An annuity is a set monthly payment from an investment that usually pays for the remainder of your life. When you receive the payment, you only pay ordinary income tax on the earnings portion of your payout each month. Your monthly payment depends on a variety of factors, such as when you invested the money, how long you’d like the payout to be, and how much income you need. Either way, you will get a monthly benefit from the annuity – usually for your life if you plan right. But what happens to your investment when you die?
How Payments Are Calculated
To understand what happens to an annuity after you die, you need to understand more about how payments are calculated. You can invest in annuities that allow you to add a beneficiary to the account, but be aware that it affects how the payment is calculated when you have a beneficiary that is also going to receive annuity payments for life. How they’re calculated depends on the type of annuity you invest in.
Life Annuity Versus Term Certain Annuities
When it comes to a life annuity, your age, life expectancy, interest rates, and the type of annuity you invest in is all considered in the calculations. The way they calculate the payment is to use all that information to divide up the payments you’ll be collecting, based on mortality stats tables and on the principal of the investment.
Payout Determined on Principal, Mortality, and Interest
So, if you invested $100,000 and the mortality stats show that you will live another 20 years, the initial payment is calculated at principal/life expectancy. In this example, that means you’d get a payment of $5000 a year guaranteed. The rest of the payout is determined on the earnings from the investment.
With a life annuity, you may be able to assign a beneficiary such as your spouse. Depending on your ages, the payments might go down slightly to account for the longer life expectancy of your spouse, or they might be the same if your spouse is older than you since it’s based on life expectancy. For example, if your spouse is ten years younger, that is going to add another ten years to the base payout needs.
With a term annuity, you go into it knowing the payment is going to be made for only a prescribed amount of time such as 10, 20 or 30 years. Your beneficiary will receive payments only up to the number of years you planned for in this type of annuity. When you’re making your plans, this is something you should consider if you want to ensure your spouse also has an income if they outlive you.
It’s nice to know that you can leave your investments to a beneficiary like a spouse, child, or other loved ones. You can work with your insurance company to set up an annuity that keeps your principal safe and still provides income to your family should you pass away too soon. Beneficiaries can receive a lump sum or a stream of payments depending on how you set up the contract.