What Happens to an Annuity When the Owner Dies?

The Short Version

Most fixed annuities pass directly to whoever you've named as beneficiary, generally bypassing probate entirely. That's one of the quieter advantages of annuities compared to assets that have to go through an estate.

What happens next depends on a few things: who the beneficiary is, how the contract is structured, and the choices they make about how to receive the money.

Naming a Beneficiary Correctly

This sounds obvious, but it's one of the most commonly overlooked steps. When you set up an annuity, you name a beneficiary (or beneficiaries) directly on the contract — separate from your will. That designation controls where the money goes, regardless of what your will says.

Keeping beneficiary designations current matters. Life changes — marriage, divorce, a new grandchild — and a contract with an outdated beneficiary can send money somewhere you didn't intend.

If the Beneficiary Is a Spouse

A surviving spouse typically has an option most other beneficiaries don't: spousal continuation. Instead of taking a payout, the surviving spouse can often continue the contract as their own, preserving its tax-deferred status and continuing to grow under the same terms.

If the Beneficiary Is Not a Spouse

A non-spouse beneficiary (an adult child, for example) generally has a few options, depending on the contract:

• Lump sum — receive the full death benefit at once
• Five-year rule — withdraw the full amount over up to five years
• Payments over their life expectancy — some contracts allow this, spreading the tax impact over a longer period

The right choice often comes down to the beneficiary's own tax situation — spreading the income out can keep them from being pushed into a much higher bracket in a single year.

How the Money Is Taxed

For a non-qualified annuity, the beneficiary generally owes ordinary income tax only on the portion that exceeds the original deposit — the growth, not the principal. For a qualified annuity (IRA-funded), the entire amount is typically taxable as ordinary income, same as it would have been for the original owner.

What If No Beneficiary Was Named?

If a contract has no living named beneficiary, the death benefit typically becomes part of the deceased owner's estate and may have to go through probate — the exact outcome the beneficiary designation is meant to avoid. This is a good reason to double-check your paperwork rather than assume it's handled.

The Bottom Line

A properly named, up-to-date beneficiary designation is a small piece of paperwork that makes a real difference for the people you leave it to — faster access to the money, no probate delay, and options for managing the tax impact. It's worth reviewing every few years, especially after a major life change.