If you’re saving for just yourself, a single life annuity may be the perfect choice. Your beneficiaries won’t see a payout, though, as payments end when you die. A single life annuity, or straight life annuity, can provide a retiree with a monthly payment for as long as he or she lives. When the annuity holder dies, the payments stop. There are advantages and drawbacks to that, so here’s how a single life annuity works and what you need to know.
Single Life Annuity Defined
The single life annuity is just one of many varieties of life annuities that can help fund retirement. Of them all, the single life annuity offers the highest monthly payout.
This makes the single life annuity attractive, of course. However, there is one big potential drawback to a single life annuity. Unlike some other types of annuities, the payments for this annuity end when the annuity holder dies.
This can be a problem if the annuity holder has a spouse who is also depending on the annuity payments to fund retirement. For this reason, single life annuities are not always the best choice for married people.
Single Life Annuity Variants
There are some different types of annuities that help address the shortcoming of the single life annuity.
Joint and survivor annuity
A joint and survivor annuity is the most common single life annuity. It pays monthly benefits for as long as either the annuity holder or a beneficiary is alive. Typically, the other beneficiary is the spouse. The joint and survivor annuity thus funds both spouses’ retirements.
There is, however, a drawback to the joint and survivor annuity. That is, the monthly payout will be smaller than for a single life annuity purchased for the same dollar value. Another wrinkle on the annuity concept can help address this concern while still leaving a surviving spouse some income, at least for a time.
Period Certain Annuity
This option is the period certain or life plus period certain annuity. If you purchase one of these annuities and die before a certain number of years, then your beneficiary will still receive payments until that period expires. Ten or 20 years is a typical period for a period certain annuity.
The period certain annuity also helps moderate the risk of an annuity buyer dying prematurely. A premature death reduces the value of a single life annuity for annuity holders and survivors, because payments end with the annuity holder’s death.
By continuing payments to a beneficiary for a certain number of years, the period certain annuity helps the annuity buyer receive a higher payback on the purchase of the annuity despite a premature death. However, annuity holders should be mindful of the potential tax implications of that higher payout.
Who Could Use A Single Life Annuity?
Single life annuities can be good choices for unmarried people because they offer the highest payouts. And they make the most sense for single people at or near retirement age.
Very young people, in their 20s and 30s, may be better off investing in the stock market rather than buying an annuity. Since they have decades to go before retirement, the passage of time can help smooth out the effects of market cycle ups and downs on their portfolios.
People ages 55 to 75 may benefit most from the guaranteed income of an annuity. It is insulated from the market booms and busts. Older people, in their late 70s and 80s, may not have enough years of life remaining for annuities to make sense. That’s because annuities have a relatively high cost compared to other retirement financing tools.
For a couple with a pension or other savings that could provide retirement income, a single life annuity could give them a higher payout while both spouses are living. After the annuity holder dies, the surviving spouse’s living expenses would presumably be lower.
Who Can’t Use a Single Life Annuity?
Single life annuities make the least sense for married people, especially those with limited other sources of retirement savings. But a single life annuity still can be a good choice for couples with other retirement income.
If other income can support a surviving spouse, the single life annuity might be a good choice. However, if the annuity provides the only retirement income, a joint and survivor annuity may make more sense.
Single life annuities also don’t help people who want to leave a bequest to heirs other than spouses. If a retirement saver is concerned about bequeathing assets to children or others, another annuity type that makes a lump sum payment or continues regular monthly payments to survivors may be a better choice.
Single life annuities offer the highest payouts of any type of annuity. However, the drawback of single life annuities is that they don’t help provide financial support for spouses or other dependents after the death of the annuity holder.
Other types of annuities can create post-retirement income for people other than the annuity holder. In those cases, joint and survivor annuities or period certain annuities may be better options.
- Wondering if a single life annuity would be a good fit for your retirement plan? You may want to consult a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- If you don’t know how much you’ll need for retirement, SmartAsset’s retirement guide can help figure out the details. From figuring out Social Security’s role in your retirement to calculating the future value of your 401(k), the guide can help clarify some of the murkier aspects of retirement planning.
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