By Brent Matthew
With company pensions largely a thing of the past, many workers have turned to annuities to guarantee they receive a steady income during retirement. You might be among them, but do you know what happens to your annuity once you pass?
An annuity can be a reliable source of income in retirement. However, many people believe that the annuity passes automatically to heirs upon their death. That isn’t always the case, and some annuities may revert to the insurance company.
What happens to your annuity after you pass depends on the type of annuity and the decisions you made to build the contract for it. Talking to a fiduciary financial advisor at Scottsdale Wealth Advisory can help you understand the fate of your annuity when you pass.
Keep reading to learn more about how your annuity may be handled after your death.
What Is an Annuity?
An annuity is a financial contract between you and an insurance company that pays you a guaranteed amount, typically during retirement. Depending on the type of annuity you selected and the terms of your contract, an annuity can end with your death or pay out to beneficiaries you named.
Beneficiaries can:
- Receive a lump sum
- Stretch payouts over their lifetime
- Roll the annuity into an inherited individual retirement account (IRA)
- Disclaim the annuity
The option beneficiaries choose can impact their tax situation. A beneficiary should consider consulting a financial advisor or tax consultant when inheriting an annuity.
Common Payout Options in an Annuity
You can choose the payout options when you purchase your annuity. Your selection when you buy the annuity can impact the death benefit, if any, that your beneficiaries receive. However, you cannot change the option once you begin receiving benefits—a period known as annuitization.
Here are the most common types of annuities and payout options:
Single Life Annuity
You can receive a payout for the remainder of your life, and this type of annuity offers the highest payout. However, the tradeoff is that payments end with your death.
Fixed Period or Period Certain Annuity
Some annuities guarantee a payout for a certain number of years, such as 10 or 20. If you die before the end of the period (say, 10 years into a 20-year annuity), the remaining payouts go to your designated beneficiary or beneficiaries.
Joint and Survivor Annuity
Married couples often choose a joint and survivor annuity, which can help cover both spouses. If one spouse passes away, payments continue to the surviving spouse, with the payouts either remaining at the same level or being reduced.
Refund Option
With a refund provision, your beneficiary can receive an amount equal to the difference between your investment and what has been paid out up to your death.
A financial advisor can help you understand what may happen to your annuity before you start receiving payouts.
Tax Implications of Annuity Payouts
Annuity payouts received by your beneficiary are taxable. Taking a lump sum can result in a substantial tax bill. Beneficiaries can typically spread payouts over their lifetime to lessen the tax burden or roll the proceeds into an inherited IRA for simplicity and tax efficiency. Your beneficiary can also refuse the payout to avoid the taxes altogether.
Talk to a Financial Advisor About Your Annuity
You can purchase an annuity to add to the income you can use in retirement. Whether retirement is still far in the future or fast approaching, consider consulting a financial advisor to help ensure your loved ones are financially taken care of in the event of your passing.
At Scottsdale Wealth Advisory, we can provide strategies to help you accumulate wealth and assist you in understanding how an annuity supports your retirement and your loved ones after you’re gone.
To schedule your complimentary financial coaching session, call (480) 247-9090, email info@SWAFirm.com, or book directly at calendly.com/BrentMatthew. Looking forward to connecting soon!
FAQ
1. What happens if I don’t name a beneficiary on my annuity?
If you don’t name a beneficiary for your annuity, the proceeds typically go to your estate upon your passing. This can result in additional administrative work and potential delays in distribution. It may also result in higher taxes, as your estate would be responsible for paying them. To avoid this, ensure you designate a beneficiary and keep it up to date.
2. Can I change my annuity’s beneficiary after I start receiving payments?
It depends on the terms of your contract. Some annuities allow you to change beneficiaries after you begin receiving payments, while others may not. It’s important to review your contract carefully or consult a financial advisor to determine if and how you can make changes to your beneficiary designations.
3. Will my spouse be affected by my annuity when I pass?
If you have a joint and survivor annuity, your spouse will typically continue receiving payments after your death, though they may be reduced depending on the terms of your contract. If you don’t have a joint annuity, the payments may end upon your death, and your spouse may not receive anything unless you have named them as a beneficiary or chosen another payout option that provides for them.
About Brent
Brent Matthew is the founder and CEO of Scottsdale Wealth Advisory, a full-service fiduciary retirement planning firm serving pre-retirees and retirees across Arizona and multiple states. With a strong commitment to always putting clients first, Brent leads the firm in developing comprehensive, tax-efficient financial plans tailored to each family’s unique goals. He is responsible for researching investment, annuity, and life insurance strategies and building smart asset allocations that reflect both long-term growth and risk management.
Brent is driven by a core belief: “The success of this firm will be measured by the success of the families it represents.” That client-first approach has guided his work since the beginning. He is currently enrolled at the College for Financial Planning and is on track to earn his CERTIFIED FINANCIAL PLANNER® designation. He also holds his Series 65 license and Arizona Life and Health Insurance Producers License.Outside the office, Brent embraces the Arizona outdoors with “lil B” and their two pomskies, Heimo and Kota. Whether he’s hiking, fishing, dirt biking, skiing, golfing, kayaking, or skeet shooting, Brent finds balance and joy in staying active. He’s also a fan of CrossFit, brunching, and cruising the Phoenix canal system on his beach cruiser—usually with classic tunes from the Marshall Tucker Band, Gordon Lightfoot, or Crosby, Stills & Nash playing in the background. To learn more about Brent, connect with him on LinkedIn.
