Annuity vs Investment: Annuity Suitability

Let’s talk about annuities versus investments — and whether it even makes sense to compare them.

First of all, annuities are not investments.

Annuities are contracts.

They are transfer-of-risk contracts issued by life insurance companies. You are transferring the risk to the company to primarily solve for principal protection and lifetime income. Those are the two major things.

There are also annuities designed for legacy and long-term care. That’s the PILL acronym:

Principal Protection
Income for Life
Legacy
Long-Term Care

But the point is simple: annuities are contracts.

Investments Absorb Risk. Annuities Transfer Risk.

Investments are the non-annuity side.

Investments can go up and down. They fluctuate. They can go straight up or straight down. That’s volatility.

When you invest, you are absorbing risk in exchange for potential returns.

Annuities do the opposite.

You are transferring risk to the issuing life insurance company.

Contracts versus volatility.
Transfer the risk versus absorb the risk.

You cannot have both.

The Problem in the Annuity Industry

The biggest problem, in my opinion, is that too many agents sell annuities as investments.

“You can get market upside.”
“You can get bonuses.”
“You can get the best of both worlds.”

No, you can’t.

If it sounds too good to be true, it is. Every single time.

There is no G for growth in the PILL acronym.

There is no S for stock market.
No B for Bitcoin.
No E for ETF.
No M for mutual fund.

If you want that, go to the investment side and knock the cover off the ball. I hope you have a great advisor. I hope you’re a great advisor to yourself.

But never, ever, ever buy annuities for potential, hypothetical, theoretical, backtested unicorn-chasing-butterfly returns that never happen.

Why This Confusion Exists

I’ve worked at Dean Witter, Paine Webber, UBS, Morgan Stanley. I’ve been on the investment side at a very high level.

When I left that world and moved fully into the annuity, contractually guaranteed space, I was shocked at how annuities were being pitched.

People were saying annuities could get market returns.

That’s not what they are designed to do.

Annuities are contractual guarantees between you and the life insurance company.

We buy them based on the contractual guarantee.

Period.

You Cannot Hybrid a Contract and an Investment

There are agents who try to hybrid the two.

They try to say you can get market upside with no downside.

You can’t.

If someone is trying to sell you that, they are mixing apples and oranges.

It’s contracts versus volatility.

Transfer the risk versus absorb the risk.

You cannot absorb the risk and transfer the risk at the same time.

There Are No Mulligans in Retirement

In golf, you get a mulligan. You hit it into the water, you get to do it again.

There are no mulligans in Chapter Two.

There are no do-overs in retirement.

You cannot make a mistake.

You cannot buy the dream.

You have to own the contractual realities.

If you want the dream, go to the investment side.

If you want contractual guarantees, that’s where annuities come into play.

Annuity Suitability Comes Down to One Question

Annuity suitability is not about whether annuities are good or bad.

It’s about what you are trying to solve.

Are you trying to:

Transfer risk and secure guarantees?

Or absorb risk for potential growth?

If you want growth, go to the investment side.

If you want guarantees, look at annuities for what they actually are — contracts.

The Bottom Line

Annuities and investments serve different purposes.

Annuities are contractual guarantees designed for principal protection, lifetime income, legacy, and long-term care.

Investments are designed to absorb market volatility in exchange for potential returns.

Contracts versus volatility.

Transfer the risk versus absorb the risk.

That’s the decision.