Annuities are a unique financial vehicle that can serve beneficial to many individuals attempting to provide secure retirements and money that can be streamed as income for life.
What’s often overlooked with annuities when structured as an investment vehicle is the aftermath and what takes place with remaining funds if the annuity holder was to pass away prematurely.
It often leads to a specific question.
What happens to an annuity when you die?
Here is what you need to understand about this topic.
When you die, several different scenarios are in play when you have money invested in annuities. It depends if your annuities are designed to pay until your death and then discontinue when you do pass away, and it depends if you have named a beneficiary for your annuity in the event of your passing.
Different annuities have different payout options and provide income in different manners based on how you have them structured and based on what you chose with your financial professional at the time of structuring the original contract.
In this brief post, we will cover how this works and what death benefit options an annuity can provide.
For quick reference and navigation, you can use the links below to skip to any specific section of this post:
- Understanding Annuity Beneficiaries
- Different Kinds of Annuities
- The Different Forms of Withdrawal Options
- Additional Considerations
- Final Thoughts
Understanding Annuities and Beneficiaries
Annuities are designed to help individuals financially prepare against 1 thing.
The uncertainty and unpredictability of life.
Opposed to playing the stock market or having a portfolio filled with other high-risk investments, annuities are designed to provide certainty and payments that can be calculated for the duration an individual is likely to need that income.
Annuities are also offered in different forms.
Different Kinds of Annuities
To fully understand the outcomes and what happens to an annuity when you pass away, it’s essential to first understand the different variations of common annuities often selected by consumers when the original annuity contract is purchased.
Joint Annuities- Joint annuities can be offered in two forms.
A joint life annuity will only provide benefits until the first of two individuals pass away.
A Joint and Last Survivor Annuity will continue to pay benefits until both annuitants named in the contract have passed away. (This is known as the costliest form of annuity available)
Deferred Annuities- Deferred Annuities use an accumulation period to build cash value and distribute the said cash funds at a specified later date in time.
Refund Annuities- Refund annuities refer to a provision insurance companies have placed on annuities to ensure that payments will still be provided even if an annuitant passes away prematurely.
This takes the risk out of individuals being scared that they may never receive any benefits with an annuity or provide any financial security for their family.
This is also why it’s imperative to ensure you have a beneficiary named in your contract for the funds to pass down to if this event does occur.
Immediate Annuities- Immediate annuities take a lump sum of cash and begin distributing monthly or even yearly payments to the annuitant right away.
These are often used in situations such as winning the lottery or to help safeguard the chance of using a large sum of cash irresponsibly and to allow funds to provide guaranteed income for life.
Options for Beneficiaries to Understand with Annuities
Now that we have a grasp of how annuities may be structured and how they work let’s discuss why a beneficiary is crucial and the options you would have if you did pass away prematurely.
Annuities act and behave much like life insurance when it comes to naming and providing remaining benefits to your beneficiary.
At the death of the annuity owner, if the contract would have had remaining funds to continue paying, they can be left to a named beneficiary that the annuity owner would have chosen when the contract was structured.
A few common examples of likely beneficiaries could include the following:
This does not mean that the beneficiary listed above is your only option.
You can choose who you wish as your beneficiary on an annuity contract, and the insurance company who provided the original annuity would create a contract detailing these decisions that you have made.
This contract would specify critical components of the annuity, such as where the leftover money would pass too.
Typically, when the money passes to a beneficiary after the annuity owner has passed away, two options would be available when structuring the contract.
Option 1- This would provide all the money remaining in the annuity that would have been scheduled to pay to the annuity owner.
Option 2- This would provide a guaranteed minimum to the beneficiary at the time of passing by the annuity owner.
For an understanding of which option is best, it’s recommended that you compare options and speak to a professional before structuring any contract.
More cost or portions of the premium may be required in order to provide a guaranteed minimum, which can ultimately take away from your earnings and accumulation.
Again, speak to a professional and get a full breakdown before making any of these critical decisions.
What Happens Next After A Beneficiary Is Named and The Annuity Owner Passes Away?
Let’s assume the contract has already been structured, and a beneficiary is named.
At this point, when the annuity owner has passed, the insurance company will begin distributing the remaining payments and funds to any beneficiaries named in the original contract.
It’s also important to understand that payments provided to beneficiaries can be offered in several different ways.
Most commonly, the remaining funds leftover in the account will either be provided in the form of a lump-sum payment or through a stream of payments.
If you choose a lump sum payment, you will simply receive 1 check for the remaining funds, or your beneficiaries would receive these funds.
Once this is complete, you would consider the contract fulfilled.
If, however, you choose to take steam of payments, you will designate how long you choose to continue payments, and the payments will be distributed accordingly based on this timeframe.
This is also a good time to speak to a professional as the beneficiary before ultimately deciding which of these options makes the most sense for you.
Additional Considerations to Keep in Mind
Another important consideration to keep in mind is that the amount of money left over to beneficiaries with annuities is completely different than the funds that beneficiaries would receive under a life insurance contract.
With life insurance, the insured chooses their death benefit amount, if they pass, their beneficiaries get that said amount that was selected at the time of the contract.
With annuities, the amount of leftover funds that can pass to beneficiaries can vary greatly.
It 100% depends on how many payments have already been distributed, the rate of return that your annuity is currently earning, and how much total cash is left over within the annuity.
In most situations, annuities are not designed to be financial backing for your family if you pass away.
In these situations, choosing one of the best life insurance policies with one of the top life insurance companies makes much more sense.
However, for individuals who need an additional layer of protection inside of their financial portfolio and guaranteed income in the later years of life, an annuity may make perfect sense and provide a safe income for the remainder of your life.
As stated previously, it’s critical to speak to a professional about your options, death benefit payout options for your beneficiaries to gain a full understanding of any contract you may enter.
Nonetheless, annuities are certainly a financial vehicle that can prove beneficial to a wide range of consumers who need some guarantees in the retirement years of life.