Inherited Annuities: What Happens to an Annuity When You Die?

What Happens to an Annuity When the Owner Dies?

When an annuity owner dies, the contract's death benefit or remaining guaranteed payments pass to the named beneficiary, bypassing probate in most cases.

What the beneficiary actually receives depends on which phase the contract was in. If the owner died during the accumulation phase, before payments started, the insurer pays the death benefit, typically the contract value or the premiums paid minus withdrawals, whichever is greater. If the owner died during the payout phase, the answer depends on the payout option the owner elected.

• Life only. Payments stop at death. Nothing passes to heirs from that portion of the contract.
• Period certain (guaranteed term). The remaining guaranteed payments continue to the beneficiary until the term runs out.
• Joint and survivor. Payments continue to the surviving spouse or other named survivor for the rest of their life.
• Life with period certain. If the owner died inside the guarantee window, the beneficiary collects the rest of the guaranteed payments. After the window, nothing remains.

The single most common problem we see is not the contract terms. It is the beneficiary designation. An annuity with a living named beneficiary pays by contract, directly from the insurer. An annuity with no beneficiary, or a deceased one, pays to the estate and waits on probate with everything else. If you are an heir in that second situation, a probate advance can bridge the gap while the estate works through the court.

What Is an Annuity Death Benefit?

An annuity death benefit is the amount the insurer pays your beneficiary at your death, typically the contract value or premiums paid, whichever is greater.

That "whichever is greater" structure is the standard death benefit on deferred annuities. Say the owner put $150,000 into a contract that dropped to $138,000 in a bad market year. The standard death benefit still pays $150,000, minus any withdrawals the owner took along the way. Some contracts add enhanced death benefit riders that lock in the highest anniversary value or guarantee a minimum annual increase, in exchange for an ongoing rider charge.

Death benefits matter at scale. More than 55 million individual annuity contracts were in force in the United States as of 2024, according to the National Association of Insurance Commissioners (NAIC) (opens in a new tab), and nearly every one of them names someone who will eventually file a claim. To collect, the beneficiary submits a certified death certificate and the insurer's claim forms. The insurer then presents the payout options covered next.

Spousal vs. Non-Spousal Beneficiary Options

A surviving spouse can continue an inherited annuity as the new owner. Every other beneficiary must take the money out on a schedule.

That is the core distinction, and it drives both the timeline and the tax bill. Here is how the options compare for a non-qualified annuity:

Swipe to see all columns →

Spousal continuation is the option that changes everything. A spouse named as sole beneficiary steps in as the new owner, the contract keeps growing tax-deferred, and no immediate tax bill comes due. Non-spouse beneficiaries cannot do that. They pick a payout schedule, and each schedule spreads or concentrates the taxable earnings differently.

One more distinction worth flagging. Everything above describes non-qualified annuities, contracts bought with after-tax money. If the annuity sits inside an IRA or workplace retirement plan, retirement account rules control instead, and most non-spouse beneficiaries must empty the account within 10 years under the SECURE Act. Ask the plan custodian which framework applies before you elect anything.

Do Beneficiaries Pay Taxes on an Inherited Annuity?

Yes, usually. The earnings portion of an inherited annuity is taxed as ordinary income, while the original owner's investment in the contract returns tax-free.

Annuities do not get the step-up in basis that inherited stocks or real estate receive. The gain that built up during the owner's life carries over to you, and the IRS treats it as income when you take it out. Withdrawals from a non-qualified contract come from earnings first, so early distributions tend to be the most heavily taxed. The mechanics are laid out in IRS Publication 575 (opens in a new tab).

How you elect to receive the money is really a decision about when to pay the tax. A lump sum recognizes all the earnings in a single tax year. The five-year window and life-expectancy schedules spread the income across more years and often keep you in a lower bracket. Our annuity tax calculator estimates how a withdrawal or payment stream splits between taxable earnings and tax-free basis.

One exception runs the other way. If the annuity funds payments from a personal physical injury settlement, those payments are generally tax-free under IRC Section 104(a)(2), and guaranteed payments a beneficiary inherits generally keep that character. Inherited annuity taxes turn on facts specific to your contract, so talk to a tax professional before you elect a payout option. The election is usually irrevocable.

What If the Payments Are Life Contingent?

Life contingent annuity payments stop when the measuring life dies, so they do not pass to a beneficiary. Only guaranteed payments continue.

This surprises families more than any other rule on this page. Many settlement and income annuities pair a guaranteed period certain with a life contingent tail. The guaranteed portion behaves like property and flows to the beneficiary. The life contingent portion simply ends. We go deeper into how these payments work, how they are valued, and what can be done with them in our guide to life contingent payments. If you are unsure which type you inherited, the annuity issuer can confirm it, or send us the benefits letter and we will read it with you.

Can You Sell an Inherited Annuity?

Yes. Beneficiaries can sell some or all inherited annuity payments to a funding company for a lump sum, usually without court approval.

If you are reading this a few weeks after losing someone, you are probably discovering that an inherited annuity pays on its own schedule, not yours. Funeral costs, the estate attorney, a mortgage on the family house. Those bills arrive now, while the annuity pays $900 a month for the next 15 years. Inherited annuities are the most common annuity type CSF purchases, and we will not be beat on price.

The transaction is simpler than most people expect. Because an inherited annuity rarely requires court approval, most sales close in 2 to 4 weeks from the day you accept an offer. You can sell everything or keep part of the stream. We see beneficiaries take $30,000 or $50,000 now and leave the remaining payments running for later. Our guide to cashing out an annuity compares selling against surrendering to the insurer, and our step-by-step guide to selling annuity payments walks through the paperwork.

Get written quotes from two or three buyers before you sign anything, and compare the net dollar amount on the same payments. We say that because we know what happens when people compare. They usually come back to us. Have questions about the payments you inherited? Call us at (800) 317-3769. That gets you a direct line to our team, not a call center, and there is no cost or obligation. You can also start from our annuities hub to see how the full process works.