The 4 Types of Annuities the Big, Bad, Evil Annuity Companies Sell

Annuities sometimes get a bad rap, but they’ve been around forever.

In Roman times, the wives of fallen soldiers were given an annuity that would provide them with income for the rest of their life as gratitude for their husband’s service.

There is even evidence that annuities existed in Egyptian times and who knows, maybe even before that (here’s an interesting article on the history of annuities if you’re interested)

So, the idea of annuities has been around forever.

And simply put, an annuity is just a guaranteed income stream.

It can last a few years.

It can last a few decades.

It can last for a lifetime (most common).

It can even last for multiple generations (many wealthy families set up generational annuities to provide income streams for their children, grandchildren, and even great grandchildren).

The annuity market might seem complex, considering the fact that there are 470+ different kinds of annuities on the market and 80+ different annuity companies that sell them, but annuities can be broken down into 4 simple categories that I’m going to go over right now:

Type 1 — The Pension Annuity

This is what most people think of when they think of an annuity.

You put a lump-sum into an annuity contract and the insurance company promises you a guaranteed payment for a set period (5-years, 10-years, lifetime, joint life, etc.).

That’s pretty much it.

These are incredibly simple.

You put money in and you receive a “promise” from an insurance company to provide you income for however long you decide.

These annuities are not the most popular on the market anymore because there is no inheritance, or residual value in the contract for your beneficiaries when you die, but they can still be one of the most effective ways to provide guarantee income.

Type 2 — The Variable Annuity

These are annuities that take your money and invest it directly in the stock market.

These can be used effectively to grow your money, but they are typically not a good way to do so.

These tend to be a very expensive, and very ineffective vehicle for providing the contractual guarantees that most people are looking for in retirement.

They are also loaded with hidden fees most of the time (sometimes 3–5% per year!) that makes them a cash-cow for financial professionals, but not always the best deal for consumers (I recently did a video all about this).

These can be used effectively but I run into these frequently and most of the time, we can find a better vehicle, with lower fees, and higher guarantees.

Type 3 — The Fixed Annuity

Fixed annuities are like CDs, they have a guaranteed interest rate and are not designed to provide income.

They are simply a place to park your money.

These are great short and mid-term savings vehicles because they offer guaranteed returns on your money with 100% protection of your principal!

There are no fees on these vehicles, but you have to make sure not to pull your money out of these contracts before the pre-selected period ends, otherwise you will pay surrender charges.

You can also grow your money tax-deferred (unlike CDs) as long as it stays inside of one of these contracts (so these are often used as a way to lower your tax bill each year AND as another way to grow your money tax-deferred, like a retirement vehicle).

Type 4 — The Indexed Annuity

These are the types of annuities I deal with the most because they are “indexed” to the stock market — meaning you can participate in the growth of the market with 100% protection from any losses.

These can be designed as a “growth annuity” or as a future or deferred “income annuity” (if you’re younger you’re probably looking for growth, if you’re about to retire, you’re probably looking for income).

In both cases, your money will be able to participate in the market when it goes up while having 100% protection from ANY losses if the market goes down, which makes these very powerful “safe money” vehicles!

There are also no investment fees eating away at the growth of these contracts, so they can be an efficient way to grow your money without having to cut a big check to your investment broker each year.

These contracts also have a “contract value”, which makes them very popular.

Unlike the old-school annuities that vanished when you died, these annuities payout the residual contract value to your beneficiaries, so you are never at risk of the big, bad, evil annuity companies keeping “your money” when you die.

So there you have it.

A simple, easy-to-understand breakdown of the different types of annuities that exist on the market right now.

Annuities can be a wonderful tool for growing your money without risk (i.e. safe money), and one of the most efficient ways to providing guaranteed income (that you can never outlive) in retirement.

Annuities can also allow you to create income much cheaper than the stock market can (so you don’t have to have $15 million saved to retire comfortably like I talked about in this blog)!

The annuity companies aren’t really big, bad, or evil.

They offer very valuable contractual guarantees.

The problem is that so many people are sold products that are not suitable for them (and their financial situation).

That’s why it makes sense to work with somebody who truly understands your goals, your financial objectives, and your biggest concerns in retirement (or leading up to it).

Annuities are not right for everybody, but there are a lot of creative ways to leverage annuities for wealth-building, protection against market volatility, guaranteed lifetime income (that you can never outlive), and even as a way to position yourself to retire completely, 100% tax-free (including collecting your social security check tax-free)!

As with all planning, the earlier you can start addressing some of these topics, the better off you will be.

If you want to chat more, schedule some time with me (below).