If you started thinking about your retirement, you probably thought of Straight Life Annuity as a retirement income.
Most people look forward to their days of retirement, especially if they had a busy business life. Spending time with your loved ones, having no worries, and enjoying your days of retirement is a pretty picture to have in mind.
There is only one thing missing in the picture – as a retiree, you will still have costs (almost as high as during your working life), and to cover those costs easily, you will need a pension plan.
To have the enjoyable retirement you deserve, you should start consulting insurance companies on what type of annuity they offer, so you can make the best choice for yourself. Making the decision is not an easy job – you have to think about death benefits, annuity payments, payment options, payout options, etc.
All these things will be clearly defined in an annuity contract with your insurer, but before that – we will cover everything you need to know about Straight Life Annuity in this article.
You will learn:
- What is a Straight Life Annuity Retirement Plan
- How does Straight Life Annuity work
- Who should buy Straight Life Annuity
- What are the benefits of Straight Life Annuity
- What are the downsides of Straight Life Annuity
- What are the costs of Straight Life Annuity
- What are the alternatives to Straight Life Annuity.
By the time you finish reading this article, you will have an overview of annuity options, and be ready to make a step forward in designing your retirement plan. Let’s dig in!
What is a Straight Life Annuity Retirement Plan?
A Straight Life Annuity Retirement Plan — also known as Straight Life Policy or Single Life Annuity — is a retirement income product that pays a benefit until death but forgoes any further beneficiary payments or a death benefit.
With Straight Life Annuity there is a guaranteed income stream until the death of the annuity owner. After the annuitant dies, the payments stop, meaning that there is no more money or death benefit due to the annuitant, spouse, or heirs, making it a cheaper option than other retirement income products.
If you decide to buy Straight Life Annuity, you will be converting an upfront premium payment into a vested right to a reliable income stream for the rest of your life.
A basic annuity is just a stream of payments, whereas, in the context of retirement planning, it represents regular income payments until death. There is no cash value or principal value involved with Straight Life Annuity – only the contract with the life insurance company.
A Straight Life Annuity Retirement Plan means that the retiree will receive monthly payments for as long as they live; afterward, the payments will stop.
How Straight Life Annuity Works
Most annuities come with benefit payments to a designated beneficiary (usually a surviving spouse or kids) who continue to receive regular payments or death benefit payout. That is not the case with Straight Life Annuity.
Straight life annuity forgoes this added benefit in favor of higher guaranteed payments while the annuitant is alive. There are different ways to earn a Straight Life Annuity – it can be bought throughout the annuitant’s working life by making periodic payments into the annuity, or it may be purchased with a single lump-sum payment.
Those who choose lump-sum purchases usually make them shortly after they retire. No matter the way you buy it, you will be eligible for regular payments.
Keeping in mind that there is an omission of the death benefit, Straight Life Annuity is also known as Single Life Annuity, as it better serves those who do not have a spouse or heirs. Since there is no death benefit, the annuity payouts get to be higher. The longer the life expectancy of the annuitant is, the more they will receive in payments.
Straight Life Annuity Payments
Straight Life Annuity payment rates are calculated based on the insurer’s age and life expectancy, interest rates (both current rates and the insurance company’s expectations about future rates), and the size of the premium payment.
They aim to ensure that the annuitant lives the total life expectancy and receives all of the premium back with interest. This means that the younger you are when purchasing an immediate annuity, the smaller your payments.
Deferred annuities usually have more significant payments, as there is a later start date, meaning that the insurance company has enough time to invest the funds before annuity payments begin.
Fixed life annuities bring fixed income amounts during the entire time, meaning that you will always know how much to expect throughout your retirement.
If annuitants are ready for a higher tolerance of risk, life insurance companies will offer variable annuities. Variable annuities have fluctuating payments tied to investment performance. They give you an option to choose from different mutual funds offered by the insurance company.
Owning a variable annuity means that if the funds perform well, payments will be higher. On the other hand, if the funds perform poorly, the payments will be lower. There is always a minimum payment amount regardless of investment performance, so make sure to check this with your insurance agent.
There are also structured annuities and indexed annuities that link payout amounts to the stock market. Indexed annuities offer a “no-loss” guarantee and have an earnings cap limiting the annuity’s growth to around four or five percent. Structured annuities come with a higher earnings cap but allow for some limited losses.
Who should buy Straight Life Annuity
Straight Life Annuity is an ideal option for people who do not have a spouse, heirs, or relatives to care for – even after death.
If the abovementioned applies to you, you could purchase Straight Life Annuity and experience lower premiums and higher payouts, especially compared with other types of retirement insurance products.
A straight Life Annuity could be a good choice for those who started their estate planning, as a straight life annuity could fill a gap left by other investments and savings accounts.
Benefits of Straight Life Annuity
There are many reasons people choose straight life annuity as their retirement income plan – that is not a coincidence. Here are the most significant upsides that could make you interested in buying a straight life annuity.
Certainty
A big plus of straight life annuity is the fact that it is pretty predictable and reliable. This comes with the annuity payments being defined in advance, independent of financial volatility or economic downturns. With Straight Life Annuity, you are buying a certainty and low-risk retirement income product.
Bigger growth potential
Straight life annuity brings you certainty but also a growth potential if bought strategically. Suppose you buy a straight life annuity calculated to cover all fixed expenses you have (combined with Social Security). In that case, you will free up other resources that could be invested in different assets with more considerable growth potential.
Protection from the loss
With a straight life annuity, you have no chances of experiencing principal loss. If it ever happens that the insurance company fails, annuities will still be covered by state guaranty associations up to the amount of the principal investment.
Each state association defines a cap on the total loss to be absorbed per annuity, so make sure to check this information more precisely before making the purchase.
Custom made
We all love products and services that are custom-made for us – as they bring us the highest value. The good news is that a straight life annuity could also be tailor-made to the annuitant’s specific needs.
Downsides of Straight Life Annuity
There are always two sides to the coin – this case included. Even though straight life annuity has its pros, there are also some downsides you should bear in mind. Here are the most significant ones you should be aware of.
Possible Inflation
Throughout the annuitant’s lifetime, their annuity can face some vulnerabilities in high inflation, erasing the buying power of the fixed payment. If this worries you a lot, you could consider buying specific riders, precisely cost-of-living and inflation adjustment riders. They could protect you from increasing living costs.
No Death Benefit
You might be attracted to having lower premiums and higher payouts, but you also may regret one day not leaving anything behind for your loved ones. Straight life annuity comes with no death benefit, meaning that once you pass away, all the payments stop. This is a significant feature to have in mind before choosing your retirement plan.
Low Liquidity
This is one of the most significant downsides of a straight life annuity. Not being able to access your funds in case of emergency – or in any other regular situation when you lack money, is a significant setback.
There are two options you could do in this situation, and they are not the ideal ones. You could withdraw early, but most probably, you will incur significant surrender penalties. Another option is to sell the right to receive future annuity payments in exchange for a lump-sum payment.
Compared to other insurance or retirement income products, low liquidity is easily noticeable.
What is the cost of a Straight Life Annuity?
This is the question we hear pretty often. It is wholly expected to be curious and to want to know how much it would cost you in total to own a straight life annuity.
The straight life annuity is cheaper than other types of annuities, as there is a lower risk on the insurer for the policyholder to outlive the amount they paid into the investment.
You should also consider how straight life annuity is taxed, as taxes make a big difference in personal budgets. Luckily, a straight life annuity comes with tax advantages depending on how qualified your annuity is.
A qualified annuity is an annuity that is funded with pre-tax money. An excellent example of this is IRA. These annuity premiums are deductible for the year the contribution is made, and the taxes are required only when money is received as annuity payment on the back-end.
However, if you wish to withdraw your funds before turning 59.5 years, you will receive tax penalties. When you reach age 70.5, your annuity will be subject to minimum distribution requirements.
On the other hand, non-qualified annuities are funded with money that has already been taxed. Payments from this type of annuity are only taxable to the extent the payment constitutes growth on principal – the remainder is the non-taxable return on premium.
A critical thing to bear in mind is that both – qualified and non-qualified annuities grow tax-deferred, meaning that no taxes are required on the annuity’s earnings before you receive money from the insurance company.
Alternatives to Straight Life Annuity
If you think that a straight life annuity is not the ideal option for you, we have some good news. There are some alternatives to straight life annuity that could probably suit your needs better. Let’s learn more about them.
Joint and Survivor Annuity
If you are not keen on leaving a surviving spouse without any income after your death, then joint and survivor annuity might be a good option for you. Joint and survivor annuities offer payments for the contract owner’s life and the life of one other person. Bear in mind that with the contract lasting more extended, the payments are slightly lower.
Period Certain Annuity
Period certain annuities have a predetermined duration of payments. This option is ideal for older people or people suffering from health conditions. It protects them against losing the majority of their premium if they die soon after their purchase.
If the annuitant dies before the end of the term, benefits will continue to a designated beneficiary for the remainder of the period.
Whole Life Insurance – Infinite Banking Concept
We will be completely straight with you – this is our number one recommendation. Owning a whole life insurance policy is the first step in implementing infinite banking that could help you secure retirement income and bring you additional benefits. Here are the most important things you should know about Whole Life Insurance and Infinite Banking.
The concept of infinite banking is about strategically using your whole life insurance policy from a mutual insurance company as a personal endless banking system. In other words, Infinite Banking is essentially being your own banker.
One of the many benefits of a whole life insurance policy is that policyholders can borrow money using their policy’s cash value. Using this borrowing setup, you would never have to borrow money from a bank again and instead would borrow for yourself (your whole life insurance policy) and pay yourself back over time. Thus, being your own bank.
The goal of Infinite banking is to duplicate the process as much as possible to build the value of your own bank. The duplication process happens by lending and repayment of money typically held in the cash value of a permanent life insurance policy.
Infinite banking allows you to better work towards your individual and unique financial goals for yourself and your family and have control over your finances without dealing with banking fees or interest rates on loans.
Infinite Banking involves:
- Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company
- Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy
- Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.
The way infinite banking works allows you to mimic the way a bank operates and borrows money.
Instead of borrowing from a bank, you borrow from yourself while still allowing your whole life insurance policy to earn dividends (money) even though you are using that money elsewhere.
Whether it be for your child’s education, a downpayment on the house, or medical expenses, borrowing for yourself and being your own bank allows you the financial freedom and control of your money.
Entering the Banking Business gives you much better control over your finances and helps you build wealth using the life insurance policy.
Final Thoughts
We hope that we helped you understand better the concept of Straight Life Annuity. Even better – we hope that we brought you a new perspective about Whole Life Insurance and Infinite Banking.