A “straight life annuity” is a type of annuity contract that provides the annuitant (the person who receives the payments, usually the person who purchases the annuity) with a guaranteed income stream for the remainder of their life. Once the annuity is purchased, typically with a lump sum payment, the insurance company agrees to make regular payments to the annuitant starting either immediately or at a future date, continuing until the annuitant’s death. It’s the simplest life annuity: payments stop at death, with nothing to survivors.
Key features of a straight life annuity include:
Guaranteed income
The primary benefit of a straight life annuity is the guarantee of a steady income for life, which can serve as a foundation for retirement planning by ensuring that the annuitant will not outlive their savings.
No survivor benefits
Unlike other annuity products that may offer benefits to survivors or beneficiaries after the annuitant’s death, straight life annuities typically cease payments upon the death of the annuitant. This feature often allows for higher periodic payments compared to annuities that include survivor benefits.
Payment amounts
The amount of the periodic payments is determined by several factors, including the amount of the initial lump sum investment, the age and gender of the annuitant at the time of purchase (which influence life expectancy), and prevailing interest rates.
Tax implications
In Canada, if the annuity is bought with registered money (for example, from an RRSP), the payments are fully taxable as income. If it is bought with non-registered money, only part of each payment is taxable: the part that is a return of the purchase price isn’t taxed.
No access to principal
Once the annuity is purchased, the annuitant typically cannot access the lump sum principal or alter the terms of the annuity, making it important to carefully consider the decision in the context of overall financial planning.
Because straight life annuities do not provide benefits after the annuitant’s death, they are often chosen by individuals without dependents or those who have other means to provide for heirs.