Jump to content

Contingent Annuity Question


Recommended Posts

I have very limited knowledge of DB plans. Assume participant is married and spouse is beneficiary.

I understand that the monthly benefit payment amount is reduced if a participant elects a contingent annuity versus life only annuity. What happens if the participant's spouse pre-deceases the participant? Does the monthly amount remain the same? Or is it adjusted upward for the rest of the participant's life?

Thanks

QPA, QKA

Link to comment
Share on other sites

(1) Your question depends upon Plan design. Typically, there is no change in the monthly payment (and the plan wins). In some plans, however, the monthly payment to the participant "pops up" to the life only amount prior to any reduction. The "pop up" feature may be forever or may be available only if the beneficiary dies prior to attaining a certain age.

(2) It is not a given that the contingent annuity option causes a reduction in benefit from the life only form. Again, plan design. Some plans offer a free joint & survivor annuity; most plans charges via a reduction in pension. Whether or not no reduction could also depend upon whether or not beneficiary is spouse or non-spouse.

(3) Independent of plan design, if spouse predeceases participant, then if participant is a female, remarriage occurs within 24 months; if participant is male, then he moves in the with women he's been flirting with each morning at Starbucks.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

Link to comment
Share on other sites

Referring back to ATA's comments:

1. True, some plans offer pop-up features, but in most instances, there would be a slightly larger reduction for a joint form with pop-up versus the essentially same joint form without pop-up. Theoretically, that could raise a question as to whether spousal consent would be needed for a 50% joint form with pop-up, since the potential spousal benefit would be lower than under a regular 50% joint form. I have never seen a pop-up with an age limit for the pop-up to come into play. It has been my experience that most plans do not offer a pop-up form.

2. True, some plans offer free joint forms to married participants (and straight life annuities to non-married participants). My luck, the first such plan I ever encountered (and there have been but few since) was a smallish plan where the owners were married with a 20 year age difference. The vast majority of the plans I have seen do apply an actuarial adjustment to go from the normal form (life annuity with or without a certain period) to a joint form, spouse or otherwise.

3. If one retires under a joint form, the survivor benefit can only go to the specific person to whom the participant was married when payments began (in the absence of plan provisions to the contrary). I wish great happiness to the participant and the new spouse if the spouse as of retirement date has died and the participant remarries, but there can be nothing payable to the new spouse after the participant's death. Although there have been at least a couple somewhat baffling court decisions to the contrary.

Always check with your actuary first!

Link to comment
Share on other sites

I think we're making this way too complicated....

If the participant is still active, his normal form is now a single life annuity and is calculated as such.

If the participant is retired, then it depends on the form of benefit that he selected.

Link to comment
Share on other sites

I think we're making this way too complicated....

If the participant is still active, his normal form is now a single life annuity and is calculated as such.

If the participant is retired, then it depends on the form of benefit that he selected.

My interpretation of the original post was that the situation is either that a participant has retired and elected a joint form and subsequently the joint annuitant died or that the participant is considering the election of a joint annuity and is trying to find out how it would work. Simple answer - unless the form elected is a pop-up joint form, if the benefit starts and the joint annuitant subsequently dies, the benefits will remain at the reduced level for the rest of the annuitant's life, with no compensation for the fact that no survivor payments would ever be made, despite the reduction.

Always check with your actuary first!

Link to comment
Share on other sites

I have very limited knowledge of DB plans. Assume participant is married and spouse is beneficiary.

I understand that the monthly benefit payment amount is reduced if a participant elects a contingent annuity versus life only annuity. What happens if the participant's spouse pre-deceases the participant? Does the monthly amount remain the same? Or is it adjusted upward for the rest of the participant's life?

Thanks

Let's throw some overly simplistic numbers in.

Participant has a life annuity of 1,000 / month

Option 1 Joint and 75% contingent annuity

This annuity provides the participant with 800 / month and IF the spouse dies the annuity remains at 850 and IF the participant dies then the annuity drops to 600 / month

Option 2 Joint and 75% survivor annuity

This annuity provides the participant with the same 850 / month BUT upon the death of either the participant or the spouse the annuity drops to 600 / month

The pop-up annuity is, in my opinion, a rare option to see in plans.

Link to comment
Share on other sites

I have very limited knowledge of DB plans. Assume participant is married and spouse is beneficiary.

I understand that the monthly benefit payment amount is reduced if a participant elects a contingent annuity versus life only annuity. What happens if the participant's spouse pre-deceases the participant? Does the monthly amount remain the same? Or is it adjusted upward for the rest of the participant's life?

Thanks

Let's throw some overly simplistic numbers in.

Participant has a life annuity of 1,000 / month

Option 1 Joint and 75% contingent annuity

This annuity provides the participant with 800 / month and IF the spouse dies the annuity remains at 850 and IF the participant dies then the annuity drops to 600 / month

Option 2 Joint and 75% survivor annuity

This annuity provides the participant with the same 850 / month BUT upon the death of either the participant or the spouse the annuity drops to 600 / month

The pop-up annuity is, in my opinion, a rare option to see in plans.

Comments on the 2 options:

1. I am guessing that all references in the two options to $850 should have been $800.

2. It is my experience that the monthly benefit under a true joint and contingent form (option 1) will tend to be significantly lower than the monthly benefit under a true joint and survivor form (option 2). That is, it is likely that if the plan pays $800 per month for option 1, option 2 might be something more like $850-$900 per month, since the present value of the anticipated benefit stream would be lower than in option 1 (making it reasonable to have a smaller reduction from the life annuity). Depending on the respective ages of the participant and the spouse, option 2 might even involve a monthly payment greater than $1,000, since with an older spouse, the participant's benefit could quickly drop to $600.

3. I agree that the pop-up option is rare, but so is a true joint and survivor like option 2. In general, it is not offered in a qualified plan so much because it shifts the focus away from providing benefits to the participant. It would, however, meet the requirements for being a Qualified Joint and Survivor Annuity. You would tend to see that sort of benefit more often in the individual annuity area, where the annuitant and his or her wife are converting family assets into an annuity that treats them more as equals.

4. If the plan offers both regular contingent forms and pop-up contingent forms, depending on the relative ages, if the regular 75% contingent form is $800 per month, you might see something like a reduction to around $780-$790 for a 75% contingent form with pop-up.

Always check with your actuary first!

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...