Straight Life Annuity

What Is a Straight Life Annuity?

Straight life annuities, also called single life annuities or life only annuities, are contracts that guarantee a stream of income for the lifetime of only one person — the annuitant.

They do not provide income to surviving spouses or additional annuitants when the annuitant, usually the annuity owner, dies. The high monthly payouts and lack of a legacy or sustained income stream make this annuity uniquely suited for a single person who has no intention of providing financially for others after their death.

When Does a Straight Life Annuity Benefit Married Couples?

As part of a holistic financial strategy and diverse portfolio, a single life annuity may benefit married people or retirees with alternative sources of income and other assets to leave to beneficiaries. Retirees who have begun their estate planning may find that a single life annuity can fill a gap left by other investments and retirement savings accounts.

Married people generally opt for an annuity structured in such a way that it can continue to provide income to the surviving spouse after the first spouse dies.

It may make sense, however, for a married person to buy a straight life annuity if his or her spouse has another income stream. This still allows the first spouse to maximize their retirement income without worrying about leaving a surviving spouse with nothing to live on.

An interesting strategy utilizing straight life annuities is when they are coupled with a permanent life insurance policy. Let’s say a couple has $500k set aside for an annuity, but one spouse also has a $500k permanent life insurance policy. They could choose a straight life annuity with the spouse who has the insurance as the annuitant. The annuity income payments will stop at that spouse’s death, but the other spouse will receive the life insurance payout and then choose to purchase another annuity.

Chip StapletonFINRA Series 7 and Series 66 License Holder

Chip Stapleton is a financial advisor who has spent the past several years of his career working primarily in financial planning and wealth management. He is a FINRA Series 7 and Series 66 license holder and passed the CFA Level II exam in 2022.

Pros and Cons of Straight Life Annuities

Straight life annuities are a popular option, but they are not for everyone. Each type of annuity has its benefits and drawbacks, and it’s important to consider whether the rewards of a straight life annuity outweigh the risks for your financial situation.

Annuities with a life only payout typically provide the largest individual payment amounts when compared with other annuitization options. The guaranteed life payments can provide some peace of mind, ensuring that you will not outlive your retirement savings.

However, a straight life annuity also comes with the most risk, as payments can end unexpectedly when you pass away. Unless you pay extra for a death benefit rider, what remains of your annuity’s value goes back to the insurer when you die and they will make no payments to beneficiaries.

Alternative Annuity Payout Options

As with every other feature of an annuity, payouts can be structured to suit your needs. If your objective is to provide income for your spouse upon your death or leave financial assets to a beneficiary, you’ll be better off purchasing an annuity with a different payout structure.

Other annuity payout options include:

• Period Certain
• Life Annuity with Period Certain
• Joint and Survivor Annuity
• Lump-Sum Payment
• Systematic Annuity Withdrawal
• Early Withdrawal

None of these options is inherently better than the others. According to the Bureau of Labor Statistics, payout decisions are not only about monetary value. The type of payout you select should align with your long-term goals and retirement lifestyle.

Joint and Survivor Annuities

One way to solve the problem of leaving a surviving spouse without an income after you die is to purchase a joint and survivor annuity. Unlike straight life annuities, joint and survivor annuities guarantee payments for the lifetimes of the annuitant and the life of one other person, typically the original annuitant’s spouse.

Because these payments last longer — beyond the death of the first annuitant — payments are slightly lower. You can also establish a payout schedule that distributes slightly larger amounts while both annuitants are still alive and then reduces the amount of income the surviving spouse receives by 25% to 50%.

Period Certain

Period certain annuities have a predetermined duration of payments instead of tying payments to a lifetime. This option makes sense for older retirees or people in poor health because period certain annuities protect them against losing the majority of their premium in the event that they die soon after their purchase.

If the payee of a period certain annuity dies before the end of the term, benefits will continue to a designated beneficiary for the remainder of the period. This is in direct contrast to the terms of a single life annuity, which state that the remaining cash value goes to the insurer when the annuitant dies.

Life Annuity With Period Certain

Some straight life annuities have the option to add a period certain rider to the contract. With this combination of payout options, you can have guaranteed payments for a certain number of years and for your lifetime. 

If you pass away before the period elapses, your remaining payments will go to a beneficiary. So if you purchase a life annuity with a 20-year period certain, for example, and you pass away after 10 years, your beneficiary will receive the payments you would have received for the remaining 10 years.

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Frequently Asked Questions About Straight Life Annuities