If retirement is on the horizon, you may have considered a straight life annuity to make those golden years even more blissful. As a retirement income product that pays a benefit until you pass away, a straight life annuity provides a regular income stream to maintain your standard of living as well as a number of other benefits.
Before we get into the nitty-gritty of straight life annuity, it’s important that you consult a financial expert that specializes in retirement planning.
Independent insurance agents understand the ins and outs of financial products and connect you with the perfect policy for your unique needs.
What Is a Straight Life Annuity?
Sometimes referred to as a “single life policy,” a straight life policy is a retirement income product that pays a benefit until the policyholder (the annuitant) passes away.
However, once the individual is deceased there are no more payouts. The key component of this annuity is that it forgoes any further beneficiary payments or a death benefit.
How Much Does a Straight Life Annuity Cost?
Straight life annuities are generally cheaper than other types of annuities, as there’s less risk on the insurer for the policyholder to outlive the amount that they paid into the investment. Generally speaking, men collect slightly higher single life payouts due to shorter life expectancies than women.
Who Is a Straight Life Annuity Right For?
A straight life annuity provides a guaranteed income stream until the death of the annuity owner. With no payouts after the owner's death, this means that heirs, beneficiaries, and spouses receive nothing.
Single individuals with none of the aforementioned can experience lower premiums and higher payouts, especially when compared with other types of annuities and retirement income products.
How to Purchase a Straight Life Annuity
There are basically two ways to purchase a straight life annuity policy:
- Making periodic payments into the annuity over the course of the annuitant's working life
- Purchasing the annuity with a single lump-sum payment, which usually is made at, or shortly after, the annuitant's retirement
Either payment option will result in the same regular payments and can be modified with optional riders, such as a cash-refund rider that pays out the remaining funds in the policy to a beneficiary.
Why You May Want a Straight Life Annuity
There are a number of scenarios where a straight life annuity can be beneficial to your financial strategy in retirement:
- Straight life annuities provide regular funds in your later years when you may not be earning income. This helps maintain a quality of life guarantee and predictability that variable investment options may not be able to.
- Like all annuities, straight life annuities act as longevity insurance, where you can be guaranteed income even if you outlive how much you initially paid into the annuity.
- Considering that straight life annuities are geared towards single individuals, they are not the best choice for couples who are planning to live off of the retirement income the annuity provides.
- If you’re a single male retiree, you can get the largest monthly payouts, as insurers consider men to have shortened life expectancies.
- The premiums for straight life annuities can be funded in multiple ways, including:
- Selling mutual funds or stocks
- Transferring funds from an IRA or 401(k)
- Cashing in the surrender value of a life insurance policy through a 1035 Exchange, with reduced tax liability.
- For those who are recipients of large settlements or windfalls (i.e., lottery winners), straight life annuities can ensure a steady income for life while also avoiding the risk of squandering a substantial amount of funds. This also helps reduce the ultimate tax bill by accepting payment in the form of a life annuity rather than as a lump-sum payment.
Alternatives to Straight Life Annuity
If these reasons aren’t compelling enough to select a straight life annuity, there is the joint and survivor annuity. This policy ensures that payouts are given to both named individuals until death, which includes the owner and a beneficiary, with the most common beneficiary being a spouse.
Another annuity that contrasts the straight life policy is the life plus period-certain annuity. This annuity pays a benefit for either the owner's lifetime or for a specific period of time, whichever is longer.
As another example, the cash refund annuity provides a guarantee that a spouse or beneficiary will receive a sum equal to the premiums paid into the annuity. This sum is determined minus the sum of payments already made should the owner pass away before breaking even.
How to Compare Straight Life Annuity Policies?
Not all straight life annuity policies are created equal. Here are some things you should look out for when selecting the right policy:
- Ask for a prospectus from an insurance agent when looking over a policy. The prospectus will provide a rundown of fees, estimated earnings, and other relevant information.
- Ask lots of questions. This will give you a feel for the company’s customer service, which is important when you need to make significant changes. Chances are if the company isn’t personable or forthcoming with information, expect problems with your annuity down the road.
- Compare rates. While most rates of insurers tend to mirror their competitors, there may be differences that can compound down the road.
- Check the company’s longevity. While it’s rare than an insurer goes bankrupt and you’ll still be partially covered by state- and federal-run programs, it can be an unnecessary risk and headache for your hard-earned wealth.
Now that you’re up to speed on straight life annuities and whether they’re right for your financial future, it’s time to speak with a financial expert to guide your decision making.
To minimize risk and maximize your future, an independent insurance agent can provide you with the information you need to make the best decision.
They help make sense of the fine print, clarify what’s covered, and offer additional advice such as adding riders specific to your unique situation.
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