Annuity education  ·  Reviewed October 7, 2026  ·  By Nazim Lokhandwala

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The short version. What happens when an owner or annuitant dies depends on whether payments have started, who is named as beneficiary, and whether the money is inside an IRA or not. Beneficiaries usually owe income tax on the gain, and the timing rules differ for non-retirement and retirement annuities. [1, 2]

If death happens before income starts

The NAIC says a basic death benefit generally applies if you die during the accumulation period, and it is usually the greater of the account value or the minimum guaranteed surrender value. Enhanced death benefits cost extra. Survivors typically owe income tax on a death benefit. The California Department of Insurance also warns that a beneficiary may face a surrender charge when cashing in, and that an annuity can be part of an estate. [1, 3]

If death happens after income starts

After annuitization, survivors may not receive anything unless the contract or the payout option continues payments. This is why payout choices such as period certain, refund, and joint and survivor matter. See payout options. [1]

Non-retirement annuities: the five-year rule

For an annuity held outside an IRA or workplace plan, federal law says that if the holder dies before the annuity starting date, the entire interest must generally be distributed within five years of death. [4]

  • Designated beneficiary exception. A designated beneficiary may instead take payments over life or life expectancy, beginning within one year of death. [4]
  • Surviving spouse. A surviving spouse who is the designated beneficiary is treated as the holder, which allows the contract to continue. [4]
  • If payments had already started. Payouts must continue at least as fast as the method in use at death. [4]

Retirement-account annuities: the ten-year rule

For an annuity inside an IRA or workplace plan, the rules for inherited retirement accounts apply instead. For owners who died after 2019, a beneficiary who is not an "eligible designated beneficiary" must empty the account by December 31 of the year containing the tenth anniversary of death. If the owner died before the required beginning date, no distribution is required before year ten. Eligible designated beneficiaries include a spouse, a minor child, a disabled or chronically ill person, and someone not more than ten years younger than the owner. A sole-beneficiary spouse may elect to be treated as the owner. If the owner died on or after the required beginning date, annual withdrawals may also be required. The exact schedule is detailed, so confirm it with a tax professional. [5, 6]

For the full set of inherited IRA rules, see Inherited IRAs and Beneficiaries.

How the gain is taxed to the beneficiary

The SEC says gains are taxed at ordinary income rates when a death benefit is received. The IRS says a single-sum payment from a variable annuity after death is taxable to the extent it exceeds the unrecovered cost, and the same cost-versus-gain idea applies broadly. [7, 8]

A note on probate. Whether an annuity avoids probate depends on the beneficiary designation and the law of your state. The regulator sources we reviewed do not address it, so ask an estate attorney how your named beneficiaries, and any trust, work together.

Questions to ask about death and beneficiaries

  • Who is the owner, who is the annuitant, and who is the beneficiary? Are they the right people?
  • What does the contract pay at death during the accumulation period, and does it cost extra?
  • Can my spouse continue the contract? Under what rules?
  • Would the beneficiary face a surrender charge or a short deadline to take the money?
  • Is this contract inside an IRA, so that the ten-year rule applies?
  • Have I named a contingent beneficiary, and when did I last review all beneficiary forms?

Plan a conversation

Frequently asked questions

What happens to an annuity when the owner dies?

It depends on whether payments have started, who is the beneficiary, and whether the annuity is inside an IRA. Beneficiaries usually owe income tax on the gain.

What is the five-year rule for annuities?

For non-retirement annuities, federal law generally requires the entire interest to be distributed within five years of the holder's death, with exceptions for a designated beneficiary and a surviving spouse.

Does an annuity avoid probate?

It depends on the beneficiary designation and state law. The regulator sources we reviewed do not address it, so ask an estate attorney.

About this guide. This is general education, not tax, legal, or investment advice, and it is not a recommendation to buy or not buy any product. Nazim Lokhandwala is a licensed insurance professional who offers fixed and indexed annuity products. He does not offer variable annuities or registered index-linked annuities. This guide covers every type so you can compare, and an annuity is not the right choice for everyone. Annuity guarantees depend on the claims-paying ability of the issuing insurer. Product features, rates, and rules vary by company and by state, so read your contract and ask the seller to explain anything that is unclear.

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