Most annuities pay a beneficiary if death happens before income begins, but some payout choices can leave no money for heirs.
Annuities mix investing with insurance contract rules. That mix is why the answer isn’t one-size-fits-all. Two details usually decide it: whether you’re still building value or already taking payments, and the payout option you picked.
How Annuities Treat Death Before Income Starts
Many deferred annuities include a basic death benefit during the saving phase. The National Association of Insurance Commissioners says that if death occurs during the accumulation period, the contract can pay some or all of the annuity’s value to beneficiaries, either as one payment or multiple payments. NAIC buyer’s guide on basic death benefits is a solid baseline for how insurers describe this.
Most basic designs pay the contract’s current value, sometimes with a stated minimum. The wording that matters sits in the policy pages, not the brochure.
- Withdrawals often reduce the benefit: Money taken out can lower what remains at death.
- Fees keep running: Ongoing charges can shrink contract value over time.
When Death Benefits Shrink Or Disappear During Payouts
Once you turn an annuity into income payments, the payout option drives what heirs get. A life-only payout can stop at death with nothing left, because the income was priced to last for your life and only your life.
If leaving money behind matters, you usually want a payout option that keeps payments going for a set period, keeps payments going for two lives, or includes a refund feature. Those choices often lower the monthly payment, since you are buying more guarantees.
Payout Options That Often Leave Something For Heirs
- Period certain: Income is guaranteed for a set number of years. If you die early, remaining payments go to the beneficiary.
- Joint and survivor: Payments continue while either spouse is alive, often at a stated percentage for the survivor.
- Refund options: Some immediate annuities offer cash refund or installment refund features.
Payout Options That Can End With No Benefit
- Life only: Payments stop at death.
Common Death Benefit Designs By Annuity Type
“Annuity” covers several products. Death benefit rules vary across fixed, indexed, and variable contracts, and vary again once riders enter the picture. Use the patterns below as a map, then match them to your contract language.
Fixed deferred annuities
Fixed deferred annuities commonly pay a basic death benefit tied to the contract value during accumulation. The NAIC guide describes this as a standard feature for many deferred contracts.
Indexed annuities
Fixed indexed annuities are still fixed insurance contracts. The death benefit often tracks contract value shaped by the crediting method and contract charges. It is usually not a separate “extra payout.”
Variable annuities
The SEC explains that a common feature of variable annuities is a death benefit paid to a beneficiary, often the greater of the account value or a guaranteed minimum such as purchase payments minus withdrawals. SEC guidance on variable annuity death benefits also notes stepped-up designs that can reset the guaranteed amount under stated rules.
What A Beneficiary Actually Receives
Beneficiaries usually file a claim with the insurer and provide proof of death and identity checks. Then they select a payout method allowed by the contract and by tax rules for the account type.
- Lump sum: One payout of the death benefit value.
- Installments: Payments spread across a set time window.
Annuity Death Benefit Rules That Change The Answer
Two contracts can use the same product label and still pay out differently because the contract roles and triggers are not always the same.
Owner versus annuitant
The owner controls the contract and names beneficiaries. The annuitant is the life used to price income payments. Some contracts trigger a death benefit when the owner dies. Some trigger when the annuitant dies. If those are two different people, read the policy definition of “death” for the contract.
Primary and contingent beneficiaries
A primary beneficiary is first in line. A contingent beneficiary steps in if the primary beneficiary dies first or cannot be located. If you leave the contingent field blank, the insurer may pay the benefit to your estate, which can add court paperwork and delays.
Per stirpes versus per capita wording
Some beneficiary forms let you pick how shares pass down a family line. “Per stirpes” commonly keeps a deceased beneficiary’s share in that branch of the family. “Per capita” commonly re-splits shares among living beneficiaries. If the form offers those options, choose the one that matches your intent and keep a copy with your estate papers.
Table: Death Benefit Outcomes By Contract Stage And Choice
| Situation | What Heirs Commonly Get | What To Check In The Contract |
|---|---|---|
| Deferred annuity, saving phase | Contract value or stated minimum | Death benefit definition; rider charges |
| Deferred annuity with withdrawals taken | Reduced value | Withdrawal reduction rules |
| Variable annuity with minimum guarantee | Greater of account value or stated minimum | Minimum method; withdrawal impact rules |
| Variable annuity with step-up design | Guaranteed amount tied to step-up dates | Step-up schedule; rider cost |
| Immediate annuity, life only | Often nothing after death | Any refund feature? |
| Immediate annuity, period certain | Remaining guaranteed payments | Length of period |
| Joint and survivor payout | Income continues for surviving spouse | Survivor percentage |
| Annuitized contract with refund option | Refund or remaining payments | Cash refund vs installment refund wording |
Fees And Contract Features That Shape The Death Benefit
Fees and contract mechanics can change what heirs receive, even when two annuities look similar at a glance.
Surrender charges
Some annuities charge a surrender fee if the contract is cashed out early. Many contracts waive that fee at death, but not all. Read the death benefit section and the surrender schedule together.
Market value adjustments in fixed contracts
Some fixed deferred annuities use a market value adjustment (MVA) during the surrender period. The MVA can raise or lower the payout based on rate moves. Some contracts waive it at death, some do not.
Riders that change the death benefit
A rider can add a guarantee, like a step-up feature on a variable annuity or a return-of-payments design on some fixed products. Riders cost money each year, so the trade-off is guarantee versus ongoing drag.
Taxes: What Heirs May Owe On Annuity Death Proceeds
A death benefit can carry income tax. Money can pass outside probate and still be taxable.
Investor.gov notes that variable annuities are tax-deferred until you make a withdrawal, receive income payments, or a death benefit is paid. Investor.gov’s tax timing summary states that timing clearly.
For many nonqualified annuities (bought with after-tax dollars outside a retirement plan), the taxable piece is often the gain in the contract, not the return of your own payments. For qualified annuities inside IRAs or employer plans, distributions are often taxable as ordinary income, shaped by plan rules and any after-tax basis. The IRS covers pension and annuity distribution reporting rules in IRS Publication 575.
Tax moves beneficiaries can think about
- Lump sum versus spread: Spreading payments can smooth taxable income across years.
- Account type: Retirement plan annuities can have stricter distribution timing rules.
- State taxes: State income tax rules can change the net result.
What The Claim Process Looks Like
Most insurers have a beneficiary claim packet. It usually asks for a certified death certificate, beneficiary identification, and the choice of payout method allowed by the contract. If there are multiple beneficiaries, each one often submits their own forms.
Delays usually come from missing tax forms, unclear beneficiary splits, or mismatched names. A quick fix is to keep beneficiary names consistent with legal ID and to store the insurer’s contact details where your executor can find them.
Spouse options on retirement-plan annuities
When an annuity sits inside a workplace plan, the plan can require spousal consent for certain beneficiary choices, and the default payout can be a joint-life style benefit. That is one reason to check plan paperwork along with the annuity contract, since the plan can set rules that sit on top of the insurer’s contract terms.
How To Check Your Own Contract Fast
- Confirm the stage: Accumulation or income payments?
- Find the death benefit definition: Look for a section titled “Death Benefit” or “Beneficiary.”
- List reductions: Withdrawals, rider charges, surrender charges, MVA.
- Confirm the payout option: Life only, period certain, joint and survivor, refund.
- Verify beneficiaries: Names, percentages, and contingents.
Table: Quick Checklist For Leaving Money To Heirs
| Question To Ask | Where To Look | What It Tells You |
|---|---|---|
| Is there a basic death benefit during accumulation? | Death benefit section | Heirs can receive value if death occurs before annuitization |
| Does the contract waive surrender charges at death? | Surrender schedule; death benefit clause | Less leakage if beneficiaries cash out |
| Was a life-only payout selected? | Payout election | Payments may stop at death with no remainder |
| Is a period certain, joint payout, or refund feature selected? | Payout election | Some payments can continue to beneficiaries after death |
| Is the annuity inside a retirement plan? | Statements; plan type | Distribution timing can be shaped by plan and IRS rules |
| Are beneficiaries current and complete? | Beneficiary form | Reduces delays and disputes |
Answering The Core Question In Plain Terms
Many annuities do pay a death benefit when the owner dies before income starts. Once income starts, the payout option drives the result. If you want heirs to receive money, choose an option that leaves value behind and confirm the policy wording that sets the benefit and reductions. If you want the highest lifetime income and do not need a benefit for heirs, a life-only payout can do that.
References & Sources
- National Association of Insurance Commissioners (NAIC).“Buyer’s Guide to Fixed Deferred Annuities.”Defines basic death benefits during the accumulation period and outlines common payout methods for beneficiaries.
- U.S. Securities and Exchange Commission (SEC).“Variable Annuities: What You Should Know.”Describes common variable annuity death benefit designs, including minimum guarantees and stepped-up features.
- Investor.gov (U.S. SEC).“Variable Annuities.”Explains tax deferral timing and notes that tax can apply when a death benefit is paid.
- Internal Revenue Service (IRS).“Publication 575: Pension and Annuity Income.”Provides federal tax reporting rules for pension and annuity distributions that can apply to beneficiaries.