How Annuities Can Fill the Social Security Spousal Gap
Most retired couples rely heavily on Social Security benefits. When one spouse dies, there’s often a major loss of their benefits.
The surviving spouse will get either their own benefit or the survivor benefit (the deceased spouse’s benefit), whichever is higher. If one spouse’s benefits are low, the impact on income will be small.
But when both spouses are collecting substantial benefits, as is often the case, there will be a significant reduction that could last for many years.
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That can cause a shortfall because living expenses may not decline very much. If the survivor stays in the same home, property taxes or rent, utilities, insurance and some other monthly expenses remain about the same.
For example, Jim Jones collects $2,500 a month, and June Jones gets $2,000. If one of them dies, the survivor will receive $2,500 a month — a 44.4% drop in total benefits. If both are getting $2,500, the drop would be 50%.
One way to offset a decline in future Social Security benefits is to buy a joint lifetime income annuity. It provides a stream of guaranteed income that continues after the death of a spouse. You must choose when your payments will start when you sign up. Some products, however, may allow you to change the start date.
A fixed indexed annuity with an income rider, a more complex product, also provides guaranteed lifetime income. The big advantage is flexibility: The starting date for income is not set when you buy the annuity. You can begin when you want.
A traditional lifetime annuity produces generous income “forever”
An income annuity can cover one person or both spouses. A joint income annuity pays the survivor the same income stream after one spouse has died. It can help fill the income gap that is created when Social Security benefits plummet after a spouse’s death.
You can choose an immediate or a deferred annuity. With a deferred income annuity, the longer you defer payments, the greater they’ll be.
How much income can you get?
For example, the Joneses are 67 years old and healthy. They deposit $200,000 in a joint deferred lifetime income annuity. They decide to start receiving payments at 80. With one of the highest-paying products on the market (as of August 2026), they will receive $3,758.07 a month for as long as either is living.
Of that amount, only $2,454.02 will be taxable, as the remainder is considered a non-taxable return of principal. If at least one of them lives long enough for the entire principal to be repaid, the income will continue but become fully taxable. This is where the insurance aspect kicks in and why an income annuity serves as longevity insurance.
Here’s a different scenario. Jim is in bad health and doesn’t expect to live more than a year or two. He wouldn’t be eligible to buy more life insurance, but annuity companies don’t care about a buyer’s health.
The couple decides to purchase an immediate income annuity. If they buy a joint lifetime immediate annuity with a $200,000 deposit, they’ll soon start receiving $1,237.65 a month (only $519.81 taxable) from one top insurer.
If Jim lives longer than expected, that’s fine. If he doesn’t, June will have a cushion to make up for reduced Social Security benefits.
Alternatively, Jim and June could put part of their money in an immediate annuity and part in a deferred income annuity, or they could purchase an income annuity payable only on June’s life, which would provide a higher guaranteed income.
The traditional income annuity typically has no cash surrender value. You’ve traded your money for a stream of income — your own private pension.
Indexed annuity: Cash value plus guarantee gives flexibility
A fixed indexed annuity offers a different, more flexible path to guaranteed lifetime income.
These products guarantee a portion of the stock market’s gains during up years while offering complete protection from loss during down years. They credit interest based on the growth of a market index, such as the Dow Jones Industrial Average or S&P 500. So while you typically don’t get all of the return when the market is booming, in return, you lose nothing in down years.
By adding a guaranteed lifetime-income rider, you can assure future income. Since the starting date for income is not set when you buy the annuity, you can start getting payments whenever you want to. This is a great feature because even a retiree in great health can die unexpectedly.
Have cake and eat it, too, but no free lunch
Normally, when you convert an annuity into an income stream (“annuitization”), its cash surrender value becomes zero. That’s not the case if you add an income rider. You still own the full unused value of your annuity: You can “have your cake and eat it too.”
But there’s no such thing as a free lunch. Most insurers charge around 1% annually of the assets in the annuity to add an income rider. That’s significant: Your money will grow more slowly than without the rider.
The lifetime income payment amount is determined by the income account value and your gender and age at the time you start receiving payments. The income account value typically grows at a guaranteed annual compounded rate of 4% to 8%, so the longer you wait, the greater the income.
The income account value and cash value of your contract are separate. The income account value is used only to calculate your guaranteed income payments. It has no cash value and cannot be withdrawn.
In contrast, the contract value can be withdrawn or passed to your heirs. After many years of guaranteed income payments/withdrawals, the contract value may fall to zero, but you’ll still get the same income for life.
Another downside is fluctuating interest rates. If the market goes through a long bear cycle, you may earn nothing on your contract value for several years.
Nevertheless, having cash value and flexibility are powerful advantages that make indexed annuities worth considering for generating a strong stream of income.
There’s no one approach that’s best for everyone. The traditional income annuity and the indexed annuity plus income rider each have their pros and cons. For some couples, the former will fit the bill; for others, the latter will.
This article covered a basic scenario where each spouse is collecting Social Security. If one spouse is significantly younger, planning can be a bit more complex. Nevertheless, the same general principles hold.
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356. The firm also offers an income-annuity quoting service. There are no fees or charges for the firm’s services; 100% of the client’s money goes to work for them in their annuity.
