According to the statement below, only the gain is taxable. A non-qualified annuity is one that is not part of an employer plan.
Taxation
Unlike other investments, the named beneficiary of a nonqualified annuity does not get a step-up in tax basis to the date of death. However, that doesn't mean the beneficiary will have to pay taxes on the full amount. Because the purchaser of the annuity made the investment with after-tax dollars, only the amount attributable to investment income is taxed, but it will be taxed as ordinary income and not enjoy any special capital gains treatment. When there is a death benefit that exceeds the value of the account, that additional amount is also taxed as ordinary income. Beneficiaries are not subject to the 10 percent early distribution penalty that applies to distributions before the annuity owner reaches age 59 1/2.