The Annuity Monopoly: What Is It?

The annuity industry has something other financial product categories do not.

A monopoly on contractual lifetime income.

Stocks, bonds, CDs, money markets, and other investments can all generate income.

But annuities are designed to contractually provide income for as long as you live.

That lifetime income guarantee is what makes annuities different.

Key Takeaways

• The annuity monopoly is contractual lifetime income.
• Four primary annuity types can provide lifetime income.
• Those products are SPIAs, DIAs, QLACs, and Income Riders.
• Lifetime income can be structured for one life or jointly for two lives.
• Social Security and pensions also function as lifetime income sources.
• Annuities should be evaluated as transfer-of-risk contracts rather than growth investments.

Which Annuities Provide Lifetime Income?

There are four primary annuity solutions for lifetime income:

• Single Premium Immediate Annuities
• Deferred Income Annuities
• QLACs
• Income Riders

Each can contractually provide income for life.

The difference is primarily when the income begins and how the contract is structured.

What Does Lifetime Income Mean?

Lifetime income means the payments continue for as long as the covered person is alive.

If the contract is structured jointly, the payment can continue for as long as either covered person is alive.

That remains true even when the annuity has paid out more than the original premium.

That is the longevity risk being transferred to the insurance company.

Why Other Products Are Different

You can receive income from:

• bonds
• CDs
• dividend stocks
• money markets
• preferred stocks
• other investments

But those income streams depend on the underlying asset or account.

A lifetime annuity contractually ties the payment to your life rather than simply to the remaining account value.

Social Security Is Already Lifetime Income

Most retirees already own a lifetime income benefit through Social Security.

Social Security pays for as long as you live.

It also includes inflation adjustments under the program's rules.

That makes Social Security an important foundation for the retirement income floor.

Pensions Work the Same Way

If you have an employer pension, that is another form of lifetime income.

The payment can continue for life according to the pension terms.

The problem is that relatively few workers now have traditional employer pensions.

That leaves many retirees with 401(k)s and IRAs but no automatic lifetime income stream.

A 401(k) Is Not a Pension

A 401(k) helps you accumulate assets.

It does not automatically create lifetime income.

At retirement, you still need to decide how much to withdraw, when to withdraw it, and how long the assets need to last.

An annuity can potentially convert part of those accumulated assets into a contractual pension-like payment.

What Is an Income Floor?

Your income floor is the amount of dependable money reaching your bank account every month.

It may include:

• Social Security
• pension income
• annuity income
• other dependable sources

The goal is to create enough predictable income to support the lifestyle you want.

Why the Income Floor Matters

Once the income floor is established, you may be less dependent on market performance for monthly expenses.

That can make it easier to leave investment assets invested during periods of volatility.

The annuity does not replace the investment portfolio.

It can provide the contractual foundation under it.

Lifetime Income Is Based Primarily on Life Expectancy

Lifetime annuity pricing is primarily based on life expectancy.

Interest rates matter, but they are secondary.

Generally, the older you are when income begins, the higher the initial payment because the insurance company expects to make payments for a shorter period.

Joint-Life Income

Joint-life income involves two lives.

The payment may be lower than a comparable single-life payment because the insurance company could be responsible for payments for a longer period.

The benefit is that income can continue for the surviving spouse.

Annuities Are Not Investments

Annuities are contracts.

They are transfer-of-risk products.

That distinction is important.

You are not buying an annuity because you expect it to outperform the stock market.

You are buying it because you want the insurance company to contractually assume a specific risk.

With lifetime income, that risk is longevity.

Do Not Buy an Annuity for Market Growth

Market growth and lifetime income are different objectives.

If you want market growth, use market investments.

If you need contractual lifetime income, compare lifetime annuity guarantees.

Trying to make one product solve both objectives can create unrealistic expectations.

Fear of Missing Out Can Get in the Way

Some people hesitate to create lifetime income because they worry the money could have earned more in the market.

That is FOMO.

But retirement does not have to be an all-or-nothing decision.

You can use part of your assets to establish the income floor and keep the rest invested.

Lifetime Income Can Support Your Lifestyle

Retirement is eventually about spending.

You accumulated the assets so they could support your life.

A dependable income floor can create more clarity around:

• travel
• family
• hobbies
• daily expenses
• discretionary spending

The objective is not simply to have the highest account balance possible.

Compare the Contractual Guarantee

Lifetime income annuities are commodity products.

Different carriers can provide different contractual payments.

That is why the appropriate comparison is the actual income guarantee rather than the company logo or product brochure.

Where to Compare Lifetime Income

Use our annuity calculators to compare current lifetime income guarantees from multiple insurance companies.

You can compare SPIAs, DIAs, QLACs, and Income Riders based on your age, state, premium, and income start date.

The Bottom Line

The annuity monopoly is lifetime income.

Annuities can contractually provide income for as long as you live, transferring longevity risk from you to the issuing insurance company.

Stocks, bonds, CDs, and other financial products can all play important roles in retirement, but they do not provide the same contractual lifetime income guarantee.

That is the specific problem annuities are uniquely designed to solve.

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