Annuity Age Restrictions: Too Old or Too Young?
The Annuity Man
Annuities are contracts issued by life insurance companies. So when someone asks me “How do annuities work?”, it really depends on the type of annuity contract you are referring to. Most annuity types are designed for lifetime income, but other types solve for principal protection, CD returns, and one type is even structured for market growth.
When it comes to age requirements or restrictions to buy an annuity, there’s no uniformity as you might have guessed. All product types are different, and carriers can also have their own age rules as well.
I always receive general and unanswerable questions like, “What is the best age to buy an annuity?” Unless you are a true sociopath salesperson, there are no good answers to that question...just bad sales pitches. It all comes down to what you are contractually trying to achieve.
Annuities are transfer of risk strategies, so regardless of your age, if you don’t need to transfer any risk...then you don’t need an annuity.
Suitable and Appropriate Trumps Age
So before I even dive into what age you have to be (or not be) to buy specific annuity types, let’s establish that annuities are not for everyone. Just because you can buy one doesn’t mean that you should, and that’s coming from someone who sells annuities in all 50 states and has thousands of clients.
As I mentioned in the introduction, an annuity contract is a transfer of risk strategy. You are transferring the risk to the annuity company to solve for specific goals. I use an easy to remember acronym called P.I.L.L. that explains what annuities should primarily be used for.
P stands for principal protection
I stands for income for life
L stands for legacy
L stands for long term care/confinement care
If you don’t need to contractually solve for one or more of the items listed in the P.I.L.L., you don’t need an annuity in my opinion. The argument from the annuity industry would be for the “missing G” for market growth. Fixed Index Annuities (FIAs) are CD products, but the Variable Annuity (VA) strategy has a good argument for tax deferred growth using mutual funds (aka: separate accounts). However, you are still limited with those mutual fund choices depending on the issuing carrier.
The P.I.L.L. really has nothing to do with age, but the specific contractual goals you are trying to achieve.
Life Expectancy Drives The Train
Annuities were put on the planet during the Roman Times to pay a lifetime income to the dutiful Roman soldiers and their families. Those “annuas” (Latin for “payments’) were the original version of a Single Premium Immediate Annuity (SPIA).
Most annuity types are designed for lifetime income, and the primary pricing mechanism is your life expectancy at the time you start the payments. So with a SPIA, you give the life insurance company a lump sum and they base that income stream on how long they project you to live, with an interest rate playing a secondary pricing role. If you live longer than your projected life expectancy, they are on the hook to pay. If you die early, you can structure the policy so that 100% of any unused money goes to the listed beneficiaries...and not a penny to the annuity company.
So when I get the typical question of “What is the monthly payout for a $100,000 Annuity?”, I can’t tell you that answer until I have your date of birth. It’s about life expectancy.
Just like Social Security payments, the younger you are when you start the income...the lower the payment because your projected life expectancy is long. The older you are, the higher the payment because your projected life expectancy is shorter.
Annuities for Older People
So are annuities a good investment for the elderly? The answer is maybe, and it depends on the specific financial goals of that person. Annuities are not one size fits all, even though they are too often sold like that.
Just because you are getting older doesn’t mean you need an annuity. However, some annuity types can be a good fit if an additional fixed income stream or principal protection is the goal. Most seniors aren’t overly concerned about income taxes, but they are looking for strategies that will pay income in addition to their Social Security benefits. An Immediate Annuity (SPIA) is a simple and logical choice to fill in those needed income gaps.
Most carriers will issue Single Premium Immediate Annuities (SPIAs) to people in their 90s. However, the bigger question is if that SPIA is suitable at that age and for the specific circumstance.
The reality is that after age 80, annuity product choices become more limited. That's just a brutal fact.
Annuities for Young People
Even though young people can purchase many types of annuities, they probably shouldn’t buy one. Ironically, this decision comes down to life expectancy as well. Young adults need pure market growth in my opinion, so buying an annuity of any type makes no sense. The focus should be on long term investing with unlimited upside potential because young people have the time to shoulder that risk.
There’s no reason to lock up money in annuities that have surrender charges and early withdrawal penalties. The only caveat to that is if your 401k type retirement plan is now offering a future lifetime income strategy along with your mutual fund choices. That might make sense, but only in proportion and if allocated properly.
So what is the minimum age for an annuity? In my opinion it doesn’t matter because young people shouldn’t be buying annuities of any type. Of course there are rare instances where they might fit, but overall it’s not a product category that needs to be considered by the “youngsters.”
For the record, I’ve seen annuities issued to children as a joint lifetime legacy income strategy with a parent or grandparent. Annuities can also work for children or young people that are injured as part of a structured settlement. But overall, annuities don’t fit for most young people. In my opinion, if you are in your 40’s or younger....stay with pure market type growth (non-annuity) products.
Annuity Square Pegs
Salespeople sell things. That’s what they do. That’s a bad thing if the salesperson thinks they are a hammer and everyone they run into is a nail. I call this “annuity square peg” selling. Regardless of the goal, age, or suitability issues, that favorite deferred annuity or indexed annuity is going to be pitched to everyone. That’s insane from a fiduciary standpoint, but it’s how too many annuities are sold.
This is why I am not a fan of the “bad chicken dinner” annuity seminar selling strategy. People are enticed to come hear a presentation by offering them a free dinner, and then every person is pitched that agent’s “favorite” annuity. It’s like holding a health seminar and giving every attendee the same drug prescription.
So if you are a 40 year old or an 80 year old at that seminar, you probably don’t need to even listen to what they are selling...so just enjoy the free food.
One of my go to sayings is you should always own an annuity for what it “Will Do.”, not what it might do. “Will Do” are the contractual guarantees of the policy. Never base your decision to buy an annuity on a sales pitch that focuses on hypothetical, theoretical, projected, back-tested, hopeful, non-guaranteed agent return scenarios. Don’t buy the dream because you are going to own the contractual realities.
Annuities are contracts and commodity products, and should be shopped with as many carriers as possible using an objective annuity calculator or fixed rate feed. Quotes change every 7 to 10 days like a gallon of milk, and can only be locked in as part of the application process. Whether the money is coming from a Traditional IRA, Roth IRA, or non-IRA type of account...the contractual guarantees will be the same. The only difference will be the taxation of the money coming out depending on the account type.
So when it comes to annuity age restrictions, I think it’s more important to focus on the suitability and appropriateness of the annuity type being considered. If that transfer of risk contractual guarantee meets your specific goals, then your age really doesn’t matter.