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The tax consequence associated with a survivor's death benefit from a nonqualified annuity is that only the investment portion is taxable. In a nonqualified annuity, the owner contributes after-tax dollars, which means that the initial investment made into the annuity has already been taxed. When the annuity is distributed upon the owner's death, the payout may consist of both the return of these after-tax contributions and the earnings or growth accumulated within the annuity.

The taxable portion of the benefit is the earnings on the investment, as these earnings have yet to be subjected to income tax. Therefore, when a beneficiary receives a survivor's death benefit, only the amount representing the earnings above the original investment is taxable. The portion corresponding to the deceased owner's original contributions is not taxable upon distribution.

In comparison, other options present misconceptions. The entire benefit being taxable would disregard the tax-free return of principal, and the assertion that nonqualified annuities have no tax consequences is inaccurate since any earnings would indeed be taxable. The notion that it's tax-free if held for more than a year is also incorrect; the tax treatment does not change based on holding period if it is still a nonqualified annuity. Understanding the distinction between contributions and earnings is key to grasping how