What Are Annuities Commonly Used For?
So, you're doing annuity research? That's pretty cool. I mean, you must be leaning in to see, "Hey, does this make sense for me?" The question is, "What are annuities commonly used for?" People try to use them for many things, but they buy most annuity types primarily for their unique benefit proposition. That proposition is that annuities provide lifetime income that you can never outlive. You would think the annuity industry would pound the table on that and promote that. For some reason, they haven't done that. Hopefully, in the future, I will be named annuity czar of the country, and I will promote that with my Got Guarantees? T-shirt in talking about lifetime income.
But there's more to it than that. They're commonly used for income, but they also can be used for other things. We're going to discuss that, go through the history of annuities, where that all started, and then some easy-to-remember acronyms and questions that will allow you to choose the right annuity or even decide if an annuity is right for you. At the end of this blog, I will tell you how to download all of my annuity Owner's Manuals for free. So, hang in there with me, and I'll also tell you how to get quotes if you're interested in looking at that as well. Let's get started.
What Is an Annuity?
What is an annuity? An annuity is a contract. It's a transfer of risk. It started in Roman times. The Roman soldiers got SPIAs, Immediate Annuity payments, a lifetime income stream for them and their families for their dutiful service to the empire. That's where it started. Annuities have been sold in this country for hundreds of years, but they're starting to hit their stride a little bit because we have 10,000 baby boomers retiring daily, and most people want guarantees. You get to the end of the road. You've worked hard, you've saved, you've scrimped. You have this lump sum of money and don't want to lose it. You don't want to see some market or catastrophic event and wipe all that hard work away.
Where Do Annuities Fit?
So where do annuities fit? They fit there when you're saying, "Okay, we need a lifetime income stream that we could never outlive. Me and my spouse, whatever." That's an annuity guarantee that most people are looking for. I've come up with a couple of things that are unique to Stan The Annuity Man that make this whole process easy. Because when you look at annuities as a whole, you're just getting all this sales pitch information, you don't know what to think. Let me give you an acronym, PILL, P-I-L-L. P stands for principal protection. I stands for income for life. L stands for legacy. The other L stands for long-term care, confinement care. So P-I-L-L, remember that. Because if you do not need to solve for one or more of those four items, you do not need an annuity.
Now I know everyone's out there going, "But, hey, Stan, how about growth? How about market growth? I want market growth." In my world, Stan The Annuity Man deals with contractual guarantees only. It's all about the will do, not might do, and the will do, meaning contractual guarantees might do as potential. You don't buy annuities for potential. If you need market growth, you don't need an annuity type, in my opinion, and I'm right, by the way. So, PILL, remember that.
The Two Questions
The other important thing to remember is just two questions, and if you ask these two questions and answer them, you will find out if you need an annuity and, if so, what annuity type you need. The first question is, "What do I want the money to contractually do?" Underline contractual. The second question is, "When do I want those contractual guarantees to start?" From these two questions and the PILL, that will determine whether you need an annuity or not, and if you do, which type to quote.
They Are Annuities Too!
I was on a panel the other day, some financial thing, and they brought me in, and I'm sitting up there with a bunch of money managers. I call them masters of the universe. They think that nothing they do is wrong, bless their hearts, and they're all putting down annuities in a vague sort of way. But at the same time, they're talking about Social Security planning, pension planning, and all these things. I finally just said, "Yeah, I hate to break up this party, but pensions and Social Security, ladies and gentlemen, wouldn't those be defined as annuities?" They're like, "Of course." I'm like, "Then how are you putting down annuities?" Now I know what they were doing. They're putting down some of the sales practices, and there are people pushing the envelope on, "I don't care what's being sold." But the point is, I had to reel them in a bit and say, "Hey, stop putting annuities down and then talking good about pension income streams and Social Security income streams because those are annuity payments."
When you hear the whole, I hate annuities thing, reel that in. There are agendas behind it. In my opinion, most money managers don't like annuities because they can't charge a fee for them. They can't charge that wrap fee for the annuity. Once the person buys an Immediate Annuity, that money is going to be a lifetime income stream. It's annuitized, and they can't manage it, or they can't charge a fee. So anytime you hear a negative story about annuities, just look at the source, which might explain why it's a negative one.
What are annuities commonly used for? We talked about the PILL. So, let's go through the product types and where that fits in that PILL. The P, or Principal protection, would be Multi-Year Guarantee Annuities, the annuity industry's version of a CD, and Fixed Indexed Annuities, a CD-type annuity. It's not a market-type annuity. It's a CD-type annuity. It's fixed. So those fall under principal protection.
The I or income for life would be the Single Premium Immediate Annuity. It is for income now. A Deferred Income Annuity, or DIA, which is income later. It's an Immediate Annuity, but just deferred. Then you have a QLAC, Qualified Longevity Annuity Contract, which, using your IRA, is a Deferred Income Annuity inside your IRA, but those are all lifetime income type products. Then you have what's called an Income Rider, which is an attached benefit to a Deferred Annuity. Typically, a variable or index that solves for future income needs.
The L for legacy would be if you want to buy a Fixed Annuity and leave that portion to leave all of that growth to your beneficiaries. Or you can buy a death benefit rider that grows by a specific percentage that can be paid out to your beneficiaries upon your demise. So that's the L.
Then the other L is long-term care, and there are some annuities out there that actually solve for long-term care or confinement care. It's all going to be dependent upon whether you qualify for specific products, etc. Some are guaranteed issues. Some, you have to go through telephone interviews, but there are annuities out there for solving for long-term care.
Those are the types that solve the P-I-L-L, the principal protection, income for life, legacy, and long-term care. Notice there's no G for growth because Stan The Annuity Man believes that if you want market growth, you don't need an annuity because annuities are contracts, and they're transfer of risk products. With the PILL, you're transferring the risk to the annuity companies to solve for that specific issue.
All right, so we've covered a lot. I hope I've answered the questions on what annuities are used for. There's a video I did on Multi-Year Guarantee Annuities. I would encourage you to take a look at it. I've written a book on it as well that I'd love for you to download for free. In fact, I'd like for you to download all six of my owner's manuals for free. They are very informative, and they will help you in your quest to understand, number one, if you need an annuity, and number two, if so, what type fits. Once you figure out what type, then you can do your research using my books, and you can go to my site as we've got all kinds of information. I've got a blog, I've got a podcast, all kinds of stuff, and you can book a call with us and get a quote.
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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.