Fred Orentlich on Single Life Annuity

[fredorentlich]

Hello I am Fred Orentlich and I will be talking about annuities. A single life annuity is simply an annuity, either deferred or immediate, that is owned by one single individual. It is not owned jointly between a husband and wife. With most single annuities, the payments end upon the death of the annuitant. However, there are a number of options for naming beneficiaries and guaranteeing that principal will not be lost if the annuitant dies before the full amount of his or her premiums are returned.
Basics

A single life annuity can be a deferred annuity purchased as part of a retirement plan or it can be an immediate annuity for which payouts will begin within the next 12 months. Deferred single life annuities are subject to the same distribution restrictions that other retirement investments are. A 10% penalty is incurred on distributions that begin before age 59 ½. Plus, the distribution will be subject to ordinary income tax rates for the tax year in which the distribution was taken. For this reason, all annuity investors are always reminded to seek the advice of a qualified tax professional prior to purchasing a new annuity or annuitizing one that is currently in a portfolio.

An immediate single life annuity begins paying the owner immediately. If he or she elects to receive payments monthly, then payments begin the next month. If he or she elects to receive payments quarterly, the payments will begin within the next quarter. This type of annuity, which is usually purchased with a single premium, is often purchased in lieu of a single premium whole life insurance policy. While they function in similar ways, the immediate annuity can guarantee income for life or for a predetermined number of years.

Why Choose a Single Life Annuity Instead of a Joint Annuity?

In most cases, the amount of the payouts on a single life annuity are higher than those paid out on a joint annuity. This is especially true if the husband is older than the wife. The payouts on a single life annuity only take into account the age of a single annuitant. If he or she is 78 years old and purchases a single fixed immediate annuity in the amount of $100,000, the payments will be based on his or her life expectancy only. With a joint annuity, however, if the husband is 78 and the wife is 74, that same $100,000 will have to cover both of them while they are both alive and will be based on her life expectancy, not his. Therefore, the payments will typically be significantly lower on a joint annuity than on a single life annuity.

Can Benefits be Paid to a Beneficiary Other Than a Spouse?

A straight life annuity is one for which payout will end with the death of the annuity owner. However, most insurance companies will offer a kind of refund option on a single life annuity. For example, the annuity owner can name a beneficiary who will receive the amount of the account that had not yet been paid at the time of the annuitant's death. If $55,000 remains in the annuity account, it will be paid to the person of the annuity owner's choosing. He or she can also choose what is known as a "guaranteed period" or "period certain" option.

With this option, the annuitant opts to have payouts made for a certain number of years. If he or she dies before the number of years in the contract have been completed, the beneficiary will receive payments for that number of years. If the period certain was 25 years and the annuitant dies in year 6, the beneficiary will receive payments for 19 years.

Note that these refund options are significantly different than an annuity that is purchased jointly between a husband and wife.