Annuity death benefits, in plain English

Before choosing a payout, identify the contract holder or owner, annuitant, and beneficiary. For a nonqualified annuity, IRC § 72(s) generally keys the statutory after-death distribution rules to the death of a holder. If the holder is not an individual, the primary annuitant is treated as the holder, and a change in the primary annuitant is treated as the holder’s death. The contract may separately define when an annuitant’s death triggers a death benefit, so both the statutory event and the contract event must be checked.

For a nonqualified annuity subject to IRC § 72(s), if a holder dies after the annuity starting date, the remaining payments must continue at least as rapidly as under the distribution method in effect at death. If a holder dies before the annuity starting date, the remaining interest generally must be distributed within five years, subject to the designated-individual and surviving-spouse rules in § 72(s)(2)-(4). An annuity held inside an IRA or employer retirement plan is governed principally by IRC § 401(a)(9) and the qualified-account rules instead.

The answer is contract-specific. A deferred annuity commonly promises a standard death benefit based on a contract value or another defined measure. Some contracts add a return-of-premium floor or an enhanced death-benefit rider. Rider values are not necessarily cash values available during life, and fees or restrictions may apply.

• Standard death benefit: the base formula written into the contract.
• Return-of-premium feature: a formula that may protect specified premium, adjusted by the contract terms.
• Enhanced rider: an optional formula that may increase the beneficiary amount under stated conditions.

For an annuity already paying income, the result depends on the elected payout: life-only payments may stop at death, while a period-certain or joint-and-survivor election may continue payments. Read the settlement endorsement, not just an account-value statement.

A valid primary beneficiary generally receives the benefit. A contingent beneficiary may receive it if no primary beneficiary can. If no beneficiary survives or the designation fails, the contract's default provision may direct payment to the owner's estate or another default recipient.

Spouses can have options that other beneficiaries do not. When the surviving spouse of a nonqualified annuity holder is the individual designated beneficiary, IRC § 72(s)(3) applies the after-death rules by treating the spouse as the holder. Non-spouse beneficiaries face different distribution rules. A trust or estate named as beneficiary is not itself an individual surviving spouse for this rule, and trust and estate beneficiaries require extra care because the named recipient and account type can affect timing and tax treatment.

Depending on the contract and tax rules, the menu may include a lump sum, payments over a fixed period, life-contingent payments, or spousal continuation. A qualified annuity inside an IRA or plan also has post-death required-distribution rules; the contract cannot be read in isolation.

Start with the insurer's written election form. Compare timing, access to cash, remaining guarantees, and the taxable amount of each payment before signing an irrevocable election.

1. Notify the insurer or servicing administrator.
2. Request the current claim packet and every available settlement option.
3. Provide the certified death certificate and required identity or tax forms.
4. Confirm ownership, beneficiaries, account type, cost basis, contract value, and any rider value in writing.
5. Check tax and required-distribution deadlines before electing a payout.
6. Keep the claim confirmation, tax forms, and the contract's calculation of taxable and nontaxable amounts.

Rev. Rul. 2005-30 addresses a deferred annuity owner-annuitant who dies before the annuity starting date. In that setting, the death benefit above the owner-annuitant’s investment in the contract is income in respect of a decedent whether paid as a lump sum or as qualifying periodic payments and does not receive an IRC § 1014 basis adjustment. Payments continuing after the annuity starting date, including joint-and-survivor payments, require separate analysis under IRC §§ 72 and 691. By its terms, Rev. Rul. 2005-30 applies to deferred annuity contracts purchased on or after October 21, 1979; contracts purchased before that date remain subject to the prior rulings, under which the death benefit could receive a basis adjustment.

• The headline rider value may not equal the cash surrender value.
• A life-only income election can leave no continuing benefit.
• Income tax and estate or inheritance tax are separate questions. IRS Publication 575 explains federal survivor and beneficiary income-tax treatment.
• A beneficiary usually does not receive a basis step-up on a deferred annuity’s untaxed gain where the owner-annuitant died before the annuity starting date; see the section above for the facts Rev. Rul. 2005-30 addresses and its October 21, 1979 contract limitation.
• Deadlines can differ for qualified and nonqualified contracts.
• An outdated beneficiary form can defeat what a will appears to say.

• Spousal continuation, lump sum, and stretch options
• Non-spouse beneficiaries and the 10-year rule
• Taxation of inherited annuities
• Annuities owned by or payable to trusts
• State estate and inheritance tax impact