Steve Jobs famously said that "simplicity is the ultimate sophistication." This statement should be the guiding force behind any decision to buy an annuity. The vast majority of annuities sold today are so complex that only the actual product designers can fully explain the details of the policy.
Deferred variable annuities and indexed annuities represent an estimated 80% of all annuities sold annually in the country, with most offerings being so complex that most policy owners cannot explain the basics of the contract. If you own an indexed or variable annuity, you are probably nodding your head in agreement, and still wondering what you actually have.
Index annuity option strategies and variable annuity separate account choices in combination with an array of attached benefit rider choices has created confusion and given rise to misinformation and misunderstanding from the consumer's standpoint.
The harsh reality is that annuities should not be considered as growth products, even though that's how most are sold. Even the best no load variable annuity with over 300 separate accounts, is still limited from a growth "choices" standpoint. The annuity industry vehemently disagrees with me on this, but the facts support my annuity "nonmarket growth" argument.
All products eventually need to be stripped down to their simplest form. For annuities, that means income. Annuities were designed to produce a lifetime income stream when they were first developed, and despite the recent product design confusion, nothing has changed. Annuities provide income that can start right now or start at a later date. With some annuity riders, you also have the option of never taking income, and using the income amount for a contractual death benefit.
Annuities should be just that simple, and it's frustrating to see the industry continually creating complex product offerings that cause confusion.
The true value of an annuity is when your account reaches zero, and your are on the annuity company's side of the ledger. That's the purest definition of transferring risk. The annuity company prices all lifetime income streams on the annuitant/person's life expectancy. In short, they know when you are supposed to die.
You are in essence taking that bet that you will live longer, and then transferring the risk to the insurance company to pay you regardless of you long you live, even if you live to some ridiculous age like 120. The same goes for setting up a joint payment with you and your spouse. The bottom line is that you aren't going to outlive your income, which is described today as solving for longevity risk.
Single premium immediate annuities are the primary strategy for income now, and your income stream starts a month after the policy is issued and continues until you die. It also can be structured so that all unused money goes to your listed beneficiaries.
The same actuarial rules apply even if you are going to start your annuity income stream at a future date. At the time you turn on the annuity income stream, your payment will be based on your life expectancy.
Longevity annuities (deferred income annuities) came on the scene around seven years ago, but have become popular only within the last two years. In essence, this strategy is a deferred immediate annuity. Using deferred and immediate to describe the product is probably the reason why the word longevity is now used. You can defer this product for as long as 45 years, and there is no market attachment. This is a future pension product, with no fees, and a low commission.
The other annuity strategy for income later is attaching an income rider to a deferred annuity. Because I only show contractual guarantees, I consider deferred annuities like variable and indexed annuities as nothing more than delivery systems for income riders.
I could care less about any type of market growth potential with funds or index options, and only look at the rider growth percentage guarantee along with the guaranteed payout at the time income is taken. With an income rider, you can know to the penny what your future income stream will be, and that's where your decision should be made. Income riders are flexible, and the fees are only taken out of the investment side of the ledger.
Most income riders that have been attached to deferred annuity policies are never accessed for income, go unused, and only provide revenue to the annuity company. Sad, but true. Income riders have been around for about 10 years, and really started becoming popular after the last market correction in 2008. Ever since that time, the dream of having both growth and guarantees have boosted deferred annuity/income rider sales to hundreds of billions per year.
If the possibility of "income never" exists in your mind, my advice would be to consider an income rider that can also be used as a death benefit in case you never use the rider for income. They are few and far between but most income rider/death benefit combinations pay out the death claim over a five-year time period instead of lump sum. If you don't have this legacy type provision, then that income rider that has been contractually growing by 5% to 8% is nothing more than monopoly money if not used for income.
Whether you are looking for income now, income later, or income never, always look at three to five different carriers that solve for the specific problem before making a decision.
Always base your decision only on the contractual guarantees, not hypothetical market numbers, and remember that annuities should primarily be used for income — not growth.