What Is a Straight Life Annuity?
A straight life annuity, sometimes called a straight life policy, is a retirement income product that pays a benefit until death but forgoes any further beneficiary payments or a death benefit. Like all annuities, a straight life annuity provides a guaranteed income stream until the death of the annuity owner.
What makes a straight life unique is that, once the annuitant dies, all payments stop and no more money or death benefits are due to the annuitant, their spouse, or heirs. This has the effect of making the straight life annuity less expensive than many other types of annuities and retirement income products.
What Is An Annuity?
How a Straight Life Annuity Works
While many types of annuities allow the annuity owner to name a beneficiary (usually a spouse) who will be eligible for either continued payments or death benefits, a straight life annuity forgoes this added benefit in favor of higher guaranteed payments while the annuitant is alive.
A straight life annuity policy may be bought over the course of the annuitant's working life by making periodic payments into the annuity, or it may be purchased with a single lump-sum payment. Usually, lump-sum purchases are made at, or shortly after, the annuitant's retirement. Either payment option will result in the same regular payments.
- A straight life annuity completely stops payments upon death, unlike other annuities.
- Because of this, straight life annuity products are usually less expensive than other, similar products.
- Outright purchases of annuities are usually done just following retirement.
- Straight life annuities, due to the fact they pay nothing upon death, are usually best for people without partners or beneficiaries.
With the omission of the survivor and death benefits, a straight life annuity owner can achieve the highest possible monthly payment. Accordingly, such an annuity is best suited to individuals who lack a spouse or partner.
In effect, it acts as a straight bet on longevity; the longer the owner/annuitant lives, the more they will receive in payments. It has no provision for limiting risk in case of premature death, in which case the annuity writer keeps the balance. Straight life annuities may not be the best choice for couples who live off of the retirement income the annuity provides.
Like all annuities, straight life annuities act as longevity insurance.
In such a case, the surviving spouse would need to have an alternate source of income, likely another annuity. Straight life annuities may not be a good choice for individuals who intend to pass along their wealth to heirs, either.
Special Consideration: Alternatives
As an alternative, there is the joint and survivor annuity, which continues to make payments until both named individuals (owner and beneficiary, usually spouses) are deceased. There is also the life plus period certain annuity, which pays a benefit for either the annuitant's lifetime or for a specific period of time, whichever is longer. There is also the cash refund annuity, which is a guarantee that a spouse or beneficiary will receive a sum equal to the premium paid into the annuity (minus the sum of payments already made) should the annuity owner/annuitant die before breaking even.