Types of Annuities: How to Choose

Stan The Annuity Man, America's annuity agent, here with you once again. Today, we're talking about how to choose annuities. With so many types out there, how do you decide? A lot of people say, "I hate all annuities." That's like saying you hate all restaurants, trucks, shoes, or socks. It makes no sense because annuities come in many types. There are Variable Annuities, Fixed Annuities, Deferred Income Annuities, and Single Premium Immediate Annuities. So, how do you choose between them? That's what we’re going to cover today. It’s going to be informative—think of it as a firehose of information. Let's get started.

Forget the Hype—Annuities Are Contracts

Forget the sales pitch, the hype, and the too-good-to-be-true nonsense you hear on TV or radio commercials. Annuities are contracts, plain and simple. They’re transfer-of-risk contracts. The starting point for choosing the right annuity is simple: ask yourself two questions.

The first question: What do I want the money to contractually do? Got that? Let me repeat it: What do I want the money to contractually do?

Second question: When do I want those contractual guarantees to start? Write these down—underline "contractual" and put it in bold if you're typing. Annuities are contracts; you should never buy them based on hypotheticals, theoretical projections, or back-tested hopeful returns. Don’t buy the dream; buy the reality. You're going to own a contract that provides real, contractual guarantees.

The PILL: A Simple Way to Decide

To help guide your decision, I’ve created an easy acronym called PILL. It stands for:

• P: Principal protection
• I: Income for life
• L: Legacy
• L: Long-term care/confinement care benefits

If you don't need to solve for one or more of these goals contractually, then you probably don’t need an annuity. It’s that simple. Ask those two questions, then evaluate whether your needs align with PILL.

When people say, "I want a reasonable rate of return," I cringe. What does "reasonable" mean to you? Some people say 7-8%, but guess what? That's not realistic with annuities. If you aim for 7-8% returns every year for life, they would build a statue of you on Wall Street. Annuities are not about market growth. If you want market returns, don’t buy an annuity. That includes Indexed Annuities, which are CD-like products with limitations.

Indexed Annuities and Variable Annuities

Let’s talk about Variable Annuities and Indexed Annuities. I don’t sell Variable Annuities because I focus on contractual guarantees. Variable Annuities do offer market growth, but even they have limitations on mutual fund options—called "separate accounts." If you’re seeking market returns with limitations, you’re in the wrong place.

As for indexed annuities, they're essentially CD-type products. They were designed in 1995 to compete with CDs. They have limitations on the upside and are generally not meant for market growth.

How to Choose: Narrowing It Down

Now, back to our two questions and how they narrow down your options. Let’s walk through some scenarios.

Scenario 1: Immediate Income

What do you want the money to contractually do? I need income to start right now. Got it. When? In 30-60 days. This means you’re looking at a Single Premium Immediate Annuity (SPIA). It's that simple. Once you know this, you can go to The Annuity Man and run a quote using my proprietary annuity calculators.

Scenario 2: Lifetime Income Later

What do you want the money to contractually do? I need lifetime income. When? Seven years from now. This narrows it down to either a Deferred Income Annuity (DIA), an Income Rider attached to a Variable or Indexed Annuity, or a Qualified Longevity Annuity Contract (QLAC). You’ll be able to get quotes for all of these options as well.

Scenario 3: Principal Protection

What do you want the money to contractually do? I want to protect my principal and not lose a penny. When? I just want some CD-type interest. This narrows you down to two products: a Multi-Year Guarantee Annuity (MYGA) or a Fixed Index Annuity. Both of these products offer principal protection.

The Importance of Guaranteed Income

Most people are looking for guaranteed income. With 10,000 baby boomers retiring every day, they’re all seeking guarantees. If you want guaranteed income right now, then you’re looking at a SPIA. If you want it later, you’ll consider a Deferred Income Annuity, a QLAC, or an Income Rider.

You can approach income in two ways. If you need income now, it’s a simple Immediate Annuity. If you want income in the future, say 7-10 years from now, we can quote a Deferred Income Annuity or reverse-engineer a quote for a specific future income amount.

Customization Is Key

The bottom line is that annuities are customizable—they are not one-size-fits-all. Think of it this way: if a doctor were prescribing one specific medicine to everyone in a room, would that make sense? Of course not. The same goes for annuities. You need to ask those two questions and then look at the PILL framework. You may even decide that you don’t need an annuity at all.

Long-Term Care and Legacy Benefits

Let’s briefly discuss long-term care and legacy. If you can’t qualify for traditional long-term care, specific riders cover long-term care and confinement care. The same goes for legacy. If you can’t qualify for life insurance but still want to leave a death benefit, you can purchase annuities with a death benefit rider that provides guaranteed issue coverage.

Conclusion: Connect With Me

I know that went fast. To make sure you have the best understanding of which annuity product fits your needs, visit The Annuity Man to connect with us directly. We're here to answer all your questions.

Additionally, I’ve created six Annuity Owner’s Manuals that I’m offering for free and with no obligation. You can download them here. Educate yourself between videos, podcasts, and articles I write daily.

Thank you for joining me today. I’ll see you next time on Shooting it Straight With Stan.