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Annuities can be a great strategy for providing guaranteed money for retirement. They can also help ensure that the annuity owner’s heirs are provided for if they die too early. If you are an annuity beneficiary, you may be wondering what options you have for receiving a payout of the annuity benefits. Learn about the different types of investment annuities and what options beneficiaries have for payout of inherited annuities.
What Are Annuity Beneficiaries?
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An annuity beneficiary is someone who inherits annuity payments after the original owner of the annuity dies. Annuities are insurance contracts that make a series of payments at regular intervals. Because annuities protect retirement savings and provide guaranteed income, many people use them to ensure they’ll have predictable cash flow in the present, future, or even for loved ones after death. The annuity owner works with the insurance company to designate an annuity beneficiary who will receive either all of the remaining payments or a guaranteed minimum.
Inheriting an Annuity vs. Buying Annuity
As mentioned above, an annuity is a contract issued by insurance companies to provide consistent, guaranteed income for yourself or your family. The money invested in the annuity grows through capital gains and interest accumulation. It is often used to supplement retirement income or protect large lottery winnings.
If the annuity provides a death benefit provision, then the person who purchased the annuity can specify a beneficiary–someone who can inherit the money that remains after the owner passes away. The annuity owner’s death doesn’t impact the payment schedule. If they bought a 10-year annuity, for example, and only receive payments for the first five years, then the beneficiary would continue to receive payments for the next five years.
Types of Annuities and Payout Plans
The type of annuity you have will depend on what happens with the annuity and how the beneficiary will receive payments after the owner dies. There are two main types of annuities and a third type that combines features of the other two.
This type of annuity guarantees payments for a specific length of time. For example, common fixed periods are 10, 15, or 20 years. If the owner dies before payments begin or before the payments are complete, then the amount may be paid to a beneficiary the owner designated until the balance is depleted. If the owner of the annuity outlives the fixed period, then no further payments are guaranteed unless the plan provides for a continuation of benefits.
A life annuity is a plan that guarantees annuity payments for as long as the owner of the annuity lives. That said, the payment amount is based on factors like the annuity owner’s age, interest rates, and the account balance. The payments will be smaller if the insurance company anticipates that the annuity owner will live for a long time.
If the annuity payments have not begun at the time of the annuity owner’s death, though, many plans will provide a death benefit to the annuity beneficiary. The payment is usually made in a lump-sum that amounts to the total of all the premium payments that were made.
If the annuity is a joint life annuity that guarantees payments for the life of the annuity owner and their spouse, the surviving spouse will receive payments from the annuity for the duration of their life. If both spouses die early, they can generally appoint a third beneficiary to receive the death benefit.
Life With Period-Certain Annuity
This type of annuity is a hybrid of the two basic types described above. With this type of annuity plan, the owner is guaranteed to receive payments for the duration of their life but can also choose a fixed period within which payments will be guaranteed.
For example, if the owner of the annuity chooses a life plus period certain with a period of 20 years and the owner dies within the first 10 years, the annuity beneficiary will receive the annuity payments for the remaining 10 years. Essentially, this hybrid type of insurance plan guarantees the owner will receive payments for the entirety of their lives but also guarantees that their heirs will receive those payments if they die too soon.
Options for Inherited Annuities
Annuity beneficiaries often receive options from the insurance company for how they want to receive a payout from the annuity. Here are the most common options for receiving payouts from inherited annuities:
- Lump-sum payment: With this option, the beneficiary can receive any remaining money in the account and pay taxes at the time of payout. They can then put the money into an IRA or another investment account.
- Stretch distribution payments: With this type of payout option, you take the remaining account balance and stretch that amount to provide payments for the remainder of your life. The payment amount and frequency of payments are determined by your life expectancy.
- Five-year-payments: This type of payout option allows you to withdraw incremental amounts from the annuity over a five-year period and a final payment with any remaining income in the fifth year.
- Spousal distribution payments: With this type of payout, the surviving spouse is established as the owner of the annuity and they receive the payments of the same amount and frequency that their spouse established.
- Annuitized payments: Here, the annuity pays out on a consistent schedule over time, but you determine how it will pay out based on your needs or preferences. While this option can be appealing, it is important to note that once you choose this option and set the schedule, it cannot be changed.
Inheriting an annuity can provide you with a way to supplement retirement income and cushion your income over many years. However you prefer to receive the income, it is important to treat it the same way you would any other asset you inherit and decide where it fits in your long-term financial plan. This can help you decide if the income is better used for expenses in the short-term or if it is ideal to use it to supplement your retirement income.