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birb_cromble  1mo ago (text post)   948 thread views

Weekly Finance Thread - 2026-06-13

A weekly thread to discuss financial matters - from personal all the way up to global.

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Can someone more knowledgeable than I am explain what the purpose of an annuity is? They seem like a fixed income investment bound together with a life insurance policy. Is that the whole point? Am I missing something that makes them more attractive than that?

They are a means to have fixed income for you. And they are (usually) issued by life insurance companies.

Normal Term Life Insurance:

  1. at age 30, you pick a term life insurance to safeguard your family.
  2. You pay $1000 (called premium) to the insurance company every year and depending upon the risk of you dying, the company assesses its risk, and is ready to pay your family in case of your death, a sum assured amount like say $1 million.
  3. if you don't die in year 1, you pay $1000 next year (as premium) to continue having this benefit for your family.
  4. You do this for the term of your insurance policy. Say 30 years.

Normal Fixed Annuity:

  1. At age 60, you look at your portfolio and say that you need some kind of income throughout the rest of your life.
  2. You go back to the life insurance company, and pay it $1 million and the company says, okay now you got an income stream which we will pay throughout your life period. There are multiple options in an annuity and based upon the parameters, the company will pay higher or lower amount.
  3. If you don't have anyone around you, so you say to the company, I just want an income for my life, after that keep the amount with you. Depending upon how long the company thinks you may live, it can offer $60,000 a year all your life.
  4. If you have a kid(s) or some nephew/niece for whom you want to leave that $1M, you tell the company, I want an income stream while I live, then you give back that $1M to my nephew XYZ. So, they will reduce the amount to give to you, and will pay out say $30,000.
  5. Then there are variable annuities, inflation step up annuities, joint life annuity, joint life annuity with Principal back, etc.

So it's a bet between you and the insurance agency that you're going to live longer than they think you will?

A good insurance agency shouldn't force you to make the distinction. You should get a guaranteed income in retirement with a fixed tax deferred growth for a set amount of time. There are many ways to structure an annuity that should prevent the "betting" angle of a fixed annuity. Generally, if the annuity runs out of money the annuity won't provide income beyond the principal+fixed growth of the annuity.

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