Process

• When you inherit an annuity, you file a claim for the annuity's benefits with the insurance company. This requires that you provide proof of death of the original insured individual (the original annuity holder). You must provide a copy of the death certificate and fill out a death claim form as proof. One you have received the proceeds of the annuity, you may do anything you want with them. Generally, annuity benefits are used either as a personal savings or as additional income.
  
  

Disadvantages

• The disadvantages of inheriting an annuity are in how the annuity is taxed. Annuities are subject to ordinary income tax. Because of this, any annuity income increases your gross income. If your income is increased enough, it may result in a higher marginal tax rate which means you will pay more in income taxes.
  
  

Benefits

• The benefit of an annuity inheritance is that you receive money right away after you file for the death claim. Many investments pass through probate. Annuities are passed directly the beneficiaries when the original policyholder dies.
  
  

Misconceptions

• A common misconception is that you only have one option when choosing your inheritance. If your inherited annuity is a deferred annuity, you may receive either a lump sum distribution or immediate annuity payments. If you take the lump sum option, you pay income taxes on all of your gains in the contract immediately. The gain in the contract is any amount over the principal amount in the contract. Immediate annuity payments are mostly a return of principal with a small amount of interest added to the principal. This effectively reduces the amount of income taxes you pay, since only a small amount of your payment is investment gain.
  
  

Considerations

• Consider what you need the annuity money for. A lump sum distribution is normally only ideal when you have a need for a large, lump sum savings. But, because of the taxes you will pay up front on the annuity, this option may not be the best option for you. Annuity payments may be used to fund other retirement plans over time, or may be used as a second source of income.