Types of Annuities: Which one is best?
The Annuity Man
What is the best type of annuity? That’s a good question. But in the annuity world, there are no perfect answers, just bad sales pitches. The best type of annuity is the one that provides the highest contractual guarantee for your specific situation and the exact goal you are trying to achieve. It’s really that simple.
However, getting to that perfect annuity finish line is filled with endless distractions. Bad chicken dinner seminars, misleading TV and radio ads, and agenda driving sales pitches are all trying to divert you from the most simplistic contractual goal.
Let’s make sure you keep your eyes on the contractual prize by taking a look at the brutal facts when it comes to the different types of annuities available, and which one might be best for you.
One Word Does NOT Say It All
I love it when people talk about “annuities” like they are one product, and that they all work the same way. If you want to sound completely stupid and shout to the world that you have a low IQ, then say “I Hate Annuities.” It’s like saying that you hate all restaurants, or you hate all shoes, or you hate all trucks. Makes as much sense. If you are going to say that you hate all annuities, then also say you hate pensions and you definitely hate those lifetime Social Security payments. I digress and step down from my annuity soap box.
Life insurance companies issue annuity contracts. Regardless of the type of annuity chosen, they are all transfer of risk strategies. You are transferring the risk to the annuity carrier to contractually solve for a specific goal. So it’s very important for you to pinpoint what that specific goal is for you and your family.
2Qs That Matter
There are only 2 questions that you need to ask and answer to determine if you need an annuity, and if so...what type.
- What do you want the money to CONTRACTUALLY do?
- When do you want those CONTRACTUAL guarantees to start?
That’s it. It’s that simple. From those two answers, it’s easy to determine what type of annuity that you need. Once that annuity type is pinpointed, then you shop all available carriers for the highest contractual guarantee.
What’s The Goal?
Annuities primarily solve for 4 different things. I use the easy to remember acronym P.I.L.L. to describe those 4 goals.
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 those items in the P.I.L.L., then you don’t need an annuity of any type. Notice that there is no “G” or “M” for stock market type growth. In my opinion, if you want real stock market growth, then never buy any type of annuity.
Monopoly Is Good
Not many businesses in this country have a pure monopoly. The annuity category actually has a monopoly on lifetime income. No other financial product provides a contractually guaranteed payment that you can never outlive. Annuities don’t = Hate.
Annuities = Lifetime Income.
Annuities = Retirement Income.
Annuities = Pension Income.
If I was appointed “Annuity Czar,”, that would be the message I would pound home to the consumer and the over 10,000 baby boomers that reach retirement age every single day. Pavlov anyone?
There are many types of consumer annuities available. Below are the most popular with a brief description of each and what they contractually solve for.
Single Premium Immediate Annuities (SPIAs)
Description: This is the original income annuity developed in the Roman Times. Also called Lifetime Annuities, Retirement Annuities, and Pension Annuities. SPIAs provide contractually guaranteed income.
Contractual Goal: Lifetime income starting as soon as a month and within one year.
Deferred Income Annuities (DIAs)
Description: This is a SPIA structure, but deferred. This retirement income stream payment will typically be a set amount for the rest of your life.
Contractual Goal: Lifetime income starting as soon as 13 months and as far out as 20 to 40 years.
Qualified Longevity Annuity Contracts (QLACs)
Description: This is a DIA structure that can only be used in a qualified account, and can be set up joint life with your spouse even though it’s your personal IRA. QLACs provide a lifetime stream of income starting at a future date (as late as age 85). You (or you and your spouse) receive payments regardless of how long you live.
Contractual Goal: Lifetime income using qualified (ie. Traditional IRA or 401k) money.
Multi-Year Guarantee Annuities (MYGAs)
Description: This is the annuity industry’s version of a CD (Certificate of Deposit). You choose the fixed period of time and the amount of money (i.e. lump sum payment) you place in the policy.
Contractual Goal: Principal protection with a guaranteed annual interest rate.
Fixed Index Annuities (FIAs)
Description: Also called Equity Indexed Annuities or Fixed Indexed Annuities. Potential upside is attached to a market index call option. An Income Rider benefit for future lifetime income can be attached at the time of application.
Contractual Goal: Principal protection with CD or enhanced CD returns.
Variable Annuities (VAs)
Description: VAs are deferred annuities that have a surrender charge schedule that declines over time. The non-guaranteed returns are based on how the internal mutual funds and markets perform.
Contractual Goal: Mutual Funds (i.e. Separate Accounts) for tax deferred (and hopeful stock market type) growth.
Shop For The Top
Shopping for annuities should be like shopping for a plane ticket. Annuities are commodity products, and quotes are like a gallon of milk. They expire every 7 to 10 days, and you can only lock them in during the application process. It’s important to find an objective annuity calculator or fixed rate feed that shops all carriers for the highest contractual guarantee for your specific situation.
So which annuity type is best for you? Ask the 2 questions and think of the items in the P.I.L.L. Then shop like heck for the best contractual deal available.