What is a Straight Life Annuity? Everything You Need to Know

Straight life annuity is really just a term for an annuitization option that annuities have.

Another term for this option is life-only or single life annuity.

When you annuitize your annuity on a straight life/life-only basis, you receive a guaranteed stream of income for the rest of your life.

However, with this payout option the beneficiary will not receive a death benefit; payments cease when the annuitant dies. Because there is no death benefit with this payout option, annuity payouts are usually higher.

In this article, we cover everything you need to know about straight life annuities, so you can decide if they're a good option for you.

Straight Life Annuities Defined

Annuities are a type of insurance contract. They pay a steady income to retirees for the rest of their life. If you select the straight life annuity payout option and the annuitant dies, no additional funds are paid by the insurance company. These types of annuities don't offer any death benefits. Note that straight life annuities are the same as single life annuities.

How a Straight Life Annuity Works

A deferred straight life policy works the same way other deferred annuities work. First, you pay premiums to an insurance company to fund your annuity. Your annuity account accumulates earnings and grows. Later, you can choose to annuitize. Annuitization begins your regular stream of retirement income.

How Much Does a Straight Life Annuity Cost?

Like other annuities, you can fund straight life annuities to the level you desire.

The more money you contribute through your premium payments, the greater your account value will be, and the more income you'll receive in your payouts. You can typically fund your annuity with money from your savings, your IRA, or by selling stocks, mutual funds, and other investments. You can even cash in the surrender value of a life insurance policy.

How Much Does a Straight Life Annuity Pay Out?

The total payout amounts depend on several factors, including your life expectancy. However, in general, straight life annuities offer the highest payouts of any other payout option.

Is a Straight Life Annuity Taxable?

Yes. Like other annuities, straight life annuities are tax-advantaged. They grow tax-deferred, which means you don't pay taxes on earnings until you receive them. That helps your account value grow faster. For most people, this also means paying taxes in retirement.

Many people have lower incomes in retirement, so they fall into a lower tax bracket. If you're in a lower tax bracket when you pay your annuity taxes, you’ll pay fewer taxes overall. Check out our other article to learn more about annuity taxation.

Pros and Cons

So, is a straight life annuity policy worth it?

It depends on your situation. Here are some of the pros and cons of this particular type of annuity.

Pros:

• Guaranteed retirement income. They provide income during an annuitant's retirement, and it is guaranteed to last the rest of their life.
• Higher payouts. Straight life annuities don't offer beneficiary payments. They stop paying upon the death of the annuitant. This allows the annuity company to offer higher payout amounts. Straight life annuities typically offer the highest payouts of all annuity payout options.

Cons:

• No death benefits. If you die before receiving your full annuity, no remaining payments are made by the insurance company. That means you cannot name beneficiaries and your survivors will receive nothing. This type of annuity is not ideal for individuals who need a legacy planning tool.
• You could lose money. Even if you die and the annuity payments you have received are lower than the account value, your beneficiaries do not receive anything. That means if you die before breaking even, you could lose money.

Who Is a Straight Life Annuity Right For?

Straight life annuities can be a great way to create an alternate source of income in retirement. They're especially good for single retirees who don't have any heirs.

These individuals do not need to worry about leaving a legacy for family, so they can enjoy larger payouts while they're alive.

But straight life annuities are not for everyone. A straight life annuity is not ideal for older retirees or those with poor health.

With this type of annuity, the longer the annuitant lives, the more money they receive. Individuals with a shorter average life expectancy may lose their money if they die soon after buying this type of annuity.

Are there Straight Life Options for All Types of Annuities?

Yes, you can combine a straight life payout option with most types of annuities. For example, each of the following is a type of annuity that offers a straight life payout option.

You do not usually choose your annuitization option until you elect to annuitize. That means that you can purchase an annuity with multiple payout options and select the one that’s right for you when you’re ready to receive income.

• Straight Life Immediate Annuity. This is a straight life annuity that begins to pay you back soon after you buy it. It is the same thing as a "straight life single-premium immediate annuity."
• Straight Life Deferred Annuity. This is a straight life annuity that has time to grow and accumulate interest before it pays you back.
• Straight Life Variable Annuity. This is a variable annuity that pays out over your life after it's annuitized.
• Straight Life Fixed Indexed Annuity. This is a fixed indexed annuity that has a life income payout structure after it is annuitized.
• Straight Life Fixed Annuity. This is a fixed annuity that has a life income payout structure after it is annuitized. Single-Premium Straight Life Annuity. This is a straight life annuity that you fund in a single lump-sum payment.
• Flexible-Premium Straight Life Annuity. This is a straight life annuity that you fund in several premium payments over a period of time.

When Does a Straight Life Annuity Benefit Married Couples?

Most married couples choose an annuity that pays the surviving spouse income for the rest of their life. But there are some cases when a person might choose a straight life annuity even if they have a spouse or heirs.

One example is when their spouse owns another retirement income product. This additional product may grant the spouse enough income to last the rest of their life, so they don’t need the income from the straight life annuity.

In this case, a straight life annuity might make sense. It would allow the annuitant to maximize their income since the other spouse is covered by another product.

Alternatives to Straight Life Annuities

If you have a partner and you want to make sure that you both have lifetime income, you can purchase a joint and survivor annuity. By selecting an annuity with a joint payout option, you and your spouse can both receive income payments for the duration of your lifetimes.

Another alternative is to buy a cash-refund rider, sometimes called a "cash refund annuity."

This guarantees that a beneficiary will receive at least the principal premium paid (minus any payouts).

It ensures you'll at least break even and won't lose money if you die early. A final alternative is to choose an annuity that offers death benefits for a designated beneficiary. That way, you can pass on your wealth to friends, family, or even a charity.

The Takeaway on Straight Life Annuities

Straight life annuities provide you with a steady retirement income until you die. But if you die before receiving all of your funds, they won't provide any further income to a spouse or beneficiaries after you die. That makes them ideal for single people with no heirs.

If you have a spouse, heirs, or another entity you'd like to benefit from your legacy, a straight life annuity may not be the best choice. Instead, you might prefer an annuity with death benefit options. Still not sure if a straight life annuity is right for you?

Consider consulting a financial advisor or another professional. They can help you decide if this type of insurance product is a good fit for your needs. And let us know if we can help. Our licensed representatives can help you understand the power of annuities.

Ask them about Canvas' powerful fixed annuity options that help you steadily and safely grow your retirement savings.

Our annuities offer guaranteed retirement income as well as death benefits. This ensures your wealth gets passed on to your friends, family, or favorite charity.