Joint and Survivor Annuity

A joint and survivor annuity is a financial contract between an individual (the contract owner) and a life insurance company (the contract issuer). In exchange for an upfront payment, or a series of payments, the issuer provides a primary annuitant and a secondary annuitant a future stream of income distributions for the duration of both their lives. This differs from a single life annuity, which only makes income distributions for the duration of one annuitant’s life.

A joint and survivor annuity is designed for the conservative, hands-off investor that seeks financial security for both themselves and a loved one. Often, this tax-advantaged vehicle is used to bolster a retirement plan.

You can structure a joint and survivor annuity to begin making income distributions immediately or after a specified accumulation period. Additionally, the annuity contract can take the form of a fixed, indexed or variable annuity, which gives annuitants an array of investment options.

Regardless of the contractual structure, a joint and survivor annuity provides dual-life income distributions that continue whether the primary or secondary annuitant dies first. You are allowed a fair amount of discretion when defining the income distributions, but once a contract is established, modification is difficult.

You can structure joint and survivor annuities with a variety of payout options, depending on the issuing company and the nature of the contract. You can structure one to maintain a consistent payment over the lives of both annuitants. Alternatively, you can choose to receive a lower payout  amount following the death of one of the annuitants. You can also structure them  to distribute an increasingly large amount over time.

Generally, 100% joint and survivor contracts have smaller initial payments than reduced payout structures, and inflation-indexed contracts have the smallest starting points. Modifying the starting points of the payment streams in this way allows the issuing insurance companies to make sure the economics of the contract make sense.

Clearly, there is a fair amount of complexity associated with payout options. It is important to take time to carefully review the terms and conditions of a joint and survivor annuity before making a purchase. Consult with a financial advisor to help make sense of things.

The dual-life payout feature is widely considered the most valuable aspect of a joint and survivor annuity. However, its tax-deferred nature is a close second. The money invested in a joint and survivor annuity is permitted to grow tax-free until distributed. Thanks to the power of compounding interest, this can greatly increase your ability to save for retirement.

That said, the tax treatment of joint and survivor annuities can be complicated. The Internal Revenue Service (IRS) maintains strict guidance for these instruments and taxes income distributions differently depending on the structure of the annuity and the source of the funds used to purchase the contract.

The structural considerations pertain to the relationship between the primary and secondary annuitant. For married couples, there are no stipulations. However, if the primary and secondary annuitants are not married, the IRS imposes special rules.

For example, the secondary annuitant cannot be 10 or more years younger than the primary annuitant and continue to receive 100% of the distribution. Violation of this rule negates any favorable tax treatment and can result in a penalty.

The funding source consideration pertains to whether the money used to purchase the annuity originated from an IRS-qualified fund, which deems it “qualified,” or elsewhere, which deems it “nonqualified.”

This is only a cursory recap of the tax treatment of joint and survivor annuities. To understand the full range of tax implications that pertain to you, consult with a tax professional or financial advisor.

As with any financial instrument, the benefits and risks of joint and survivor annuities should be carefully considered prior to investment. Joint and survivor annuities offer investors some valuable benefits, but also expose them to several risks that warrant caution.

A joint annuity is an annuity that is owned jointly by two or more individuals that have an equal claim to the annuity’s contractual value. Distributions from a joint annuity cease upon the death of any of the owners. At that point, the annuity usually pays a death benefit to named beneficiaries.

Conversely, a joint and survivor annuity is an annuity that provides income distributions to two annuitants, a primary annuitant and a secondary annuitant, throughout both their lives.

As you assess your options, do not lose sight of your investment objectives and risk tolerance. If you lack a holistic investment strategy, consult with a fiduciary financial advisor. They can help you optimize your finances.

Editor Bianca Dagostino contributed to this article.