Special rules apply when the inherited beneficiary is a non-spouse. If the beneficiary is a non-spouse, the taxes depend on the payout choice. If the non-spouse beneficiary chooses a lump sum payout option, they will owe taxes on the interest earned on the original premium. They will not have to pay income tax on the premium. If the beneficiary chooses to continue with annuity payments, each payment will be taxed individually. Choosing this option spreads out the tax liability over a longer period of time.
