Annuity vs Perpetuity: Key Differences Explained

Hi there. Stan The Annuity Man, America's annuity agent, licensed in all 50 states. Today's topic might be my favorite topic ever. So, I have a team of people that put these topics together for me, and we go over them in a big meeting room. We're drinking sodas and things like that, and they’re like, “We need to talk about annuities and perpetuities and the difference between the two.” And I did a Scooby-Doo. I'm like, “Huh?” I was like, “What are you talking about?” I'll tell you what we're talking about after this.

What Is a Perpetuity?

So, we’re sitting at this table, and someone from my team—very, very smart—is explaining this topic. I’m Southern Stan, originally from the South, and sometimes that twang sneaks out. And if anyone wants to send me peach cobbler, go ahead and do that. It’s my favorite dessert.

Of course, I’m sitting there thinking, “Well, perpetuity means forever.” My wife loves me in perpetuity. Politicians are stupid in perpetuity. It just means something that never stops. My wife, by the way, is in the background going, “Forced vomit.” But you get the idea—that’s how most of us understand the word “perpetuity.”

So, I said to this smart person on my team, “What are you talking about?” And they explained, “A long time ago in England, there were perpetuity bonds that paid a coupon forever. No maturity date. No end date. Just an ongoing payment.” I’m like, “Huh?” Total Scooby-Doo moment. “Whoa.” Pretty interesting.

Modern Examples of Perpetuities

Now to me, having worked for Dean Witter, Paine Webber, Morgan Stanley, UBS—and the big buildings, the marble buildings—man, I looked good in the suit. I had the tie and the whole thing and the briefcase.

I guess a perpetuity-type bond in today's world would be a dividend stock. To me, that's a perpetuity yield, that as long as you own the stock, it’s going to pay the yield. Unless, I guess, the company decides not to pay that dividend. But there’s a lot of legacy stocks out there—big ones—that are going to pay that dividend and are known for dividend payments if you buy the stock. So that’s a perpetuity-type investment.

How Annuities Differ

Now with annuities—and there are many different types of annuities—you can’t just say “annuities.” I love it when people say, “What’s the best annuity, Stan?” I don’t know. Tell me what you're trying to achieve. There’s no best annuity. If anyone says that they have it, then they’re just trying to sell you something. Or as my team says, they’ve only learned one product, and that’s the product they’re going to sell you—regardless of what you need or even if you need it.

Annuities Have an End Date

Alright, so with annuities, let’s take an example of a Deferred Annuity—a deferred-type annuity: Multi-Year Guarantee Annuities, Fixed Index Annuities. A Multi-Year Guarantee Annuity, for example—you could buy a 3-year maturity or a 5-year maturity. After that, it’s matured.

And by the way, spoiler: all annuities have what we call an end date to the policy. A lot of times, people get the policy—they bought a 5-year MYGA—and they see in that contract somewhere where the end date is decades down the road. What that means is we can get out of it in 5 years without penalty. You can get your money back. But if no one contacts you and no one ever calls you, and you forget you had the policy—which will never happen at The Annuity Man—that policy is going to end. It’s not an in-perpetuity policy. Annuities are not in perpetuity.

When Annuities Are in Perpetuity

Now, asterisk to that—if you buy a lifetime income product: SPIA, DIA, QLAC, and Income Rider. SPIA is Single Premium Immediate Annuity. DIA is Deferred Income Annuity. QLAC is Qualified Longevity Annuity Contract. And then Income rider—that can be attached to, say, Indexed Annuities.

The income guarantee is in perpetuity. As long as you are breathing, the annuity company is on the hook to pay.

Fun With Financial History

So, I think the unique topic of the difference between annuities and perpetuities—first of all, we all learned something today. Correct me if I'm wrong—nod your head—that you didn’t even know there was a perpetuity bond. I didn’t either. I thought that was cool. And it was issued in England a long time ago.

My team says it’s no longer available. So of course I said, “Well, is it still in perpetuity?” I mean, I don’t know. But the point is, I had to ask my friend Moshe Milevsky because he’s so smart and he’s done all this research on tontines. And I’m sure if I brought up perpetuity bonds to Moshe Milevsky—he was recently on my podcast, I’d encourage you to view that—he’d be like, “Yeah, the perpetuity bond…” and go down the rabbit hole because he’s so smart.

No ROI Until You Die

Every time I ask Moshe a question, he goes, “Do you want the 1-minute, 10-minute, or 1-hour version of the answer?” I love that. I think if I said, “Hey Moshe, how are you doing today?” He’d say, “Do you want the 1-minute, the 10-minute, or the 1-hour version?” I mean, he’s that smart.

But I think what you need to understand with annuities is that lifetime income is as long as you’re breathing. So that's in perpetuity, right? I mean, as long as you're breathing. If you live—people say, “What if I live to 150?” They're going to pay. “What if I live to 177?” They're going to pay. “What if I live to 200?” They're going to pay. They meaning the annuity company. That’s the transfer of risk. You’re transferring the risk to the annuity company to pay you for as long as you are breathing.

And that’s what I always tell people: there’s no ROI—Return on Investment—until you die. It’s a really neat rhyme, but it’s true. And we don’t know that ROI until you die. And I make this offer to everybody: I’ll fly to your funeral. I will sing acapella, a song that I’ve made up about ROI, and I’ll include your ROI on that annuity. No one to this day has taken me up on that—which is sad because my voice remains untapped and unknown to the musical public.

The Real Takeaway

I digress. The point is this: annuities—you have to understand—you buy them for the contractual guarantees. You own them for what they will do, not what they might do.

Deferred annuities like MYGAs and Indexed Annuities—they have an end date to that annuity. They just do. But Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, and income riders attached to Indexed Annuities—those income guarantees are in perpetuity.

The Cocktail Party Challenge

So, the lifetime income is in perpetuity. My wife of 36 years, Christine’s love for me is in perpetuity. Right, Christine? Hope you’re reading this. And politicians in D.C. will be crooked and stupid in perpetuity. Can we all agree that all of those are in perpetuity?

That is my—I was just rolling—on annuities and perpetuities. That should be a t-shirt. I really believe that. Maybe. I don’t know.

So, when you go to the cocktail party next time, walk up to someone you really don’t like and say, “Hey, do you know what a perpetuity is? Do you have a perpetuity bond?” And if they go, “No,” you can say, “I do—because I bought a SPIA from Stan The Annuity Man for lifetime income. And that’s lifetime income in perpetuity. Get me a scotch, right? Go get me a beer, player—because I just one-upped you.”

Alright, I’m having fun. I will see you on the next Stan The Annuity Man blog—and I’m going to create them in perpetuity.