Florida 2-15 Life, Health and Variable Annuity AgentFlorida Laws and Regulations Specific to Life Insurance and AnnuitiesHard
A Florida resident owns a variable annuity and passes away during the accumulation period. Which of the following statements accurately describes the tax treatment of the death benefit paid to the beneficiary?
- AThe death benefit, exceeding the principal contributions, is taxable as ordinary income to the beneficiary.
- BThe death benefit is taxed as a long-term capital gain to the beneficiary.
- CThe entire death benefit is considered tax-free to the beneficiary.
- DOnly the principal contributions are taxable to the beneficiary.
Show answer & explanationAnswer & explanation
Correct answer: A. The death benefit, exceeding the principal contributions, is taxable as ordinary income to the beneficiary.
When a variable annuity owner dies during the accumulation phase, the death benefit paid to the beneficiary is generally the greater of the account value or the total premiums paid. Any amount exceeding the principal contributions (i.e., the earnings) is considered taxable as ordinary income to the beneficiary.
Why the other options are wrong
- B. Annuity earnings are taxed as ordinary income, not capital gains.
- C. This is incorrect; the earnings portion of the death benefit is taxable.
- D. This is incorrect; the principal contributions are generally returned tax-free, while the earnings are taxed.
Variable Annuity Death Benefit Taxation (Accumulation)
The tax treatment of the amount paid to a beneficiary when the annuitant dies before annuitization, where earnings are taxed as ordinary income.
- Occurs during the accumulation period.
- Earnings above principal are taxed.
- Taxed as ordinary income to the beneficiary.
Memory trick: Death in accumulation means earnings are 'ordinary' tax, not free.