What happens to interest earned if the annuitant dies before the payout start date?

When an annuitant dies before the payout start date, the interest earned on the annuity contract is typically considered taxable income. This means that the beneficiaries may be responsible for paying taxes on the interest that has accrued up until the point of the annuitant's death.

The reasoning behind this is that the IRS treats the earnings on annuity contracts as taxable income when they are withdrawn. If the annuitant has not yet started receiving payments, the interest has accrued but remains taxable at the time of death, similar to how interest in a savings account is treated.

Though beneficiaries may receive a death benefit from the annuity, any accumulated interest is subject to taxation. Understanding this aspect is crucial for financial planning and for managing any potential tax liability that may arise from the death benefit.