Annuities are a way to have an incoming stream of money your whole lifetime, no matter how long you live. They also give you the option to take care of a family member or other beneficiary after you have passed. How much do you know about annuities? Let’s discuss what annuities are, how they work, the different types, and how to handle them.

The Phases of Annuities: Accumulation and Payout

All annuities are not created equal. They are very customizable, and it’s important to know what you are getting into and understanding how they work. Deferred annuities are ones where they payments don’t begin right after purchase. This affects how they payout in the event of the annuitant’s death.


The accumulation phase is where the purchaser is putting money into the account. If that person were to die during the accumulation phase, the payout would go to the beneficiary. It will be equal to whichever is greater between the contract amount or the amount paid towards the premiums.


If the person with the annuity dies after the deferment has ended, or during the payout phase, things work out differently. The process of payout will depend on what type of annuity purchased. First, if the annuity is a single-life, also called an immediate annuity, the payments stop upon death. There are, however, contracts that you can purchase that will payout to a (or more than one) beneficiary.

Life with Period Certain

When the person with the annuity (annuitant) passes, the beneficiary selected by them will receive a payout for a specific, fixed number of years.

Joint & Survivor

This type of annuity is owned by multiple people, usually spouses. When the final annuitant dies, the payments are only stopped at that point. Sometimes these come with the stipulation that the payment is reduced once the first annuitant passes away.

Amount Certain

Unlike the “Life With Period Certain” contract, which pays out to the beneficiary for a certain amount of time, the “Amount Certain” contract will payout until a fixed dollar amount is paid out. The payment amount and the time frame that the payments are made depend on when the overall payment amount is reached.

Spousal Continuation

This is a provision that if the beneficiary is the spouse of the annuitant, the spouse may assume the role of the annuitant upon the passing of the original annuitant. The role of annuitant passes to them. They decide when funds can be withdrawn, and they also can appoint a new beneficiary.

Beneficiary Payout Options

When the annuitant chooses a beneficiary, be it a person, more than one person, or a charity, they also choose payment terms. The beneficiaries may receive payouts in various ways.


This provides the payout to the beneficiary as a one-time payment of the full amount.

Non-qualified Stretch Provision

This can also be called the “life expectancy” method. This will entitle the beneficiary to payouts over the rest of the beneficiary’s life.

Five-Year Rule

If the beneficiary is not a person, but a charity, trust, or estate, this would provide that the payouts will happen in full over a period of five years after the owner of the annuity’s death. This may be multiple payments or a single lump sum.

Taxes with Inherited Annuities

As with the initial annuity’s owner, when an annuity is inherited, taxes are usually deferred until money is withdrawn from it. It can become more complicated, though, depending on if it is a qualified or a non-qualified annuity.

Qualified annuities are paid for with money before taxes have been taken out. This is commonly a traditional IRA. When the payouts of this type of annuity begin, then funds are taxed.

Non-qualified annuities, conversely, are funded with already taxed dollars. Therefore, the only part of these that are taxable are the growth of the annuity.

The final thing to consider in terms of taxes is how the payout is structured. When you receive the money as a lump sum, it comes with the largest tax liability, and the income tax is paid the same year as the disbursement.

Annuities are complex, and there are so many options to choose from. Consulting a knowledgeable agent can really help to break it all down for you so you can see all the options. Give Aines, Carter & Associates a call today or set up an appointment to find out more.