What it means
An annuity is a contract in which you give an insurer a lump sum, or pay premiums over time, in exchange for regular income. In a single-life annuity, payments stop when the one named person dies.
A joint life last survivor annuity covers two lives and continues until the second person dies. The main benefit is security for the partner who lives longer.
Without the joint feature, a spouse could be left with little income after the main annuitant dies. This protects the household against the risk of outliving its savings, often called longevity risk.
There is a price. Because the insurer expects to pay for longer, the starting payment is lower than for a single-life annuity bought with the same money.
The more generous the survivor benefit, the lower the initial income. Contracts usually let you choose the survivor percentage, such as 100%, 75% or 50% of the original payment.
A higher percentage gives the survivor more income but lowers the initial payment. A lower percentage gives bigger payments while both are alive but a smaller income for the survivor.
Other points matter. The payments may be fixed or may rise with inflation, and some contracts include a guarantee period or a refund of premiums.
Tax treatment depends on the country and on how the annuity was funded, so you should take professional advice before buying. An insurer's financial strength also matters, since the promise lasts for decades.
Check the company's ratings and any protection schemes that apply in your country. Some countries also have schemes that protect annuity holders if an insurer fails.
In practice
Real-world examples.
Example
A retired couple converts part of their pension pot into a joint life last survivor annuity. The husband's health is poor, so they choose a 100% survivor option to protect his wife. The couple accept a lower starting income in exchange for that certainty.
Example
A business owner selling his company uses some of the proceeds to buy a joint annuity. The monthly income covers his and his partner's basic living costs, whichever of them lives longer. The annuity sits alongside his remaining investments, which he can use for travel or gifts.
Example
A financial planner compares a single-life annuity paying $4,500 a month with a joint life option paying $3,900 a month. She explains that the difference of $600 a month is the price of continued income for the surviving partner. The couple decide the protection is worth the cost.
Formula
Calculation
Survivor payment = Original monthly payment x Survivor percentage
Suppose a couple buys a joint life last survivor annuity paying $4,000 a month while both are alive, with a 75% survivor benefit.
Survivor payment = $4,000 x 75% = $3,000 per month
Annual income while both are alive = $4,000 x 12 = $48,000
Annual income for the survivor = $3,000 x 12 = $36,000
After the first death the household income falls by $1,000 a month, but the survivor still receives $36,000 a year for life. If the survivor benefit were 100%, the survivor would keep the full $4,000, but the starting payment would usually be lower to pay for that promise.Case study
Seen in the real world.
This is a fictional illustration. Hartley and Joan, an invented retired couple, had $400,000 in savings and were worried about running out of money. They wanted an income they could not outlive.
Their adviser, Sunil, showed that a single-life annuity would pay more but would stop when Hartley died. Joan, who was five years younger, was likely to live longer, so they chose a joint life last survivor annuity with a 75% survivor benefit.
The initial payments were lower, but the couple gained certainty. In this illustrative story, they kept an emergency fund for unexpected costs and said the lifetime guarantee allowed them to sleep more easily. They also reviewed the plan with a second adviser to check the insurer's financial strength.
Watch out
Common mistakes.
- Choosing the highest starting payment without considering the survivor. A single-life annuity pays more but leaves a partner unprotected. The difference can be several hundred dollars a month.
- Ignoring inflation. A fixed payment buys less each year, so consider an option that rises over time. Ask whether increases are available and what they cost.
- Assuming the money passes to heirs. Many annuities stop when the last person dies, unless a guarantee period is chosen. Check for a guarantee period or refund option.
Questions
People also ask.
What does last survivor mean?
It means payments continue until the second of the two people dies. The income can continue for decades.
Is a joint annuity better than a single-life annuity?
It is better if you want to protect a partner, but it pays a lower income at the start. Your health, ages and budget should drive the choice.
Can the survivor benefit be lower than the original payment?
Yes, many contracts reduce the payment to a set percentage, such as 75% or 50%, after the first death. The choice is made when the contract is bought.
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