What Happens to Your Annuity When You Pass Away?

18 June 2025

Planning for the future isn’t just about saving up for a comfortable retirement—it’s also about making sure your loved ones are taken care of after you're gone. If you’ve invested in an annuity, you might be wondering: What happens to your annuity when you pass away?

Good question. It’s something a lot of folks don’t think about until it’s too late. But don’t worry—we're diving deep into it today so you have all the right info at your fingertips. Think of it like writing a “just in case” letter to your family (trust me, they’ll thank you later).

This article will walk you through everything—whether your annuity dies with you, who gets the remaining money, and how taxes and contracts play a huge role in what happens next.

What Is an Annuity, Anyway?

Let’s start simple. An annuity is a contract between you and an insurance company. You pay them either a lump sum or a series of payments, and in return, they promise to send you regular income either right away or later on (depending on the type you choose).

There are a few flavors of annuities, but they all have the same basic goal—to help you not outlive your money. Think of it as a paycheck in retirement that you can’t outlive.

But the big question is: What happens when your life clock stops ticking? Does all that money just disappear into thin air?

Well… it depends.

Different Types of Annuities and What Happens After Death

Before we dive into the specifics of what happens when you pass away, we need to talk about the type of annuity you have. Because believe me, this makes ALL the difference.

1. Immediate vs. Deferred Annuities

- Immediate Annuities start paying you soon after you make your investment.
- Deferred Annuities keep your money growing for a period before you start receiving payments later.

Each of these can be structured in different ways, and what happens when you pass away depends largely on those structures.

2. Fixed vs. Variable Annuities

- Fixed Annuities pay you a guaranteed amount.
- Variable Annuities fluctuate based on investments (think: stock market).

Both of these also come with death benefit options, which we’ll break down in a bit.

The “Annuity Dies with You” Scenario (True or False?)

Okay, let’s bust a myth here. You may have heard that annuities just disappear when the person who bought them dies.

That’s only kinda true—and only if your annuity doesn’t have a death benefit or named beneficiaries.

So, let’s say you bought a single-life annuity without any riders or beneficiary designations. It pays only while you’re alive. Once you pass, the payments stop—full stop. The insurance company keeps any balance left in the account.

Harsh? A little. But that’s the deal you make in exchange for a potentially higher payout during your lifetime.

Now, if you don’t like the sound of that, don’t worry—there are ways to make sure your money doesn’t vanish into a black hole.

Adding a Beneficiary: Your Money Doesn’t Die With You

The smartest thing you can do is name a beneficiary for your annuity. That way, when you pass on, someone else can step in and receive the remaining funds.

You can usually choose:

- A spouse
- Children
- A charity
- A trust

When you assign a beneficiary, the annuity becomes part of your legacy. It’s like saying, "Hey, I worked hard for this money—it shouldn’t stop working just because I’m gone."

Different contract options let you tailor how payments go to your loved ones. Let’s walk through the most common ones.

1. Joint and Survivor Annuity

This one’s great for couples. With a joint and survivor annuity, the income continues for your spouse even after you’ve passed. It might be a reduced amount (like 50% or 75%), but it helps keep the bills paid and the lights on.

2. Period Certain Annuity

Not sure how long you’ll live but still want to protect your family? Period certain annuities guarantee payments for a set time, say 10 or 20 years. If you pass away during that period, your beneficiary keeps getting payments until the term ends.

Think of it like renting a room—you’ve paid for 10 nights. If you leave early, someone else can still stay.

3. Refund Annuity

This one’s all about getting your money’s worth.

- Cash Refund: Your beneficiary gets the original principal minus payments you already received.
- Installment Refund: Your beneficiary gets the rest of the payments—spread out just like you were receiving them.

This ensures you or your heirs get back every dollar you put in.

Death Benefits in Deferred Annuities

If you have a deferred annuity (the kind that grows over time), things work a bit differently. These annuities usually come with a built-in death benefit. That means your beneficiary gets the greater of:

- The current account value, or
- The total amount you put into the annuity (minus withdrawals)

Here’s the catch: your annuity has to still be in the “accumulation phase” (aka, you haven’t started getting payouts yet). Once you start receiving income, the game changes.

Taxes: What Does Uncle Sam Want?

Ah yes, taxes. You didn’t think we’d get through this without a visit from Uncle Sam, did you?

The money your beneficiary receives from your annuity may be taxable as ordinary income. How much they pay depends on:

- The type of annuity
- How payments are structured
- Whether the annuity was purchased with pre-tax or post-tax dollars

If you used pre-tax dollars (like with a traditional IRA annuity), your beneficiaries could be on the hook for the full amount when it’s withdrawn.

If it was post-tax, only the earnings portion is taxable. Either way, it’s not a tax-free inheritance like a life insurance payout.

Pro tip: it’s worth chatting with a financial advisor or tax pro to make sure your beneficiary doesn’t get blindsided later.

What Happens If You Don’t Name a Beneficiary?

Now here’s where things can get messy.

If you don't name a beneficiary—or all your beneficiaries have passed away—the annuity becomes part of your estate. That means:

- It goes through probate (ugh, delays and legal fees)
- It could be subject to estate taxes (depending on your estate’s value)
- Your original wishes might not be honored

Not only could it cost your family more money, but it can cause stress and frustration during a time they should be focusing on healing.

So take a wild guess what the most important takeaway is here...

👉 NAME A BENEFICIARY.

And review it now and then—because life changes, and so should your estate plan.

Common Scenarios and What Happens

Let’s bring this all together with a few real-world scenarios. These help make it clearer (and maybe even help you see your own situation in one of them).

Scenario 1: You Have a Single-Life Annuity With No Death Benefit

- You pass away.
- Payments stop.
- The insurance company keeps the remaining balance.

Outcome: No money goes to your heirs.

Scenario 2: You Have a Period-Certain Life Annuity (20 years), and You Die in Year 5

- Payments go to your named beneficiary for the remaining 15 years.

Outcome: Your family still receives income.

Scenario 3: You Have a Deferred Annuity in Accumulation Phase

- You pass away.
- Your beneficiary gets the higher of the account value or the amount you invested.

Outcome: Your money becomes a gift, not a burden.

How to Make Sure Your Wishes Are Honored

Here’s a quick checklist to wrap things up:

✅ Review your annuity contract
✅ Confirm your beneficiary designations
✅ Consider adding a death benefit or rider if it makes sense
✅ Talk to a financial advisor to smooth out the wrinkles
✅ Keep your family in the loop

Trust me, that last one? Super important. It’s way easier on everyone when they know exactly what to expect.

Final Thoughts

Annuities can be a fantastic way to create lifetime income, but they don’t have to stop helping just because you’re gone. With the right planning, your annuity can be a powerful legacy tool—not just a retirement vehicle.

Remember, every annuity is different, and what happens after you pass depends on the choices you make now. So take the time to read the fine print, talk to an expert, and make sure your hard-earned money finds its way to the people (or causes) you care about most.

Your future—and your family’s—deserve that kind of peace of mind.