Every working adult intends to have a retirement plan that will serve their needs once they retire and cannot work anymore. As the years go by, the reality of not going to work becomes real, and one seriously seeks an annuity that would serve them in retirement. A smooth retirement with a steady flow of cash is what everyone wishes for themselves.
An annuity is a contract between an insurance company and an individual who is the annuitant. The individual makes payments to the company that will be remitted back to them when it matures or according to the agreements between the individual and the insurance company.
Before purchasing any annuity, one has to have enough background information on what it entails. Some annuities cover the annuitant and his family, while others cover only the individual. Others cover the surviving heirs or next of kin, while others are terminated with the death of the annuitant.
There are several insurance options, and this article will explore the straight life annuity and what it entails. The most common questions asked concerning the straight life annuity will be answered in this article. Some of them include how the annuity works, the advantages and disadvantages, payout options, who qualifies for the insurance, and alternatives to the straight life annuity.
What is the Straight Life Annuity
The straight life annuity is also referred to as the life-long annuity or the straight life policy. It serves the annuitant until they die. The policy protects the individual against running out of cash in their retirement by providing a guaranteed income stream until the annuity holder dies.
The greatest difference between the straight life annuity and other annuity policies is that it stops remittance once the annuity owner dies. It does not offer financial support to any survivors, heirs, widow or widower once the annuity owner dies. This makes the straight life policy the best option for individuals who do not need to provide for anyone after they die. This includes single people without spouses or children that depend on them.
When the annuitant dies, all payments are stopped, and no death benefits are given to the annuitant’s family or survivors. This makes the straight life policy cheaper than other retirement programs. The amount given to the annuity holder is also higher than that of policies that cover the heirs of the annuity holder once they die.
How the Straight Life Annuity Works
As mentioned above, the straight life annuity covers only the annuity holder. They are guaranteed(1) a steady payment while they are alive. The policy foregoes death benefits to the annuity holder’s beneficiaries. The death of the annuitant marks the end of their contract with the insurance policy, and no more remittance is made to them or their family.
The straight life annuity may be purchased at any time over the course of the annuitant’s working life. The payment starts when they retire and are no longer working and stops when they die.
The Annuity policy may be funded in the following ways;
- Sale of stocks and mutual funds or any other traded securities.
- Transfer of permanent life insurance cash values.
- Personal savings/Bank accounts
- Fund transfers from trusted retirement plans.
When the policy is funded with pre-tax dollars, the owner will pay taxes on the entirety of the annuity payments. When payment is made from after-tax cash, the payments will be taxed on the interest earned portion of the payment. An example of after-tax payment is paying for the annuity from personal savings or bank accounts.
The amount of payouts given to the annuity holder when they retire entirely depends on the amount they contributed when they were working. A pre-tax annuity is taxable but the tax is deferred until the annuity matures when the owner goes into retirement. This normally results in a faster growth of their account value and it is the greatest reason why most people pay taxes in retirement.
Although the straight life annuity is meant to benefit only the annuity owner, some straight life annuity options are structured in a way that the surviving spouse can get the payouts when their partner passes on. If a couple has another source of income, they can maximize their retirement income which would cover the surviving spouse when their partner dies.
Advantages and Disadvantages of Straight Life Policy
The advantages of straight life annuity include;
- Guarantees(1) a steady cash flow until the annuity holder dies.
- Higher payments are made since the policy does not last beyond the holder’s death.
- Best payout option for individuals without beneficiaries or heirs.
Just like any other annuity policy, the straight life annuity has its own downsides. These include;
- It does not offer any benefits to beneficiaries, heirs, next of kin or spouse of the annuity holder once they die.
- If one dies early, they could lose any remaining value.
Who Qualifies for the Straight Life Annuity
Anyone can purchase a straight life annuity depending on their preferences.
The best candidates for this kind of annuity are those that do not have any financial responsibilities to their families or spouses once they die. This is because payment stops when the annuity holder dies and does not offer any kind of payments to their survivors.
The straight life policy is also a great option for individuals who have other sources of income and assets. This implies that only a portion will go to their annuity. The heirs or spouses of the annuity holder will enjoy the assets set aside for them even after their kin who is the annuity holder dies.
The single life annuity assures a minimum income level that is not affected by fluctuations in the market. This allows an individual to save proactively with what remains of their portfolio to get higher and better returns.
Most financial advisors ask retirees to have other guaranteed sources of income from social security and other insurances that will take care of other expenses when they go into retirement.
Payout Options for Straight Life Annuity
The straight life policy offers several options for paying out once the annuity owner goes into retirement. One selects the option that best suits their interests.
Just like all the other annuity options, this straight life policy is available in different forms that come with different payout options.
Types of Straight Life Annuities
Here are some of the payout options for the straight life policy;
Straight Life Immediate Annuity
This type of straight life annuity is a single premium immediate annuity (SPIA). The annuity owner starts to receive payments shortly after purchasing the product.
Straight Life Fixed Index Annuity
This straight life annuity option is fixed to a specific index. It is annuitized on a straight life payout in the future and it is optional.
Straight Life Fixed Annuity
This type of straight life annuity has a set interest rate. This makes it the most stable straight life policy option.
It is a multi-year guaranteed annuity (MYGA). It is annuitized on a straight life payout in future and it is typically optional.
Straight Life Variable Annuity
This straight life annuity option is tied to an investment portfolio. This investment portfolio serves to control the amount paid to the annuity owner.
Straight Life Deferred Annuity
This is an annuity that grows and accrues interest over time. Typically purchased with a lump-sum. Also, can be purchased through structured payments. This is normally done on a monthly basis.
Single-Premium Straight Life Annuity
In this straight life payout option, the payment is made as a one-time lump-sum payment. This is typically optional.
In case one finds that they are not eligible or they are not interested in the straight life annuity policy, there are other annuity options that can be better fit for your financial goals.
This usually happens when one is not sure of their life expectancy or they do not intend to leave their loved ones high and dry without anything.
Period Certain Annuity
This period specific annuity provides one’s beneficiaries or heirs with funds when the annuity owner dies early. They are given a chance to enjoy these benefits for a predetermined period, normally between 5-20 years.
This may also be an option for someone who is looking to have their payment payout of over a set number of years, typically between 5-20 years.
Cash Refund Rider
This type of policy allows one to personalize their annuity in order to benefit their loved ones when they die.
The policy is characterized by remitting any remaining balance to the annuitant family or beneficiaries.
The cash refund rider shields one’s beneficiaries while making sure no premium is wasted, as each remaining coin is credited back to the beneficiary when one dies.
Joint and Survivor Annuity
The joint-to-survivor annuity is owned jointly, mostly by spouses, and it pays out regardless of which spouse dies first. This guarantees that the living spouse is left with a retirement income.
This is the best insurance option for couples who do not have heirs to pass down their wealth to.
This policy changes from one company to another, as some companies provide more benefits to the surviving spouse.
Life Plus Period Certain Annuity
This is a hybrid annuity and insurance product that allows the annuity owner to have a lifetime payout while also having the choice to leave the remaining unused payments to a beneficiary or their spouse.
The policy comes with a specific payout period, usually between 10-20 years. There also may be tax implications in the case of beneficiaries receiving the payouts.
What Does This All Mean
To summarize, the straight life annuity is an insurance contract that provides a steady flow of income to an individual during their retirement years. It can be funded through the sale of stocks, mutual funds, or other securities, as well as through personal savings and transfers from retirement plans. Although offers no death benefits to the annuitant’s survivors or heirs and is the best option for individuals who do not need to provide for anyone after they die. It is important for individuals considering purchasing a straight life annuity to research and understand the terms of the policy and its potential advantages and disadvantages before making a decision.
At Safe Wealth Plan, we provide encompassing advice on all retirement and financial planning aspects. We can help you choose the right annuity plan to protect you from sequencing risk and secure your financial future.
Book an appointment with us today to learn more about annuities and how they can benefit you during retirement.
- Guarantees are subject to the paying ability of the issuer.