What Happens to the Money in an Annuity When You Die?

There is a lot to be said for annuities when it comes to your retirement. They’re the only commonly available financial vehicle, other than Social Security (or a pension if you still actually have one), that can provide a guaranteed stream of income for life, no matter how long you live.

But what if your lifetime doesn’t last as long as you hope? What happens to the money in an annuity when you die? Annuities sometimes get a bad rap from people who argue that if you die too soon, your family will get nothing. Whether or not an annuity pays a death benefit to your beneficiaries when you die depends on how your annuity is structured—and there are numerous ways to structure an annuity.

Understanding the types of annuities available and how you might use them can help you determine whether one might be a good fit for you.

Accumulation annuities vs. income annuities

To understand what happens to an annuity when you die, it’s important to first understand the two categories of annuities: annuities that help you accumulate funds for retirement and annuities that provide stable income in retirement. Here’s what happens with the money in each annuity category when you die.

Annuities that accumulate funds for retirement

If you’re using an annuity to save for retirement and haven’t started taking an income stream (annuitization), your beneficiaries can typically get the current value of your annuity. That’s because the insurance portion of the annuity (which is what guarantees lifetime income) hasn’t been turned on yet.

Beneficiaries have several options for saving these funds. One option is to receive the funds in a lump sum, which would give them immediate access to the full amount. Alternatively, they could opt for periodic payments, depending on their financial needs and the terms of the annuity.

Once received, beneficiaries are able to decide where to place these funds. A few options include depositing them into a brokerage account for investment opportunities, a savings account for safekeeping or liquidity, or even moving them into another annuity to continue growing the investment.

Annuities that provide income in retirement

Unlike annuities that are accumulating funds for retirement, which combine an accumulation feature with an insurance feature, income annuities are all insurance. Income annuities are designed to make payments for a long period of time, which means the annuity might not pay as much if you die too soon. But there are a lot of different ways to structure an income annuity. Here’s how they work:

• Life only: This bases your payments on the length of your life. Once you die, the payments stop, and no more benefits are paid. Many couples choose to use joint-life payments. With joint life, the payments continue until the second person dies. You can even have the payment to the second person decrease when the first person dies, which results in higher payments when both people are living.
• Life with refund: You’ll continue to receive payments for as long as you live, and you or your beneficiary are guaranteed to get a least the amount you paid in. If you die before that amount is paid out, your beneficiary will get payments up to the amount that you initially paid for the annuity upon your death.
• Life with period certain: In this case, your payments will continue until you die (or until you and your spouse die if you select a joint-life option). But they will continue for a minimum period of time (say 10 or 20 years) even if you die. If you die prior to the end of the period certain, your beneficiary will get those payments.
• Period certain only: Income is paid for a set number of years and then stops. If you die prior to the end of the period certain, your beneficiary gets those payments. If you outlive the period certain, the payments still stop.

The different structures will result in different payout amounts for the same premium (what you pay for the annuity). For instance, a life-only annuity will pay more on a monthly basis than a joint-life option with a period certain for the same premium. That’s why it’s a good idea to talk to a financial advisor about your specific situation. They can help you build an annuity income plan that’s best for your specific needs.

What you leave behind should be part of a larger plan

As with any financial tool, it’s important not to look at annuities in isolation. Rather, think about how all your financial tools work together. This is where your financial advisor can help.

Together with your advisor, you can develop a comprehensive plan using a mix of financial tools to grow and protect your money. Every situation is different—and your advisor can design a plan custom-tailored to you that identifies blind spots and opportunities that may have otherwise gone overlooked.

Annuities are contracts sold by life insurance companies and are considered long-term investments that may be suitable for retirement. Income annuities (either immediate or deferred) have no cash value, and once issued they can’t be terminated (surrendered). The original premium paid is not refundable and cannot be withdrawn.