What Is an Annuity?

What is an annuity?

Let’s make this simple.

An annuity is a contract.

Not an investment.

Not a strategy.

A contract.

If you buy one, you are going to receive a policy that spells out exactly what that annuity will do.

Key Takeaways

• An annuity is a contract issued by a life insurance company
• It is a transfer of risk product
• It solves for Principal Protection, Income for Life, Legacy, and Long-Term Care
• If you do not need one of those, you do not need an annuity
• The two most important questions define which annuity fits
• Annuities are not designed for market growth

Annuities Are Transfer of Risk Products

Here’s the real purpose.

Annuities transfer risk.

You are shifting a specific financial risk to the insurance company.

That risk could be:

• outliving your money
• losing principal
• leaving money to beneficiaries
• covering long-term care needs

That’s what you’re buying.

Where Annuities Came From

The word annuity comes from the Latin word:

“annua,” meaning annual payments.

Going all the way back to Roman times, soldiers were promised lifetime payments for their service.

That is essentially what a modern Single Premium Immediate Annuity does today.

This concept has been around for hundreds of years.

What Annuities Actually Solve For

Annuities solve for four things.

This is the framework:

P.I.L.L.

• P = Principal Protection
• I = Income for Life
• L = Legacy
• L = Long-Term Care

If you do not need to solve for one of those four things:

You do not need an annuity.

It’s that simple.

The Two Questions That Matter

There are only two questions you need to ask.

Not three.

Two.

What do you want the money to contractually do?
When do you want those contractual guarantees to start?

That’s it.

Every annuity recommendation should come from those answers.

How This Works in Real Life

Let’s walk through it.

Example 1

“I need lifetime income starting in 90 days.”

That’s an Immediate Annuity.

Example 2

“I need principal protection for five years.”

That’s a Multi-Year Guarantee Annuity or a Fixed Index Annuity.

Example 3

“I need income starting in 10 years.”

That’s a Deferred Income Annuity or an Income Rider.

Example 4

“I want market growth and high returns.”

That does not work.

You do not need an annuity.

The Biggest Mistake People Make

People try to use annuities for something they are not designed to do.

They want:

• market growth
• high returns
• upside potential

That is not what annuities are built for.

They are built for: guarantees.

Where Annuities Fit in Your Portfolio

Annuities are not meant to replace everything.

They are used to:

• create income
• protect principal
• reduce risk
• solve specific problems

They are a tool.

Not a one-size-fits-all solution.

The Reality About the Industry

There are a lot of products.

And too many people try to sell:

• one product
• to every person
• for every situation

That does not work.

That is a square peg in a round hole.

And a lot of times, it is driven by commissions.

What You Should Focus On

Forget the noise.

Forget the sales pitch.

Focus on this:

What is the contract going to do?

That’s it.

Where to See How Annuities Actually Work

Once you understand the purpose, the next step is seeing real numbers.

What does income look like?

What are the guarantees?

What do different annuities actually do?

You can compare those side by side using our annuity calculators here: https://www.stantheannuityman.com/ annuity-calculator/

The Bottom Line

An annuity is a contract.

It transfers risk.

It solves for:

• Principal Protection
• Income for Life
• Legacy
• Long-Term Care

If you do not need one of those, you do not need an annuity.

If you do, then the right annuity becomes very clear once you answer two simple questions.