An annuity pays its remaining value to the person you name on the contract’s beneficiary form, and the rules that govern annuity beneficiaries turn on three questions: is the annuity qualified or non-qualified, is the beneficiary your spouse, and had payments already started when the owner died. Those answers control how quickly the money must come out, how it is taxed, and whether the beneficiary can keep the contract growing. The money moves directly to the named person and skips probate.
Who You Can Name and How
When you buy an annuity, the insurance company has you complete a beneficiary designation form. The primary beneficiary has first claim on the remaining contract value at your death. A contingent beneficiary receives the funds only if the primary has already died or declines the payout. You change either one by filing a new form with the insurer.
A beneficiary can be a person, a trust, a charity, or your estate. A trust gives you control over how and when funds reach the recipient, which matters if the person is young, financially inexperienced, or has special needs. Naming your estate pushes the annuity into probate and gives up the main advantage of having a beneficiary at all.
Naming a Minor
Insurers generally will not pay proceeds directly to a child under 18. If you name a minor, the company typically holds the money until a court appoints a guardian or custodian, which adds delay and cost. A cleaner route is to name a custodian under your state’s Uniform Transfers to Minors Act, or to use a trust that spells out how the funds are managed until the child reaches a chosen age.
Per Stirpes vs. Per Capita
If you name more than one beneficiary, say what happens when one of them dies before you. A per stirpes designation sends a deceased beneficiary’s share down to their own children; if you named three children equally and one predeceases you, that share goes to your grandchildren rather than to the surviving siblings.1U.S. Office of Personnel Management. What Is a Per Stirpes Designation A per capita designation instead splits the deceased beneficiary’s share among the surviving beneficiaries and leaves nothing to that person’s heirs.
Update After Divorce
Divorce does not automatically remove an ex-spouse from your annuity. Some states revoke the designation on divorce for non-qualified annuities, but for annuities inside ERISA-governed employer plans the Supreme Court held in Egelhoff v. Egelhoff that the plan must pay whoever is on file, even a former spouse.2Legal Information Institute. Egelhoff v. Egelhoff File a new form with the insurer as soon as the divorce is final.
Why a Spouse Beneficiary Is Treated Differently
A surviving spouse named as the sole beneficiary of a non-qualified annuity can do something no other beneficiary can: step into the owner’s shoes and become the new owner of the contract. Under 26 U.S.C. § 72(s)(3), the spouse is treated as the holder of the annuity and is not forced into an immediate distribution or the five-year deadline that applies to other beneficiaries.3Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
This spousal continuation keeps the contract growing tax-deferred. The spouse can start or continue payments, name new beneficiaries, or simply let the account accumulate. The option generally requires that the spouse be named as sole beneficiary rather than sharing the designation with other individuals or a trust.
Payout Options for a Non-Spouse Beneficiary
A non-spouse beneficiary chooses from several distribution methods. The menu depends on whether the annuity is non-qualified (bought with after-tax dollars) or qualified (held inside an IRA, 401(k), or similar plan), and on whether payments had already begun.
Lump Sum
Taking the full death benefit at once ends the contract immediately and hands over all the funds. The tradeoff is that the taxable portion is treated as ordinary income for that year and can push the beneficiary into a higher bracket.
The Five-Year Rule for Non-Qualified Annuities
If the owner of a non-qualified annuity dies before the annuity starting date, federal law requires the entire balance to be paid out within five years of death.3Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Inside that window the beneficiary can withdraw on any schedule, so long as the contract is empty by the deadline.
Life Expectancy Payments
A designated beneficiary of a non-qualified annuity can instead elect to spread distributions over their own life expectancy. Those payments must begin within one year of the owner’s death.3Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Not every insurer offers this route, so the contract language controls.
The 10-Year Rule for Qualified Annuities
Qualified annuities follow different rules after death. Since the SECURE Act took effect in 2020, most non-spouse beneficiaries who inherit a qualified account must empty it within 10 years of the owner’s death, replacing the older lifetime “stretch.”4Federal Register. Required Minimum Distributions Whether you also owe annual withdrawals during those ten years depends on when the owner died relative to their required minimum distribution (RMD) starting age:
- If the owner died before their RMD start date, you can withdraw on any schedule as long as the account is empty by December 31 of the year holding the 10th anniversary of death.4Federal Register. Required Minimum Distributions
- If the owner died on or after their RMD start date, you must take annual minimum distributions in years one through nine and empty the account by the end of year 10.4Federal Register. Required Minimum Distributions
Some beneficiaries escape the 10-year clock. These “eligible designated beneficiaries” include a surviving spouse, a minor child of the deceased (until age 21), a disabled or chronically ill beneficiary, and anyone not more than 10 years younger than the original owner. They can still stretch distributions over their own life expectancy. When a minor child reaches 21, the 10-year period begins for them at that point.4Federal Register. Required Minimum Distributions
How Much the Beneficiary Actually Receives
The contract’s death benefit provision fixes the amount. A standard death benefit on a deferred annuity guarantees the greater of the current account value or total premiums paid minus withdrawals, so the beneficiary is not stuck with less than what went in even if the investments dropped.
Optional riders can lock in higher values. One common version pays out the account’s highest anniversary value; if the account peaked at $150,000 three years ago and now sits at $120,000, the beneficiary still gets $150,000. Other riders apply a fixed annual growth rate to the base amount. These riders carry an extra annual fee.
If the owner dies during the surrender charge period, most insurers waive those charges on the death benefit. The beneficiary receives the full amount without the penalty that would apply to a voluntary early withdrawal.
How the Beneficiary Is Taxed
Taxation is governed by 26 U.S.C. § 72 and turns on whether the annuity is qualified or non-qualified.3Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
With a qualified annuity, the original owner never paid tax on the contributions or growth, so the entire distribution is taxable as ordinary income to the beneficiary. Federal rates for 2026 run from 10% to 37%.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
With a non-qualified annuity, the beneficiary owes tax only on the earnings. The IRS uses an exclusion ratio to separate the taxable growth from the tax-free return of the original owner’s investment, so each payment is only partially taxable.3Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
Annuities do not receive a step-up in tax basis at death. Federal law excludes annuities described in § 72 from the general rule that resets an inherited asset’s basis to its date-of-death value.6Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent The accumulated gains are treated as income in respect of a decedent, so the beneficiary inherits the original cost basis and owes income tax on all the earnings.7Office of the Law Revision Counsel. 26 U.S. Code 691 – Recipients of Income in Respect of Decedents
One tax that does not apply: the 10% early-distribution penalty. Federal law exempts distributions paid to a beneficiary after the account holder’s death, whatever the beneficiary’s age.8Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The same exemption applies to non-qualified annuity contracts.3Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Regular income tax still applies to the taxable portion.
Claiming the Money
Contact the issuing insurance company. You will generally need a completed claim form, a certified death certificate, and the contract or policy number. If the policy is lost, the insurer will ask you to sign a lost-policy certification. In some cases, such as a death during the contract’s contestable period, the company may request medical records.
Once the insurer verifies the paperwork and confirms you as the named beneficiary, you pick your payout option. Processing usually takes a few weeks. Move quickly. Some deadlines run from the date of death rather than the date you file, including the one-year window for electing life-expectancy payments on a non-qualified annuity.
What Happens If No Beneficiary Is Named
If no beneficiary is named, or every named beneficiary predeceases the owner and no contingent is listed, the annuity value defaults to the estate.9Internal Revenue Service. Retirement Topics – Beneficiary That routes the funds through probate under the will or state intestacy law, which adds months and administrative cost.
An estate also loses distribution options. An estate that inherits a qualified annuity generally must distribute the entire balance within five years and cannot use the 10-year rule or life-expectancy payments available to individual beneficiaries. Reviewing your beneficiary designations after a marriage, divorce, birth, or death in the family is the simplest way to keep the annuity out of court and in the hands of the people you chose.