What happens to my annuity after I die?
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.
Annuity Payout Plans
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.
Ultimately this depends on what type of annuity you have and if you have already "annuitized" it.
If you are still in the accumulation phase of life, or are just taking withdrawals from the policy as you need them your beneficiary would receive the proceeds from the policy.
If on the other hand you have "annuitized" the policy.(turned it into a guaranteed income streem for the rest of your life) if you pass away the payments will normally stop and that is the end of it.
There are exceptions to these two scenarios if your policy has additional death benefits or other living benefits. OR if when you annuitized you selected a joint life payment, or some period certain.
For more specific info sit down with a Fee Only Fiduciary Financial Planner to review you annuity and it specific options.
Live for Today, Plan for Tomorrow.
DAVID RAE, CFP®, AIF® is a Los Angeles-based fiduciary financial planner with DRM Wealth Management, a regular contributor to Advocate Magazine, Huffington Post Queer Voices, Investopedia not to mention numerous TV appearances. He helps smart people across the USA get on track for their financial goals. For more information visit his website at www.davidraefp.com or the Fiduciary Financial Planner LA Blog
That is a more complicated question than you might think due to the fact that there are many variables, annuities have two different stages; the Accumulation Phase & the Distribution Phase. During the Accumulation, you place money into the annuity contract whether Lump Sum, Monthly Installments, or some combination thereof with the intent of having it "grow." During this phase, the value of the annuity would go to your designated Beneficiaries you placed on the Annuity Contract in the event of your death. If you die during the surrender penalty period, if any, those are almost always waived due to death. The Beneficiaries could then determine what to do with the assets/monies if no Trust is involved dictating how the monies would be used and/or distributed.
The Distribution Phase occurs once you are ready to use or spend the money. You can either take out monies, pay any applicable tax, and use however you wish and the assets would go according to your will. If, however, you decide to take some type of "income" (usually "lifetime income"), this is known as the Distribution Phase and means you have annuitized the assets in return for an income stream. You have given up the assets for "income." This is an irrevocable decision and you have traded the lump sum of assets for an income for some defined period.
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 is over. These annuitized income streams can be set up based on a number of different fashions or scenarios though. Some people prefer to have an Income for Life, but a Minimum Sum Certain. This means you or your heirs would receive an income for a sum certain of years, say 10, or you over your lifetime if longer. You would take less monthly income than a straight Income for Life, but if you got hit by a bus a month after annuitization, the income doesn't simply cease. Your beneficiary(s) would receive payments over the remainder of 10 years.
So once you annuitize it, you have given up all the assets or monies in the policy for some type of guaranteed income stream over a lifetime and/or a certain period. If it was an Income for Life, you have 'given away" the assets in return for income and when you die, any and all benefits, assets, or income cease. Your beneficiaries would receive nothing.
I hope this is clearer than mud. I tried to speak in plain English and not insurance jargon. One last comment for the sake of accuracy, insurance companies love to use the term "income" for life or term because it sounds good/appealing. Really, only a portion of the cash flow is really "income" would be taxable, the rest is simply a return of your own money over time. Thus the growth or appreciation would be taxable while your original principal or deposits/investment into the annuity are not. Hope this helps and good luck.
To begin, annuities can be very complex with several different types of annuities available and each of those generally having a number of subgroups. To really assess what will happen to a specific annuity after death (or even to understand its features prior obtaining one), a qualified, fiduciary financial advisor should be consulted.
(The following is not individual advice nor an exhaustive list of annuities and their features but rather an oversimplification for the sake of education.)
Let's split annuities into two parts: Immediate and Deferred. (These terms refer to when the annuity starts paying you money).
Immediate: One of the most common Immediate annuities is a Single Premium Immediate Annuity. These allow you to exchange a lump sum for a guaranteed payment for certain period such as 5, 10, or 20 years, or a lifetime (the lifetime option can be on joint lives as well meaning that the last person to die of the two original people named keeps getting the same monthly check). People with a very low risk tolerance or who have a very long life expectancy often find these appealing. What is sometimes misunderstood however is that once elected, the lump sum is no longer your asset, but rather the insurance company's asset. In other words, you don't own your money anymore. You traded it for a paycheck. This makes these less desirable for people with shorter life expectancies and those desiring to leave money to heirs. Another drawback that is often understated is the fact that only a small part of the money coming in is investment income- the vast majority of it is just your money coming back to you.
Hypothetical Immediate Annuity: Pay $100,000 to ABC insurance company. They now own the $100,000. In turn, they send you $500 a month for the rest of your life. But until you've received checks for 16.6 years, you've made no money but just been receiving the original $100,000 in payments. Often these do have return of premium riders or other potential benefits you can add, but each rider usually decreases the monthly payout thus stretching out how long it takes to get your own money back to you. For most immediate annuities, when you die your estate gets nothing and payments cease (unless you were still within the guaranteed period i.e. 10 year certain and you die at year 8 then the estate would pick up payments for the next 2 years until the 10 years are complete).
Deferred: These annuities are often similar to traditional investments in that you are not generally giving the money to the insurance company but rather letting them invest it for you. In return, you can be guaranteed returns at a fixed rate, guaranteed a rate within a specified range, or given a varying rate based upon market performance. These can be cashed out when you're done with them or can be annuitized which means you switch the money into payment mode. Unlike the the majority of immediate annuities, in payment mode on most deferred annuities you are still owner of the money but the amount you "own" is decreased by each payment of your money you receive. It is possible however to add a lifetime income rider to these so that the annuity cannot stop payments to you while alive even if the account value reaches $0 but these are almost always subject to an additional cost. Hypothetical Example of Deferred Annuity: Put $100,000 into annuity, wait 10 years to draw. At that point you can take out $135,000 lump sum (with taxes due on all growth if bank money (N/A if IRA money)), start paychecks of desired amount every month until money is gone, or if the rider was elected for lifetime income $500 a month for the rest of your life. The disadvantage of these is that they generally have surrender periods which means even though the company does not own your money, they have a right to use it for a specified period (7, 10, 15 years are most common). If you decide you want it back in that specified period or if a financial need comes up that requires withdrawals above the allowed percentage (often 10%), then you can pay penalties in excess of 12%! This means that in the $100,000 example above, you could lose up to $12,000 to the insurance company if you decide to stop the investment during the surrender period. Ouch!!
At the annuity owners death, any remaining money in the actual account goes to named beneficiaries. (It should be noted that if you elect the lifetime income option on these types of annuities, they will often have two amounts listed on your statements: one is the actual money in the account and the other is how much they are basing your monthly payment on. The first is liquid; cash in your pocket money. The second is really just a theoretical number for calculating your payment and does not pass to beneficiaries as a lump sum (usually).).
When my father passed away a few years ago, my mother took some of her savings and investments and bought several single-premium deferred annuities. She was looking for strong guarantees, so she could count on a fixed income when she needed it. She also wanted some liquidity for health emergencies.
In addition, she wanted to be able to pass on something to her children and grandchildren. Of course, she needed to take care of herself first, but after that the money would be for her kids.
Eventually, she needed to start taking distributions from some of them to cover growing health-related expenses. When she passed away last year, the annuitized payments went to her beneficiaries. Those products that had not been annuitized paid out a lump sum.
The whole plan worked well, thanks to the guidance of an expert in annuities who knew how to pick the right ones, and structure them to meet all her needs.
What happens to your annuity after you die depends on the type of annuity it is. If it's a typical whole life annuity, the payments stop when you die. If it's an annuity certain, the payments are made for a definite period of time, regardless of how long you live. That period of time will be specified in your annuity contract. If it's a joint life annuity, payments continue as long as the two or more persons named in the contract live. You need to read the terms of your annuity to learn which of these kinds of annuities yours is. That will give you the answer.