Annuities: The Definitive Guide

You often see commercials explain annuities as retirement strategies to never outlive your money. Annuities are a strategy to get regular, stable payments at a later time.

  1. What is an annuity?
  2. What is an annuitant?
  3. Quick summary
  4. Types of annuities
  5. Pros and cons
  6. Why retirement planners love annuities
  7. Reasons people buy
  8. Reasons people pass
  9. Who should consider an annuity?
  10. Annuity versus pensions
  11. How much money should you put into an annuity?
  12. Lifetime vs. fixed period payments
  13. What happens to your annuity when you die?
  14. Conclusion

What Is An Annuity?

An annuity is a contract between you and an insurance company. You exchange money now for a guaranteed stream of income later. 

It’s a financial plan for never outliving your money – one of the most common retirement worries. 

What Is An Annuitant? 

The annuitant is the person who will receive the income from the annuity. Typically, this person also owns the contract. 

However, in some cases, the spouse of the contract owner can continue to receive the annuity payments after the owner passes. 

Quick Summary

Annuities pay you back more money later than you pay into it now. It’s a contract between you and an insurance company for creating a stable, dependable income stream during your retirement. 

Types Of Annuities

Like virtually every financial product, there are tons of variations to suit different goals. This also makes it confusing for people looking into annuities for the first time. 

There are three main types: 

  • Fixed annuities
  • Indexed annuities
  • Variable annuities

Each has different pros and cons. Consider your financial planning goals and your risk tolerance. Those are good indicators of which type is right for you. 

But before we get into that, you can purchase each type above as either an immediate or deferred annuity. 

Immediate vs. Deferred Annuities

This one is simple. Immediate annuities begin paying you immediately. Deferred annuities grow (tax-deferred) for a while before they start paying you. 

Fixed Annuities

Fixed annuities grow at a set rate – usually a fairly conservative one. 

While all annuities provide peace of mind about outliving your money, fixed annuities are the most stable version. The company invests in stable investments with low risk, so the return is also low. 

The difference between a fixed annuity and a certificate of deposit is that the annuity grows tax-deferred. In contrast, you pay taxes on your CD growth each year. 

Indexed Annuities

Indexed annuities tie their growth to market indexes. While the company may invest elsewhere to try beating the marketing, the indexes determine the rate of return in your account. 

Variable Annuities 

Variable annuities give you a variety of sub-accounts to choose from. These are typically professionally managed funds – like mutual funds. 

The important part to note is that some of these funds have yearly management fees. It’s usually a small % of the amount in the fund that pays for the fund manager’s time and expertise. 

There is good news though, you can end up with larger annual payouts than with a fixed annuity. But with bigger rewards, there is a bigger risk. The insurance company doesn’t guarantee that you will make anything beyond the principal. 

Variable annuities are better options for people with a higher risk tolerance – and a backup income stream if things go wrong. 

Pros and Cons of Annuities

Not everyone needs an annuity. If you have enough money to fund your retirement entirely and leave a bunch to your heirs, annuities probably aren’t for you. 

Likewise, if you are approaching your retirement and counting on social security to see you through your golden years, it’d be a wiser course of action to meet with a financial planner and have a path laid out that fits your circumstances. 


  • Guaranteed income stream
  • Good for covering known expenses
  • Passive income – set it and forget it
  • Little to no market risk


  • Check for management fees
  • Other investments have higher rates of return
  • Many policies don’t leave anything to heirs

Why Retirement Planning Professionals Love Annuities

Retirement planning research shows that portfolios containing annuities are more stable than those without them. They virtually always outperform other safe investments, like CDs or government bonds. 

Portfolio failure becomes a mounting concern when they approach and enter retirement. If the market crashes or the government makes changes to social security, it can leave a retiree in a tough position. Adding annuities to your retirement planning drastically reduces the likelihood of portfolio failure. 

Another study shows that choosing a single premium fixed annuity instead of bonds or variable annuities can preserve your assets while allowing you to meet your spending goals better. 

In short, retirement planning professionals love annuities because they’re stable without being stagnant. They will still provide when you wake up one morning to a stock market crash that would otherwise destroy your portfolio.

Reasons To Get An Annuity

Annuities are a guarantee as long as the company stays in business. You will get the same amount every month as long as you live.

This creates a stable financial environment for known, fixed expenses. For example, you may know that you’ll need to pay a certain amount for health insurance and bills each month. You can set up an annuity to cover these fixed expenses for life. 

Annuities are a fantastic set-and-forget money management strategy. Finance blogs call this “passive income” nowadays.

For every person who loves the ins and outs of investing and personal finance, there are a dozen others who just want everything to be taken care of. That way, they can focus on what’s important to them. 

Reasons To Pass

Other investment options grow your money faster. Annuities tend to have management fees that you pay each year, that’s on top of the commission to your agent. 

Something like an index fund can work just as well as a set-and-forget option with significantly lower costs.

Extremely high wealth families will also consider indexed universal life policies – this works best for younger people with time for the fund to grow.

If you have your retirement planning all setup and aren’t worried about money, you can also use these other investment avenues to double down on not outliving your wealth. 

Who Should Consider an Annuity? (And Who Shouldn’t?)

Anyone considering an annuity should be approaching retirement. Newly retired (since that can sometimes happen unexpectedly) is also an excellent place to look into it. 

Annuities don’t grow your money as fast as some investments, but they’re guaranteed to payout. High risk – high reward investments look great on paper to the optimist, but bubbles and crashes can decimate a portfolio. 

If you’re looking to fund the rest of your life, and your portfolio can’t withstand a market crash, an annuity is a good option for making sure that you don’t have to go back to work in your 70s or 80s. 

Annuities are not for the extremely rich or extremely poor. If your retirement plans are well funded and recession-proof, there isn’t much an annuity can do for you. If your retirement plan is to live off social security, you should speak with a fee-based financial planner. 

Annuity Versus Pension

Pensions and annuities are essentially the same things. One you purchase from an insurance company with money. The other your employer provides for you based on the time you put in making its money. 

Since most employers don’t provide pensions anymore, putting the responsibility of retirement planning on the individual, annuities are one method of giving yourself a pension.

How Much Money Should You Put Into an Annuity?

It’s difficult to anticipate precisely how much money you’ll need in retirement. All sorts of surprises come up, some of which you cannot control. 

The ideal solution is to get input from a financial advisor. That being said, a wise course of action in place of a financial expert standing by to help is to use an annuity to cover your known, fixed costs. 

There are some retirement tricks like a 401(k) rollover, which can save a retirement account if you suspect poor management.

Lifetime vs. Fixed Period Payments

Most people chose lifetime payments. They offer peace of mind for enjoying your golden years – regardless of how many you may get. 

Fixed payment annuities are another excellent option for covering fixed costs with known endpoints. You might use a fixed period annuity to cover any remaining mortgage payments, or perhaps you’re providing some financial support for your grandchildren. 

If the expenses you’re looking to cover with an annuity have a fixed period, then fixed period payments make sense. If not, they don’t. 

What Happens to an Annuity When You Die?

In most cases, the annuity will cease to payout. If you’re concerned about what happens if you pass before you receive the principal back, talk to your insurance agent. They can point you annuities that address those concerns.

Some plans will allow you to add a spouse. In this case, the annuity will keep paying your spouse after you pass. 


Annuities aren’t right for everyone. They’re best for people who are neither ultra-wealthy nor dirt poor. 

It’s an avenue for retirement planning worth exploring. After all, who doesn’t like the idea of trading money now for more money later? But make sure you understand the risks and taxes of any investment option before staking your retirement it. 

How Abrams Insurance Solutions Can Help

We are a small group of independent insurance agents who focus on helping families prepare for the future – no matter what that brings. 

If you have any questions about annuities, give us a call at 858-703-6178. We’re happy to walk you through it, and there is never any obligation to buy.