What Happens to the Money when an Annuitant Dies?

A pure life annuity is one in which the continuation of payments by the insurer is contingent upon the continuing survival of one or more lives. The remaining consideration (premium) paid for the annuity that has not been distributed (including accrued interest) is fully earned by the insurer immediately upon the death of the annuitant. This is why annuities payable for the life or lives of one or more annuitants frequently include a minimum payment guarantee. In other words, many annuities include both life and fixed period or refund elements so that if death occurs prematurely, the annuitant and the annuitant’s survivors will recover a total of at least some minimum amount. Therefore, each annuity payment where a minimum guarantee has been purchased is composed of: (1) return of principal; (2) interest or earnings on invested funds; and (3) a survivorship element.

If an annuitant dies before having recovered the full amount guaranteed under a refund or period-certain life annuity, the balance of the guaranteed amount is not taxable income to the refund ­beneficiary—until the total amount received tax-free by the annuitant plus the total amount received tax-free by the beneficiary equals the investment in the contract. From that point on, all additional amounts received are ordinary income

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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