Single life or joint-and-survivor: choosing how an income annuity pays

If you are married or partnered and the income annuity is meant to cover household bills, the usual answer is to buy the version that keeps paying the survivor, because the main danger of a single-life annuity is that it stops at the exact moment the household's other income is also shrinking. The price of that protection is a lower starting payment, and the whole decision comes down to whether that price is worth paying given your health, your other income and what the survivor would need.

This post walks through the choice with one couple, shows what each option pays under good and bad luck, and ends with a decision list. All numbers are hypothetical illustrations chosen for tidy arithmetic. They are not quotes, and real payments vary by insurer, ages, state and interest rates at the time of purchase (see how annuity rates are set and why they move for why).

The two options in plain terms

A single-life annuity, also called a life-only annuity, pays for the life of one person, the annuitant, and stops at that person's death. It pays the most per dollar of any lifetime option, because the insurer's obligation ends when one person dies.

A joint-and-survivor annuity covers two lives. It pays while both are alive, and after the first death it continues to the survivor at a percentage chosen at purchase, commonly 50%, two-thirds, 75% or 100% of the original amount. Because the insurer expects to pay for longer, the starting payment is lower than the single-life payment, and a higher survivor percentage lowers it further. The glossary entry for the joint and survivor annuity has the short version.

There are variations. In some contracts the survivor percentage applies whichever spouse dies first. In others it applies only if one named person dies first. Some contracts add a period certain guarantee on top, which pays heirs if both die early. The post on period certain, cash refund and installment refund options compared compares those add-ons in detail.

The illustrative couple

Say Lee is 65 and Pat is 63. They are retired, they own their home, and they plan to use $300,000 of savings to buy a single premium immediate annuity (Single premium immediate annuities (SPIAs): how they work) that will cover part of their fixed expenses. The quotes below are invented for illustration.

The price of protection is the difference from the single-life figure:

• 50% survivor: $1,700 − $1,590 = $110 a month, or 6.5% less ($110 ÷ $1,700).
• 75% survivor: $1,700 − $1,530 = $170 a month, or 10.0% less.
• 100% survivor: $1,700 − $1,480 = $220 a month, or 12.9% less ($220 ÷ $1,700), which is $2,640 a year.

Notice that the price rises by smaller steps than the protection does. Going from 50% to 100% survivor protection doubles what the survivor receives ($795 to $1,480, an extra $685 a month) for an additional $110 a month of income given up. That is why many couples who decide to protect the survivor at all choose a high percentage. It is also why the choice of percentage deserves as much thought as the choice between single and joint.

Four ways the future could play out

The decision is a bet on which spouse dies first and when. Look at the same four options across different outcomes. To keep the arithmetic simple, count only the annuity payments.

Outcome A: Lee dies at 72, Pat lives to 90. Lee has collected 7 years of payments, and Pat is 70 when Lee dies and then collects for 20 more years.

• Single life on Lee: 7 × 12 × $1,700 = $142,800. Nothing after Lee's death.
• Joint 100%: 7 × 12 × $1,480 = $124,320 while both live, plus 20 × 12 × $1,480 = $355,200 to Pat, for a total of $479,520.

In this outcome Pat is left with a guaranteed income of $1,480 a month under the joint option and nothing from the annuity under the single-life option. The single-life choice produced $336,720 less over the period, and, more importantly, left the survivor with no annuity income for twenty years.

Outcome B: Pat dies at 75, Lee lives to 90. Lee is 65 at purchase and lives 25 years from it.

• Single life on Lee: 25 × 12 × $1,700 = $510,000.
• Joint 100%: 25 × 12 × $1,480 = $444,000.

Here the single-life choice paid $66,000 more, because the survivor protection was never used. That $66,000 is the cost of insurance that did not pay a claim, 25 × $2,640. Insurance that is never needed always looks like a loss afterward, as with car insurance in a year without an accident.

Outcome C: Both are alive when Lee reaches 90. Lee has collected for 25 years, and Pat, at 88, is alive too. Single life has paid $510,000 and joint 100% has paid $444,000. The single-life choice again paid more so far. The survivor protection has not been used, though if Lee dies at 91, Pat would still be covered under the joint option and not under the single-life one.

Outcome D: Both die early. If both die within a few years, the total paid under any of these options is small, and the premium is largely gone. That is the risk of every lifetime annuity without a refund feature, and the reason some couples add a period certain or a refund.

The comparison shows the structure of the decision. The single-life option wins in B and C. The joint option wins in A, and its advantage in A is not just dollars but the survivor's security. The question is which of those worlds you worry about more and what the survivor's life would look like in A.

What the survivor actually needs

When one spouse dies, the household's income does not fall by half, and its costs do not either. The housing costs, insurance, utilities and property taxes are largely unchanged. Some costs drop, mostly food and some travel. Income drops more sharply.

Social Security is the biggest example. A surviving spouse generally keeps the larger of the two benefits and loses the smaller; the details are in Social Security survivor benefits and the $255 death payment, and the Social Security Administration can tell you the numbers for your record. A pension that stops at the retiree's death, or pays the survivor a reduced share, adds to the drop. If the household's essential bills were being paid with both Social Security checks and a single-life annuity, the survivor could find that two income sources have fallen to one and a half, or even one.

A practical test: list the essential monthly expenses, then ask what the survivor's income would be in each of the two cases (Lee dies first, Pat dies first) under each option. If an option leaves a survivor short of covering essentials, it is the wrong option for that case.

Questions that point toward joint-and-survivor

Use the following as a checklist. The more of these apply, the stronger the case for survivor protection.

• The annuity will pay for essential expenses, not just extras.
• The spouse who would survive has little income of their own, or would lose a large Social Security check or a pension when the other spouse dies.
• The spouse is younger, in good health, or from a long-lived family. The younger the spouse, the longer the potential survivor period.
• The couple wants to avoid having to ask the surviving spouse to cut spending sharply.
• The couple would otherwise need to buy life insurance on the annuitant to protect the survivor. In that case, compare the survivor-option cost with the life insurance premium, and consider that a medical exam or health issues can change what insurance costs.

Questions that point toward single-life

• The annuitant is the only person who depends on the income, such as someone who is single or whose partner has independent means.
• The spouse has a large pension, substantial savings or a life insurance policy that will cover the loss of the annuity income.
• The person whose life sets the payment is in much better health than the spouse, who may not outlive them by much. A single-life annuity on the healthier spouse pays more and the survivor risk is smaller. A planner can model this, because the answer depends on whose life is being used for payment.
• The couple wants the largest monthly check and is willing to cover the survivor risk another way, such as with life insurance or by holding a pool of savings.

Some couples split the difference. They buy a single-life annuity on one spouse and a separate annuity on the other, each sized to the needs of the household, or they buy a joint option at a lower percentage such as 50% because the survivor has other income.

The odds of one spouse outliving the other

For a couple, the right question is not how long each person will live but how long the longer-lived of the two will live. Two people of similar age and health have a much better chance that at least one of them reaches 90 than either has individually. That is the logic behind pooling a household's longevity risk in a joint annuity: the payment has to last for the second death, not the first.

A few patterns apply to most couples, and none is a prediction for you. The younger spouse tends to be the likelier survivor. On average, women live longer than men in the United States, so in a mixed couple the wife is more often the survivor. And people in poor health at purchase are less likely to be the last survivor. The life expectancy calculator gives a population-level picture, but it cannot tell you which of you will be left. That uncertainty is what the survivor option insures.

Health at the time of purchase usually does not change the price of an ordinary income annuity, so the insurer is pricing a typical couple, not yours. If one of you is seriously ill, you know something the price ignores. A couple in which one spouse is healthy and the other is not should weigh that in choosing whose life sets the payment and what survivor percentage to buy. A few insurers offer specialized quotes for impaired health, and it is worth asking.

Pensions and the spousal consent rule

If the income comes from an employer pension rather than a purchased annuity, federal rules apply. Pension plans covered by ERISA must generally offer married participants a qualified joint and survivor annuity, and choosing a single-life payout instead requires the spouse's written, witnessed consent. That rule exists because the pension decision is so often a one-way door for the survivor. An individual annuity bought with your own savings has no such rule. The purchase is a choice, and the contract does not require your spouse to sign off unless a state community-property or divorce rule says otherwise. If you are in a pension decision, see also pension risk transfer: when your pension becomes an annuity for what happens when a plan sells its obligations to an insurer.

Some other things to check

The irrevocability. Once the annuity starts, you generally cannot change the option. A divorce, a death or a change in need later does not reopen the choice. Ask whether the contract allows the survivor to be changed under any circumstances, which most do not.

Who is the joint annuitant. The survivor protection is tied to a named person. If you divorce, the former spouse often remains the joint annuitant and the lower payment continues. A divorce settlement can address this, but the insurer follows the contract.

Taxes. For an annuity bought with after-tax money, each payment is part tax-free return of your cost and part taxable income, under the exclusion ratio. The calculation for a joint annuity uses the joint life expectancy of both people, so a longer expected payout period spreads the tax-free recovery over a longer time. For an annuity bought with IRA money, payments are generally fully taxable. how annuities are taxed and a tax professional can show the detail.

The insurer's strength. A joint annuity may run for 30 years or more. The guarantee is a promise from the insurer, backed up to limits by state guaranty associations. Look at the insurer's financial strength and your state's guaranty limit before putting a large sum in one contract.

Inflation. A level check buys less over decades, and for a survivor that might be 30 years out. The post on a flat annuity check and inflation: how purchasing power erodes looks at that erosion.

How to compare real quotes

1. Decide the household's essential monthly spending and what the survivor would still have from other sources.
2. Ask for written quotes for the same premium, the same ages and the same start date, under single life and under joint with several survivor percentages.
3. Calculate the cost of survivor protection as a dollar amount a month and as a percentage of the single-life figure, as in the table above.
4. Run the four outcomes above using your own numbers, including the one that worries you most.
5. Compare the cost of survivor protection with the alternative of life insurance on the annuitant, if available and affordable.
6. Use the annuity payout calculator for a rough check, then confirm against actual quotes.
7. Confirm the contract terms: survivor percentage, whether it applies whichever spouse dies first, any period certain, and the free-look period.

Key takeaways

• A single-life annuity pays the most but stops at one death; a joint-and-survivor annuity pays less at the start and continues to the survivor at a chosen percentage.
• In the example, 100% survivor protection cost $220 a month, or 12.9% of the single-life payment, and the survivor's guarantee was worth hundreds of thousands of dollars in one scenario and never used in another.
• The decision turns on what the survivor would still have: Social Security usually drops to the larger benefit, and a pension may drop too.
• Pension plans under ERISA require spousal consent to skip survivor protection; individual annuities do not, and the choice is generally irrevocable.
• Compare written quotes for several survivor percentages, and consider a planner if the answer depends on health or on a pension.