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An annuity is an insurance contract. You pay an insurance company a lump sum (or a series of payments), and they promise to pay you a stream of income, often for life. There are several types, and they vary enormously in cost and complexity.
The main types
- Single Premium Immediate Annuity (SPIA): give them money, get monthly income for life starting now. Simple. Often reasonable.
- Deferred Income Annuity: give them money now, payments start in 10-20 years. Useful for longevity insurance.
- Variable Annuity: your money is invested, payments fluctuate with returns. Often complex and expensive.
- Indexed Annuity: return is tied to a stock index with caps and floors. Almost always loaded with hidden fees.
When they make sense
- You're worried about outliving your savings (longevity risk)
- You want income you can't outlive, regardless of how long you live
- You have substantial assets but want a guaranteed income floor
When they're being sold to you wrong
- The salesperson works on commission and aggressively pushes complex variable or indexed products
- There's a 7-10 year surrender charge that traps your money
- Fees are 2-4% per year, eating most of the return
- The pitch involves the words 'guaranteed' and 'stock market gains' in the same sentence
What this lesson is NOT
This is not a recommendation for or against buying an annuity. Whether one fits depends on your other income, your health, and the specific contract's fees and terms, which range from reasonable to predatory. This lesson helps you ask the right questions and spot a bad deal, not choose a product. Read the contract, and be wary of anyone paid a commission to sell you one.
Test what you learned5 questions · ~2 min
Quick check on this lesson
Answer each question and we’ll show you why the right answer is right, and why the others aren’t.
- 1.
Per the lesson, what is an annuity?
- 2.
Per the lesson, what is a Single Premium Immediate Annuity (SPIA), and how does the lesson characterize it?
- 3.
Per the lesson, when does an annuity actually make sense?
- 4.
Per the lesson, what are the warning signs that an annuity is being sold to you wrong?
- 5.
Per the warning callout, what should you do if someone is recommending an annuity that pays them a 7-10% commission?
0 of 5 answered
Reflection (private to you, stored locally)