When the owner or annuitant of an annuity dies, the death benefit is what passes to the named beneficiary, ordinarily the full account balance at that point, interest included.
How annuity death benefits work
Most fixed annuities and MYGAs pay the entire account value to the beneficiary, not just the original deposit. Take a hypothetical $100,000 MYGA where the owner passes away three years into the contract with the balance grown to $117,000: the beneficiary receives the full $117,000. Carriers almost always waive surrender charges at death, so the payout is not reduced no matter where you are in the term. Because the death benefit passes directly to the named beneficiary rather than through the estate, it generally avoids probate, which can get funds to your family faster than many other assets would. Our guide on what happens to your annuity when you die walks through the process in more detail.
Taxes on an annuity death benefit
The beneficiary owes ordinary income tax on the gain, meaning the portion of the payout above what the owner originally deposited. Unlike many other inherited assets, an annuity death benefit does not get a step-up in cost basis, so the built-in gain stays taxable no matter how long the contract has been in force. A beneficiary can often choose between taking the money as a single lump sum or spreading it out over a period of years, and that choice can change how much of the payout lands in a higher tax bracket in any single year. A tax professional can help a beneficiary weigh those options before money moves, especially if a lump sum would push them into a higher bracket than spreading the payout out would.
A death benefit only reaches the right person if the beneficiary form behind it is accurate, so it is worth reviewing after a marriage, divorce, birth, or death in the family. Naming a contingent beneficiary matters too, in case the primary beneficiary does not survive the owner. If a contract lists an estate as the beneficiary rather than a person, the payout typically has to pass through probate after all, which removes the speed advantage a named beneficiary is otherwise meant to provide.
Frequently asked questions
What is an annuity death benefit?
It is the payout your named beneficiary receives when you, or the annuitant on the contract, pass away, generally matching the full account balance at that time, interest and all.
Are surrender charges taken out of an annuity death benefit?
Not usually. Insurers typically waive any surrender charge when they pay a death claim, so your beneficiary gets the full balance no matter how far into the surrender period the contract was.
Do beneficiaries pay tax on an annuity death benefit?
Only on the growth. Whatever the payout exceeds the original premium counts as ordinary income to the beneficiary, and unlike many inherited assets, there is no step-up in basis to soften that bill.
Written and reviewed by
James Forren Warren
Licensed Retirement Income Strategist · License #20551202
James Forren Warren is a licensed Retirement Income Strategist with Tax Free Wealth Plan. For the past five years he has helped individuals and families turn their savings into retirement income they can count on. He writes and reviews the annuity research on this site and keeps it plain: what a product does, what it costs you, and who it actually fits.
Educational only, not investment, tax or legal advice. Tax Free Wealth Plan LLC is a licensed insurance agency, not a registered investment adviser or broker-dealer. Annuities are not bank deposits, are not FDIC insured and are not guaranteed by any government agency. Guarantees are backed solely by the claims-paying ability of the issuing insurance company. Features, rates and availability vary by state and change over time; the contract and disclosure documents govern.