A straight life annuity is a form of annuity that makes payments for a single person’s life. It does not pay a death benefit, nor does it pay spousal benefits. The annuity payments end when the beneficiary dies. Here’s how it works.
Consider working with a financial advisor as you create an investment or retirement plan.
What Is a Straight Life Annuity?
A straight life annuity is a form of a lifetime annuity, which is an insurance contract that provides guaranteed payments to the recipient. It’s mainly used as a retirement vehicle for people to invest in during their working lives, and then collect on in retirement. As with most lifetime annuities, this is a contract that you typically invest in early and collect on later in life.
Once the contract enters repayment (annuitization), typically beginning in retirement, it makes a set payment every month for the rest of your life. And once you, as the beneficiary, die, the contract ends and the annuity stops making payments.
A straight life annuity does not have any spousal or dependent benefits. And it does not issue a payout when the beneficiary dies. This makes straight life annuities a very straightforward product.
You will receive payments that start at a set date. And those payments will continue for the rest of your life. Once you die, the contract expires.
Payout Options for Straight Life Annuities
Unlike many other types of annuities, straight life annuities have only one payout option. You can buy straight life annuities in either immediate or deferred form. With an immediate annuity, you begin collecting payments immediately after buying the contract.
With a deferred annuity, you hold and put money into the annuity for a period of time and then begin collecting payments at some point in the future. Deferred annuities almost always pay more than immediate contracts because they repay in part based on the growth of the underlying investment during the deferral period.
Once the straight life annuity enters annuitization, the contract has one payout structure: You collect a pre-defined, monthly payment for the rest of your life. Once you die, the contract expires and issues no further payments.
Good Candidates for a Straight Life Annuity
Like all lifetime annuities, straight life annuities are structured primarily for retirees. This is true for a number of reasons, including the fact that your payments will be minimal with a lifetime annuity that begins significantly earlier than retirement – if you could find someone to sell you that product at all.
In retirement, the classic case for a straight life annuity is someone with no spouse or significant heirs. With a straight life annuity, your spouse will not receive any continued payments after your death. Nor will there be any lump-sum payment to your heirs. This may make straight life annuities an appropriate product for retirees with neither spouses nor heirs to think about.
It can be a good product for households that need a targeted addition to their retirement plans. For example, if you know that you want money to pay the costs of living for one member of the family, a straight life annuity can be a good product to use.
This can be particularly the case if one spouse has more significant medical or other financial needs than the other. Either way, this allows you to plan around a specific stream of income, which can often be exactly what a retirement plan needs.
Alternatives to Straight Life Annuities
The most common alternatives to straight life annuities are other forms of lifetime annuity contracts. These can come in several forms. Many lifetime annuities can be structured as a “joint” or “joint and several” annuities. These contracts include both spouses in a household. When the primary beneficiary dies, the annuity continues making payments to the spouse until he or she, too, passes.
Other lifetime annuities are structured similarly to life insurance contracts and include what’s known as a “death benefit.”
This is an amount of money that your annuity contract pays in a lump sum to either your estate or named beneficiaries after you die.
You can also purchase a period certain annuity, which is a contract that provides payments for the greater of either the rest of your life or a minimum payment period. If you die before the minimum period has elapsed, the payments continue to a named beneficiary.
The key difference with all of these alternatives is that they can issue payments to spouses, dependents and heirs. If you want to include other people in your retirement or estate planning and want to use this specific asset to do that, then a different lifetime annuity may be a good option. If not, then a straight life annuity may work well.
A straight life annuity is a contract that makes payments to you for the rest of your life. Then, it expires once you die. It does not make payments to your spouse or heirs. And within a straight life annuity, there are payout options between immediate and deferred annuities. Make sure to choose which payout option fits your financial goals.
Tips for Retirement Planning
- Wondering if you need an annuity as part of your retirement income plan? Consider working with a financial advisor specializing in retirement planning. 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.
- Not sure if you’ll have enough income to sustain your lifestyle in retirement? Check out our retirement income calculator to see if you’re on pace. And if the savings in your 401(k) aren’t going to be enough, consider opening an IRA at a low-cost brokerage to add more investments to your portfolio.
Photo credit: ©iStock.com/tdub303, ©iStock.com/Sakorn Sukkasemsakorn, ©iStock.com/Kunakorn Rassadornyindee, ©iStock.com/RomoloTavani