What is a single life annuity & should you consider it?

When planning for a secure financial future, many people turn to annuities. A single life annuity is ideal if you want to receive regular payments starting at a certain age and continuing for the rest of your life. Learn more about single life annuities to help determine if they're the right choice for you.

A single life annuity is an annuity that provides you with regular payments throughout your lifetime. Also called "life only," this type of annuity is designed for one person, with payments ending upon their death and no payout to a beneficiary. Various types of annuities—immediate, deferred, fixed or variable—can offer a single life payout option.

Single life or "life only" annuities can ensure a steady stream of income during retirement. Payments continue for your lifetime, allowing you to enjoy your retirement years without the stress of outliving your savings.

There are two ways to purchase a single life annuity:

• Single premium immediate annuity (SPIA). With a SPIA, you pay a lump sum upfront, and the insurance company provides steady payouts starting within a year. This option skips the accumulation period, allowing immediate income generation, which may be ideal for those nearing retirement.

• Single premium deferred annuity (SPDA). With a SPDA, you pay a lump sum upfront but start receiving payments in the future, often around retirement. This option allows for compound growth during the accumulation period, with earnings accumulating tax-free until withdrawal.

If you choose a deferred annuity, fixed and variable annuities can offer tax-deferred growth on your contributions. Here are the features to know:

• Fixed annuities. A fixed annuity provides a guaranteed interest rate for a set period of time. The accumulated value is not tied to market performance but rather is based on an interest rate offered by the annuity company. A fixed annuity's value will not decline due to market losses, making it a predictable option.

• Variable annuities. A variable annuity allows you to select variable investment options, or subaccounts, whose value will fluctuate depending on the options you choose. The pros and cons of a variable annuity mean it may have more growth potential than a fixed annuity, but it can also lose value if the subaccounts decline. These are considered higher risk than fixed annuities due to the potential for loss.

• Fixed index annuities. A hybrid of fixed and variable, fixed index annuities have an interest rate that fluctuates based on the performance of a market index, such as the S&P 500, up to a cap. If the index generates positive returns, you may earn more than with a fixed annuity; if not, you may earn less. It's worth considering a fixed index annuity if you want the opportunity to earn a higher interest rate and protect your accumulated value from market losses.

Once you move from the accumulation to the distribution period of a single life annuity, you'll begin receiving income payments. Generally, income from a fixed payout will be set at a specific percentage (depending on your contract) while income from a variable annuity will fluctuate based on the market performance of the underlying investment choices.

For single life annuities, your annuity payout amount is based on the IRS mortality table and the Social Security Administration's average life expectancy. Generally, your specific payment will depend on your age when you settle the contract and your gender. Because women often live longer, their payment may be smaller than a man's.

When you're considering the payout amounts and options, keep inflation's role in your retirement in mind. Inflation can mean your money has decreased purchasing power, even if your annuity income and other income sources hold steady. You may be able to purchase a contract that includes inflation adjustments for an additional premium. You can typically opt for level increases that adjust your payments by a set percentage each year, or you can choose a CPI-adjusted annuity, where annuity payments are adjusted based on changes in the Consumer Price Index each year.

Choosing an inflation-adjusted payout option means lower early payments than a single life annuity without inflation adjustments.

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A single life annuity provides payouts for the life of just one person, but joint and survivor annuities involve payouts to you and another person, often a spouse.

Choosing the right annuity depends on your circumstances. A single life annuity provides guaranteed income for as long as you live, but payouts stop when you pass away. If you're a single person with no beneficiaries, this can be a smart way to maximize your income payments in retirement.

If, on the other hand, you're married and want financial protection for your spouse after you pass away, a joint and survivor annuity will guarantee payments continue for as long as either of you is alive. Because the annuity is designed to last longer than a single person's lifetime, the initial monthly payments are typically lower compared with a single life annuity.

There's no one-size-fits-all retirement solution, so it's important to weigh the potential benefits and drawbacks before committing. Before choosing a single life annuity, here's what to consider:

• Guaranteed income. Knowing you have a reliable source of income in retirement can alleviate the stress of running out of money.

• Longevity. Because payments last throughout your retirement years, you won't outlive your retirement savings.

• Potential for higher payouts. Because single life annuities provide payments only as long as you live, with no benefits or payouts available to a spouse or beneficiaries, the monthly payouts may be higher than other payout options.

• No death benefit. With a single life annuity, payouts end at your death. Married couples or those looking to leave money to loved ones may want to consider how it compares to other payout options that involve joint coverage or naming beneficiaries.

• Limited flexibility. Once annuity payments begin, you may not be able to withdraw your principal or use it for cash value. (Some insurance companies allow for commuted lump-sum withdrawals, but this can impact your annual withdrawal amount.) Also, if you take money out of the annuity before age 59½, you may have to pay a 10% federal tax penalty in addition to income tax on the withdrawal.

• Inflation risk. If you choose a fixed annuity with no inflation adjustments, your lifetime monthly payments will not change. That means your payments may not keep up with inflation rates throughout your retirement. Variable annuities or inflation-adjusted payout options may be better equipped to keep up with inflation over the long term.

Multiple factors are involved in choosing any annuity, but a single life annuity may be right for people with limited retirement savings or who are interested in a long-term payout setup.

Purchasing a single life annuity can be a simple way to set up and generate retirement income for the rest of your life. However, it's one option among many retirement income tools. Your needs and circumstances will drive your individual financial plan. Connect with a Thrivent financial advisor to learn more about whether a single life annuity can help you reach your retirement goals.