If the annuity contract is a tax-qualified annuity, such as an IRA, the entire amount of the death benefit will generally be fully taxable. Different rules apply to Roth IRAs. The death benefit from a Roth IRA may be income tax free if certain requirements are met.
If the annuity contract is a non-tax-qualified annuity, any amount over the owner's cost basis (generally the after-tax contributions that were made by the owner) in the contract is taxable as ordinary income.
The death benefit is generally not taxable to the beneficiary. However, any claim interest paid as part of the death benefit may be taxable.