What Are the Benefits and Disadvantages of Joint and Survivor Annuity?
A joint and survivor annuity is an annuity that provides payments to two people. The first person is the annuitant, who receives the payments during their lifetime. The second person is the beneficiary, who receives the payments after the death of the annuitant.
Joint and survivor annuities provide a guaranteed income for life, which means that the annuity payments will continue even if you die soon after you start receiving them.
This annuity can be purchased for retirement income in your 60’s, 70’s, or even in your 90’s to provide guaranteed lifetime income. Joint and survivor annuities may also be used to determine how much of an estate is taxable.
How Joint and Survivor Annuities Work
When you purchase a joint and survivor annuity, you are essentially splitting your annuity payments with someone else.
The annuitant will receive a smaller payment each month, but the beneficiary will continue to receive payments for the rest of their life, even if the annuitant dies first.
This type of annuity can be a good option for married couples or for anyone who wants to provide income for a loved one after their death. It can also help to reduce the estate taxes that must be paid after someone dies.
Tax Implications of Joint and Survivor Annuities
One of the main benefits of a joint and survivor annuity is that it can reduce the amount of estate tax that must be paid after someone dies. This is because the payments from the annuity are taxed as income, and not as a gift.
The money you invest in an annuity grows tax-deferred over time, which means you don’t have to pay taxes on the growth until you start receiving payments.
While joint and survivor annuities defer taxes, they don’t allow you to avoid them completely. Once payments begin, you’ll have to include those amounts as taxable income, which could increase your overall tax liability if you’re also taking withdrawals from tax-deferred or taxable accounts.
Advantages of Joint and Survivor Annuities
There are several advantages to choosing a joint and survivor annuity:
Guaranteed Income for Life
The payments will continue even if the annuitant dies soon after starting to receive them. This means that the beneficiary will continue to receive payments for the rest of their life.
Protection From Creditors
If you are worried about your creditors taking your money, then a joint and survivor annuity may be the right choice for you. Joint and survivor annuities are protected from creditors, so your money will stay safe.
Increased Estate Value
The joint and survivor annuity does not decrease the taxable amount on the rest of your estate, so it can actually increase its value.
Reduced Estate Taxes
The payments from the annuity are taxed as income, not as a gift, which can reduce the amount of estate tax that must be paid after someone dies.
Protection for the Beneficiary
If the annuitant dies first, the beneficiary will continue to receive payments for the rest of their life.
Security in Retirement
Joint and survivor annuities can provide guaranteed income for life, so you will never outlive your savings.
Disadvantages of Joint and Survivor Annuities
There are also some disadvantages to choosing a joint and survivor annuity:
Reduced Payment Amount
The primary disadvantage is that the annuitant’s monthly payments will be reduced in order to provide a larger payment to the beneficiary.
This means that someone who purchases a joint and survivor annuity will receive a lower monthly income than they would have if they had purchased an individual annuity.
The annuity payments will be paid to the primary annuitant for a set amount of time, and then the payments will change over to being paid to the beneficiary. This means that you will have less control over your monthly income.
Joint and survivor annuities must be purchased with your entire net worth in order to provide the best tax benefits.
The Bottom Line
Joint and survivor annuities can be good options for married couples who want to provide income for their spouse after they die or for anyone who wants to reduce estate taxes.
It is also beneficial because they can provide guaranteed income for life, so you will never outlive your savings. However, the annuitant’s monthly payment amount will be reduced in order to provide a larger payment to the beneficiary.
Joint and survivor annuities usually pay out more money over time, so the primary advantage of this type of annuity is that the beneficiary will receive payments for life.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.