A joint annuitant is a person who, alongside the primary annuitant, stands to receive benefits from an annuity contract throughout their lifetime. They’re often the spouses or partners of the primary annuitant, but can also be anyone else named in the contract. Upon the primary annuitant’s death, the joint annuitant becomes eligible to receive annuity payments, ensuring a predictable income flow. In order to make sure your estate is fully protected, it could be useful to work with a financial advisor when creating an estate plan.
How a Joint Annuity Works
Joint annuities operate as contracts purchased from an insurance company. They commit to regular income payments to two individuals, typically until the last remaining annuitant has passed away. The payments can start immediately or can be deferred to a later date.
A joint annuitant’s role extends beyond merely guaranteeing financial stability. An elderly couple, for example, may have limited sources of income post-retirement. If the primary annuitant passes away, and the annuity has the surviving spouse as a joint annuitant, then that spouse could continue receiving payments. In this sense, having a joint annuitant can help safeguard the financial future of that loved one.
Setting up a joint annuity involves a few common steps:
- Research and select your provider: Research reputable insurance companies or financial institutions that offer joint annuities and compare their products, fees and terms.
- Choose the annuity type: Decide on the type of joint annuity you want (e.g., immediate or deferred, fixed or variable) based on your financial goals and risk tolerance.
- Determine your contribution amount: Determine the amount of money you and your joint annuitant (spouse, partner, etc.) want to contribute to the annuity.
- Designate payout options: Select payout options such as joint life, survivorship, or other options available that determine how payments will be disbursed during and after both annuitants’ lifetimes.
- Understand terms and conditions: Review and understand the terms, fees and any penalties associated with the joint annuity, including withdrawal limitations and surrender charges.
- Fund the annuity: Transfer the agreed-upon amount of money into the joint annuity account, following the provider’s instructions for funding.
- Receive confirmation and documentation: Once the annuity is established, receive confirmation of the contract, and keep copies of all documents for your records.
- Monitor and review: Regularly review the joint annuity contract, understand performance, and make adjustments as needed to align with your financial objectives.
Pros and Cons of Having a Joint Annuitant
Here are five common benefits of having a joint annuitant:
- Continued income: If one annuitant passes away, the surviving joint annuitant continues to receive income payments, ensuring financial support for the surviving spouse or partner.
- Potential tax benefits: In some cases, joint annuities might offer tax advantages, such as tax-deferred growth or preferential tax treatment upon distribution.
- Legacy protection: It can serve as a means to provide for heirs or beneficiaries by ensuring the continuation of payments to the surviving annuitant.
- Spousal coverage: Offers a way for spouses or partners to secure a reliable income stream that supports both individuals during retirement.
- Potential for higher payouts: Joint annuities might offer higher payouts compared to single-life annuities due to the pooling of life expectancies.
And, here are five common drawbacks:
- Reduced payouts: Joint annuities usually offer lower payment amounts compared to single-life annuities because the insurer considers the life expectancy of both annuitants.
- Complexity in beneficiary designation: In some cases, beneficiary designations might be limited or altered due to the joint nature of the annuity.
- Limited flexibility: Joint annuities often have limited flexibility in changing or modifying the contract terms after purchase.
- Costs and fees: They might have higher fees or charges compared to other investment options, impacting the overall returns.
- Dependency on the other annuitant: Both annuitants’ lives are connected financially, and any financial decisions or changes must consider both parties.
How Annuity Contracts Work
Annuity contracts are agreements between an individual (or individuals, in the case of joint annuities) and an insurance company. They involve an initial investment, and in return, promise to make regular income payments to the individual, either immediately or in the future.
There are different types of annuity contracts, such as immediate annuities that begin payouts soon after investment, and deferred annuities that defer the payout start. Fixed annuities provide a constant income stream, while variable annuities vary based on the performance of underlying investments.
You should research the terms and limits of each type of contract. For example, fixed annuities can offer you financial predictability, but they may not account for inflation as those payments typically don’t go up. However, you may have other options available to help you keep pace with inflation.
Bottom Line
Before you invest in a joint annuity, consider financial needs, health status, longevity expectations, and individual preferences for both annuitants to ensure this type of annuity aligns with the goals and circumstances of both parties.
Tips for Retirement Planning
- A financial advisor can help you properly prepare for retirement by helping determine how much you need and then coming up with solutions to help you get there. Annuities might just be one piece to the puzzle. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You can use a retirement calculator can also help you estimate how much you might need for when you retire.
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