Joint and Survivor Annuity

What Is a Joint and Survivor Annuity?

A joint and survivor annuity, also known as a “joint-life annuity,” is an insurance product for couples that continues to make regular payments as long as one spouse lives. Annuities are generally used to provide a steady stream of income during retirement. In the case of a joint and survivor annuity, both spouses have guaranteed coverage. Such plans sometimes include a third annuitant, who may receive the balance of a preset minimum number of payments if both spouses die early. This beneficiary is often a child of the couple who purchased the annuity.

Understanding Joint and Survivor Annuities

With a joint and survivor annuity, insurers typically reduce monthly payments by one third or one half for the surviving annuitant. These terms depend on the source of funds and options chosen before the payments begin. For example, Sarah and Paul’s joint and survivor annuity pays them $6,000 monthly. When Sarah dies, Paul might receive $3,000 to $4,000 each month.

When annuities are sponsored by employers, the employer decides which income payment options it will provide. Annuities offered may include single or joint and survivor options. However, employer-sponsored qualified plans must make the joint and survivor annuity the automatic choice for couples married at the time of retirement. An individual may receive a single-life annuity only with written, notarized approval from the primary annuitant’s current or (depending on the divorce settlement) former spouse.

There are also provisions for making payments to a third party when both annuitants die before monthly payments have exceeded the principal. In these cases the money goes to the annuitants’ estate or a named beneficiary. If the annuity has an installment refund provision, the insurance company must make monthly payments to the estate or beneficiary until the original value of the annuity is reached. If an annuity has a cash refund provision, the balance of the principal goes to the annuitants’ estate or a named beneficiary in a lump sum.

Advantages of a Joint and Survivor Annuity

A joint and survivor annuity has the advantage of providing income when people live longer than expected, just like other annuities. If someone retires at 65 and only anticipates living to be 80, then it might make sense to consume all savings in the first 15 years. However, there is still a chance that the retiree will live to be 90 or 100. A possible solution is to buy an annuity that starts making payments at age 80 and spend the rest of the retirement savings.

Annuitants are also able to achieve returns higher than those offered in the market. That is possible because they get some of the money paid by other holders of annuities who die first.

The greatest benefit of joint and survivor annuities comes when one spouse dies much earlier. Historically, annuities were often offered through employers. During much of the 20th century, most employees were men, who generally have lower life expectancies than women. As a result, it was very common for the employee able to buy the joint annuity to die before the spouse, who might continue receiving payments for years or even decades.

The life expectancies of spouses can play a significant part in deciding between a joint and survivor annuity and a single-life annuity.

Disadvantages of a Joint and Survivor Annuity

Like all annuities, joint and survivor annuities do not provide good returns when people are younger and less likely to die. Mutual funds often offer lower fees than annuities, and most exchange-traded funds (ETFs) charge far less. Immediate annuities make more sense after age 65, as they benefit from mortality risk, where higher death rates make more funds available for folks who have longevity

There are also increasing issues with joint and survivor annuities as employment and marriage patterns change. Same-sex couples typically have similar life expectancies, so they do not get as much benefit from joint and survivor annuities as traditional couples did in the 20th century. Of note, individuals with traditional jobs tend to get the best deals on joint and survivor annuities.