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What Is the Purpose of an Annuity?
Today's topic is what is the purpose of an annuity. Why do you even need one? What do they solve for? We're going to go through that with all types, so you can understand if it even makes sense for you to own an annuity, and if it does, which one fits your situation best.
First, I'm going to go over what an annuity is, what it solves for, and its purpose. Also, I'm going to talk to you about the two questions you need to ask yourself and answer to find out if you need an annuity and, if so, what type. I'm also going to tell you this acronym I've come up with, even if you need to consider an annuity, you know what it solves for. Finally, I'm going to talk about where annuities fit in your portfolio.
So, what is an annuity? Well, an annuity is a contract. I don't believe annuities are investments; they're contracts. If you don't believe me, buy one, you're going to get a contract in the mail, it's called a policy, and it's going to spell out exactly how that annuity works. Essentially, they're a transfer of risk product, and you're transferring the risk to the annuity company to solve a specific goal.
History of Annuities
What's the history of annuities? It's interesting if you don't know it. The word annuity, if you break down the word annuity, A-N-N-U-A in Latin means annual payments. In Roman times, when annuities started, the dutiful Roman soldiers were out there fighting it out, laying it on the line, and the government put in place an annua, a payment, and a guaranteed lifetime income stream for that dutiful soldier and their families. That's the history of annuities. In essence, that product from the Roman times is today's Single Premium Immediate Annuity, and it's been sold in this country for hundreds of years. So, when people say, I hate all annuities, or all annuities are bad, I don't think they know what they're talking about. I believe they have an agenda, and to say that is like saying, I hate all restaurants, I hate all trucks, I hate all socks, and I hate all fruits; it's crazy. It's uninformed and misleading, but that's the history of annuities.
What Do Annuities Solve?
Now, what do annuities solve for? Primarily, they solve for principal protection and income, but they also solve for other things. I've come up with a unique acronym that will tell you if you need an annuity or not, and that acronym comes from the word pill. P-I-L-L. P stands for Principal protection, I stands for Income for life, L stands for Legacy, leaving money to your loved ones, and the other L stands for Long- term care. Let's go over that again. P is for Principal protection, I is for Income for life, L is for Legacy, and the other L is for Long-term care. In my perfect world of annuities, you don't need an annuity if you do not need to solve for one or more of those four things. It's really that simple. Ask yourself, do you need principal protection? Do you need income for life? And if so, when? When do you need that to start? Do you need legacy? Do you need long-term care? If you say no to all four of those, move on. It's okay. I've done my job, and I've educated you. But that's what annuities solve for.
The Purpose of an Annuity
The question of the day is, what is the purpose of an annuity? Well, to even find out if you need one, you use that pill acronym I just went over, but there are also two questions, only two, not three, two questions that you need to ask yourself and answer to see if you need an annuity, and if you do, what type? There's not one type that's a one size fits all. Currently, in the sales environment, too many agents and advisors are trying to fit a square peg into a round hole, which is they're selling one product and trying to solve all things for all people with that one product. The only thing that happens is that the agent's solving for himself, or they just need to do their homework. Also, agent recommendations are often based on commissions or the level of commissions. All annuity commissions are built into the product; you never see them. Good or bad, it is what it is. Am I a fan of that? No, but it is what it is. Too many agents and advisors are basing their recommendations on higher commission products. That doesn't mean the higher commission products are bad; it just means there's somewhat of an agenda. So, let's get to the two questions that you need to ask. Number one, what do you want the money to contractually do? Underline contractually. Second question, when do you want those contractual guarantees to start? Let's do it again. What do you want the money to contractually do? When do you need those contractual guarantees to start? Let's go through some scenarios. I asked this to a person the other day, same two questions. He goes, "I need income, and I need it to start in 90 days." Now, what does he need? What'd he want the money to contractually do? "I need lifetime income." When do you want the contractual guarantees to start? "I need the income to start in 90 days." Great. Guess what product that is? That's a Single Premium Immediate Annuity. Let's do another one. What do you want the money to contractually do? "I need principal protection." When do you want those contractual guarantees to start, or how long do you want those guarantees for? "Five years." Okay, what has this person described? Really, two products. A Multi-Year Guarantee Annuity, which is the annuity version of a CD. You could lock a rate in for five years or buy a five-year Fixed-Indexed Annuity. They both protect the principal. Let's do another one. What do you want the money to contractually do? "We need lifetime income." When do you want those contractual guarantees to start? "We need those contractual guarantees to start in 10 years. We're retiring in 10 years, so we want to make sure we have income starting in 10 years." What did that person describe? They described a Deferred Income Annuity, and they also described an Income Rider. So, guess what? We quote both. See how easy that is? Let's do another one where it doesn't work. What do you want the money to contractually do? "I want a reasonable rate of return in market growth." It doesn't work. You don't need an annuity. If you need market growth, and to all of my Variable Annuity friends out there, because once again, you're limited in your choices, when you're looking for market growth, you need unlimited choices. So, that's how the two questions work.
Remember this, annuities are contracts, and they're transfer of risk contracts. You're transferring the risk to solve for a specific goal, so you need to remember the two questions. What do you want the money to contractually do, and when do you want those contractual guarantees to start? And also the PILL. P stands for Principal protection, I for Income for life, L for Legacy, and the other L for Long-term care. If you need quotes on your specific situation, check out our annuity calculators, and we'll send you a quote, leave you alone, and treat you as a professional.
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