many annuities, this is at least the amount you paid in — even if the account value has dropped. For others, it could be more or less than what you contributed, depending on market performance or how many payments you had already received.

Key Takeaways

  • Most annuities may provide your beneficiary will receive at least what you paid in, even if the account value fell below that amount.
  • The death benefit stops once you begin receiving lifetime income payments, unless you chose a payout option that continues to a beneficiary.
  • Variable and indexed annuities may offer enhanced death benefits that pay more than your contribution, but these usually cost extra.
  • Your beneficiary receives the death benefit outside of probate in most cases, which can mean faster access to the money.
  • The death benefit amount is set by the annuity contract, so you should review your paperwork to know what your beneficiary will receive.

What happens to the death benefit once you start receiving payments

The death benefit changes or disappears once you begin taking income from the annuity. If you chose a life-only payout — meaning payments stop when you die — your beneficiary receives nothing beyond the last payment you were due. The insurance company keeps the remaining balance.

If you selected a payout option that includes a beneficiary, such as life with period certain or joint and survivor, the death benefit transforms into a continuation of payments. With period certain, if you die before the may provide period ends, your beneficiary receives the remaining payments. With joint and survivor, your spouse or named beneficiary continues to receive a reduced payment for life.

Once you have started receiving any lifetime income, the original death benefit — the lump sum your beneficiary would have received if you died before payments began — is no longer in effect. You cannot have both the full death benefit and lifetime payments.

How death benefits differ between fixed, variable, and indexed annuities

Fixed annuities typically may provide a death benefit equal to the greater of what you paid in or the current account value. This is straightforward: if you contributed $100,000 and the account is worth $95,000 when you die, your beneficiary gets $100,000. If the account grew to $120,000, they receive $120,000.

Variable annuities often offer a basic death benefit of the amount you invested, but the account value may be higher or lower depending on how the underlying investments performed. Some variable annuities include an enhanced death benefit rider that guarantees a higher payout — for example, the highest account value reached on any contract anniversary, or a percentage increase each year. These riders cost extra in annual fees.

Indexed annuities work similarly to fixed annuities for the death benefit. You are may provide at least your contribution, and if the index-linked account grew, your beneficiary receives that higher amount. The death benefit does not include any gains that were not credited to your account.

When the death benefit is reduced or eliminated

Some annuities reduce the death benefit over time if you do not make withdrawals. A few contracts include a surrender charge period — typically 5 to 10 years — during which withdrawing money costs a penalty. If you die during this period, the death benefit may be reduced by the surrender charge amount, though many insurers waive this for death.

If you have already withdrawn money from the annuity, the death benefit is reduced by the amount you took out. For example, if you paid $100,000 and withdrew $20,000, the death benefit is now $80,000 (assuming the account value did not grow). Some annuities also reduce the death benefit if you take withdrawals beyond a certain percentage each year.

Annuities with living benefit riders — which may provide you can withdraw a certain amount annually without penalty — may reduce the death benefit if you use that rider. The contract will specify how the death benefit changes based on your withdrawals.

How your beneficiary receives the death benefit

Your beneficiary does not have to go through probate to receive the death benefit. Because the annuity names a beneficiary directly, the insurance company pays them outside the probate process. This usually means faster access to the money — often within 30 to 60 days of providing a death certificate and proof of identity.

The beneficiary can typically choose to receive the death benefit as a lump sum or, in some cases, as a series of payments over time. Some annuity contracts allow the beneficiary to continue the annuity as an inherited contract, which delays taxes but locks them into the original terms. Others require the beneficiary to take the money within a set timeframe.

Your beneficiary should contact the insurance company directly with a death certificate. The company will explain the options available under your specific contract and handle the paperwork. Keep your annuity contract documents in a place where your beneficiary can find them — the contract number and insurance company name are what they will need to start the process.

Tax treatment of death benefits for your beneficiary

How your beneficiary is taxed on the death benefit depends on whether the annuity was funded with pre-tax or after-tax money. If you contributed to the annuity with pre-tax dollars — such as a rollover from a 401(k) — the entire death benefit is taxable income to your beneficiary in the year they receive it.

If you funded the annuity with after-tax money, only the earnings portion of the death benefit is taxable. The amount you originally contributed returns to your beneficiary tax-free. Your annuity statement should show how much of your account is earnings versus your original contribution (called the cost basis).

If your beneficiary chooses to take the death benefit as payments over time rather than a lump sum, the tax is spread across those years. This can result in a lower tax bill than taking everything at once, depending on your beneficiary's income level.

What to do if you cannot find your annuity contract

If you own an annuity but do not have the contract, contact the insurance company directly. You will need your policy number, which appears on any statements or correspondence you received. If you do not have that, provide your name, date of birth, and Social Security number — the company can look up your account.

If you are the beneficiary of someone else's annuity and cannot locate the contract, ask family members or check the deceased person's financial records, tax returns, or statements. You can also contact the National Association of Insurance Commissioners (NAIC), which maintains a database of unclaimed annuities and life insurance policies. Some states also have unclaimed property programs that may have records of forgotten annuities.

Frequently Asked Questions

Can I change my beneficiary after I buy the annuity?

Yes. Contact your insurance company and request a beneficiary change form. You can change your beneficiary at any time before you die, and the change takes effect once the company processes it. Some companies allow you to make changes online; others require a signed form. There is no cost to change your beneficiary.

What if I name multiple beneficiaries?

The death benefit is divided among them according to the percentages you specify on the beneficiary form. If you name three beneficiaries at 33% each and you die, each receives one-third of the death benefit. If one beneficiary dies before you, their share typically goes to the remaining beneficiaries unless you named a contingent beneficiary to replace them.

Is the death benefit the same as the surrender value?

No. The surrender value is what you can withdraw if you cancel the annuity while you are alive — and it may be less than what you paid in if you are still in the surrender charge period. The death benefit is what your beneficiary receives if you die, and it is usually at least your contribution. These are separate amounts.

Do I have to name a beneficiary?

Yes, you must name at least one beneficiary when you buy the annuity. If you do not name anyone, the death benefit goes to your estate, which means it enters probate and may take longer for your heirs to receive it. Naming a specific person or people keeps the money out of probate.

What happens to the death benefit if the insurance company fails?

Each state has a guaranty fund that protects annuity death benefits if an insurance company becomes insolvent. The amount of protection varies by state, but it is typically at least $250,000 per person per company. If you are concerned about a company's financial stability, you can check its rating with agencies like A.M. Best or Moody's.