A single life annuity offers a guaranteed income for one person — the annuitant. When they pass, their dependents don’t receive benefits.
These contracts typically offer higher payouts than joint annuities, as the pay period is shorter. This additional income makes single life settlement options attractive for those who don’t need to continue payments for spouses or beneficiaries.
Read on to discover what single life annuities are, their benefits, and how they compare to other savings vehicles.
What is single life annuity & how does it work?
Single life annuities function similarly to other annuity types: They’re a contract between you and an insurance provider, where you contribute a lump sum or make periodic contributions in return for a future income stream. Below are additional details about this payout option.
Available payment structures
There are a variety of payout options available in annuities, and are offered with different annuity types.
- Fixed annuities: Fixed annuities provides a guaranteed interest rate and stable income. They’re unaffected by market fluctuations.
- Variable annuity: Market fluctuations affects variable annuities. They offer the potential for higher returns but involve investment risk tied to the performance of underlying subaccounts.
- Fixed indexed annuity: Fixed index annuities link potential growth to a specific market index while retaining some protection from market downturns. They differ from variable annuities by crediting interest based on index performance, like the S&P 500. They often cap your potential earnings, but they also guarantee that your investment (or principal) won’t decrease due to negative market performance.
Annuity purchasers can choose between whether they want delayed or immediate payments by selecting the appropriate annuity type, deferred annuities and immediate annuities, respectively.
An immediate annuity begins disbursing income as soon as 30 days after the annuity’s purchase. A deferred annuity postpones income payments to a later date, allowing the contract’s value to grow during the deferral phase, also called the accumulation phase. Depending on the buyer's preference, this phase may span a few years to several decades.
Factors that affect a single life annuity’s payment amount
The following factors affect how much income an annuitant receives:
- Life expectancy: Insurers base payouts on how long they expect to send distributions. Buyers with longer life expectancies usually receive smaller payments to account for the extended payout period.
- Principal amount: A larger account value generally produces higher income payments, while a smaller account value leads to lower payouts.
- Insurer expenses and pricing margin: Insurance companies factor in their operating expenses, administrative costs, and profit margins when setting annuity rates. Higher expenses generally translate to lower payments for the annuitant.
- Riders: Annuity contracts can include optional provisions called riders. Adding a rider may reduce the annuity’s base payout in exchange for additional options.
5 benefits of a single life annuity
Single life annuities offer buyers several benefits, including the following.
1. Simplicity
Many consider single life annuities the most straightforward annuity structure. It generally entails a one-time setup, and the insurance company handles all the details of delivering your income, so you have no ongoing management tasks.
2. Longevity insurance
A single life annuity provides a guaranteed paycheck for your entire life, no matter how long that is. This applies to both immediate and deferred single life annuities. Both types share the same advantage: They guarantee a lifetime income stream, just on different timelines.
3. Flexible legacy or spousal planning
Married couples generally avoid single life annuities, but some use them strategically. They select the higher monthly income from a single life annuity and supplement it with life insurance for the spouse.
This arrangement delivers a larger payout during retirement, while the separate life insurance policy pays the spouse or family if the annuitant passes. Using this method, annuity owners could maximize retirement benefits while protecting their spouse’s future.
4. Potential creditor protection
Most state laws shield annuity funds from creditors. If you face lawsuits or bankruptcy, creditors typically cannot seize your annuity savings.
5. Higher lifetime income
A single life annuity usually delivers the highest possible monthly payment for a given premium because payments are guaranteed for only one lifetime. For retirees prioritizing income maximization, this is often the deciding factor.
Single life annuity vs. joint and survivor annuity
A joint and survivor annuity provides payments to two individuals, generally spouses. Unlike a single life annuity, a joint and survivor annuity continues payments to the surviving partner after the other’s passing.
Here’s a look at other key differences between both annuities.
Survivor benefit structure
Single life annuity: Spouses and beneficiaries don’t receive any remaining payouts once the annuity owner dies.
Joint and survivor annuity: A joint annuitant continues to receive payments at the death of the first annuitant.
In the event of one annuitant’s passing, insurers often pay survivors the full original payment or a percentage — commonly 50% or 75%. Participants choose their preferred option at the time of the annuity’s purchase.
Payouts
Single life annuity: These contracts typically provide a higher retirement income than comparable joint and survivor annuities. A joint annuity covers two lives, so the insurer expects to pay over a longer combined lifespan.
Joint and survivor annuity: If you provide your beneficiary with 50% of your original payment after your death, your monthly payments will be smaller than those of a single life annuity. The 100% option pays even less, as it guarantees the full payment will continue to the survivor after your death.
Tax treatment
The IRS taxes single life and joint and survivor annuities similarly. A key difference is whether the annuity is qualified (funded with pre-tax dollars) or non-qualified (funded with after-tax dollars):
- Qualified: You’ll pay income tax on the entire payout, including principal funds. However, you can deduct contributions from your yearly income taxes.
- Non-qualified: You’ll only owe income tax on the earned interest, not the principal returns.
In both cases, annuities benefit from tax-deferred growth, so taxes don’t apply until payments begin.
A joint and survivor annuity offers an additional tax benefit to the beneficiary. When the first annuitant passes away, the survivor continues receiving payments, avoiding a large lump-sum payout that could result in a big tax bill. The survivor reports the annuity income on their tax return, just as the original annuitant did.
Liquidity
Liquidity refers to how easily you can convert your asset into cash. Neither single-life nor joint and survivor annuities are liquid financial vehicles. If you withdraw funds before the payouts begin (also called the annuitization phase), you may face surrender charges, market value adjustments andan early withdrawal tax penalty Once annuitization starts, you can’t receive additional payouts on top of the already-scheduled payments.
Who should consider a single life annuity?
Single life annuities generally could suit investors who meet the following two criteria:
- They want a guaranteed retirement income.
- They don’t have dependents who rely on them financially. That way, when the annuitant passes, no one is affected by the annuity’s discontinuation.
There’s a common exception to this advice: Individuals who carry sufficient life insurance or have other provisions for beneficiaries may still choose a single life annuity. They benefit from a single life annuity’s high monthly payouts, ensuring dependents remain protected through alternate financial arrangements.
Collect guaranteed income for life with Gainbridge
To secure your financial future, explore Gainbridge’s annuities to find one that meets your unique needs. Learn more about Gainbridge, or get in touch to gain personalized assistance from our team of financial experts.
FAQ
What’s a straight life annuity?
Straight life annuity is another term for a single life annuity. They’re the same payout option.
What’s a lifetime annuity?
A lifetime annuity is any contract that guarantees payments for as long as you live, even if your principal has been fully paid out. Both single life annuities and joint and survivor annuities fall into this category.
Are single life annuities and single payment annuities the same?
No — the two terms describe different annuity contract attributes.
In a single life annuity, payments stop when the original annuitant dies. In contrast, a single premium annuity (sometimes called a single payment annuity) refers to how the annuity is funded — it’s purchased with one lump sum rather than multiple payments over time.
So, an annuity can be funded with a single premium and single life can be elected as the payout option, but not all single premium annuities allow only for a single life payout option, there are generally other payout options available.
This article is for educational and informational purposes only. You should not rely on the information presented as financial, tax or legal advice. You should consult with your own advisor about your unique needs.
Guarantees are based on the financial strength and claims paying ability of the issuing insurance company.
.jpeg)
