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What is the “Life Only” Option on Annuities?

Annuities are financial products that aim to provide income security, particularly during retirement. While they can be an effective tool in managing financial, they come with their share of trade-offs that potential investors must be aware of. One of these trade-offs comes in the form of the "Life Only" option on annuities.

Under the Life Only option, your annuity balance is turned into an income stream that will be paid out to you for as long as you live. The payout rate, in this case, is usually the highest possible since the issuing company is not obligated to pay any remaining balance to beneficiaries upon your death. This can potentially mean that a substantial sum of money - such as $100,000 - could be retained by the company if you were to pass away shortly after the income starts. In other words, the issuer pays a slightly higher rate under this option at the cost of any remaining balance upon the annuitant's demise.

Before diving deeper into the intricacies of this option, it is worth highlighting the general concept of annuities and their broader pros and cons. Annuities can protect you from several financial risks, the most important of which is outliving your savings. By locking your money into an annuity, you gain a guaranteed minimum return, often in the form of lifelong income. This can provide peace of mind, especially in retirement when you no longer have regular employment income.

However, annuities also come with their downsides. Firstly, annuity holders pay upfront fees and continually incur costs over the life of the product. This can eat into your potential earnings. Secondly, annuities can limit your upside potential. Unlike certain investments that may offer higher returns in favorable market conditions, annuities tend to offer steady, but typically lower, returns.

Now, coming back to the Life Only option, its suitability greatly depends on an individual's circumstances and financial goals. If you are a person with no dependents and your primary goal is to secure the highest possible income for yourself during your lifetime, this option may be worth considering. However, for those with dependents or a desire to leave a legacy, the lack of any benefit to beneficiaries can be a significant disadvantage.

Choosing the “Life Only” option will turn your annuity balance into income that will be paid only to you, and will last only as long as you live.

Annuities can be turned into income streams that are guaranteed to either remain the same or to increase based on an inflation-adjustment rider. The payout rate will be determined based on the length of the annuitant’s life expectancy, the amount being converted to income, whether annual increases are part of the contract, and what provisions are made for beneficiaries or joint annuitants.

In a Life Only option, the payout will be the highest possible, because the company is not obligated to pay anything to beneficiaries at all.

We do not recommend this unless you are a complete Scrooge with no love for anyone.

If you buy yourself a lifetime income annuity with a Life Only income option, this will usually be done with a substantial sum of money, such as $100,000, and if you die shortly after the annuity income starts, the company gets to keep all of the remaining balance.

They may be willing to pay you a higher rate for this option, but the payment is only slightly higher than it would be otherwise, such as with a Life with Cash Refund option.

What is the “Life with Period Certain” Option?
What is the “Joint and Survivor” Option?