Under a straight life annuity contract, the annuity makes payouts on a regular basis for the remainder of the annuitant’s life, no matter how long the annuitant lives. The payments end when the annuitant passes away. Additional payments aren’t made to a beneficiary.
The following is an example of a straight life annuity, which also is known as a single life annuity. George is 65 years old and recently retired. He is worried about the possibility of outliving his income during his retirement, so he purchased a straight life annuity. He funded his annuity with a deposit of $100,000 and will receive fixed payouts from the insurer for life of $498 per month. His payments will continue until George passes away.
If George didn’t receive payouts totaling at least his deposit by the time he passes away, the insurer will keep the excess. If George lives a long time, he will receive aggregate payments greatly exceeding his deposit, and the insurer will continue making the payment no matter how long George lives. George won’t be required to make an additional deposit with the insurer.
How Does a Straight Life Annuity Work?
A straight life annuity is a contract between an insurance company and the annuitant. The annuitant usually purchases the annuity with a lump sum deposit, and the insurer promises to make a fixed regular payment to the annuitant for life. Often, a straight life annuity is purchased shortly before the annuitant wants regular payments to begin, and the annuitant begins to receive payments soon after the deposit is made.
The annuitant will receive regular payments (usually monthly) for the rest of his or her life. This ensures that the annuitant will not outlive his or her income and will never run out of money. Though payments usually are made monthly, the annuitant can elect a different payment frequency, such as quarterly or annually.
An advantage of the straight life annuity is the annuitant will receive the maximum regular payment available for the amount of the lump sum deposit. An individual can buy an annuity with different payment terms, such as one that provides a death benefit to a beneficiary or that continues payments to a beneficiary if the annuity passes away prematurely. But the payments made while the annuitant is alive will be less than the payments on a straight life annuity.
An individual might be able to buy a straight life annuity under which the regular payments increase with inflation or some other factors instead of being fixed for life. But an inflation-indexed annuity will have a lower initial payment than a fixed-payment annuity.
Who Should Buy a Straight Life Annuity?
A straight life annuity can be suitable for a single adult who has no spouse or other dependent to provide for.
A single life annuity also is appropriate for someone, either married or single, who has other sources of income and assets and plans to put only a portion of the retirement nest egg into the annuity. The guaranteed income from the annuity can free the individual to invest more aggressively with the rest of the retirement portfolio and potentially earn higher returns. The annuity also provides assurance that a minimum amount of income will flow into the household regardless of how market fluctuations are affecting the rest of the portfolio.
Studies have indicated that having a portion of a retirement nest egg in an annuity that pays income for life often makes a nest egg last several years longer than when an annuity isn’t used. Some financial advisors recommend that a retiree have guaranteed income, from Social Security and annuities, that at least equals fixed, required expenses. Some advisors call a straight life annuity a private pension.
Alternatives to Straight Life Annuities
The straight life, or single life, annuity is only one type of payout available from an annuity. Remember that each is likely to make lower regular payments to the annuitant than the straight life annuity. Other commonly-available annuity payouts include:
– Life with Cash Refund: This option allows a beneficiary to receive a payment when the aggregate lifetime payments made to the annuitant don’t at least equal the lump sum deposit made to purchase the annuity or some other threshold.
– Life and Period Certain: The annuitant receives payments for the longer of life or a minimum number of years. If the annuitant passes away before the minimum number of years, payments will continue to one or more beneficiaries named by the annuitant for however many years are left in the period of years. A common form of this annuity is life and 10 years certain.
– Joint and Survivor Annuity: The payments continue for the joint life of the annuitant and a named beneficiary, usually the annuitant’s spouse. Payments are made as long as one of the two beneficiaries is alive.
– Period certain: Payments are made for a fixed number of years. If the annuitant outlives that period, payments stop at the end of the period. If the annuitant dies before the end of the period, payments continue to one or more beneficiaries named by the annuitant.
What you don’t know about your retirement finances can hurt you. Learn more about all aspects of your retirement finances, especially the most important recent changes, through Retirement Watch. The only publication to cover all the elements of retirement finance, it has been edited for more than 30 years by America’s #1 retirement expert, Bob Carlson. Carlson was trained as an attorney and accountant and has served as Chairman of the Board of Trustees of the Fairfax County Employees’ Retirement System (which has more than $5 billion in assets) since 1995.