What happens to an annuity when you die
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Beneficiaries are persons designated on the annuity contract who will receive the money when you pass away. You may name one, or more than one, beneficiary. You can also change beneficiaries at any time. However, the beneficiaries listed on your annuity at death are the only beneficiaries entitled to receive the money in the annuity.
The significance of naming beneficiaries on the policy is that the policy bypasses probate. Most investments are left to your estate when you die. If the estate is large enough, the probate process could take six months, a year or longer. This ties up assets. Annuities are not subject to this process.
By bypassing probate, you get the receipt of an annuity within a very short
period of time. Many insurers pay benefits within a week or two after receiving all of the paperwork necessary to pay a claim. This means that you don't have to wait to use the money left to you by your loved ones.
Naming a beneficiary is important. Beneficiaries should be people or charitable organizations. If there is no beneficiary named on the policy, the money is left to the estate. If this happens, then the annuity passes through probate.
Even though an annuity is an insurance policy, this does not mean that it receives the same tax benefits of a life insurance policy. An annuity contract is taxed at ordinary income tax rates when you die. The tax liability depends on the tax bracket of the beneficiary.Source: ehow.com