The Truth About Annuities | How Income & Guarantees Really Work

The Truth About Annuities | How Income & Guarantees Really Work

Welcome to another episode of Shooting It Straight With Stan. I’m Stan The Annuity Man, America’s Annuity Agent, licensed in all 50 states. If you want to run live quotes, download free books, or access our proprietary calculators, head over to The Annuity Man.

Today’s topic is one of my favorites: How the Annuity Sausage is Made. I’m not going to drag you through the back rooms where actuaries crunch numbers all day, but I am going to give you a clear, 30,000-foot view of how annuities are structured and priced. By the end, you’ll understand the key moving parts—and why life insurance companies have those massive skyscrapers.

The Basics: Who Makes the Sausage?

Life insurance companies are the issuers of annuities. Social Security is technically an annuity. If you’re one of the 9% who still have a pension, that’s an annuity too. Required Minimum Distributions (RMDs) from your IRA? That’s another annuity-like payment stream.

But what about commercial annuities sold today? Let’s break down the main types.

Three Core Lifetime Income Products

1. Single Premium Immediate Annuities (SPIAs):
2. The original annuity dates back to Roman times, when soldiers received pensions for their service. With SPIAs, income starts right away—think “rip the knob off the faucet and let the water (income) flow.”
3. Deferred Income Annuities (DIAs):
4. Similar to SPIAs, but with income starting more than a year later.
5. Qualified Longevity Annuity Contracts (QLACs):
6. Created in 2014 by the IRS and Treasury, QLACs allow you to use traditional IRA or qualified plan funds to buy future income. You can even structure them for joint lifetime income with a spouse.

All three are “annuitization products,” meaning once income begins, it keeps flowing for life. Pricing is based primarily on life expectancy (yours or joint), with interest rates playing a secondary role.

Capacity: The Hidden Ingredient

Here’s a piece of the sausage-making process no one talks about: capacity.

An annuity company may decide this week they want more 72-year-olds on their books. They’ll boost payouts to attract that age group. Once they’ve filled that “tranche,” they lower payouts to stop the flow.

That’s why annuity quotes change every 7–10 days—like a gallon of milk going bad. And it’s why you can’t just shop one company. You must shop them all to find the highest contractual guarantee at the time you’re ready.

Why You Can’t Time Annuities

Some people think they can “time the market” with annuity purchases. You can’t. There’s no bell at the top or bottom. If a contractual guarantee looks fair for your situation, lock it in.

Other Types of Annuities

• Income Riders: Add lifetime income to Indexed or Variable Annuities. Riders are commodity products—shop all carriers for the highest contractual guarantee.
• Multi-Year Guarantee Annuities (MYGAs): The annuity industry’s version of a CD. Fixed terms, fixed rates, no lifetime income. Once companies hit their fundraising goals for a given term, they lower rates.
• Indexed Annuities: Introduced in 1995 as CD alternatives, they offer limited upside using caps, spreads, and participation rates. Remember my rule: If you can’t explain it to a 9-year-old, don’t buy it.
• Variable Annuities: Mutual funds dressed up as “separate accounts.” We don’t sell them because they can lose value. For pure market growth, consider buying mutual funds.

The Bottom Line: Own Annuities for What They Will Do

Life insurance companies know when you’re going to die—that’s why they price products with precision. Annuities aren’t investments; they’re contracts. Always buy for what they will do (the contractual guarantees), not what they might do (the sales pitch).

To make a smart choice, ask yourself two simple questions:

1. What do you want the money to contractually do?
2. When do you want those guarantees to start?

Once you answer those, we can show you the highest contractual guarantees available from every carrier. You can even run the numbers yourself, 24/7, at The Annuity Man.

That’s the truth about how the annuity sausage is made. Principal protection and lifetime income are the two primary reasons people buy annuities, and if those fit your needs, the guarantees can be powerful.

As my grandfather always said: “If you tell the truth, you don’t have to remember anything.”

I’m Stan The Annuity Man. Thank you for reading, and I look forward to seeing you next time.