5 Things Every Couple Needs To Know Before Buying A Joint Annuity

When you’re planning for retirement as a couple, figuring out how to make your money last through both of your lifetimes is a top priority — but it isn’t always easy.

 Joint and survivor annuities are sometimes floated as a potential solution to that piece of the retirement puzzle. On paper, it sounds like a no-brainer: Guaranteed income that continues for both your life and your spouse’s life. But like most things involving annuities, the devil is in the details.

This article unpacks how joint and survivor annuities work and the trade-offs couples need to understand before buying one.

 Here’s what you need to know.

What is a joint and survivor annuity?

A joint and survivor annuity is a type of retirement income product designed for couples. You pay a lump sum or series of payments to an insurance company, and in exchange, they guarantee a monthly payout for the rest of your life — and your spouse’s life too.

When the first spouse dies, the surviving spouse continues receiving monthly payments, either in full or at a reduced rate, depending on how the annuity was structured.

This type of payout option is especially common when someone retires from a job with a traditional pension plan. In fact, federal law requires most employer-sponsored pension plans to default to a joint and survivor payout unless both spouses agree to something else.

However, even if you retire without a pension, like most private sector workers, you can still purchase an annuity with a joint and survivor payout from an insurance company on the open market.

Joint annuity vs. joint and survivor annuity

The terms “joint annuity” and “joint and survivor annuity” sound interchangeable, but they’re not.

A jointly owned annuity has two owners on the contract. If one dies, the policy typically pays out a death benefit and ends — unless you have a rider that specifies otherwise.

With a joint and survivor annuity, it’s different. The contract is set up to keep making payments to the surviving spouse after the first one dies, following the payout schedule you agreed to in your contract. It’s designed for lifetime income, not a lump-sum death benefit.

5 things every couple should know before buying a joint and survivor annuity

A joint and survivor annuity payout isn’t inherently good or bad — it’s a tool. Whether it’s right for you depends on numerous factors, including your overall financial situation, income needs, health, age and your spouse’s age and financial acumen. Let’s break down what you need to consider before buying this type of annuity.

1. Your monthly payouts will be lower than if you’d bought a single life annuity

Joint and survivor annuities always pay less per month than single life annuities. That’s by design. The insurance company is committing to pay out over two lifetimes instead of one — and that extended timeline means they have to spread your initial investment over a longer period.
 

The longer the likely payment window, the lower the monthly benefit.

How much lower? That depends on how long each of you is expected to live (insurance companies use actuary tables to determine that) as well as the structure of the contract and other factors. But on average, you can expect a joint and survivor payout to be roughly 9 percent to 17 percent lower per month than a single life payout.

2. A high survivor benefit also means lower monthly payments

How much a surviving spouse receives is customizable. The most common survivor benefits are 100 percent, 75 percent and 50 percent.

Opting for a higher survivor benefit — like 100 percent — means you’ll get smaller monthly payments up front, but the surviving spouse will continue receiving the full amount for life. Choosing a lower percentage, such as 50 percent, bumps up the initial payout but cuts the survivor’s income in half once one partner passes away.

That’s the trade-off in a nutshell: More security later, or more income now.

If both spouses have other sizable income sources — like Social Security, pensions or savings in a retirement plan — it may not make sense to opt for the full 100 percent benefit. But if one partner depends heavily on the other’s income, the 100 percent option offers better peace of mind.

3. Things can get messy if you get divorced

Splitting up assets in a divorce is rarely easy but the process can get even more irksome when you throw an annuity into the mix.

If you purchased a joint and survivor annuity while you were married, chances are it’s considered marital property. That means the contract can be split, its value offset by other marital assets or it can be canceled entirely.

But it’s not always a clean break. The type of annuity matters. Some contracts are more flexible and easier to divide, while others can be a nightmare. Figuring out the actual present and future value — especially with variable annuities or fixed index annuities — gets complicated fast. You have to factor in surrender charges, bonuses, benefit riders and other fine print.

These details can all impact how much the annuity is actually worth and how it ends up being divided in the settlement. There’s always potential tax hits, surrender fees and long-term implications to consider. If you already have an annuity and you’re getting a divorce, don’t make any final decisions without legal and financial advice.

If there’s any chance of divorce — and statistically, there’s always a chance — you need to understand how locked-in your joint and survivor annuity terms are and what flexibility you have in changing the contract later.

4. You can find a lower-cost option with potentially higher returns elsewhere

Instead of putting a big chunk of your retirement savings into one contract, consider whether you’re better off bypassing an annuity all together.

Sure, annuities offer peace of mind — but they also tie up your money in exchange for predictability and lower returns. You might be willing to make that compromise if, let’s say, money management isn’t a strong skill or your spouse doesn’t have many retirement assets of their own.

But if your retirement plan is already well-structured and diversified, you may not need to lock up such a large portion of your assets in an annuity.

Similarly, if you like the idea of higher potential returns, fewer fees and less complexity, you might consider working with a fee-only financial advisor. Paying that financial advisor an ongoing retainer to manage your portfolio as you age and assist you with a withdrawal strategy might be cheaper than buying a joint and survivor annuity.

After all, most financial advisors charge a 0.25 to 1 percent fee on the assets they manage for you. Meanwhile, it’s not unheard of for annuity contracts to charge 3 percent or more in fees, commissions and add-on costs.

As you solidify your retirement plan, get all options on the table. You might discover that an annuity — any annuity — isn’t right for you.

5. You may end up losing money, depending on how long you live

The truth is joint and survivor annuities don’t always pay off. Depending on how long you both live, you might lose more through reduced payments than your spouse gains in survivor benefits.

To demonstrate how, imagine Mark, a 65-year-old man, is evaluating two annuity options:

• The first option is a single life annuity that pays a monthly income of $2,200 for his lifetime, but payments end when he dies. 
• The second option is a joint and survivor annuity with a 50 percent survivor benefit. It pays $2,000 per month during his lifetime — $200 less than the single life annuity. If Mark dies before his wife, she’d receive 50 percent of this amount, or $1,000 per month, for the rest of her life.

Based on life expectancy estimates, Mark anticipates living another 25 years, while his wife is projected to live an additional 29 years.

So if Mark chooses the joint and survivor annuity, he’d receive $200 less per month for the next 25 years, or a total of $60,000 over his expected lifetime. After he dies, his wife would receive $1,000 per month for the rest of her estimated life — four years — amounting to $48,000 in total payments to her.

Ultimately, by selecting the joint and survivor annuity, Mark would potentially forgo $60,000 in lifetime payments, while his wife would stand to receive $48,000 after his death. That’s a $12,000 net loss compared to the single-life annuity scenario.

Of course, everyone’s situation is different, but make sure the math actually works in your favor before signing a contract. 

Bottom line

Joint and survivor annuities can be a viable option for couples who want guaranteed lifetime income for both partners; however, that peace of mind comes with trade-offs: lower monthly payouts, higher costs for full survivor benefits, potential complications in a divorce and the risk of leaving money on the table.

If you’re not sure what’s right for you, talk to a fiduciary financial advisor who can help you weigh the pros and cons based on your retirement goals. And don’t let uncertainty or fear push you into a product that overpromises and underdelivers.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.