Should a Married Couple Get a Joint or Single Life Annuity?

Annuities can complement your financial independence fund and come in various forms, insuring the life of a person (single life annuity). In the case of a partner, annuities can also insure the life of the first-to-die spouse (joint annuity), with the surviving spouse typically receiving 50% of the benefit. Let’s face it, there are 100 things more fun to think about than that, if you ask me.

For this reason, I have summarized some considerations for you to review: money personality, asset protection and opportunity cost. We will go over all of these, and ultimately, the decision will depend on your individual circumstances and financial goals. Let’s start with the basics.

Single Life Annuity

When evaluating single life annuities, one must consider the advantages and disadvantages. An educated consumer is always better informed than someone who makes a decision based on friendly advice.

Advantages of a Single Life Annuity

• If your profession is highly litigious there may be asset protection
• Maximum payout
• If you have longevity in the family
• Lifetime income guaranteed

Disadvantages of a Single Life Annuity

• Tying up assets and little liquidity
• If you die prematurely, your beneficiaries—such as heirs or a spouse—may not receive the full benefit amount
• May not cover an unforeseen accident that can end up in death
• May not be the best return available in the industry 

Joint and Survivor Annuity

When evaluating joint and survivor annuities, one must consider the advantages and disadvantages for each of the insured individuals, taking into account their health, longevity expectations and consumer behavior.

Advantages of a Joint and Survivor Annuity

• Protects you from outliving your income producing assets
• Benefits last for the lives of both you and your spouse
• Benefits if both spouses have longevity in the family 
• May be beneficial if assets are insufficient to meet spouse’s needs or if insurance coverage is not feasible

Disadvantages of a Joint and Survivor Annuity

• No access to the principal
• May not be the best return 
• Payments are smaller compared to single life annuity
• Can tie up assets 

A single-life annuity provides the largest monthly payment for one individual’s lifetime. A joint-and-survivor annuity pays a lower benefit than a single-life annuity during your lifetime but will continue to pay your spouse/partner in the event of your premature death.

Marguerita M. Cheng, CFP®, CRPC®, CSRIC®, RICP®CEO of Blue Ocean Global Wealth

Marguerita M. Cheng, CFP®, CRPC®, CSRIC®, RICP®, is the chief executive officer at Blue Ocean Global Wealth. As a CFP Board of Standards Ambassador, Marguerita educates the public, policymakers and media about the benefits of competent and ethical financial planning. She is a past spokesperson for the AARP Financial Freedom campaign.

Essential Points for Your Decision-Making Process

When planning for your financial future as a couple, it’s essential to consider the distinct money personalities and financial habits of each spouse. Couples often find that financial opposites attract, which makes understanding each other’s attitudes toward money important. Whether one of you is a spender or a saver, finding the right balance between annuities and investments can help ensure financial stability and longevity. 

Additionally, evaluating asset protection options like life insurance, especially in light of your assets and liabilities, can inform whether a single or joint annuity is more appropriate. Understanding the opportunity costs and other benefits, such as medical coverage and future living expenses, is vital. Discussing these decisions with your spouse and a financial advisor can provide the clarity needed to make informed choices that align with your joint financial goals.

Money Personalities 

Evaluate the needs of each spouse. In couples, financial opposites often attract. One should closely consider the money habits, financial discipline, attitudes and values of each spouse, especially if there is longevity in their families. If one of you has trouble keeping cash without spending it, a joint annuity may be a viable solution to avoid outliving your money. On the other hand, if one of you is a saver, then you may consider a combination of annuities and investments.

Asset Protection

Assess alternatives such as life insurance. The kinds of assets and liabilities you have will also play an important role in your decision. For example, if there are other income-producing assets and only one of you has longevity in your family, you may consider a single annuity and life insurance for the other spouse. On the other hand, if you have many liabilities, debts and obligations that can outlive you, a joint annuity to cover the debt and your living expenses may be more appropriate.

Opportunity Cost

Consider other benefits such as medical coverage. Sometimes, a pension plan can be converted into an annuity, and the decision of whether to opt for a single or joint annuity may hinge on medical coverage for both spouses, even though the single annuity might provide a higher benefit. Evaluating the opportunity cost of medical coverage versus the payment amount can be a helpful exercise in determining whether an individual or joint annuity makes sense. Additionally, it’s important to consider future living expenses and assets, such as inheritance of income-producing assets (e.g., real estate), payoff of large loans (e.g., mortgage), downsizing or changes in lifestyle (e.g., moving from the city to a farm).

It is recommended that you make this decision with your spouse and consult a financial advisor to help you evaluate options. Your advisor can facilitate the conversation by providing neutral advice focused on your joint goals rather than emotional aspects. Before making a decision, fully understand the alternatives of each annuity, as they offer various riders and options to extend payouts to certain periods, amounts and provide protection for beneficiaries. It’s important to recognize that what works for a friend or chosen relative may not necessarily be the best option for you. Each couple is unique, with personal needs and expectations, so ensure you consider all these aspects before signing the dotted line.

Is a Joint or Single Life Annuity Right for You?

The decision between a joint or single annuity for a married couple depends on their unique circumstances. Let’s explore two illustrative cases.

Ana’s parents lived until 95 years old each, while Anthony’s parents lived until 70 years old each. Their combined net worth includes a home valued at $500,000 and investments totaling $1 million. They will be free of mortgage and all liabilities by the end of this year.

One option is to purchase a joint annuity for $1 million, which would provide them with approximately $65,000 annually. This amount should be sufficient to cover their expenses, taking into account taxes and inflation, for the rest of their lives.

Alternatively, they could consider purchasing a single annuity for Ana and a life insurance policy for Anthony.

Both Jane and Joseph have parents who have lived past 80 years old. Their net worth consists of a rental property valued at $250,000, generating an annual income of $25,000, a fully paid home valued at $500,000 and investments totaling $1.25 million. Their investments could include both qualified (e.g., retirement accounts like IRAs, 401(k)) and non-qualified (e.g., brokerage accounts, rental property) investments. They have no liabilities but enjoy traveling and spending.

They could consider purchasing two single annuity policies for $500,000 each, which would provide them with a combined annual income of approximately $74,000. This approach would leave $250,000 in investments to supplement their lifestyle and travel expenses, as well as to provide an inheritance for their grandchildren.

Consideration of these options includes choosing between a $500,000 annuity and a $1 million annuity. If opting for a single annuity, they should consider adding a rider for value protection or a guarantee period, ensuring beneficiaries or the estate receive income for a specified time. Choosing a joint annuity requires understanding if the surviving spouse will receive 50% or 75% of the income, with riders available to guarantee payments to surviving spouses or for a specified period, ensuring assets pass to heirs if both die.

The decision between a single and joint annuity depends on their financial goals, asset protection needs and opportunity cost. It’s noteworthy that the average age for purchasing the first annuity is in the 50s, with usage typically between ages 70-75. Annuities typically yield 4-6% annually, varying based on age and gender. Jane and Joseph should consult with a financial advisor to align their goals with the best strategy, as “one size does not fit all’ in financial planning.”