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Annuity Death Benefits: Are They Taxable?

Stan Haithcock
February 5, 2024
Annuity Death Benefits: Are They Taxable?

Hello, everyone out there. My name is Stan The Annuity Man, America's annuity agent. I'm the top agent in the country, licensed in all 50 states, including yours.

‌Today, a little bit of motivation. We're going to talk about death. Yes, that's a motivational topic. But we need to talk about annuity death benefits. Are they taxable? How do they work? All that stuff. You need to know that because you must control things from the grave. You need to set things up for your family. You must understand that the evil annuity company doesn't have to keep the money. People always say, "Well, I wouldn't buy an annuity because the annuity company's going to keep the money." That's not true. Yeah, that's your decision if you want to set the annuity up that way.

‌But, when you talk to my team and me, when we go over your situation and put together an annuity strategy customized for you, we will talk about legacy, which is leaving money to your heirs, death benefits, etc.

‌The other day, I got a call, and the guy's like, "I don't care about my wife or my kids. I just want the highest payment." Great. That's fine. I'm not a psychologist; I don't want to get into all that. But it's up to you.

But most people, and you might be that person, most people will say to me, "You know what, Stan, I've worked really hard for this. I want the guarantees annuities provide, but I also want to set things up for my family." So, with that, let's talk about death.

‌Life Insurance

‌All right, back on that motivational topic of death. Annuities are issued by life insurance companies. All annuities are issued by life insurance companies. They're contracts. Now, the interesting dichotomy, yes, I said dichotomy, don't ask me to spell it, but I like that word, is that life insurance death benefits pass to your beneficiaries tax-free, probate-free lump-sum. Fantastic. I always tell people life insurance is the best return on investment you will never see. Why? Because you're dead.

‌I don't sell life insurance, but Stan The Annuity Man has a ton of life insurance on me. In fact, let's just put this out here. If something fishy happens to me, like I'm walking down the mountain, and I just fall off the cliff, and someone's with me, like my family, investigate them because they just became very rich. I digress.

‌But yes, I love life insurance. Life insurance, I mean, it's great. I know people who say, "Well, I don't want to pay the monthly agreement." But from a legacy standpoint, the great part about life insurance is that you know that your family will be taken care of. Now again, I don't sell life insurance, but I certainly buy a lot on me.

‌The interesting part is life insurance companies issue annuities, but annuities do not offer that same tax-free death benefit. With annuities, regardless of type, that death benefit will be taxable. So, understand that.

The question is, well, Stan, we're talking about death. We're talking about motivational topics like death. Why would I buy an annuity for a death benefit? Well, to get life insurance, most life insurance, there's some guaranteed issue stuff, but to really get a large amount, like million-dollar coverage, $2 million coverage, whatever, you must go through a medical test, blood tests, and a nurse comes to your house. Life insurance companies have the big buildings for a reason. They want to insure healthy people. Young, healthy people. They don't want to insure people with pre-existing conditions. This isn't Obamacare; this is capitalism, baby.

‌Guaranteed Issue

‌So, if you cannot qualify for life insurance, and a lot of people cannot. My mom's like, "Can I get life insurance?" I'm like, "Mom, you're 80. No, you can't get life insurance." I guess you can get some guaranteed issue stuff with a very low amount, but that's not what we're talking about.

But annuities are guaranteed issue. What does that mean? That means if you're drinking a bottle of Jack Daniel's every single day, especially for breakfast, you're smoking cigarettes in between while you're eating Cheetos and Snickers bars, which is great, by the way. Actually, that's a great taste combo if you think about it. But I digress. The annuity company's going to issue that annuity.

‌Annuity Types

‌Regardless of the type of annuity, there are many types. There are income annuities, like Single Premium Immediate Annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts. Those types of products you can structure so that there's a legacy for your beneficiary or spouse or partner as a death benefit.

‌There are such things as death benefit riders. Riders meaning attach benefits to a policy that can be used for a death benefit. Now, that's the taxable death benefit, but you still can do that. So, annuities shouldn't be your primary decision for a death benefit. But if you can't qualify for life insurance, it certainly is your option to provide that death benefit, which is a good thing.


‌Let's look at a couple of examples of death benefits using annuities. I had a call the other day, and the gentleman said he did not need any income whatsoever. He wanted to put some death benefits in place for his beneficiaries. And you can list as many beneficiaries on an annuity policy as possible.

‌So, of course, my first question to him was, "Hey, Fred, have you ever thought about life insurance?" And he said, "I can't qualify for it." Okay, great. It's not great; you can't qualify, but great. We can transition; we have another choice. I told him, "Let's look at death benefit riders attached to Deferred Annuities like a Variable or Index Annuity." Those are just guaranteed benefits that grow at a certain percentage, but you can only use them for the death benefit.

‌I think around 20 carriers, a little bit less than that, offer a death benefit rider. We shopped him off for the highest contractual guarantee for his specific situation, state, etc. And we looked at him and said, "Okay, this one grows at 7%, or this one grows at 6%." Let me stop. It's not yield. You can't peel off the interest, transfer it, or cash it in. It's not Jimmy Carter's interest, so calm down. But the death benefit grows by this specific percentage. And then, at the very end, that amount will go to the beneficiaries as a death benefit.

‌He liked that because what we could do, because that's a contractual guarantee, we can actually say, okay, if you live 10 years, the death benefit will be this. If you live 12 years, the death benefit will be this because it's contractual. He liked that. And because he can control who the beneficiaries are, the percentages on those beneficiaries, what they're going to get paid, etc, this was an alternative to life insurance because he could not qualify for that.

‌And so, he set it up. It's an Income Rider used for death benefit, but a death benefit rider for his beneficiaries, even though he was in poor health. So, we solved the problem.

‌The only issue was that he wanted it to be a little more tax-friendly and tax-free. And I said, "Hey, you're going to be dead, so your beneficiaries are going to have to deal with the taxes. But at the end of the day, you did leave them money. And they're going to have some options on how to take that money out when you pass."

‌I'll end with this. I do these blogs and videos all the time. So, if you ever have a topic idea, comment on any of my YouTube Videos. And saying that too, if you want to explore death benefit riders or those types of strategies, please go to my site. You can always book a call with us to talk with me or a team member. Hopefully, it's going to be me, though. I really like interacting one-on-one with everybody. Yes, I have thousands of clients, but you want self-contractual guarantees. So, once the contractual guarantee is in place, you can always call me, but there's not a lot to manage. So, I can get to you. I can speak to you. And let us use our proprietary annuity calculators to shop all carriers for your specific situation. Then we look at the contractual guarantee: no pressure, no hype. You make your decision on your terms and your timeframe. But I'll encourage you to explore that.

‌Also, you can download all 6 of my annuity owner's manuals on my site for free. But there are all kinds of things to explore at The Annuity Man. I do podcasts, I do blogs, I do all of that stuff that educates you so you can make an informed decision on your terms and on your timeframe. Thank you for joining me today, and I will see you in my next blog.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.

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