Annuities are purchased as part of a financial planning strategy, typically a Life Insurance policy, to ensure a steady stream of income for Surviving Family, Heirs or other beneficiaries after the annuitant's passing.
Annuities can vary widely in terms of their features, fees, and payout options, but most often they offer a series of payments over time, rather than all at once, known as a Lump Sum.
Payments can be made monthly, quarterly, annually, or at any other interval specified in the policy. An annuity can even be structured to pay out for the remainder of a beneficiary's life.
Though annuities can gain interest over time and pay more than a lump sum, annuities are subject to taxation, whereas lump sums are not.
An annuity also can be either immediate or deferred. An immediate annuity starts paying right after a death, whereas a deferred annuity defers payments until a later date, and may accumulate value over that time.
Additional information about annuities includes but is not limited to:
Purchase and Ownership: The deceased annuity holder will have typically purchased an annuity contract from a Life Insurance company or financial institution and pays them a series of premium payments to the keep the policy.
Accumulation Phase: During the annuity's accumulation over time, the funds within the annuity contract grow on a tax-deferred basis. The funds may be invested in various ways, such as fixed interest investments or variable investment options, depending on the type of annuity chosen.
Annuitant's Passing: After the death of the annuitant the annuity contract is triggered and actions specific provisions outlined in the contract.
Beneficiary Designation: The annuity holder will have likely designated one or more beneficiaries to receive the Death Benefit. This designation is typically made when the annuity is purchased or through subsequent contract updates.
Death Benefit: Upon the annuitant's death, the beneficiary receives the death benefit, which can take various forms, depending on the annuity contract:
Lump Sum vs. Income Stream: The beneficiary may receive a one-time, lump sum payment representing the accumulated value of the annuity. Or they may receive regular, periodic payments as an income stream. This income can be guaranteed for a specific period or for the beneficiary's lifetime.
Joint and Survivor Option: In certain cases, annuities may allow a Surviving beneficiary, such as a spouse, to continue receiving payments even after the annuitant's death.
Taxation: The tax treatment of the death benefit depends on factors like the type of annuity, the beneficiary's relationship to the annuitant, and applicable tax laws. Some portions of the death benefit may be subject to income tax.
Estate Planning: Annuities can play a role in Estate Planning by providing a reliable source of income to beneficiaries, helping to meet financial needs and obligations after the annuitant's passing.