The Advantages of Spouse Annuities
Spousal annuities are annuities that continue to pay the spouse even though the annuitant dies. There are several ways to take annuity payments but often retirement programs offer life only or spousal annuities. The life only annuity payments are higher but cease when the annuitant dies. There are options for the percentage of payment offered to the spouse. The higher the percentage to go to the spouse, the lower the initial annuitant's payment is.
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Spousal Annuities and Retirement Benefits.
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Most of the time, you find spousal annuities offered for retirement pensions from the workplace. These are part of defined benefit plans, not defined contribution plans such as the 401k. The 1984 Retirement Equity Act requires a spousal annuity to be the default annuity. If you're married and don't take a spousal annuity, you have to have a written consent from your spouse.
The Cost of Living
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Even though the phrase, "two can live as cheaply as one" isn't completely true, it's partially true. The cost of housing and fixed monthly expenditures remain the same regardless of whether two people live in the house or just one person. A spousal annuity can help defer the additional costs if the annuitant dies.
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Check the Numbers
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When you take annuity payments, you're betting that you'll live longer than the average expectancy and the insurance company bets you won't. If you die even after only one payment, a life only annuity ends. By taking a spousal option on the annuity, you hedge your bet by adding the payment to a second person and factoring in that life expectancy. The insurance company uses actuarial tables to calculate the potential cost, therefore, you'll receive a smaller initial payment based on both life expectancies, but someone will receive the money for potentially a longer period. However, there are drawbacks. If your spouse dies first, you're stuck with the smaller payment for the rest of your life. So, if your spouse has her own retirement plan, you'd do better to each take just a single life annuity.
Reassurance
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Not only do spousal annuities offer reassurance to the spouse that he'll receive a stream of income after your demise, they offer the annuitant some reassurance too. Some defined benefit plans allow you to take your retirement plan money in a lump sum. However, in many cases you only have the option of single life annuities or spousal annuities. Even if your company allows you to take a lump sum, it might not be as beneficial for your spouse. If your spouse has no experience investing and no other means of income after retirement, your spouse may not be able to handle the funds to produce the same income that a spousal annuity offers.
Nursing Home
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In the event the annuitant goes to a nursing home, the couple must deplete assets to pay for the care in the facility before any government aid pays. A spousal annuity provides for the spouse, even though the cost of the nursing home may have depleted other assets. Once the annuitant passes, the payment from the annuity goes to the spouse. The monthly payments continue after the death of the annuitant in the nursing home and provide a continuous income to the spouse.
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References
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