What Is a Joint Survivor Annuity and How Does It Work?

A joint survivor annuity is a financial product designed to provide a continuous stream of income for the lifetimes of two individuals. This annuity ensures that, after the death of the primary annuitant, a designated survivor continues to receive income payments for the remainder of their life. Its purpose is to offer sustained financial security for both individuals, often a married couple, throughout their retirement years. This structure helps mitigate the financial impact of one partner’s passing, providing a predictable income stream that cannot be outlived.

Defining Joint Survivor Annuities

A joint survivor annuity is a contract with an insurance company that guarantees payments for as long as two specified people are alive. These individuals are referred to as the primary annuitant and the contingent annuitant, or survivor. While commonly chosen by spouses, the contingent annuitant can be a domestic partner, dependent, or other designated person. It provides an income stream that lasts for two lives, offering a financial safety net for the survivor.

This annuity differs from a single-life annuity, which ceases payments upon the death of the sole annuitant. The joint survivor structure addresses the concern of a surviving partner facing a sudden loss of income. Continued payments to the survivor after the primary annuitant’s death help cover ongoing living expenses.

Several factors influence the initial payment amount received from a joint survivor annuity. These include the total amount of money invested and the life expectancies of both the primary and contingent annuitants. The ages of both individuals are important, as younger annuitants or a significant age difference can affect payment calculations. Prevailing interest rates at the time the annuity is purchased also play a role in determining the income stream.

Common Payout Structures and Considerations

Joint survivor annuities offer various payout structures, allowing purchasers to tailor the income stream to their specific needs. The most common options determine the percentage of the original payment that the survivor will receive after the first annuitant’s death. These options include 100%, 75%, and 50% survivor benefits.

A 100% joint and survivor annuity means the surviving annuitant will continue to receive the full payment amount that both individuals were receiving. For example, if the couple received $2,000 per month, the survivor would continue to receive $2,000 per month. With a 75% joint and survivor option, the payment to the survivor is reduced to 75% of the original amount. Similarly, a 50% joint and survivor annuity provides the survivor with half of the original payment amount.

There is an inverse relationship between the chosen survivor benefit percentage and the initial monthly payment received by both annuitants. Opting for a higher survivor benefit, such as 100%, results in a lower initial payment amount when both annuitants are alive. Conversely, selecting a lower survivor benefit percentage, like 50%, leads to a higher initial payment while both individuals are living. This trade-off requires careful consideration of the survivor’s potential financial needs versus the desire for a larger immediate income.

The actual dollar amounts for each payout structure are also influenced by the age difference between the primary and contingent annuitants. A larger age gap, especially if the survivor is significantly younger, can lead to a greater reduction in initial payments to account for the longer expected payout period. Prevailing interest rates at the time the annuity is annuitized also impact the overall payment calculations. Once a payout structure is chosen for a joint survivor annuity, it is irrevocable.

Taxation and Beneficiary Designations

The income received from a joint survivor annuity has specific tax implications. A portion of each payment is considered a return of the principal investment, which is not taxable. The remaining portion, representing the earnings on the investment, is subject to ordinary income tax. This applies to payments received by both the primary annuitant and the survivor.

The tax treatment can vary depending on whether the annuity is “qualified” or “non-qualified.” Qualified annuities are funded with pre-tax dollars, such as through a 401(k) or IRA rollover. In this case, both the contributions and the earnings are taxed as ordinary income upon withdrawal. Non-qualified annuities are funded with after-tax dollars, meaning only the earnings portion of the payments is subject to taxation. The original principal in a non-qualified annuity is not taxed again upon withdrawal.

Beyond the primary and contingent annuitants, naming additional beneficiaries is an important aspect of annuity planning. While a joint survivor annuity provides income for two lives, a “period certain” guarantee may be included in the contract. This means payments are guaranteed for a minimum number of years, regardless of whether the annuitants are alive. If both annuitants pass away before this guaranteed period ends, any remaining payments or principal would go to the named beneficiaries. Designating beneficiaries helps ensure that any remaining value or guaranteed payments are distributed according to the annuitant’s wishes and can help avoid probate.