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Are Annuity Death Benefits Tax-Free?

Stan Haithcock
July 17, 2023
Are Annuity Death Benefits Tax-Free?

Hey, Stan The Annuity Man here. The question today is, Are Annuity Death Benefits Tax-Free? I'm going to answer that in a very quick fashion. The answer's no, but I want you to hang in there with me so I can explain why the death benefits are not tax-free. And then, at the end of the video, I'm going to tell you how to get my books for free. So, hang in there so I can explain more about annuity death benefits and the taxes you will have to pay.

Life Insurance

Okay, so here's the conundrum. Yes, I said conundrum, using the big words right now. Annuities are issued by life insurance companies. Now, when you buy a life insurance policy, you have to go through all of the medical testing and the blood work, and the nice nurse comes to your house and then does all that stuff. They do all the underwriting, right? And then, at the end, you get this policy, and when you die, your beneficiaries get this huge lump sum, which is tax-free and probate-free. That's life insurance. So, that's fantastic. I always say life insurance, and I don't sell it, but I have a ton of life insurance on Stan The Annuity Man, so my daughters will live large for the rest of their lives. That's the goal, right? I think. Anyway, life insurance is the best return on investment you will never see. Why? You're dead, player, you're dead. That's why. But that's okay.

The Conundrum

Now, here's the conundrum. Annuities, Fixed Annuities, are issued by life insurance companies. So, the question then is, "Wait a minute, Stan, if life insurance companies issue Fixed Annuities, then why isn't the death benefit of these annuities, that's issued by life insurance companies, tax-free?" I don't know the answer. All I know is they're not tax-free, okay? You have to understand that when you die, when your Learjet hits the mountain, that lump sum that you're going to leave to your beneficiaries is taxable.

Let's Get Visual

Okay, let's grab a piece of paper and draw this together to grasp what Stan The Annuity Man is saying visually. This is important. So, let's write down life insurance on the left. Excellent. So, under life insurance, write down tax-free death benefits, tax-free death benefits, and probate-free death benefits. That's a good thing, right? That's going to go lump sum, and I mean, life insurance is a great price. Stan The Annuity Man doesn't sell it because I'm Stan The Annuity Man. Okay?

Now, let's write down Fixed Annuities on the right. Under that, write down death benefit is not tax-free. I put that up there because I want you to remember it and put it on your wall. Annuities, you have to pay taxes on. Life insurance, you don't.

Now, here's the other thing about the annuity side. You don't have to go through the underwriting process either. You don't have to do any blood tests or medical tests or anything like that. They're guaranteed issue, meaning if you drink a bottle of Jack Daniels daily and smoke 12 packs of Lucky Strikes, number one, God bless you, you're a goal setter. Number two, you're not going to get life insurance. They're not going to issue it to you in most cases. So, the death benefit on an annuity is going to be taxable. Now you say, "Wait, wait a minute, Stan. I really like Jack Daniels, and I really like Lucky Strikes," or the Newport menthols if you're smoking that I don't really care. Here's the thing. You can get what's called a death benefit rider attached to an annuity that grows at a specific percentage guaranteed issue for all you players out there, and that lump sum goes to your beneficiaries, and those beneficiaries have to pay taxes.

But here's the way I look at it, you're dead. Who cares, right? You're dead. Let the beneficiaries deal with the lump sum. If you're like me, I wasn't left life insurance when my father died. I wasn't left with annuities to worry about the death benefit when that happened. But if you are doing that, you're doing your beneficiaries a favor. But in many cases with annuities, the beneficiaries will allow you to, instead of a lump sum, a lot of times they'll let them take a five-year payout on that death benefit to kind of lengthen out that tax liability.

The Bottom Line

But the bottom line, which is why you're here, which is why you clicked on this blog, which is what you put into the Google search, is, are the death benefits from annuities tax-free? The answer is no. So, hang in there with me. I'm going to tell you how to get my books for free.

Okay, we're getting ready to talk about the books. Before that, there's a video that you need to check out. It's called How Are Qualified Annuities Taxed?, which I've already done, and which you need to click after reading this and watch that because it covers a lot of the taxation, which is kind of what we're talking about today, but I dig deeper.

So, with that, being America's Annuity Agent, I'm going to provide America with the books. Here's how you get the books. And by the way, you can go to our site and get quotes, as well. We will send you quotes. We quote all carriers so that you can get QLAC quotes, Immediate Annuity quotes, and Deferred Income Annuity quotes. We have MYGA feeds, the whole thing, the whole shooting match. I'm America's Annuity Agent, right? Okay.

So, to get the free books, you can go here, fill out a quick form, and download all my books for free! If you want to talk to me, you can always schedule a call. And yes, I will be on that call most of the time unless I'm in a Learjet. I don't have a Learjet, but if I did, that's where I'd be. Until next time, Stan The Annuity Man signing off.

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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