The last wishes of a dying person make a great plot device for movies or books. Deciding who gets what -- and what they have to do to get it -- has endless potential for drama or comedy. In real life most people don't take that much trouble, but it is good to know your wishes will be respected. For example, if some of your retirement is invested in annuities, you can direct the funds to a beneficiary, rather than leaving them in your estate.
An annuity contract is like a life insurance policy turned on its head. The company still calculates your probable life expectancy, but instead of paying a lump sum when you die, it pays an ongoing income while you live. You can buy an annuity with a single payment, like a pension benefit or lottery win, but those don't come around every day. More often, you'll buy annuities by paying monthly premiums. If you live, it becomes your retirement income. If you don't, your annuity can pay out a death benefit like other life insurance products.
Old-school annuity contracts were a bit of a gamble. If you died the month after you started collecting an income, the money left in your contract reverted to the company. Modern annuities are more flexible, usually allowing you to specify one or more beneficiaries to receive any outstanding amounts if you die prematurely. Like other life insurance products, the funds are paid directly to your beneficiary by the company. They're usually taxable to your beneficiary, but they won't go through probate first and won't normally become part of your estate.
That holds true unless your designated beneficiary dies before you do. In that case, if there's no remaining beneficiary, the insurer will pay the death benefit to your executor and it will become a part of your estate. You can avoid this by updating the contract as necessary with a new beneficiary. It's also prudent to provide your insurer with one or more contingent beneficiaries. If your primary beneficiary should be deceased when the time comes, the insurer will pay the death benefit to your contingent beneficiary.
What You Leave
If you should pass away before you begin drawing an income from the annuity, your beneficiaries will receive the total accumulated value to that point. For example, if you've been salting away $5,000 a year for 20 years, the contract will contain $100,000 of your capital plus two decades' gains on the annuity investment. If you've already begun to draw an income, the death benefit depends on your contract's terms. Some will pay out any unused portion of your accumulated values. If your annuity was to pay a set amount for a set period of years, the contract will pay the balance of that amount to your beneficiaries.
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