What Is a Joint and Survivor Annuity?
A joint and survivor annuity is an income contract (usually from an insurance company or an employer retirement plan) that pays a guaranteed lifetime income to two people—typically spouses—while the first annuitant is alive and continues to pay (often at a reduced amount) for the lifetime of the surviving annuitant. It is primarily used by couples who want to make sure one spouse continues to receive income after the other dies.
Key takeaways
– Provides guaranteed lifetime income to two people; payments continue while either person lives.
– The survivor’s monthly benefit is typically reduced relative to the initial benefit (common survivorship levels: 100%, 75%, 50%, etc.).
– Employer-sponsored qualified plans generally default married participants into a Qualifying Joint and Survivor Annuity (QJSA) unless both spouses waive in writing (PBGC).
– Fees and product complexity can be material—annuity fees average around 2.3% and may be higher for complicated features (Annuity.org).
– Consider life expectancy differences, survivor needs, inflation protection, alternatives (single-life annuity plus other assets), and tax treatment before choosing.
How joint-and-survivor annuities work
– Purchase/credit: You either buy a contract with a lump sum or elect the option as part of an employer plan at retirement.
– Payout schedule: The insurer calculates a periodic payment based on the purchase amount, ages of both annuitants, survivorship percentage, interest/assumption rates, and whether the annuity is fixed or variable.
– Survivorship option: You choose the survivor benefit level. A 100% survivor option pays the same amount to the survivor; lower percentages pay a reduced survivor benefit.
– Variations: Options may include guaranteed periods (e.g., payments guaranteed for at least X years), installment refund or cash refund death benefits, fixed vs. variable payments, and inflation indexing.
Advantages
– Longevity protection for both partners: Reduces the risk that the surviving spouse will outlive retirement savings.
– Simplicity and predictability: Provides a steady, predictable income stream if the annuity is fixed.
– Employer-plan protections: In qualified plans, a QJSA protects married participants from losing survivor protection without spouse consent.
Disadvantages
– Cost: Lower initial payment than a single-life annuity because payments must fund two lifetimes; fees/commissions can be significant (average fees ~2.3% but vary).
– Reduced flexibility: Less liquidity and fewer options to change payments after annuitization.
– Possibly poor value for younger couples: If both are relatively young or similar life expectancy, the survivor benefit may not be worth the lower payments.
– Inflation exposure: Fixed payments lose purchasing power over time unless indexed.
– Opportunity cost: Money used to buy annuity cannot be invested elsewhere.
Employer-sponsored plans: special rules and steps
– Default QJSA: Under ERISA-qualified plans, married participants are generally defaulted into a Qualified Joint and Survivor Annuity unless the spouse signs a written waiver (PBGC guidance).
– Waiver requirements: Spousal consent must be written and usually notarized (or otherwise witnessed), depending on plan rules.
– Plan-specific options: Employers decide which payout options they offer; you cannot force your plan to offer something it does not provide.
Installment refund vs. cash refund
– Installment refund: If both annuitants die before total payments equal the purchase amount, the insurer continues periodic payments to the beneficiary/estate until the principal is “paid out.” This prevents losing principal.
– Cash refund (lump-sum refund): If total payments are less than the purchase price at both deaths, the insurer pays the remaining balance as a lump sum to the beneficiary or estate.
Practical step-by-step guide to deciding whether to buy a joint and survivor annuity
1. Clarify goals and needs
– Do you require guaranteed lifetime income for a surviving spouse?
– How important is preserving principal or leaving an estate?
– What other income sources (Social Security, pensions, investments) will the survivor have?
2. Gather the inputs you’ll need
– Total annuity dollars available (or lump sum you plan to use).
– Exact ages of both spouses/annuitants.
– Health status and family longevity history.
– Current budgeted monthly income need for both living and surviving spouse.
– Employer plan options and spousal consent forms (if applicable).
3. Compare payout options
– Request illustrations for: single-life immediate annuity, joint & survivor with 100% survivor, 75% survivor, 50% survivor, plus options with guaranteed periods, and refund types.
– Ask insurers or the plan administrator for net payout amounts after fees and sample lifetime projections.
4. Run simple scenarios and breakeven calculations
– Compare the single-life annuity payment vs. joint & survivor payment. Determine the survivor age at which the joint-and-survivor option becomes financially preferable (i.e., when total income received under each option crosses over).
– Consider how long the surviving spouse would need to live for the joint & survivor option to provide more lifetime income than alternative choices.
5. Consider alternatives and hybrids
– Single-life annuity for the higher income plus a smaller guaranteed legacy or liquid investments for survivor needs.
– Partial annuitization: annuitize a portion for baseline income and keep remainder invested or available as a legacy.
– Use life insurance to replace lost income rather than reduce annuity payments.
6. Evaluate fees, inflation protection, and credit risk
– Ask for the annuity’s fee schedule and surrender charges.
– Consider indexed or inflation-adjusted annuity riders if longevity protection against inflation is important (these reduce initial payouts).
– Understand insurer credit risk—check ratings from AM Best, S&P, or Moody’s.
7. Confirm legal/administrative steps for employer plans
– If you’re married and taking an employer plan distribution, review the plan’s QJSA rules and how to provide spousal waiver if desired.
– Obtain the plan’s written options and illustrations in writing.
8. Get professional help
– Discuss options with a fiduciary financial planner, Certified Financial Planner (CFP), or an attorney for spousal consent issues and estate implications to ensure the decision matches overall retirement planning.
Questions to ask the insurer or plan administrator
– What is the monthly benefit for each option (single-life, 100% survivor, 75%, 50%)?
– Are payments fixed or variable? If variable, what is the investment allocation?
– What fees, loads, and commissions apply? Are any charges embedded in the payout?
– Is there an inflation adjustment or cost-of-living rider available? What is the cost?
– What is the guaranteed period (if any)? Are installment refund or cash refund options available?
– What happens to remaining principal if both die shortly after annuitization?
– What is the insurer’s current financial strength rating?
– For employer plans: what exact spousal consent form is needed to elect a different option?
Illustrative (conceptual) example
– Suppose $500,000 is available and a single-life immediate annuity would pay $3,000 per month to a 65-year-old. A joint-and-survivor (100% survivor) option might pay, say, $2,700 per month while both live, and continue paying $2,700 to the survivor after the first death. (These numbers are illustrative only; actual payouts depend on market rates, ages, and insurer assumptions.)
– If longevity and survivor income security are priorities, the lower guaranteed payment may be acceptable. If preserving higher immediate income with flexibility for the survivor is preferred, look at combining a single-life annuity with a liquid reserve or term life policy.
When a joint and survivor annuity may not be the best choice
– Both spouses are relatively young and prefer investment growth or flexibility.
– You want to leave a substantial legacy to heirs (annuities typically trade legacy for lifetime consumption).
– The survivor has sufficient alternative income sources (Social Security survivor benefits, pension, investments).
– High fees or poor insurer ratings make the product unattractive.
Taxation basics
– Annuity income generally is taxed as ordinary income to the extent it represents earnings; if purchased with pre-tax retirement dollars (e.g., traditional IRA or 401(k)), payments are fully taxable as income.
– If purchased with after-tax dollars, a portion of each payment is usually tax-free return of basis until the basis is exhausted, with the rest taxed as earnings.
– State taxation varies and can affect decisions—consult a tax advisor.
Checklist before you commit
– Obtain written illustrations for all options.
– Compare fees and net payout.
– Verify survivor percentage options and refund features.
– Check insurer financial strength and state guaranty association coverage limits.
– Confirm spousal consent procedures if using an employer plan.
– Discuss the decision with a fiduciary advisor or tax professional.
Bottom line
A joint and survivor annuity is a valuable tool to protect a surviving spouse from outliving retirement income, offering predictable, lifetime payments. However, it reduces initial payouts compared with single-life annuities, can be costly in fees, and reduces liquidity and flexibility. Use a careful, stepwise evaluation—compare illustrations, consider alternatives, account for fees and inflation, and get professional advice to decide whether the survivor protection it provides fits your overall retirement and estate goals.
Sources and further reading
– Investopedia. “Joint and Survivor Annuity.” https://www.investopedia.com/terms/j/jointandsurvivorannuity.asp
– Annuity.org. “Annuity Fees and Commissions.” https://www.annuity.org/annuities/fees/
– U.S. Pension Benefit Guaranty Corporation (PBGC). “Your Benefit, Your Choice — Benefit Options from PBGC.” https://www.pbgc.gov/about/benefit-options
If you’d like, I can:
– Help you create a simple breakeven calculator for your ages and dollar amount.
– Compare example illustrations if you provide specific quotes.