What happens to an annuity after the death of the owner largely depends on the type of annuity plan. The owner, or annuitant, elects the annuity type and any beneficiaries at inception, though beneficiaries may be changed by the annuitant prior to death. There are several types of annuity payout plans. For some, payment ends with the death of the annuitant, but others provide for payment to a spouse or other beneficiary for years afterward.
The fixed-period, or period-certain, annuity guarantees payments to the annuitant for a predetermined length of time. Some common options are 10, 15 or 20 years. In a fixed-amount annuity, the annuitant elects an amount to be paid each month until death or benefits are exhausted. If the annuitant dies before the defined benefit is paid, some plans provide for the remaining benefits to be paid to a beneficiary. This feature is activated if either the full period has not yet elapsed or a balance remains on the account at the time of death, depending on the plan. However, if the annuitant outlives the fixed period or exhausts the account before death, no further payments are guaranteed. If the plan provides for the continuation of benefits, payments continue to be paid to the beneficiary until the predetermined period elapses or the balance reaches zero.
A common annuity option is the life annuity, which guarantees payments for as long as the annuitant lives. Payments are based on a number of factors including age, predicted life expectancy and account balance. The longer you are expected to live, the smaller your monthly payments. However, if you outlive the expected number of years, you are still guaranteed payments, so it is possible to collect more than your initial balance. Upon death, all payments stop. However, another option is to have a joint life annuity that guarantees payment for both your lifetime and that of your beneficiary. Upon your death, your spouse or other beneficiary continues to receive payments until his or her death. Payments to beneficiaries can be the full amount payable to the annuitant during his or her lifetime or a reduced amount, depending on the elections made by the annuitant at inception.
The life-with-period-certain annuity is a combination of the fixed-period and lifetime annuities. With this type of plan, the annuitant is guaranteed payment for life but can also elect a fixed period of guaranteed payment. For example, a life-plus-period-certain annuity with an elected period of 10 years pays the annuitant for life. However, should he or she die within the first 10 years of collection, payments are guaranteed to the beneficiary for the remainder of this period. This type of plan provides an amount of certainty for survivors but removes the risk of you potentially outliving your own benefits.
If your annuity is still in the accumulation phase at the time of your death, meaning you have not yet begun collecting payments, many plans provide a death benefit to your beneficiary. Typically, this lump-sum payment is the greater of your account balance or the total of all premiums paid, though some plans provide additional options.
The Advisor Insight
Dan Stewart, CFA®
Revere Asset Management, Dallas, TX
Annuities have two different stages: accumulation and distribution. During accumulation, you place money into the annuity contract with the intent of growing it over time. If you die during this time, the accumulated wealth will go to your designated beneficiaries if no trust is involved to dictate how the money should be allotted.
The distribution phase occurs when you wish to take out cash flows from the annuity while alive, meaning you have annuitized the assets in return for an income stream. This is an irrevocable decision. The two most common are income for life or joint income for life. This means that when the person dies, or the last one dies on a joint income for life, all income stops and the contract expires.