There are various types of annuities. In certain instances when the owner dies, the Internal Revenue Service requires the surviving annuitant on a joint account or the beneficiary to immediately cash in the annuity. However, the IRS doesn't require people to cash in all types of annuities when the owner dies.
Immediate Income Annuities
Immediate income annuities are funded with a single premium, and funds are immediately annuitized. Annuity owners can choose how they want to set up the annuity. They may choose to receive lifetime payments with a period certain, which means monthly payments continue for a set number of years. If the annuitant dies, the payments continue but go to the beneficiary for the remainder of the term. If the annuity has a cash refund provision, it means that if the annuitant dies before receiving a return on principal, the beneficiary must take the remaining principal as a lump sum when the owner dies.
Death After Accumulation Phase
Variable and fixed annuities have an accumulation phase during which funds are invested. At the end of the accumulation phase, which lasts for up to 10 years, the owner can choose to annuitize the contract and begin receiving monthly payments. On a joint life annuity, if one owner dies, the contract terminates and the other owner receives a lump sum. On a joint life with survivorship annuity, the other owner continues to receive monthly payments for life.
Death During Accumulation Phase
Variable annuities have a standard death benefit that entitles the named beneficiary to an amount equal to the initial funding premium, minus charges and prior withdrawals, if the owner dies before annuitization. For qualified annuities that contain tax-deferred funds, beneficiaries can elect to take the money as an immediate lump sum or to take it out periodically or as a lump sum at any point within the first five years after the owner's death.
Nonqualified Annuity Stretch Payouts
Nonqualified annuities are funded with money already subjected to income tax, as opposed to tax-deferred retirement fund money. People receiving a death benefit from a nonqualified annuity can take a lump sum, take payments within the first five years or take stretch payments. Stretch payments divide the death benefit amount of the annuity over the life expectancy of the beneficiary. Stretching payments out over a number of years enables the beneficiary to minimize his taxable income rather than take a lump sum and pay taxes on the whole sum in one tax year. The first withdrawal must occur within a year of the owner's death.