Annuities: what they are and why most people don't need them

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