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Annuity Beneficiaries

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Annuities can offer many benefits to their holders (also known as annuitants). These investments may help annuitants earn monetary interest and secure financial stability after retirement . Annuitants can select a beneficiary to receive their remaining annuity payments after they pass away.

How does someone inherit an annuity?

The owner of an annuity will usually list their annuity beneficiaries in the annuity contract. There can be one beneficiary who receives any remaining annuity payments when the payee dies or multiple beneficiaries who each receive a percentage. Once the owner of an annuity passes away, the insurance company issues the remaining payments to any beneficiaries according to the agreed-upon payout method.

Although both annuity owners and beneficiaries can be considered “payees,” they do not necessarily have the same rights and responsibilities. Owners of an annuity can designate beneficiaries, sell annuity payments, or even change terms of the annuity contract with the insurance company. Depending on the terms of the contract, beneficiaries may not have the same rights as the annuity owner.

Who can be a beneficiary?

Depending on the type of annuity, almost anyone (or even a number of people) can be named as a beneficiary. Annuity owners commonly designate their spouses and children as beneficiaries. Additionally, organizations and trusts can also be named.

Some annuities may allow spouses to effectively become the annuitant after the original owner passes away. They then have the ability to accept the remaining payout, designate new beneficiaries, and generally assume all the rights and responsibilities of the original annuitant. This practice is commonly referred to as a spousal continuation, which also grants the spouse tax-deferred status. Although non-spouses can be designated as beneficiaries, they cannot change the terms of the original contract or alter the annuity beneficiaries.

Distribution Options Upon Death

Beneficiaries may collect annuity payments in different ways. Four of the most common ways are listed below:

  • The beneficiary continues to receive the period certain payout option that the deceased payee was receiving
  • Five-Year Rule - With this option, beneficiaries can withdraw funds within a five-year time period or receive the entire amount after five years.
  • Non-Qualified Stretch - With the non-qualified stretch option, beneficiaries collect minimum payments distributed over the span of their life expectancy.
  • Lump Sum Distribution - In a lump sum distribution, beneficiaries simply receive the remaining amount of the annuity funds after the owner passes away.

Death Benefits and Taxes

In most cases, beneficiaries must pay income tax on annuity benefits. The beneficiary pays this tax when they withdraw money or receive payments from the annuity. As such, the payout method greatly influences the amount of taxes the beneficiary will pay.

Death Benefit Payout Options

The annuity owner determines the type of benefit that their beneficiaries receive upon writing the annuity contract. In general, these benefit payout options come in three major types:

  • Return of Premium - With this option, the insurance company pays a beneficiary either the full value of the contract or the sum of the premium(s) paid into the policy minus any withdrawals or fees -- whichever is larger.
  • Standard Death Benefit - In the standard option, the insurance company pays the beneficiary the value of the annuity contract minus any withdrawals or fees.
  • Stepped-Up Death Benefit Rider - A death benefit rider offers monthly or annual “step-ups." If the policy has a monthly step-up, the insurance company takes a snapshot of the account value each month. The highest monthly recorded value becomes the death benefit amount when the annuitant dies, even if the market value is currently less.

Call Peachtree Financial Solutions Today

If you inherited an annuity as a beneficiary and you’re interested in getting a lump sum of cash in exchange for your annuity payments, call Peachtree Financial Solutions at 1-800-821-7773 or contact us online to get a free quote now!

The above is some basic information on the topics, and is not a complete guide. Peachtree Financial Solutions is a purchaser of assets and does not provide legal, tax, or financial advice. Please contact independent professionals for legal, tax and/or financial advice.

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