Annuities are retirement investment vehicles developed, managed and maintained by life insurance companies. Unlike most other types of investment accounts, annuities contain death benefit provisions that allow you to specify who should receive the money in your account when you die. Annuity beneficiary rules are identical to life insurance beneficiary rules, which allow you to list anyone you choose as the recipient of the money.
Annuity Death Benefit Basics
Several different types of annuities are available, each with its own unique set of features and benefits, and not all of them appropriate for everyone. However, the death benefit is one feature accessible and available to owners of every kind of annuity. You have the option of listing the people or organizations who should receive your account value, including your children, and the percentage of the account to which each is entitled.
The primary beneficiary of your annuity is your first choice for who will receive the money in your account when you die. You may list as many primary beneficiaries as you like, and allocate the percentage of the proceeds between them. Listing your children as primary beneficiaries is entirely acceptable and extremely common. When your children eventually receive the death benefit proceeds from your annuity, the entire amount received by each child increases his taxable earning for that year, regardless of whether you already paid taxes on any of the money.
The contingent beneficiary listed on your annuity is your second choice for who will receive the money in your account when you die. Many annuity owners list their children as contingent beneficiaries when a spouse is listed as the primary. Contingent beneficiaries only receive death benefit proceeds when all of the listed primary beneficiaries are either unable or unwilling to accept the money. As long as even one primary beneficiary remains, no contingent beneficiary will be paid.
Per Stirpes Beneficiary
Many annuity owners want to ensure the money within their retirement accounts remains in the family, even if one of the beneficiaries pre-deceases them. Designating a beneficiary as "per stirpes" indicates your desire to have that person's portion of the death benefit proceeds paid out equally to his own heirs if he dies before you. This technique is commonly used by annuity owners with grandchildren. If the beneficiary dies, the allocated portion passes on to his heirs, instead of the other beneficiaries of the annuity.
Potentially significant confusion and complications may arise by listing your minor children as beneficiaries on your annuity. The life insurance company will not pay death benefit proceeds to minor children. Instead, the money is transferred to a trust and managed by a trustee appointed by the courts. As soon as the minor child or children reach age 18, the trust is dissolved and the proceeds released in their entirety.
Gregory Gambone is senior vice president of a small New Jersey insurance brokerage. His expertise is insurance and employee benefits. He has been writing since 1997. Gambone released his first book, "Financial Planning Basics," in 2007 and continues to work on his next industry publication. He earned a Bachelor of Science in psychology from Fairleigh Dickinson University.