In today's uncertain financial climate, many Americans are turning to annuities as a way to guarantee income during retirement. With inflation cooling but still problematic, market volatility causing jitters and traditional pensions nearly extinct, annuities offer something rare: predictable, steady payouts for life. But while retirees often understand the basics of how annuities work during their lifetime, there's one question that doesn't always get asked soon enough: What happens to that annuity when the person who owns it dies?

It's an important question, especially if you're counting on that annuity to support a surviving spouse or want to leave something behind for your children. And, the answer depends on several factors, including the type of annuity purchased and the options selected at the time of signing the contract. That's why understanding the potential outcomes ahead of time is key. If you don't plan ahead, that stream of income could dry up, and in some cases, the insurer might keep the remainder of the money.

So, whether you're shopping for an annuity, currently receiving payouts or managing a loved one's estate, it's critical to know what happens to an annuity after the annuitant dies.

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What happens to an annuity when a person dies?

What happens to an annuity after death depends largely on the type of annuity and the contract terms set in place. Here's what happens with the common types of annuities after the person who owns it dies: 

• Single life annuity: If the annuity is a single life annuity, meaning that it's set to pay income only for the life of the annuitant, . That means even if the annuitant dies early into the payout period, the insurance company keeps the remaining balance. This might sound harsh, but it's part of the tradeoff for getting higher monthly payments while the person is alive.
• Joint and survivor annuity: Joint and survivor annuities are a common option for married couples who want to make sure both spouses are covered. If the annuity was structured as a joint and survivor annuity, after the original annuitant passes away. That said, the amount may be the same or reduced, depending on the contract. 
• Fixed period or period certain annuity: Some annuities include a "period certain" feature, which — like 10 or 20 — regardless of whether the annuitant is alive. If the annuitant dies before that period ends, the remaining payments are made to a designated beneficiary.
• Refund options: Other annuities include refund provisions. For example, a cash refund annuity ensures that if the total amount paid out doesn't equal the original investment, the remaining amount is refunded to a beneficiary. This helps ensure that some of the money goes to heirs, even if the annuitant dies early.

It's worth noting that in most cases, any payments made to a beneficiary after the annuitant dies are considered taxable income. However, the taxation details depend on whether the annuity was qualified (funded with pre-tax dollars) or non-qualified.

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How to make sure your annuity benefits your loved ones

If you're worried about your loved ones' ongoing financial needs, there are steps you can take to make sure your annuity continues to support your family after you die. That said, it takes a bit of upfront planning and a clear understanding of the contract terms to get it right.

Start by carefully reviewing the death benefit provisions in your annuity. If you're still in the accumulation phase (i.e., you haven't started receiving payments yet), check whether your contract includes a death benefit rider. This rider can guarantee that your beneficiaries receive the greater of your account value or the total premiums paid, even if your investments have declined.

If you've already annuitized (meaning you've started receiving regular income), it's important to confirm whether your contract includes features like a joint payout option or period certain. These choices can't be added after the fact, so what you selected at the start is what determines how much, if anything, your beneficiaries receive.

You should also take the time to review and update your beneficiary designations. Life changes, like divorce, remarriage or the death of a previously named beneficiary, can create complications if you haven't kept your documents current. And make sure you name contingent beneficiaries too, in case your primary beneficiary isn't able to inherit.

Ultimately, an annuity doesn't have to be a "use it or lose it" investment. With the right setup, it can offer long-term peace of mind for both you and the people you care about.

The bottom line

Annuities can offer powerful income protection during retirement, but without the right planning, they might not offer the same protection for your loved ones after you're gone. But what happens to your annuity when you die depends largely on the structure of the contract, whether you've chosen survivorship options and who you name as your beneficiaries.

To avoid unwanted surprises, take the time to understand your annuity's terms and make sure your designations reflect your wishes. With a few thoughtful decisions, your annuity can serve as more than just a retirement paycheck. It can also be a meaningful part of your legacy.