A straight life annuity is an insurance contract that pays out a series of fixed payments over the life of the owner, or annuitant. The amount of the payments is determined by the amount of the purchase payment and the annuitant’s age at the time the payments begin. The frequency of the payments, which can be annual, semi-annual, quarterly or monthly, may also be taken into account. In the United States, a straight life annuity must be purchased from a life insurance company.
The contract payments will continue until the annuitant’s death, regardless of how long the annuitant lives. If the annuitant purchases a straight life annuity at age 65 and lives to be 102, the payments are made over that 37-year period. If the annuitant dies at age 67, the payments are made for only two years.
The amount of each payment is fixed at the time of annuitization, so if the annuitant lives longer than the actuarial tables would suggest, he may receive considerably more money than if he had simply invested the money and made regular withdrawals. Conversely, if the annuitant dies prematurely, the payments received may be considerably less than the original purchase payment. There is no death benefit associated with a straight life annuity, so no beneficiary needs to be named.
A straight life annuity is often used to provide an income stream in retirement. Annuitants may make periodic payments into the annuity during their working life, and then annuitize, or begin taking payments from, the contract when they retire. An annuitant can also purchase a new annuity contract at retirement, with proceeds from a retirement account or a lump-sum pension from an employer. The advantage to using an annuity in retirement is that the payments continue as long as the person lives. There is no risk of the retiree outliving her assets.
It is important to note that the payments stop when the annuitant dies, so there is no legacy to provide for the needs of a dependent spouse after the annuitant’s death. It is possible to purchase a joint straight life annuity, which will pay income to a couple until the second person dies.
A straight life annuity is usually a fixed annuity, with the payments remaining the same over the course of the contract. There are variable annuities as well, in which the payments vary depending on the performance of mutual funds that are held in the contract. Since the purpose of a straight life annuity is to provide a guaranteed stream of income for the rest of the annuitant’s life, variable annuities are rarely used.