When an annuity owner dies, the remaining contract value passes to the named beneficiary as a death benefit rather than reverting to the insurance company. What happens to an annuity when you die depends on three things: the payout option the owner selected, whether the annuity is qualified (held inside an IRA or 401(k)) or non-qualified (bought with after-tax dollars), and whether the person inheriting is a surviving spouse. Those three variables decide how much money is left, how quickly it has to come out, and how much of it the IRS keeps.
Whether Anything Is Left to Inherit
If the annuity is already paying income, the payout option the owner chose at annuitization controls whether a beneficiary gets anything at all. This is the single most consequential decision in an annuity contract, and it is usually irrevocable.
- Life-only. Payments stop the day the annuitant dies. The beneficiary receives nothing. This option produces the highest monthly check precisely because the insurer keeps whatever value remains.
- Period certain. Payments are guaranteed for a fixed term, commonly 10 or 20 years. If the annuitant dies before the term ends, the beneficiary receives the remaining scheduled payments.
- Installment refund. If the annuitant dies before receiving back at least the total premiums paid in, the beneficiary receives installments until that full amount has been returned.
- Joint and survivor. Payments continue for the life of a second person, usually a spouse. The amount may stay level or drop to 50% or 75% after the first death.
If the owner died during the accumulation phase, before income payments began, there is always a death benefit. It is typically the greater of the total premiums paid (minus any withdrawals) or the current account value. The premium floor protects beneficiaries when the market has driven the account below what the owner originally invested. Some contracts add enhanced death benefit riders that lock in the highest account value reached on a contract anniversary or guarantee a minimum growth rate on the death benefit.
How a Beneficiary Can Take the Money
Once a death benefit is payable, the beneficiary usually chooses among several distribution methods. The right one depends on the beneficiary’s tax bracket, cash needs, and whether the annuity is qualified or non-qualified.
Lump Sum
The whole death benefit is paid at once. Access is immediate, but every dollar of taxable gain lands in a single tax year and can push the beneficiary into a higher bracket.
Five-Year Rule
The beneficiary can leave the money in place and withdraw it on any schedule, as long as the account is empty by December 31 of the fifth year after the owner’s death.1Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs) The balance keeps growing tax-deferred in the meantime.
Payments Over the Beneficiary’s Life Expectancy
Some contracts let the beneficiary convert the death benefit into periodic payments stretched across their own life expectancy. This spreads the tax bill over many years and creates a steady income stream, at the cost of locking up the principal.
Spousal Continuation
A surviving spouse has an option no other beneficiary gets: stepping into the deceased owner’s role and treating the contract as their own. Federal tax law treats the surviving spouse as the new holder of the annuity, preserving the tax-deferred status and eliminating any immediate distribution requirement.2Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The spouse can name new beneficiaries, keep accumulating, or begin withdrawals on their own timetable.
The 10-Year Rule for Inherited Qualified Annuities
The SECURE Act, enacted in 2019, changed the rules for annuities held inside IRAs, 401(k)s, and similar retirement accounts. Most non-spouse beneficiaries who inherit after 2019 must empty the entire account by the end of the tenth calendar year following the owner’s death.3Office of the Law Revision Counsel. 26 U.S. Code 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans Before the change, non-spouse beneficiaries could stretch distributions across their own life expectancy, sometimes for decades.
Whether the beneficiary must take annual withdrawals during those ten years depends on the original owner. If the owner died before their required beginning date for RMDs, the beneficiary can wait until year ten and take everything at once. If the owner had already started RMDs, the beneficiary must take annual distributions and still empty the account by the end of year ten.4Internal Revenue Service. Retirement Topics – Beneficiary
A narrow group of “eligible designated beneficiaries” can still use the old life-expectancy stretch instead of the 10-year rule:
- A surviving spouse
- A minor child of the account holder (the 10-year clock starts when the child reaches majority)
- A disabled individual under federal tax law
- A chronically ill individual
- Someone not more than 10 years younger than the deceased account holder
Eligibility is fixed as of the date of the owner’s death.3Office of the Law Revision Counsel. 26 U.S. Code 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
Non-qualified annuities are governed by a different statute. They generally must be distributed within five years of the owner’s death, unless the beneficiary elects a life-expectancy payout that begins within one year of the death.5Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
How the Inherited Payout Is Taxed
Inherited annuities are subject to federal income tax. How much is taxable turns on whether the annuity was qualified or non-qualified.
Non-Qualified Annuities
The owner already paid income tax on the money used to buy a non-qualified annuity, so only the earnings portion of the death benefit is taxable. The return of the original premium is tax-free. If the beneficiary takes periodic payments instead of a lump sum, each payment is split between a taxable earnings portion and a tax-free return of premium using the exclusion ratio, which is set when payments begin and stays fixed for the life of the payout.6Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income
Qualified Annuities
Annuities held inside an IRA, 401(k), or other tax-deferred retirement account were funded with pre-tax dollars. The entire distribution is taxable as ordinary income. There is no tax-free return of premium because no tax was ever paid on the premiums.6Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income
No Step-Up in Basis
Unlike stocks and real estate, annuities do not receive a step-up in cost basis at the owner’s death.7Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent The beneficiary inherits the owner’s basis, and every dollar of accumulated gain remains taxable. It is one of the sharpest tax differences between annuities and most other inherited assets.
Tax Reporting
The insurance company sends each beneficiary a Form 1099-R, using distribution code 4 to identify a death benefit payment. The form shows both the gross distribution and the taxable portion.8Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498 Beneficiaries should receive it by January 31 of the year after the distribution.
Estate Tax and Medicaid Recovery
The value of an annuity payable to a beneficiary is included in the deceased owner’s gross estate for federal estate tax purposes, in proportion to the share of the purchase price the decedent contributed. Employer contributions to a retirement-plan annuity are treated as the decedent’s own for this calculation.9Office of the Law Revision Counsel. 26 U.S. Code 2039 – Annuities For 2026, the federal estate tax basic exclusion is $15,000,000 per person.10Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill Estates below that threshold owe no federal estate tax, and an annuity passing to a U.S. citizen spouse is generally shielded by the unlimited marital deduction regardless of size.
Separately, Medicaid can reach annuity money after death. Federal law requires states to seek recovery of Medicaid benefits paid on behalf of anyone 55 or older, and states may define “estate” broadly enough to reach assets that bypass probate, including annuity death benefits.11Office of the Law Revision Counsel. 42 U.S. Code 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Whether it reaches an annuity depends on the state. If the deceased owner received long-term care through Medicaid, beneficiaries should check with the state agency before spending the money.
Common Pitfalls That Cost Beneficiaries Money
No Beneficiary Named
If the owner dies without a valid beneficiary designation, the death benefit usually defaults to the estate. That forces the proceeds through probate, exposes them to the owner’s creditors, and strips away the favorable payout options built for designated beneficiaries. For a qualified annuity paid to the estate, the account generally must be emptied within five years if the owner died before their required beginning date.4Internal Revenue Service. Retirement Topics – Beneficiary
Minor Beneficiaries
Insurers generally will not pay a death benefit directly to a minor. A custodial account under the Uniform Transfers to Minors Act is one common workaround, with an adult custodian holding the money until the child reaches 18, 21, or 25 depending on state law. Otherwise, a court-appointed guardian or conservator may be required, adding legal fees and court oversight. Naming a trust as beneficiary can avoid both routes.
Divorce and Ex-Spouses
Most states have laws that automatically revoke a beneficiary designation naming a former spouse after divorce, but those laws may be preempted by federal law for annuities held inside ERISA-governed employer retirement plans. After a divorce, update the beneficiary designation directly with the insurer rather than relying on state revocation to do the work.
Filing the Death Benefit Claim
To collect, the beneficiary files a claim with the insurance company that issued the contract. The paperwork typically includes:
- A certified copy of the death certificate
- The deceased owner’s full legal name and Social Security number
- The annuity policy or contract number, found on account statements
- A completed claim form specifying how the beneficiary wants the payout delivered
Claim forms come from the insurer’s website or customer service line and can usually be submitted by certified mail or through a secure online portal. Some insurers require a medallion signature guarantee, available through banks and brokerages, for high-value claims or ownership transfers. Processing takes anywhere from 5 to 10 business days at faster carriers to several weeks when documents are missing or multiple beneficiaries are involved.12Internal Revenue Service. Retirement Topics – Death Approved payments arrive by electronic transfer or mailed check. If a surviving spouse is rolling qualified annuity proceeds into their own IRA, the insurer handles the direct transfer so the rollover does not trigger tax.