What happens to an annuity after the death of the owner depends on the type of annuity and its payout plan. There are several types of annuity payout plans. With some annuities, payments end with the death of the annuity's owner, called the annuitant, while others provide for the payments to be made to a spouse or other beneficiary for years afterward.
The purchaser of the annuity makes the decisions on these options at the time the contract is drawn up. The options the annuitant chooses affect the amount of the payout.
- What happens to the money in an annuity after the owner dies depends on the type of annuity and its specific provisions.
- Some annuities stop payments when the owner dies, while others continue to pay out to a spouse or other beneficiary.
- The annuitant decides on the provisions at the time the contract is drawn.
Types of Annuities and Payout Plans
Whether an annuity is a fixed-period annuity, a life annuity, or some variation will determine what happens when its owner dies. These are the two main options, along with a hybrid type that combines some of the features of both.
A fixed-period, or period-certain, annuity guarantees payments to the annuitant for a set length of time. Some common options are 10, 15, or 20 years. (In a fixed-amount annuity, by contrast, the annuitant elects an amount to be paid each month for life or until the benefits are exhausted.)
If the annuitant dies before payments begin, some plans provide for the remaining benefits to be paid to a beneficiary designated by the annuitant. This feature applies if 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 unless the plan provides for the continuation of benefits. In that case, payments will continue to be paid to the beneficiary until the predetermined period elapses or the account's balance reaches zero.
Another common type of annuity is the life annuity, which guarantees payments for as long as the annuitant lives. Payments are based on a number of factors including the annuitant's age, prevailing interest rates, and the account balance.
The longer the annuitant is expected to live, the smaller the monthly payments. But the payments are guaranteed no matter how long the annuitant lives.
However, if the annuity is still in the accumulation phase at the time of the annuitant's death, meaning that the payments have not begun, many plans provide a death benefit to the beneficiary. Typically, this lump-sum payment is the greater of the account balance or the total of all premiums paid, although some plans provide additional options.
If the annuity is structured as a joint life annuity, it guarantees payments for both the lifetime of the annuitant and that person's spouse. Upon one spouse's death, the survivor will continue to receive payments for life.
Those payments, or joint life payouts, can be the same amount the annuitant received during their lifetime or a reduced amount, depending on the choices the annuitant made at the contract's inception.
If both spouses die early, some annuities provide for a third beneficiary to receive payments.
A joint life annuity provides life-long income for both the annuitant and the surviving spouse.
Life With Period Certain Annuity
Still another variation, the life with period-certain annuity, or period certain plus life annuity, combines the features of fixed-period and life annuities. With this type of plan, the annuitant is guaranteed payment for life but can also choose 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. But if that person dies within the first 10 years of collecting benefits, the contract guarantees payments to the person's beneficiary for the remainder of the period.
This type of plan provides annuitants with the assurance of income for life, plus a guarantee that their heirs won't lose out entirely if they die too soon.
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.