How Do Annuities Work for Beneficiaries?

Annuities can be structured so that unused money passes to the people or entities you name as beneficiaries.

That means the common assumption that the insurance company automatically keeps your money when you die is not necessarily true.

Depending on the type of annuity and how the contract is structured, you can name primary and secondary beneficiaries, leave remaining contract value to family members, or establish lifetime income that continues for a spouse.

The important part is understanding the difference between a beneficiary and someone who is actually covered by a lifetime income guarantee.

Key Takeaways

• Annuities can be structured so unused contract value passes to beneficiaries.
• You can generally name primary and secondary beneficiaries.
• Many carriers allow beneficiary percentages to be divided among multiple people.
• A spouse may have continuation options on certain deferred annuities such as MYGAs.
• A beneficiary is not automatically entitled to continue a lifetime income payment.
• If you want lifetime income to continue for a spouse, the contract generally needs to be structured as joint life.

Can You Name Beneficiaries on an Annuity?

Yes.

Most annuity contracts allow you to name beneficiaries.

You may be able to designate:

• a primary beneficiary
• secondary beneficiaries
• additional beneficiary levels depending on the carrier

The exact options vary by insurance company and contract.

How Primary and Secondary Beneficiaries Work

The primary beneficiary is first in line to receive the applicable death benefit.

Secondary beneficiaries generally receive the benefit if the primary beneficiary is no longer living when the annuity owner dies.

For example, a spouse could be listed as the primary beneficiary and children as secondary beneficiaries.

If the spouse dies first, the children may move into the primary beneficiary position depending on how the contract is structured.

Can You Split an Annuity Between Multiple Beneficiaries?

Yes.

Beneficiary designations can typically be divided by percentage.

For example, you could leave:

• 100% to a spouse
• 50% to one child and 50% to another
• equal shares among three children
• another percentage arrangement that fits your estate plan

The total beneficiary allocation should generally add up to 100%.

What Happens to a MYGA When the Owner Dies?

A Multi-Year Guarantee Annuity can provide different options depending on who the beneficiary is.

If a spouse is the beneficiary, many companies allow some form of spousal continuation.

For example, if you own a five-year MYGA and die during year three, the spouse may be able to continue the contract for the remaining term or take the applicable death benefit.

A non-spouse beneficiary may instead receive a lump-sum death benefit, depending on the contract.

Spousal Continuation Can Be Valuable

Spousal continuation allows the surviving spouse to step into the contract instead of immediately terminating it.

That may allow the spouse to continue receiving the contractual interest rate for the remaining term.

The exact rules vary by insurance company, so this should be reviewed before purchasing the annuity.

A Beneficiary Is Not the Same as a Joint Annuitant

This is one of the most important distinctions in lifetime income planning.

Naming your spouse as the beneficiary does not automatically mean your spouse will continue receiving your lifetime income payment after you die.

If you want the income stream to continue for both lives, the contract generally needs to be established as joint life.

The person covered by the lifetime payment is an annuitant.

The beneficiary receives whatever death benefit remains under the selected payout option.

Those are different roles.

How Joint Lifetime Income Works

A joint-life annuity covers two people.

If one person dies, the contractual income continues for the surviving person according to the payout structure.

That can be useful for married couples who want dependable income to continue regardless of who dies first.

If continued lifetime income for the surviving spouse is the goal, make sure the spouse is included in the joint-life guarantee rather than simply listed as beneficiary.

What Is a Period-Certain Annuity?

Lifetime income can also be structured with a period-certain guarantee.

For example, a life-with-20-years-certain payout provides lifetime income but guarantees payments for at least 20 years.

If the annuitant dies after ten years, the beneficiary could receive the remaining ten years of contractual payments.

If the annuitant lives beyond the 20-year period, the lifetime payment continues, but there may no longer be a remaining period-certain benefit for the beneficiary.

Cash Refund and Installment Refund Options

Other payout structures can provide beneficiary protection through refund provisions.

These may include:

• cash refund
• installment refund

The purpose is to provide a way for unused premium to pass to beneficiaries if the annuitant dies before receiving the applicable contractual amount.

Adding beneficiary protection may reduce the initial lifetime payment compared with a life-only structure.

What Is a Life-Only Annuity?

A life-only payout provides income for as long as the annuitant is alive.

When that person dies, the payments stop.

There is generally no remaining death benefit.

Because the insurance company does not have to provide additional beneficiary protection, a life-only payout may provide a higher initial payment.

That structure may make sense for someone who does not need to leave the annuity value to beneficiaries.

Can a Trust Be an Annuity Beneficiary?

A trust can potentially be named as the beneficiary of an annuity.

However, trusts introduce additional legal and tax considerations.

If you are considering naming a trust, coordinate the beneficiary structure with your:

• estate planning attorney
• CPA
• tax professional

The annuity should fit within the broader estate plan rather than being structured separately from it.

Do Annuities Avoid Probate?

Properly designated annuity beneficiaries generally allow the applicable death benefit to pass directly to the beneficiary rather than through probate.

That is one reason beneficiary designations matter.

However, beneficiary information should be kept current.

Changes in marriage, divorce, deaths, births, and estate plans can all make an old designation inappropriate.

Can You Change Annuity Beneficiaries?

In many contracts, beneficiary designations can be changed during the owner's lifetime.

That provides flexibility as family circumstances change.

Review your beneficiary designations periodically to make sure they still match your wishes.

What Information Is Needed for Beneficiaries?

Insurance companies may require information such as:

• beneficiary name
• date of birth
• relationship to the owner
• contact information
• Social Security number in certain situations

When the annuity owner dies, the beneficiary will typically need to provide a death certificate and complete the insurance company's claim process.

Annuities Can Be Used for Legacy Planning

Deferred annuities can also play a role in legacy planning.

For example, a MYGA can allow money to grow and compound tax-deferred.

When the owner dies, the beneficiaries may receive the remaining contract value, subject to applicable tax rules.

This can be useful for someone who cannot qualify for additional life insurance but still wants to leave money to family members.

Taxes Matter for Beneficiaries

Inherited annuity taxation depends on several factors, including:

• the type of annuity
• whether the funds are qualified or non-qualified
• the beneficiary's relationship to the owner
• how distributions are taken

Because these rules can be complicated, tax questions should be reviewed with a qualified CPA or tax professional.

Where to Compare Annuity Options

Use our annuity calculators to compare contractual guarantees from multiple insurance companies.

If beneficiary protection is important, compare not only the income or interest rate but also the available death benefit and payout structures before choosing a contract.

The Bottom Line

Annuities can be structured to provide significant protection for beneficiaries.

You can name family members, divide benefits among multiple people, potentially continue certain contracts for a surviving spouse, and select lifetime income structures that provide beneficiary protection.

The most important distinction is that a beneficiary is not automatically covered by your lifetime income guarantee.

If you want income to continue for a spouse after you die, make sure the annuity is structured to contractually cover both lives.

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