Annuity Income: What Is It and How Does It Work

Hello, I’m Stan The Annuity Man, America's Annuity Agent, licensed in all 50 states. What are we talking about today? We’re talking about annuity income and how it works. You say, "Well, Stan, it's pretty basic. It just sends me income." No, it's bigger than that. You need to understand how it works, the different product types, how you can structure it, and all that good stuff. And I’m just the guy to do it.

Lifetime Income with Annuities

Lifetime income with annuities really comes down to the basics. It’s a combination of return of principal plus interest. Regardless of which annuity type you choose for real lifetime income, the income stream you can never outlive is your money back with interest. You’re saying, “Wait a minute, that’s not what the agent told me.” I know—they’re lying to you. You’re getting your money back with interest. And that's not a bad thing because annuities are risk-transfer contracts. In this case, you’re transferring the risk—longevity risk- the fear of outliving your money. You didn’t know that did you? Longevity risk is the fear of living too long without enough funds to sustain you.

Now, in a good Southern voice, it’s like, “What’s the ROI on that, Stan?” ROI is Return on Investment. Well, of course, because I have a Stan-henge shirt on, I’m going to give you a really good answer for that.

ROI on Lifetime Income

There’s no ROI until you die. Up until that point, it’s a pure transfer of risk. I’ll even come to your funeral for free. I’ll fly in on my Learjet—well, I don’t have one, but if I did, I’d fly in. I’ll tell your beneficiaries the ROI on your lifetime income stream annuity. I’ll even sing it at your funeral if you can believe that. None of that’s true, but I would do it if you invited me. The bottom line is—you can’t look at it as an investment. Lifetime income with annuities is all about transferring risks. Period. That’s what it is.

Nuts and Bolts of Annuities

So how does it work, nuts and bolts? It’s all about life expectancy. When we run the quotes on Stan The Annuity Man’s proprietary annuity calculators, we need your date of birth (or dates of birth if it’s joint). We also need your state of residence because annuities are approved at the state level. So, the annuities available in Florida may not be available in Texas or California. That’s just the way it is. We also need to know when you want the income to start.

Now, it doesn’t always have to be a lifetime income stream. Ninety percent of the time, with The Annuity Man, we’re quoting for lifetime income. But you can also get a specific period of time, called a “period certain.” Say, for example, you need income to fill a gap for 10, 12, 15, 17, or even 20 years. It’ll pay you or someone in your family for that time period. A lot of people want these gap fillers because they may want income to start later.

For example, I got a call the other day. The guy said, "Stan, The Annuity Man?" I said, “You got him, you got him on the phone. Absolutely.” He said, “I need to fill the gap between when I’m 60 and 70 because at 70, Social Security kicks in, blah, blah, blah, and all this stuff happens at that time.” So, we bought him a 10-year period certain annuity that’s going to pay for just those 10 years. Now, in that case, life expectancy has nothing to do with it because it’s just for 10 years.

Customizing Your Annuity Policy

To get into the weeds a little bit, you could also do a life annuity with a 10-year period. That means it’ll pay you for life, but if you die in year two, your beneficiaries will get eight more years of payments. Bottom line: it’s customizable. The quote parameters and structures can be tailored in 30 or 35 different ways, depending on what you want to achieve. When you answer the two questions I always ask—“What do you want the money to contractually do?” and “When do you want those contractual guarantees to start?”—I’ll follow up with another important question: “Do you want your beneficiaries to have the money if you die early in the contract?” That additional question will help me structure the policy for you.

Annuity Product Types

We’ve talked about some of the annuitized products in the past, such as Single Premium Immediate Annuities (SPIAs), Qualified Longevity Annuity Contracts (QLACs), and Deferred Income Annuities (DIAs). These are annuitized products where you can set it up, transfer the risk, and ensure you’re paid for life—or a period certain if you want that as well.

Now, Income Riders are attached benefits to policies like Variable Annuities or Indexed Annuities. They also provide a lifetime income stream that you can never outlive, and it's based on your life expectancy at the time you take the payment, just like all lifetime income guarantees. But visually, here’s how to think about it: Draw a line down the middle of a page. On one side, you have variable or index growth. On the other side, you have the Income Rider. Two separate calculations.

When you attach an income rider to these policies, typically, it grows by a large percentage until you start taking income. Then, you take that amount, and that's what your income stream is based on. It’s a return of principal plus interest. Once you take income, it starts withdrawing from both sides of the ledger. And if you die, 90% of the time, your death benefit is based on the accumulation value.

Key Takeaways on Lifetime Income

So, what you need to know about lifetime income in a nutshell is: 1) It’s based on your life expectancy at the time you take payments. 2) It’s a pure transfer of risk solving for longevity risk. 3) You should always shop all carriers because these are commodity products. Companies will bid on your business, so you need to shop around. At The Annuity Man, we can help you do that, ensuring you find the highest contractual guaranteed payout for your specific situation.

Conclusion

Before I go, don't forget to download our annuity owner's manuals, which you can download for free, at no cost, and with no obligation. Nobody’s going to call you or show up at your door.

So, go to The Annuity Man for quotes, to use our annuity calculator, listen to podcasts, read blogs—just everything. I’m the annuity educator in addition to being the top annuity agent. I think I’m the top annuity agent because I’m also the top annuity educator. I need you to understand fully what you’re going to buy. And there’s never any urgency to buy an annuity—just urgency to understand it before you do.

Thank you for joining me today, and I’ll see you on the next Stan The Annuity Man blog.