How to Buy an Annuity: What Type of Annuity Is Best?

Update: As of January 1, 2022 the QLAC limit increased to $145,000.

Today, we're going to talk about what type of annuity is best. Now, disclaimer, we might get to the end of the road when you and I are talking and come to a realization that no annuity type is best. Annuities are not for everyone. There are many types, and we’re going to talk about them.  

Listen, I tell people all the time, use your ears and your mouth in proportion, and that's what I do. You say, "Wait a minute, Stan The Annuity Man®, you just riffing and yelling and having fun and talk and talk and talk.” But when you and I talk, I'm listening. I'm listening about your specific situation we're going to put together a customized plan. But today, we will talk about what type of annuity is best.

All right, let's get into the types because I love it when people say, "I hate all annuities.” Really? Do you hate all restaurants, do you hate all trucks, do you hate all shoes? There are many different annuities and spoiler alerts; you already own one if you have a social security number. You already own the best inflation annuity on the planet, and that's called social security.  

Let's get into it, starting with single premium immediate annuities. That's the grandfather of all annuities; it was developed in Roman times for lifetime income stream, for the dutiful Roman soldiers and their families. That annuity is for the people out there, maybe you, that need an immediate income to start right now. If you say, Stan, I need income to start within a year, that's an immediate annuity.  

A single premium immediate annuity. You can run your quotes on my SPIA calculator and just find out the numbers, and then you can connect with me to do a customized quote. But what is an immediate annuity? It's a transfer of risk pension products. Less than 10 percent of private companies offer pensions these days. The only pensions out there for government workers are some excellent labor unions that set that up with companies for pensions.

You have to create your pension. The best place to go is a single premium immediate annuity if you need income to start within a year. There are no moving parts, no annual fees, no market attachment. It is a transfer risk primarily priced and based on your life expectancy when you take the payment. Interest rates play a secondary role. I'll repeat that interest rates play a secondary role.  

Now, the sister product of an immediate annuity is called a Deferred Income Annuity, DIA. Same structure, no moving parts, no annual fees, no market attachments. It's a straight transfer risk. It looks just like an immediate annuity except that if you want to defer past the year like you want an income to start a year or two years from now or three years from now is a Deferred Income Annuity, and we can quote that.  

That's the deferred income annuity when you need income to start down the road income later®. The sister product of the deferred income annuity, which I guess is an offshoot of the immediate annuity, is a Qualified Longevity Annuity Contract, a QLAC. Now that's the newest version of an annuity type. It was introduced in 2014 by our friends at the IRS and the Treasury Department for use inside of an IRA, a qualified type account for future income with income starting at the time of this taping past age 72. You can defer it as far out as age 85.  

There are some premium limitation rules; you can only put $135,000 maximum per IRA owner into a qualified longevity annuity contract. But once again, no moving part, no market attachments, no annual fees. It's a straight transfer risk pension product, and the good news about a QLAC is you can attach your spouse or partner as a lifetime income joint annuitant at the time of application, even though it's your IRA, which is excellent. I think it's a great way to hedge inflation because you have income starting at a later date.

Another type, multi-year guaranteed annuities, that's the annuity industry version of a CD. The difference between a CD and a multi-year guaranteed annuity, two primary differences is number one, the issuing carrier backs Multi-year guaranteed annuities, and there are state guarantee funds that back up that amount to a certain level. CDs have the best backing on the planet, FDIC, but in a non-IRA setting. By the way, you can use a multi-year guaranteed annuity in an IRA, or a non-IRA, or Roth IRA. But in a non-IRA setting, multi-year guaranteed annuity interest, gross tax-deferred, whereas, with a CD and a non-IRA setting, you have to pay taxes on that interest. But if you're looking for principal protection, short term, you can buy them as short as one or two years and go out as far as say ten years.

Typically, people like buying them in the three, four, and five-year duration; it’s just like buying a CD. You're locking in an interest rate for a specific period, no moving parts, no annual fees, no market attachments. I love it when I read people say, well, annuities are expensive. Seriously? I just told you about the first four and now getting ready to be in the fifth one, with no annual fees. Forget the expense thing. Yes, there are some out there that are expensive. Variable annuities can be costly, but we don't sell variable annuities.

When people say, "Well, they are expensive." No, they're not. Okay, period. Multi-year guaranteed annuities are for all of you people out there that are CD buyers that are looking at current CD rates and going, "What the heck, I can't put my money there, that doesn’t make any sense.” A multi-year guaranteed annuity is an excellent alternative for that, and I'm not saying they're better than CDs because they're not, and neither one is better than the other. They're different, but they are different from the standpoint of the taxation non-qualified account in the banking, but they work the same. They have an annual interest rate that you're going to get every year for a specific period you choose.  

Another product that's getting a lot of play right now is indexed annuities. Indexed annuities, fixed indexed annuities were developed in 1995 to compete with CD returns. In this case, Mega type fixed rate returns. It is not a market product, it is not a security, it is issued at the state level, and you need a life insurance license to sell it. Nothing wrong with indexed annuities; they can be a little complicated. You can set up a time to talk to me, and I'll explain.

There are many different annuities and spoiler alerts; you already own one

I always tell people sometimes talking about indexed annuities is like showing paintings to blind people, no offense to blind people. But it can get a little convoluted; we can help you with that. With fixed indexed annuities, I just don't want you to believe that "Well, this guy told me that I can get market returns, I can get 20 percent, 70 percent". No. They were developed in 1995 to compete with CD and regular CD returns, which is precisely what they do.

Now, the final thing I want to talk about is what's called an income rider. We primarily use indexed annuities as an efficient and cost-effective delivery system for income riders. "Hey, Stan, what's an income rider?". An income rider is an attachment to the indexed annuity that guarantees a future income. In other words, I'm going to buy this indexed annuity, and I'm going to attach this income rider because I need income in nine years, or seven years, or five years, or 13 years, or whatever. The income rider, which is a separate calculation, can tell you to the penny what your lifetime income will be for either you and your spouse, partner, or however you want to set it up at the time of application. So you can say, "I'm going to buy this index annuity, I know what's going to get CD type returns, but I'm going to tax this income rider because I think there's a possibility we need income in seven years, or nine years, or whatever the years. But I'm going to test it, so I know to the penny what that income stream's going to be".

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For all you planners and box checkers out there, that's music to your ears. By the way, annuities of all types should be music to your ears because you're buying them for the contractual guarantees. What's the best annuity type? There is no best type; that’s the reason that you need to know how they all work.  

Never forget to live in reality, not the dream®, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.