Joint and survivor annuity: When is it the right choice?

You want to enjoy a comfortable future in retirement. And you want the same for your loved ones. There are savings options specially designed to meet this desire. 

A joint and survivor annuity helps ensure financial stability for you and another person, like your partner. It’s a way to ensure the surviving person continues to receive payments after the first person dies.

Read on to learn more about joint and survivor annuities. We’ll show you the pros and cons and how to structure this account so the surviving person receives meaningful support after a death.

What is a joint and survivor annuity?

A joint and survivor annuity — sometimes called a joint survivor annuity or a survivorship annuity — is a contract with an insurance company. It provides regular income payments during retirement for you and another person. These payments last as long as either person remains alive. When one dies, the surviving person continues to receive payments at a set percentage.

You don’t have to be married to use a joint and survivor annuity. Any two people can share one, including partners or family members – although this typically varies by carrier and usually requires an insurable interest. 

How does a joint and survivor annuity work?

Joint and survivor annuity accounts can be opened with a lump sum or periodic payments. The account grows until you choose to start receiving payments. The annuity pays for both lifetimes. When one annuitant dies, the surviving spouse continues to receive payments for the rest of their lifetime. 

The following factors play into the annuity payout amount: 

• Your life expectancies: The insurance company will calculate payments based on the number of years you and the other person are projected to live.
• Initial contribution and interest: Payouts reflect the total amount available when you begin receiving income. This includes both the principal you initially invested and interest earned.
• Survivor benefit percentage: You decide how much you want your survivor to receive when you die. The insurance company has to retain funds for large payouts to a survivor in the future, so it can’t disperse as much during your lifetime.

If you select a 100% survivor percentage, the survivor gets the full initial payment amount, which results in a smaller initial payment amount than other survivor benefit percentages. At a 75% survivor percentage, the survivor gets 75% of the initial payment amount, resulting in a moderate initial payment that is higher than the 100% and lower than the 50% survivor benefit options. A 50% survivor percentage means the survivor gets 50% of the initial payment amount, allowing for the largest initial payment amount.

Joint and survivor annuity pros

Retirement planners who want guaranteed income for two people often choose joint and survivor annuities for the following reasons.

Financial security

Joint and survivor annuities provide a predictable stream of income for two people. These guaranteed payments ensure you don’t outlive your savings. They also help surviving partners avoid a sudden loss of income when a spouse dies.

Lifetime income

With payments lasting as long as you or your partner live, you can plan confidently, knowing your income is consistent. It can also bridge financial gaps while waiting to claim Social Security. This is a benefit for couples who prefer reliable income over higher, unpredictable returns.

Tax benefits

Joint and survivor annuities grow tax-deferred. You won’t pay taxes on the annuity funds during the growth period — just on withdrawals. If you have a qualified annuity, funded with pre-tax dollars, entire withdrawals are taxed as ordinary income. But if you have a nonqualified annuity, funded with after-tax dollars, you’ll only pay taxes on earnings.

Joint and survivor annuity cons

Risk-averse savings models can provide comfort and stability, but aren’t free of drawbacks. Here are a few to consider before shopping for joint annuities.

Inflation risk

Joint and survivor annuity payments typically stay the same over time, but costs of living may rise due to inflation. When that happens, your savings may not stretch as far as you’d hoped. You can protect yourself with a cost-of-living adjustment rider. This optional benefit increases payouts as expenses rise, but it increases the cost of the annuity.

Opportunity cost

Opportunity cost refers to the growth you may miss by choosing one investment over another. Money placed in a joint and survivor annuity can’t pursue higher returns in other investments. This can limit long-term growth if markets perform well.

Irreversibility

Annuitization of a joint and survivor annuity is usually irreversible. This means you can’t stop periodic payments and opt instead for a lump sum deposit. This keeps you from accessing larger amounts of money in an emergency.

Fees and costs

Joint and survivor annuity fees vary by product type and added features. Variable accounts often cost more because they include investment management. Riders that protect against inflation or market risk also raise the overall price.

Another key consideration with most deferred annuities is the surrender period. This is the early period of the contract when you can’t withdraw funds without facing a hefty penalty. If you need to take out money within the first few years of having the account, you may face a significant loss.

How to choose a survivor percentage

Before investing in a joint and survivor annuity, determine the survivor benefit amount. This percentage affects how much you receive during your lifetime. Here are some key considerations.

Protecting your payout

With joint and survivor annuities, the insurer must reserve funds for the survivor based on the percentage you choose. If you choose a higher percentage, you receive lower payouts during your lifetime. If you decide on a lower percentage, it increases your income but reduces protection for the beneficiary. 

Budgeting for the survivor

Before deciding the survivor percentage, think about their expenses. For example, if you know your spouse needs $3,000 to cover living expenses like rent and food, aim for a percentage that covers this amount. If your in-life payment is $4,000, a 75% survivor benefit would still ensure $3,000 for your loved one after your death.

Projecting life expectancy

Consider a higher survivor percentage if the other person has a longer life expectancy than you. They’ll need money to cover expenses for many years, and a lower percentage, like 50%, might not be enough. However, a 100% benefit would ensure a significant income stream for the rest of their life.

Is a joint and survivor annuity right for you?

Joint and survivor annuities can be reliable options for people in the following positions:

• If one person is likely to outlive the other: A joint and survivor annuity can ensure steady income for the remaining contract holder. This long-term stability protects against the risk of financial hardship after a death.
• If one person has little to no retirement income: The partner with more savings can use the money to create income for two people. The joint and survivor annuity protects the surviving spouse from hardship and supports households with uneven retirement assets. 
• If it’s not your only savings model: This type of annuity provides predictable income but limited growth. It also doesn’t allow lump-sum withdrawals after income begins. Pairing it with other pension or investment accounts can add flexibility during retirement.

IRS rules for joint and survivor annuities

Joint and survivor annuities are subject to tax rules and required minimum distributions. Here’s what you need to know. 

• Taxation: Tax rules depend on the type of annuity. With qualified annuities, entire withdrawals are taxed as ordinary income. Only your gains are subject to taxation with nonqualified annuities.
• Required minimum distributions (RMDs): Like with most retirement accounts, the IRS requires that joint and survivor qualified annuity holders begin withdrawals by age 73 to avoid penalties. 
• Qualified joint and survivor annuities: When a pension plan offers lifetime income, federal law requires the default payout for a married participant to be a qualified joint and survivor annuity. This ensures the surviving spouse receives between 50% and 100% of the amount paid out during the account holder’s lifetime.

Protect your future with Gainbridge

Joint and survivor annuities can give you and someone you love peace of mind in retirement. But these savings products are only right for some investors.

If you’re deciding whether a joint and survivor annuity fits your retirement plan, explore Gainbridge to learn more. Compare today’s annuity rates and learn how Gainbridge Save(SM) annuity accounts can support dependable income for two lifetimes.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes. Annuity (referred to as “Accounts”) products issued by Gainbridge Life Insurance Company (Zionsville, IN). Gainbridge Life Insurance Company “Gainbridge” is licensed and authorized to do business in 49 states (all states except New York) and the District of Columbia. Products and/or features may not be available in all states. 

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