What Is A Straight Life Annuity, And Is It For Me?

Posted by Jim Kantowski, CFP®, CPA on June 03, 2022

What Is A Straight Life Annuity, And Is It For Me?

Despite having plans in place, financial advisors to consult, and financial goals for the future, investors can sometimes still feel like investing itself is a gamble. When the market dips and soars—sometimes doing both within the same day—investors who are approaching their retirement years may yearn for a reliable income to enjoy after saving their hard-earned money for years.

A straight life annuity is an investment product that fulfills that aim by paying a steady monthly income to the owner. It’s a useful tool for aging investors who need assured stability—but is not as useful for other types of investors.

Below, we’ll talk about the parameters of a straight life annuity and who could benefit from it, concluding with an answer to the question: What does a straight life annuity mean, and is it right for me?

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What is a straight life annuity?

A straight life annuity is a product developed and sold by insurance companies that is designed to provide buyers with a steady source of monthly income.

Usually, an investor purchases the annuity with a lump sum of money, which the insurance company then invests, assuming the associated risk at the same time. The insurance company then pays the individual a fixed amount per month for the rest of their life from their assets.

While the insurance company assumes market risk, straight life annuities do present a degree of risk for the investor as well, however. If, for instance, an investor sets up a traditional straight life annuity with an insurance company, hands over a lump sum, and shortly thereafter dies, the insurance company keeps every cent of the money. Investors can hedge against such pitfalls by purchasing a straight life annuity with protections built in (discussed in the section below). In addition, the investor will no longer have access to the principal amount of funds turned over to the insurance company. Typically, payments remain level for the lifetime of the annuity, which creates the risk of not keeping up with inflation.

A typical straight life annuity will be based on the investor’s current age, life expectancy tables, and the current interest rate environment. Insurance companies are subject to regulations and are required to hold a certain amount of assets to fund payments. However, there is always a chance the company goes under, so make sure you choose one that is highly rated and reputable.

Various Payouts For Straight Life Annuities

Straight life annuity options you might want to consider if you wish to provide for loved ones and others include:

  • Straight life annuity with survivor benefits: An investor can choose an option that, if they die within a certain time frame (such as the next 10 years), their family will receive the remaining sum of X years of annuity payments that have not been paid. The monthly payment that is received will be lower than that of a standard single annuity if this type of benefit is built in. The investor is essentially paying insurance that they will receive a certain amount of money back.
  • Straight life annuity with joint life expectancy: This type of straight life annuity is especially useful for investors who have a spouse or life partner. If one spouse or partner dies, the other will continue receiving payments, as the annuity was based on their combined life expectancy. Again, the amount of the monthly payment will be lower since the insurance company takes on the risk that the life expectancy—now based on two lives—will be longer.

Is a straight life annuity right for me?

Often, your candidacy for a straight life annuity depends on three crucial factors:

  1. Your wish to leave an assured lump-sum inheritance behind for any loved ones or other beneficiaries
  2. Your tolerance for higher-risk risk investments like the stock market
  3. Your need to access the principal amount of your money

If your goal is to leave a large monetary inheritance for your heirs, straight life annuities may not be for you. The annuity itself requires a hefty investment, and your access to the funds will be limited; instead, you'll get a fixed payment at regular intervals. If you’re a widowed individual or don’t plan to leave an inheritance or provide for heirs, a straight life annuity could offer the income and safety you’re looking for.

If you’re an investor who’s willing and able to tolerate the stock market’s ebbs and flows, passing risk to an insurance company might not sound like a benefit. If, on the other hand, you have little appetite for market risk, a straight life annuity could enable you to banish the associated worry.

Whatever your situation, talk to a trusted financial advisor before purchasing investment products like straight life annuities. Our advisors at Bay Point can help you clarify your needs and select the most suitable financial vehicles for providing security, wealth and freedom, for years to come.

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Topics: Retirement Planning