What is an annuity?
An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. You buy an annuity either with a single payment or a series of payments called premiums. These financial products are primarily used as an income stream for retirees.

Some annuity contracts provide a way to save for retirement. Others can turn your savings into a stream of retirement income. Still others do both. If you use an annuity as a savings vehicle and the insurance company delays your pay-out to the future, you have a deferred annuity. If you use the annuity to create a source of retirement income and your payments start right away, you have an immediate annuity. 

The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.


  • Annuities are financial products that offer a guaranteed income stream, used primarily by retirees.
  • Annuities exist first in an accumulation phase, whereby investors fund the product with either a lump-sum or periodic payments.
  • Once the annuitization phase has been reached, the product begins paying out to the annuitant for either a fixed period or for the annuitant’s remaining lifetime.
  • Annuities can be structured into different kinds of instruments: immediate, fixed or variable.

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Types of Annuities
Annuities are generally divided into two categories: those designed primarily to provide income, and those designed primarily as savings vehicles. All annuities can generate income through annuitization. However, the underlying designs and features are focused in either of those two ways.

Many savings annuities offer income guarantees beyond annuitization through an optional rider, although we still consider them savings annuities because that is primarily how they are used.

Income Annuities:
Include single premium immediate annuities (SPIAs) and deferred income

annuities (DIAs). This category also includes qualified longevity annuity contracts (QLACs), which are qualified DIAs that allow for income deferral past the age of required minimum distributions.


(Single Premium Immediate Annuity) – is an annuity contract that is purchased with a single payment and pays a guaranteed income that starts almost immediately. Also called a “single-premium immediate annuity (SPIA),” “income annuity,” or simply an “immediate annuity,” an immediate payment annuity generally starts payment one month after a premium is paid and continues for as long as the buyer is alive or for a specific period of time. The longer an annuitant lives, the better the return will be. Such annuities are especially suitable for retirees who are concerned about outliving their savings.


(Deferred Immediate Annuity) – A DIA is the same as a SPIA, but the annuity owner may defer taking annuity payments at some point in the future. 

An annuity is a financial contract that allows the buyer to make a lump-sum payment, or a series of payments, in exchange for receiving future periodic disbursements. A deferred payment annuity allows the investment, known as the premium, to grow both by contributions and interest before payments are initiated. A deferred payment annuity is also known as a “deferred annuity” or a “delayed annuity.”


Qualified Longevity Annuity Contracts are Deferred Immediate Annuities that guarantee that funds in a qualified retirement plan, such as a 401(k), 403(b) or IRA, can be turned into lifetime income without violating required minimum distribution rules for those turning age 70½. QLACs allow a spouse or someone else to be a joint annuitant, meaning that both named individuals are covered regardless of how long they live (with some conditions).

In effect, QLACs act as longevity insurance. As such, they are a valuable tool in retirement income planning. Under 2020 contribution limits, an individual can spend 25% or $135,000 (whichever is less) of their retirement savings account or IRA to buy a QLAC via a single premium. The longer an individual lives, the longer a QLAC pays out. QLAC income may be deferred until age 85.

Qualified Longevity Annuity Contract and Taxes

QLACs have the added benefit of reducing a person’s required minimum distributions, which IRAs and qualified retirement plans are still subject to even if an individual does not need the money. This can help keep a retiree in a lower tax bracket, which has the added benefit helping them avoid a higher Medicare premium. Once a retiree’s QLAC income begins flowing, it could increase their tax liability. However, if managed correctly any additional tax liability can be minimized if other taxable retirement savings income sources are spent down first.

Please contact our office to receive annuity quotes.

Savings Annuities: Include fixed rate annuities (FRAs), which are also known as multiyear guaranteed annuities, fixed indexed annuities (FIAs) and variable annuities (VAs). 


Fixed Annuity – insert definition


Fixed Index Annuity – insert definition


Variable Annuity – insert definition

Understanding the Immediate Payment Annuity


Immediate payment annuities can be a valuable retirement planning tool in that they provide a reliable and inexhaustible income stream. In effect, they function as a risk management tool that works like a mirror image of life insurance (which pays a benefit at death).


Payout Options – 


When to use a SPIA – Compared to other annuities, SPIAs typically generate more income in the first 0 – 5 years than fixed, fixed index and variable annuities.


Their simplicity makes them a popular option. No need to attempt to time the market or worry about distribution timing. Also, immediate payment annuities, as opposed to front-loaded annuities, can help lower taxes by deferring payments to a time when the annuitant is in a lower tax bracket.




The needs of a retiree, as well as the person’s age and life expectancy, will dictate which immediate payment annuity is the right choice. A few things to decide include whether to maximize income now with a fixed payout, or take a lower payout initially while indexing future payments to inflation.


Annuitants may also choose whether they want a guaranteed payout or a variable payout, which may include a base payout plus a portion that is tied to the performance of a stock index, or a payment entirely pegged to an index.


Annuitants may also decide how often they are paid, known as a “mode.” A monthly mode is the most common but quarterly or annual payments are an option.



One large drawback of an immediate payment annuity is that payments end upon the death of the annuitant. If an annuitant dies earlier than expected, payments stop and the insurer or financial institution that sold the annuity keeps the principal balance.

Since the annuity payments are terminated upon the death of the annuitant, financial advisors and planners do not recommend this type of annuity for retirees who are not in good health.


Some ways around this fact is by adding a second person to the annuity (joint and survivor), or guaranteeing that payments are made for a certain period, or seeing that the principal is fully refunded (refund annuity). Such provisions cost more, however.


Once purchased, an immediate payment annuity cannot be canceled for a refund of principal from the seller. This may pose a problem should the annuitant require access to a large sum of money to deal with an emergency.



  • Fees & Expenses



SPIAs & DIAs – No fees or expenses.


Fixed Annuities- No fees or expenses.


Fixed Index Annuities – No fees or expenses, however, FIA’s typically offer income riders that may be added at an additional cost. 


Variable Annuities have two expenses:

  • Mortality and Expense (M&E) – Insert definition and range of M&E costs
  • Expense ratio of sub-accounts – Insert explanation and examples.


The typical VA pays commission to the advisor out of the M&E charge, however, there are advisory VA’s that have relatively low internal charges and expense ratios. Financial advisory add their advisory fee to advisory VA’s.


Take away


A very common misconception is that “annuities” are expensive. If you read or hear this, they are referring to variable annuities. SPIAs, DIAs, QLACs, Fixed and Fixed Index Annuities do not have fees or expenses unless the annuity owner adds a rider.



  • Glossary of Annuity Product Terms





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  • How annuities are taxed






  • Pros & Cons of Annuities



Before we address the pros and cons of annuities, we’ll first characterize the “perfect investment”. The perfect investment has 6 characteristics:


  • Unlimited growth
  • Provides an income stream for life
  • 100% Liquid
  • Little risk
  • No cost
  • Tax-Free


Unfortunately the perfect investment does not exist, therefore you must build a portfolio comprised of various investments, that combined, strike a good balance of these characteristics. Although investments may offer multiple characteristics, they typically are used for a specific purpose. For example, one would typically use equities for growth in a portfolio, cash and bonds for safety and liquidity, and annuities for lifetime income, safety and tax deferral. 


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Annuity Pros:


  • Variable annuities may be used for growth
  • All annuities offer the potential for income. The annuity owner may choose how long the income will last. For example, SPIAs may generate income for a 5 or 10 year period, or for a lifetime for one or two lives.
  • All annuities other than variable annuities protect your principal from loss.
  • Generally speaking, with the exception of variable annuities, annuities do not have fees or expenses unless the owner adds an income rider. Mutual funds and ETFs have expenses.
  • Annuities are tax-deferred
  • With exception of variable annuities, protect a portion of your portfolio from stock market losses. 
  • With exception of variable annuities, protect a portion of your portfolio from Sequence of return risk.
  • Annuities with income riders have set payout rates that typically generate more lifetime income than safe withdraw rates.


Annuity Cons:


  • With exception of variable annuities, provide limited growth.
  • Limited liquidity – Annuities have surrender charges if you surrender your annuity during the surrender period, which it typically 7 – 10 years, sometime longer. However, annuities provide 10% annual penalty-free withdraws.
  • The income from the annuity is guaranteed by the paying claims ability of the insurance company, not a bank or federal government. With this being said, the risk of an insurance company not paying its obligations is an extremely low risk. Insurance companies are required to have a certain percentage of cash available to pay claims, if an insurance gets into financial trouble, typically another insurance company will purchase that book of business and if there is not buyer, each state insures up to $250,000 for a particular company.


  • Common objections not to buy an annuity



  • I hear that annuities are bad and not to buy them. My attorney/advisor/accountant/co-worker/friend/family member…told me not to buy an annuity. I did a Google search and read or saw a video where they listed all of the reason not to buy an annuity.


As we mentioned in previous sections, there is no perfect investment and you must know the characteristics of many investments in order construct the ideal portfolio. This is where financial education comes into play. Unfortunately, many people not have the expertise in annuities we have and don’t understand annuities. They are quick to point out the fees and expenses of variable annuities, but do not point out the benefits of safety of principal, lifetime income and tax deferral. Regarding some investment advisors, there are many people who have their own agenda and want to direct you away from a particular investment in order to sell you their money management. Ken Fisher is famous for bad mouthing annuities. How much income does Fisher Investments make on their advisory fees over a decade or two? It is certainly more than the commissions in an annuity. 


  • I can make more money in the stock market. 

Agreed, however would you use a driver on the putting green? Or a drill to cut a piece of plywood? The point being, use the appropriate tool for the job. Stocks are used for growth, not to protect your principal from losses, provide guaranteed income or defer taxes. Annuities have features that equites do not have and visa versa. 


  • I prefer buying individual bonds and constructing a bond ladder with various maturities.


Buying individual bonds and holding them to maturity has its pros and cons. The advantages are: Buying bonds is relatively inexpensive if you it yourself, you can sell the individual bonds on the secondary market if you need the cash and you have control over what bonds you buy.


The disadvantage of using a bond ladder to generate consistent income in retirement are:


    • Limited inventory – You may not be able to find enough different bonds to generate enough income each month or quarter.
    • Hard to generate adequate yield in our current global low-yield environment.
    • Bonds may be called.
    • Time consuming – Each time a bond matures, you must replace it and go through the process again.
    • Difference in the Bid/Ask spread may result in buying bonds less favorable than the price institutional investors purchase bonds.
    • The amount of capital required to generate the amount of income you will need is typically much more than the amount of capital required to purchase an annuity that produces the same income.


  • I don’t want to tie up a lot of money in an illiquid annuity.


As mentioned in the Pros and Cons section, there is no perfect investment. Therefore you must find the ideal balance of multiple investment to construct the optimal portfolio. We typically use annuities to fill the gap between your desired monthly expenses in retirement and the income other sources provide. The amount of income required determines the size of the annuity. There are suitability requirements and insurance companies typically will only approve 50% of your investments be in annuities.


Annuity owners have investments other than annuities such as stocks, mutual funds and ETFs that provide growth and liquidity.


  • I’m afraid the insurance company may go bankrupt.


The income from the annuity is guaranteed by the paying claims ability of the insurance company, not a bank or federal government. With this being said, the risk of an insurance company not paying its obligations is an extremely low risk. Insurance companies are required to have a certain percentage of cash available to pay claims, if an insurance gets into financial trouble, typically another insurance company will purchase that book of business and if there is not buyer, each state insures up to $250,000 for a particular company.



  • Insurance Regulation & State Guaranty Associations



Link to page https://irionline.org/government-affairs/annuities-regulation-industry-information/insurance-regulation-state-guaranty-associations



Understanding Annuity Basics – How Do Annuities Work?  




Deferred Income Annuities in Retirement Planning – https://www.youtube.com/watch?v=Kt42T0DPSRA


The Market Risk Premium https://www.youtube.com/watch?v=7SdKXshy4T4


Investment Risks: What Your Clients Need to Know – https://www.youtube.com/watch?v=UOkPCDn7dFo


Human Capital and Life Cycle Theory https://www.youtube.com/watch?v=Wuc7_o0h9oU


The 4% Rule is Not Safe (Part 1) https://www.youtube.com/watch?v=stMt5oCjcCw


The 4% Rule is Not Safe (Part 2) https://www.youtube.com/watch?v=RsckA7BCYAQ


How to Manage Risks in Life Cycle Planning https://www.youtube.com/watch?v=Q2jmtQjjPLg


Saving Too Much https://www.youtube.com/watch?v=88aJI0eeGhA 


A New Formula for Retirement Withdrawals  https://www.youtube.com/watch?v=7zJXcdPY4Hc&t=127s 


The counter argument to buying an annuity. https://www.youtube.com/watch?v=1ck-Unnld3s Do not put this on the website. Take each point an provide a counter argument.

What annuities good for?


What annuities are not good for.




Whiteboard animation 


An annuity is a contract between you and an insurance company in which you make a lump sum payment or series of payments and, in return, obtain regular disbursements beginning either immediately or at some point in the future.

The goal of annuity is to provide a steady stream of income during retirement. Funds accrue on a tax-deferred basis, and like 401(k) contributions, can only be withdrawn without penalty after age 59.5.

Many aspects of an annuity can be tailored to the specific needs of the recipient. In addition to choosing between a lump sum payment or a series of payments to the insurer, you can choose when you want to annuitize your contributions – that is, start receiving payments. An annuity that begins paying out immediately is referred to as an immediate annuity, while one that starts at a preset date in the future is called a deferred annuity.

The duration of the disbursements can also vary. You can choose to receive payments for a specific period of time – for example, 25 years – or obtain them until your death. Of course, securing a lifetime of payments lowers the amount of each check, but it helps ensure that you don’t outlive your assets.

Annuities come in three main varieties – fixed, variable and indexed – that each have their own level of risk and payout potential. Fixed annuities pay out a guaranteed amount based on the balance of your account. The downside of this predictability is a modest annual return, generally slightly higher than a CD.

You have the opportunity for a higher return, accompanied by greater risk, with a variable annuity. In this case, you pick from a menu of mutual funds that comprise your personal “sub-account.” Here, your payments in retirement are based on the performance of investments in your sub-account.

Indexed annuities are somewhere in between when it comes to risk and potential reward. You receive a guaranteed minimum payout, although a portion of your disbursements is tied to the performance of a market index, such as the S&P 500.

Despite their potential for greater earnings, variable and indexed annuities are sometimes criticized for their fees and their relative complexity. For example, many annuitants find that they have to pay steep surrender charges if they try to withdraw their money within the first few years of the contract.

An important feature to consider with any annuity is its tax treatment. While your balance grows tax-free, disbursements are subject to income tax. Conversely, mutual funds that you hold for over a year are taxed at the long-term capital gains rate. Additionally, unlike 401(k) accounts, contributions to annuities don’t reduce your taxable income. For this reason, some finance experts recommend annuities only after maximizing your contributions to pretax retirement accounts.