He Bought a $300,000 Annuity at 70 With a 10-Year Guarantee ‘for the Kids.’ The Kids Got the Checks, and Every One Was Taxed as Their Income

When an income annuity with a guaranteed payout period passes to heirs after the owner dies, the remaining checks become taxable income to the beneficiaries. In this kind of scenario, a $300,000 annuity purchased at 70 with a 10-year period certain delivers checks to the children if the owner dies early. How much of each check gets taxed hinges on where the premium came from and what the children already earn.

Annuity Sales Hit a Record as Peak 65 Arrived

More retirees are converting savings into guaranteed income than ever before. According to LIMRA’s final U.S. Individual Annuity Sales Survey, total U.S. annuity sales reached $464.1 billion in 2025, a 7% jump from the prior year and the fourth consecutive annual record. Single premium immediate annuities, which convert a lump sum into scheduled payments and are most often paired with a period-certain guarantee, rose 6% to $14.4 billion.

LIMRA attributes much of that demand to demographics. Bryan Hodgens, senior vice president and head of LIMRA research, noted in the March 2026 final release that 4.1 million Americans are turning 65 each year, and many lack pensions or other income sources to cover basic living expenses in retirement. LIMRA has forecast that strong annuity sales will persist through 2026 despite expected economic headwinds.

How a Period-Certain Guarantee Moves Income to Heirs

A lifetime income annuity normally stops at the owner’s death. A period-certain feature guarantees payments for a fixed number of years regardless of what happens. If the owner dies before the period ends, named beneficiaries collect whatever payments remain. A buyer who starts at 70 with a 10-year guarantee leaves checks to the children only if death occurs before age 80, and only for the years left on the schedule. Once the guarantee period has run out, payments end at death.

Qualified Money Makes Every Dollar Taxable

For qualified annuities funded with IRA or retirement plan money, every dollar of each payment is taxed as ordinary income. The original contributions went in pre-tax, so the children inherit both the checks and the full tax obligation that comes with them.

Nonqualified annuities, those funded with already-taxed savings, work differently. An exclusion ratio divides each payment into a return of principal and an earnings component, and only the earnings portion is taxable. As personal finance expert Suze Orman has explained, beneficiaries “will have to pay ordinary income tax on any money that they have inherited above what you originally put in.”

Under either structure, inherited annuities miss the step-up in basis that applies to inherited stocks and real estate. Growth inside the contract is taxed at ordinary income rates, not the lower capital gains rates available for most inherited investments.

Inherited Checks Often Arrive in Peak Earning Years

Timing creates an additional complication. A parent who buys an annuity late in retirement typically has middle-aged children earning peak wages. Annuity payments stack on top of those wages and are taxed at each child’s marginal rate, which can run higher than the rate the retired parent would have paid on the same dollars.

For 2026, the IRS applies a 22% rate to single filers with taxable income from $50,401 to $105,700, and a 24% rate on income from $105,701 to $201,775. The One Big Beautiful Bill Act, signed into law in 2025, made those rate levels permanent, so heirs inheriting annuity checks in future years will face the same bracket structure. A $10,000 inherited payment fully taxable at 24% produces $2,400 in federal tax; the same payment falling into the 12% bracket costs only $1,200. The difference depends entirely on whose return the income lands on, and state taxes add further variation. This is one of a handful of IRS provisions quietly draining inherited retirement money, and we mapped out the rest in a free report on retirement tax traps.

Payout Choices That Shape the Final Tax Bill

Some contracts allow beneficiaries to take the remaining guaranteed value as a lump sum rather than continuing scheduled payments. Choosing a lump sum concentrates all the income into a single tax year and can push heirs into higher brackets. Spreading payments across years generally reduces the overall tax burden, though contract terms may limit that flexibility.

Beneficiary designations also matter. The period-certain guarantee pays the same total dollars regardless of who is named. Splitting payments among several heirs, or naming beneficiaries in lower income brackets, changes how much of each dollar survives after taxes.

As annuity sales continue to set records, more families will inherit these contracts. The guarantee delivers fixed checks on a predictable schedule. The tax cost depends on the original funding source and the beneficiaries’ income, both of which are determined long before the first inherited payment ever arrives.

Editor’s note: This article was updated to reflect LIMRA’s final 2025 annuity sales figures ($464.1 billion, up 7%), the confirmed SPIA full-year total of $14.4 billion (up 6%), Bryan Hodgens’s full title as senior vice president and head of LIMRA research, and post-publication context on the One Big Beautiful Bill Act making 2026 tax bracket rates permanent.

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