If you die before your annuity starts paying, the insurer pays the contract’s death benefit — usually the full account value — directly to the beneficiary you named, and federal law gives a non-spouse beneficiary 5 years to take it (or their lifetime, if they start within 1 year). If you die after payments have started, the answer is whatever payout option you picked on the day you annuitized: a single-life income stops, a period-certain or joint-and-survivor income keeps going.
That is the whole answer in two sentences, and it is also why so many families are surprised. The outcome was decided years earlier, on an application form, by a choice most owners do not remember making. This article walks through both phases, what a spouse can do that nobody else can, how the money is taxed when it lands, the deadline that trips up adult children, and the three things Florida law adds for a Tampa Bay household.
Two phases, two completely different answers
Every annuity has an annuity starting date — the day the contract stops accumulating and begins paying out. Death on either side of that line triggers a different set of rules.
| Before the annuity starting date | After the annuity starting date | |
|---|---|---|
| What the contract does | Pays a death benefit to the beneficiary | Follows the payout option you elected |
| Who gets the money | The named beneficiary, by contract | Depends on the option: nobody, a beneficiary, or a joint annuitant |
| How much | Usually the account value; some contracts return at least premiums paid | Remaining period-certain payments, the survivor’s lifetime income, or an unpaid refund balance |
| Federal deadline for a non-spouse | 5 years, or life-expectancy payments starting within 1 year | Set by the contract’s payout schedule |
| Can a spouse keep it going? | Yes — spousal continuation | Yes, if a joint-and-survivor option was chosen |
Most people who die with an annuity die in the first column. Deferred annuities — fixed, fixed indexed and variable — are bought for growth and income later, and the majority are never annuitized at all; the owner takes withdrawals instead. So for most Florida households, “what happens when I die” is really “what happens to the account value,” and that is the case we cover first.
If you die before payments start
The contract pays its death benefit to whoever is named on the beneficiary form. Three things about that are worth knowing.
It bypasses probate. An annuity with a named living beneficiary passes by contract, not by will, exactly as life insurance does. The beneficiary sends the insurer a claim form and a death certificate, and the money is paid without a court’s involvement. It goes through probate only if you named your estate, or if everyone you named has predeceased you and there is no contingent beneficiary — which is why a contingent name on the form is not optional.
The amount is set by the contract. The standard death benefit on a deferred annuity is the account value on the date the insurer receives proof of death. Many contracts add a floor of premiums paid less withdrawals, so a beneficiary is not hurt by a market dip in a variable contract or by a surrender charge. Some contracts offer an enhanced death benefit rider at an extra cost. Which of these applies is a contract fact, not a rule of law, and it varies by carrier and by the state the contract was issued in — so read the death benefit provision rather than assuming.
Surrender charges usually do not apply. Most contracts waive the surrender charge on a death benefit. That is contract-specific too, and a contract that does not waive it is a reason to keep shopping. Our post on taking money out of an annuity without a penalty covers how those charges work while you are alive.
The 5-year rule
Federal tax law does not let a non-qualified annuity sit in a beneficiary’s name indefinitely. Section 72(s) of the Internal Revenue Code says that if the holder dies before the annuity starting date, “the entire interest in such contract will be distributed within 5 years after the death of such holder.” The alternative is to take the money as payments over the beneficiary’s life expectancy, provided those payments begin “not later than 1 year after the date of the holder’s death” (26 U.S.C. §72(s)).
In practice a non-spouse beneficiary chooses from three options:
| Option | How it works | Tax timing |
|---|---|---|
| Lump sum | Full death benefit paid at once | All the growth is taxed in the year received |
| 5-year deferral | Leave the money in the contract, take it in any pattern, but empty it by the fifth anniversary of death | Growth taxed as it is withdrawn |
| Life-expectancy payments (the “stretch”) | Elect within 1 year of death to receive payments spread over the beneficiary’s IRS life expectancy | Each payment is part return of premium, part taxable growth |
The stretch is the option most often missed, because the election window is one year and many insurers set a shorter administrative deadline for the paperwork. A beneficiary who does nothing is usually defaulted to the 5-year rule.
If you die after payments start
Once a contract has been annuitized, the death benefit provision is gone and the payout option governs. This is the choice on the annuitization form, and it is irrevocable.
| Payout option | If you die… | What the beneficiary receives |
|---|---|---|
| Single life | at any point | Nothing — payments stop with the annuitant |
| Life with period certain (e.g. 10 or 20 years) | inside the certain period | The remaining payments in the certain period |
| after the certain period | Nothing | |
| Joint and survivor | first | The survivor keeps receiving payments for life, at 100%, 75% or 50% of the original amount depending on the election |
| Life with cash refund | before payments equal the premium | The difference, as a lump sum |
| Life with installment refund | before payments equal the premium | The difference, as continued payments |
A single-life option pays the most per month precisely because the insurer keeps whatever is left at death. That is not a trick; it is the trade. Someone with no dependants and a long family history may reasonably take it. A married couple who annuitize on one life only, to get the bigger number, are making a decision the surviving spouse will live with. The joint-and-survivor and period-certain options exist so that the income can outlive the annuitant, at the cost of a smaller monthly figure.
One tax detail from IRS Publication 575: when a joint-and-survivor annuity was already paying before the first death, the survivor “figure[s] the tax-free part of annuity payments you receive as the survivor in the same way the primary annuitant did.” The exclusion ratio simply carries over.
What a surviving spouse can do that nobody else can
The single most valuable rule in this whole area is spousal continuation. Section 72(s)(3) says that when the designated beneficiary is the surviving spouse, the 5-year and life-expectancy rules are applied “by treating such spouse as the holder of such contract.”
In plain terms: a surviving spouse who is the sole primary beneficiary can step into the deceased spouse’s place, become the owner, and leave the contract exactly as it was. No distribution is required, no tax is triggered, the deferral continues, and the spouse can later name their own beneficiaries. The 5-year clock does not start until the second death.
For an annuity held inside an IRA, the spouse has a parallel set of choices from the IRS: roll it into their own IRA, or keep it as an inherited IRA and delay distributions until the year the deceased would have reached required-distribution age (IRS retirement topics — beneficiary).
Two conditions make this work, and both are set up while you are alive:
- The spouse has to be the sole primary beneficiary. Naming “my spouse and my two children” as co-primaries can cost the spouse the continuation option on their share.
- Ownership and annuitant should line up. Contracts where the owner and annuitant are different people can pay out on the wrong death. Most carriers now default to owner-driven contracts, but older contracts are worth checking.
Qualified vs non-qualified: which deadline applies
The 5-year rule above is for non-qualified annuities — contracts bought with money that has already been taxed. An annuity held inside an IRA, a 403(b) or another retirement plan is qualified, and it does not follow §72(s) at all. It follows the retirement-account rules, which changed for deaths in 2020 and later.
| Non-qualified annuity | Qualified annuity (inside an IRA or plan) | |
|---|---|---|
| Governing rule | 26 U.S.C. §72(s) | IRA/plan beneficiary rules (SECURE Act) |
| Surviving spouse | Continue the contract as owner | Roll over to own IRA, or keep as inherited IRA |
| Most non-spouse beneficiaries | 5 years, or life-expectancy stretch elected within 1 year | Empty the account by the end of the 10th year after the year of death |
| Eligible designated beneficiaries | n/a | Minor child of the owner, disabled or chronically ill individual, or someone not more than 10 years younger than the owner — may still use life-expectancy payments |
| What is taxable | Growth only; premium returns tax-free | Every dollar (unless it was Roth) |
The IRS’s own summary of the qualified side: a non-eligible designated beneficiary must “empty the entire account by the end of the 10th year following the year of the account owner’s death,” while the eligible categories — “spouse or minor child of the deceased account holder,” “disabled or chronically ill individual,” and an “individual who is not more than 10 years younger than the IRA owner” — keep more flexibility (IRS).
The practical lesson for an adult child inheriting a parent’s annuity is to find out which kind it is before making any election. The two deadlines, the two tax bases and the two sets of options are all different.
How an inherited annuity is taxed
Three rules, in descending order of how often they surprise people.
It is ordinary income, and there is no step-up. A brokerage account or a house gets a new cost basis at death, so the heir’s gain is measured from the date of death. An annuity does not. The growth inside a non-qualified contract is income in respect of a decedent: it is taxed to whoever receives it, at their ordinary rate, exactly as it would have been taxed to the owner. On a qualified annuity, the whole balance is taxable because none of it was ever taxed. This is the strongest argument for thinking about who is named, not just whether someone is: a beneficiary in a high bracket who takes a lump sum can hand a third of the growth to the IRS in one year.
There is no 10% additional tax, at any age. The additional tax on distributions before 59½ has a specific exception for amounts “made on or after the death of the holder” (non-qualified, §72(q)) and for amounts “made to a beneficiary (or to the estate of the employee) on or after the death of the employee” (qualified, §72(t)(2)(A)(ii)). A 45-year-old inheriting a parent’s annuity pays income tax on the growth, but not the penalty.
Federal estate tax almost never applies, and Florida has none. The value of the annuity is included in the owner’s gross estate, but the IRS filing threshold for a death in 2026 is $15,000,000 (IRS). Florida’s own estate tax disappeared for anyone who died after December 31, 2004 (Florida Department of Revenue), and Florida has no inheritance tax and no personal income tax. So for a Florida beneficiary the entire bill is federal income tax on the growth — nothing at the state level, whether they take a lump sum or stretch it.
The IRMAA trap for the surviving spouse
Here is the consequence nobody mentions at the claim stage. Suppose a Clearwater widow, 71, inherits her husband’s non-qualified annuity with a good deal of growth in it and takes the death benefit as a lump sum because the insurer’s letter made that sound simplest.
That growth is ordinary income on her tax return for the year. Two years later, Medicare looks at that return to set her Part B and Part D premiums. The 2026 income-related monthly adjustment amount (IRMAA) starts above $109,000 of modified adjusted gross income for a single filer, based on the return from two years earlier (SSA). And she is now a single filer, so the bracket that used to sit at double that figure for the couple has been cut in half for her.
A lump sum that would have caused no surcharge on a joint return can push a widow or widower into an IRMAA bracket — for a full year, on top of the grief. Spousal continuation avoids it entirely; the 5-year deferral or a life-expectancy election spreads it. We cover the mechanism in detail in does annuity income count toward IRMAA?, and you can test a specific year’s income against the 2026 brackets with the IRMAA calculator.
The point is not that a lump sum is wrong. It is that “how should I take this” has a Medicare answer as well as a tax answer, and the beneficiary election form does not ask about either.
What Florida law adds
Three state rules apply to a Florida resident’s annuity at death, and two of them are the kind of thing that only gets discovered in a lawyer’s office.
Annuity proceeds are protected from most creditors. Florida Statute §222.14 provides that “the proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form, shall not in any case be liable to attachment, garnishment or legal process in favor of any creditor … of the person who is the beneficiary of such annuity contract, unless the … annuity contract was effected for the benefit of such creditor” (Fla. Stat. §222.14). The protection has no dollar cap in the statute, and it attaches to the proceeds in the beneficiary’s hands as well as to the contract during the owner’s life. That is one reason annuities show up in Florida estate plans where they might not elsewhere.
A divorce voids the designation. Under Florida Statute §732.703, a beneficiary designation “to or for the benefit of the decedent’s former spouse is void as of the time the decedent’s marriage was judicially dissolved,” and the statute lists annuities — both inside and outside retirement plans — among the assets it covers (Fla. Stat. §732.703). That protects people who forgot to update a form. It also means that anyone who genuinely wants a former spouse to remain the beneficiary has to re-execute the designation after the divorce, or it will not hold.
No state tax at any stage. Florida imposes no personal income tax (Florida DOR, GT-800025), no estate tax and no inheritance tax. A beneficiary living in Tampa pays the federal income tax on the growth and nothing else. A beneficiary who lives in another state pays that state’s income tax on the same growth — a point worth knowing if the children have moved away.
Five things to check on your contract now
None of this requires a new product. It requires reading the contract you already own.
- Who is the beneficiary, and is there a contingent? Pull the current designation from the insurer, not from memory. Check that a spouse is the sole primary if continuation is the goal, and that a contingent is named so the estate never becomes the default.
- Are the owner and annuitant the same person? On older contracts they may not be, and the death that triggers the payout may not be the one you expect.
- What is the death benefit, exactly? Account value, return of premium, or something enhanced — and is the surrender charge waived?
- Is it qualified or non-qualified? That single fact decides whether your children face a 5-year or a 10-year clock, and whether the whole balance or only the growth is taxable.
- If it is already annuitized, which payout option was chosen? If it was single-life and there is a spouse, that is worth knowing now rather than later. It cannot be changed, but the household’s other assets can be arranged around it.
Virginia Barausky reviews annuity contracts as part of a broader retirement-income picture, alongside the Medicare and long-term care decisions the same money has to fund. She works with the financial advisor who manages the underlying assets rather than around them, because the beneficiary form and the income plan have to agree.
If you would like the designation, the payout option and the tax and IRMAA consequences of a specific contract put side by side, schedule a call. There is nothing to buy on the first conversation, and the most common outcome is a corrected beneficiary form.