With an annuity, the policyholder can invest a certain amount of money during his working life. The invested amount grows in the annuity and provides him with an income in retirement. If the policyholder dies before getting his money back, the annuity then pays the income to his beneficiary instead.
The policyholder decides who his beneficiary is. Usually, the policyholder's spouse or child is the annuity's beneficiary. If the policyholder has a living trust, he can also designate the living trust as the contingent beneficiary. When the policyholder dies, the beneficiary can claim the annuity benefits by requesting a claim form from the annuity issuer. The beneficiary can then fill out the claim form and submit it, along with a certified copy of the policyholder's death certificate.
The policyholder usually has a few payment options with an annuity. Most annuity contracts offer the choice of receiving the payments over a specified period of time and getting them over an indefinite period. With the first option, the policyholder decides to spread the payments over a certain number of years. With the second option, the policyholder can choose to get the payments until the end of his life, or the end of his beneficiary's life.
If the policyholder dies before the annuity begins making payments, the death benefit redirects the value of the account to the policyholder's beneficiary. This usually ensures that the beneficiary gets at least the entire amount the policyholder has invested in the annuity, even if the account has lost money. The policyholder can choose to increase the amount of the death benefit for a certain fee, which is usually 0.43 percent of the invested amount, according to Smart Money.
If the policyholder of the annuity dies while there is still some money in the annuity, the money goes to the beneficiary. However, the beneficiary also inherits the taxes that have to be paid on the funds. The beneficiary then has to pay federal estate taxes on any amount that exceeds that federal estate tax exemption, and income tax on the profits the annuity has gained over the years.