What Is a Pure Life Annuity?

In this article...
  • Learn what a pure life annuity is and how it works, including information about settlement options, pure life annuity taxation and who is a good candidate.

A pure life annuity is an investment plan that could give you a higher retirement income than other annuity types. However, pure life annuities aren't the right choice for every circumstance. Below, you can find out how pure life annuities work and how to decide if it's the right investment option for you. 

What Is a Pure Life Annuity?

Pure life annuities are a type of annuity used to provide a steady income during retirement. Investing in a pure life annuity can provide financial protection if you live longer than your other income streams can realistically provide for. 

Pure annuities stop paying out when the policyholder dies. This prospect poses a problem for many people because the annuity could yield a poor return on investment if they die shortly after the payments begin. Therefore, many people choose a settlement option with their pure life annuity to allow payments to continue to a named beneficiary.

How Do Pure Life Annuities Work?

You can pay into a pure life annuity in regular installments or fully fund the policy in a single lump sum transaction. The money you invest accumulates interest until it reaches maturity, at which point you can receive regular annuity benefit payments to support you in retirement. Your payout schedule depends on the size of your initial investment, how much you wish to receive for each payment and your preferred policy length. 

How Do Pure Life Annuity Settlements Work?

If you purchase a pure life annuity without a settlement option like a survivor benefit, you run the risk of gaining minimal benefit from your investment if you die early. Therefore, providers usually charge lower premiums and offer better rates of return to counterbalance the risk to the enrollee. 

However, some companies allow you to select a settlement option that guarantees an income for your entire lifetime or provides a payout to your beneficiary if you die before the funds in your pure life annuity run out. Therefore, rates of return are usually lower for a pure life annuity with a settlement option because you don't risk losing your investment. 

There are various pure life annuity settlement options, and companies won't necessarily offer all the options for every pure life product. Therefore, it's essential to consider which payout option is best for your circumstances before investing. For example, you may wish to select a pure life annuity with a survivor benefit to help with your spouse's living costs if they outlive you. Options include:

  • Cash Refund Annuity: Pays a lump sum to a beneficiary if the policy owner dies, which is equal to premiums paid minus the amount already withdrawn

  • Installments: Pays out a predetermined amount monthly until the annuity funds are exhausted

  • Investment Income: Pays out a portion of the annuity's accumulated income each month but maintains the original investment to be paid to the beneficiary when the owner dies

  • Joint and Survivor Annuity: Continues to pay out until the policyholder and their named beneficiary both die

  • Life Plus Premium Certain Annuity: Guarantees payments for a set period or the account holder's lifetime, whichever is longer, mitigating the risk of living longer than your retirement income provides for

  • Lump-Sum Settlement: Pays out the original investment plus accumulated cash value in a single lump sum upon maturity, subject to taxation

What Are the Other Terms Used for a Pure Life Annuity?

There are several alternative terms used to describe pure life annuities. You may hear them called life annuities, lifetime payout annuities or straight life annuities. They may also be named according to the settlement option attached to the account. 

How Is a Straight Life Annuity Taxed?

A pure life annuity, also known as a straight life annuity, grows tax-deferred. Therefore, you'll only pay tax when you receive payments or withdrawals from the policy. How you pay tax on withdrawals depends on how you invest the funds. You'll pay tax on the entire amount if you invest pretax money. However, you're only taxed on the interest earnings if you invest after-tax money.

Is a Pure Life Annuity Right for Me?

A pure life annuity could be a good option for you if you want to secure a steady income stream for your retirement. A regular pure life annuity stops paying when you die, which means they're cheaper to buy and offer higher monthly payments. On the other hand, they won't allow you to pass on the remainder to a beneficiary if you die earlier than expected. Therefore, a standard pure life annuity could be suitable for people without financial dependents who want to spend as little as possible on an annuity for a relatively high retirement income.

However, a regular pure life annuity may not be a good option if you have dependents who would suffer financially if you died. In this situation, you may be better off selecting a settlement option to provide for any dependents left behind. 

A pure life annuity could also be a good choice for people who can't secure regular life insurance because of a pre-existing health condition. Companies don't usually require health screening for pure life annuities because it's an investment plan, so you can generally open an account even if you're terminally ill. Selecting a settlement option that passes the account balance on to your beneficiaries can help provide them with financial security.

Purchasing a pure life annuity with a long-term care rider could be more affordable than buying long-term care insurance. Which is the best option for you depends on various factors, including your age and health status, so it's worth obtaining quotes for both before making a decision. 

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