How an annuity death benefit works can be dependent on the type of annuity you have and the income option you have chosen, as well as whether or not you have added any optional “enhanced death benefit” features on your particular plan.
There are actually a number of different annuity income payout plans to choose from. With some of these, the income may continue to a named beneficiary (or beneficiaries) after the income recipient (i.e., annuitant) passes away.
How Much is an Annuity Death Benefit?
The amount of an annuity death benefit will be dependent on the payout option that is chosen by the beneficiary. These options include a lump sum distribution, or instead, an income stream that is paid out over a certain number of years.
For instance, a lump sum distribution will allow the annuity beneficiary to receive the entire remaining value of the contract in one single payment. Alternatively, the five year rule allows the annuity beneficiary to receive a portion of the remaining balance over a period of five years, or to take out the whole remaining sum in the fifth year.
An annuity beneficiary who is the surviving spouse of the annuitant may be allowed to choose an alternate option and continue on with the initial agreement as the new owner and the new annuitant on the policy.
Some annuities offer an enhanced death benefit option that provides regular (usually yearly or monthly) “step-ups.” In this case, when the annuitant passes away, the highest recorded value of the account value will be paid to the beneficiary (minus any withdrawals that have been taken).
While a stepped-up death benefit can provide a way to lock in gains to pass along to the beneficiary, there is typically an additional premium charge required for adding this enhanced benefit. So, it is recommended that you weigh out the additional cost versus the potential benefit that may be received.
Taxation of Annuity Death Benefits
Even though an annuity beneficiary receives a death benefit, it is important to understand the distinction between this type of payout and the proceeds that are received from a life insurance policy.
For instance, life insurance death benefits are not taxable as income to the recipient. (Depending on the size of the decedent’s estate, though, life insurance proceeds may be subject to estate tax).
With annuity death benefits, the beneficiary may be taxed on the distribution(s) that he or she receives following the death of the annuitant. The amount of the tax will be calculated, based on the difference between the contributions that were paid into the annuity and the amount that the annuity is worth when the annuitant passes away.
Are You Ready to Secure Income and Leave a Legacy for Those You Love?
There are many annuities in the marketplace today – and because of that, it is possible to “customize” an annuity that most closely fits your specific needs. But before you do so, make sure that you understand exactly what you’re getting. Otherwise, due to surrender penalties, it could be very costly to get out.
Working with an annuity specialist like Annuity Gator can help you to determine which annuity is right for you – or even IF an annuity is a good option to include in your overall financial planning.
Feel free to reach out to us with any questions you may have by phone at (888) 440-2468 to speak with an annuity expert. Or, you can send us a message through our secure online contact form and set up a time to chat.