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, sometimes also called a 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 this arrangement, so make sure you understand how they work before you buy one. You can also consult with a financial advisor before making a decision.
What Is a Single Life Annuity?
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.
Who Is a Single Life Annuity Good For?
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 Shouldn’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.
Alternatives to Single Life Annuities
There are some different types of annuities that help address the shortcomings of the single life annuity. Figuring out whether one of the options below or a single life annuity is better for you can have a huge impact on your long-term retirement plans.
Joint and Survivor Annuity
A joint and survivor annuity pays monthly benefits for as long as either the annuity holder or a beneficiary is alive. Typically, the 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 alternative 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. A typical period for a period certain annuity is 10 or 20 years.
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 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.
When choosing an annuity, you should consider your life expectancy, interest rates, fees, insurance company ratings, payment options and tax implications. 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 good for your retirement plan? You may want to consult a financial advisor before making a decision. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Don’t forget to account for Social Security benefits when you’re putting together your retirement income plans. You can use SmartAsset’s Social Security calculator to figure out what your benefits might look like.
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