Joint & Survivor Annuity Factors
Joint and survivor annuities offer contract holders a steady income stream that continues until the death of the second owner. Most joint and survivor annuities are sold to married couples, although children and dependents are sometimes joint owners. Many employers offer joint and survivor annuities through company pension plans. Insurance companies also sell the annuities to people outside of company plans. The Internal Revenue Service enables retirees to receive pensions as qualified joint and survivor annuities with the stipulation that the surviving spouse of the deceased worker is entitled to a payment of between 50 and 100 percent of the amount paid to the retiree while living.
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History
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In ancient Rome, citizens made annual payments to the government that provided for lifetime pension payments known as annua. In the U.S., annuities became popular during the 18th century, although, until 1912, sales were limited to groups rather than individuals. In the early 20th century most major companies offered annuity-based pension plans. Towards the end of the 20th century many companies discontinued pension plans and, increasingly, retirees set up their own joint and survivor annuities.
Survivor Annuity Types
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When an annuitant chooses a joint and survivor annuity over a single life annuity, the amount received over the annuitant's lifetime is reduced to account for the longer period of payment. An annuitant might choose a joint and 50 percent survivor annuity, in which the annuity continues over the life of the survivor, but at 50 percent of what the annuitant was receiving. Some annuities offer other ways to provide for survivors, outside the standard joint and survivor annuity. Period certain annuities are guaranteed for a certain term. Terms range from 5 to 20 years and allow the survivor to enjoy stable payments for the term regardless of when the other annuitant dies. Life income with period certain covers the annuitant for life but continues payments to a beneficiary only if the annuitant dies within the period certain time frame.
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Benefits
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Income annuities provide people with a reliable source of income. Other income generating instruments such as certificates of deposit are subject to rate fluctuations over time and when interest rates are low, CD account holders have greatly reduced income. Income annuity payments are not affected by the stock market, rate changes or the state of the economy as a whole.
Income annuities enable retirees to provide their spouses with income for life, and invested funds are not taxed until withdrawn.
Features
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Annuity ownership options allow contract holders to choose between higher short-term income and long-term income guarantees. Payments for single life contracts are much higher because the insurance company bases returns on mortality calculations for an individual. Joint contracts increase the insurance companies exposure to longevity risk. When people live longer than mortality tables suggest, the insurance companies lose money. People with minimal income generally opt for joint ownership to protect the surviving spouse financially, but people with higher income usually opt for single ownership and higher payments
Considerations
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Annuities are not regulated at a federal level and unlike bank products they do not enjoy the principal protection of the federal deposit insurance corporation. State insurance regulators do not allow insurance companies to co-mingle funds, which means annuity money cannot be mixed with general operating funds. State regulations are designed to protect annuitants from loss, but if an insurance company fails, the account holders could lose money. Some states have provisions to cover insurees who experience losses due to insurance companies failing.
Warning
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Income streams from annuities expose annuitants to the dangers of interest rate risk. Most annuities offer flat payments for life which mean that the annuitant gradually loses spending power due to inflation. Some insurance companies offer payments that adjust with inflation but the initial monthly payments are lower than on other payment plans because the insurance company offsets costs in future years by reducing benefits in the short-term. Most rising payments assume an inflation rate of 3 percent or less and don't protect against rapid inflation.
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