When Is a Straight Life Policy a Good Idea?
- With guaranteed lifetime payouts, a straight life policy is a great retirement planning option. Here’s what you should know about these plans before buying one.
With a guaranteed income stream and payouts that last until you die, a straight life policy is a great option to consider when planning for retirement, especially if you're single. However, they do have drawbacks that may make them impractical for couples and individuals with dependents. Here’s what you should know about straight life policies before you add one to your investment portfolio.
What Is a Straight Life Policy?
A straight life policy, which is sometimes referred to as a straight life annuity, is a type of plan that’s designed to provide a regular income to the annuitant as long as they live. Once the annuitant dies, all payments stop and the policy terminates.
Because a straight life policy doesn’t include a survivor’s death benefit, it’s typically a less expensive option than other types of annuities. However, if you die before you’ve received an amount equal to the premiums you’ve paid, the insurance company gets to keep the balance.
What Are the Characteristics of a Straight Life Policy?
The terms of annuities and insurance plans will likely vary depending on which carrier holds the policy. However, straight life policies have several defining characteristics, regardless of insurer.
- They provide a guaranteed periodic income stream for the lifetime of the annuity owner.
- All payments end once the annuitant dies.
- They include no death benefit.
- They require no named beneficiaries.
- They have higher periodic payments than plans that offer a death benefit.
How Does a Straight Life Policy Work?
Straight life policies and other annuities may be purchased through several channels, including:
- Insurance companies
- Investment groups
- Independent brokers and agents
A straight life policy is usually purchased while you’re still working, often during mid-career retirement or when you’re nearing or at retirement age. Purchasers can typically choose to fund plans either via monthly premiums or through a single, lump-sum payment.
If you’re funding your annuity through a lump-sum payment as you're nearing retirement, you may elect for your periodic payments to begin within the year. Investors who’ve purchased a policy earlier in life and are funding it through monthly premiums qualify for deferred payments. The date your payout begins and the frequency of payouts should be reflected in your contract, and the annuity payouts are the same whether you funded the plan through premiums or a single lump-sum payment.
The annuity continues to pay out for the duration of the annuitant’s lifetime. When the annuitant dies, payments cease and no death benefit is paid out.
What Are the Benefits of a Straight Life Policy?
When compared to other investments, straight life policies may offer annuitants numerous benefits, such as:
- Lower premiums. Because straight life policies don’t include a death benefit component, they typically come at a lower cost.
- Guaranteed income. Straight life policies are designed to provide a steady stream of income to annuitants through periodic payments, which are only discontinued when the annuitant dies.
- Higher payouts. Straight life policies offer higher payouts than plans that include a death benefit component, making them a great choice for investors who want to maximize their retirement income and who aren’t worried about leaving money to heirs.
What Are the Drawbacks of a Straight Life Policy?
The main drawback of a straight life policy is its lack of a death benefit. If you have dependents, they won’t receive a payout from this type of policy when you die, which means they may be left to cover end-of-life expenses, such as the funeral and burial, without the financial assistance of a death benefit. Plus, if a straight life policy is your sole investment, you'll be left with no inheritance for your heirs.
In addition, because straight life policies are designed to last for the duration of your lifetime, you’ll make more from your investment if you live longer. However, if you should die prematurely, the company gets to keep your premiums, so you may lose money on the investment.
Who May Benefit From a Straight Life Policy?
Because beneficiaries don’t receive money after the annuitant dies, straight life annuities are ideally suited to individuals who don’t have spouses or other dependents whose financial future may rest on an insurance policy. However, this type of plan can potentially benefit a married couple by providing an additional source of retirement income, as long as the non-annuitant spouse has another source of income that can sustain them if the annuitant dies. Married couples who are purchasing a straight life policy as part of a holistic investment strategy may fall into this category.
Are There Viable Alternatives to a Straight Life Policy?
The type of plan you purchase should reflect your family’s financial needs and budgetary considerations. If a straight life policy isn’t a good fit for you, you may be better off purchasing an alternative investment, such as a period certain annuity, a joint and survivor annuity, or whole life insurance.
Joint and Survivor Annuities
If you’re married, a joint and survivor annuity may be a viable option to help you invest for retirement. This type of annuity is similar to a straight life policy. However, it guarantees payments for the life of the primary annuitant and one other person. Although payments are slightly lower because they’re intended to last longer, the payout structure may be adapted to pay out larger amounts while both parties are alive and then reduce payouts to the surviving spouse.
Period Certain Annuities
Because period certain annuities deliver payments over a predetermined period of time, they may be better for older individuals or those in poor health. This may prevent these annuitants from financial loss if they die soon after purchasing the policy because benefits transfer to a designated beneficiary for the duration of the plan's contractual time period.
Whole Life Insurance
Although a whole life insurance policy typically costs more than a straight life annuity, it includes both a death benefit component and a cash-value component, which may be withdrawn or borrowed against as it accrues. Policyholders may also add on riders that offer living benefits, which provide access to the policy's face value while the insured individual is still alive, under specific circumstances such as a terminal or chronic illness.