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Jul 1

Annuity Proceeds: Beneficiary Designation, Probate and Passing

Unfortunately, there is quite a bit of misinformation that has spread about annuity investment contracts. What is not clear is whether these untruths are intentional or a general lack of knowledge, but it is beyond time to set the record straight.

One of the biggest concerns potential annuity investors have is what happens to their money whey they die. For reasons unknown, there is a misconception that the insurance company keeps the balance of the account at passing. This is simply not true.

What Happens to My Annuity at Death?

The majority of annuity contracts are either fixed, indexed, or variable in nature. These investments are either in deferral or are used for regular interest and/or occasional principal withdraws.

In almost all cases, when an annuity owner(s) dies, the balance of the account simply passes to a named beneficiary.  The beneficiary designation in the contract will usually list family members and the respective percentages each receives.

Annuity owners often setup their spouse as the primary beneficiary and their children and/or grandchildren as contingent beneficiaries. In some cases, a trust will be listed as a reliable means to distribute the annuity proceeds.

Annuity Beneficiary Designation and Probate

If, for some reason, there is no living person or trust listed as the contract beneficiary, then the annuity would likely be subject to the probate process. In this way, probate court would decide who inherited the annuity proceeds like it would any other asset with no beneficiary designation.

However, even with no listed beneficiary, the insurance company underwriting the annuity would not receive the proceeds. It is important to note that most annuity contracts are designed to avoid probate in the first place. (It is a good idea for annuity owners to regularly check their beneficiary designations as part of any estate plan.)

Immediate Annuity Contracts

There is one type of annuity account, commonly referred to as an immediate annuity where, in one instance, the insurance company can keep the undistributed funds when the owner dies. Immediate annuities are the least common type of contract and only suitable in certain situations.

First, it is important to understand how an immediate contract works. When an immediate annuity is purchased, the owner deposits a lump sum with a chosen insurance company.

The lump sum is then used to create a regular stream of income payable to the insured for a set number of years or a lifetime.  In this way, an immediate contract pays a portion of the principal and earned interest each payment cycle.

Lifetime Annuities and Period Certain Guarantees

There are several fail-safe riders that can be attached to an immediate annuity account that guarantee the insurance company will pay back all deposited principal and earned interest during the insureds lifetime or that of their chosen beneficiary.  This can be done through what is called a “period certain.”

The term period certain simply means the insurance company is obligated to distribute both principal and interest for a certain number of years. If the insured passes away before the period certain has been satisfied, then the payments will continue to a named beneficiary for the remainder of the contract.

Thus, the only type of annuity that allows the insurance company to keep the undistributed balance of the investment when the owner passes away is a lifetime immediate income annuity account with no period certain.

All other annuity investments will pass the entire balance of the account to the named beneficiaries in a lump sum or through regular installment payments when the owner passes away.

Request Information and Illustrations

In summary, almost all annuity investment accounts are setup to pay the entire account balance to the named beneficiaries.  The owner of the account has the ability to setup the distribution in a manner that best suits his or her tax, investment and estate planning goals.

Annuities are valued investments for their unmatched safety, regular income distributions and also because they can be setup to  avoid probate. It is important to speak with a knowledgeable agent in order to understand what you can expect from your policy now and in the future.

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