Straight life. This payout option means that you get your payment until you die. Period. Even if you exhaust all of the money you put in, you will still get your monthly check. This sounds like an excellent deal, but consider this: Insurance companies would not offer these plans if they were losing money. A few fortunate souls may outlive their annuity investment, but for the majority of cases, the insurance companies will win. They win if you die before you’ve exhausted your investment because they get to keep all of the remaining funds.
I take the position that this is too big of a risk (and the insurance companies agree, or they wouldn’t sell these things). If you follow my advice and retire a millionaire, you can keep the bulk of your funds invested and never have to touch the principal. If that is the case, then you will never have to touch the principal, and it will keep making you enough to live on even in poor performing investments like bonds. You can live to be 100 and still have a considerable chunk of cash to leave your kids or your cat (or do something awesome and endow a Chair of Criminal Justice). I view most of these insurance annuities as I do playing the lottery; it is just a tax on the uneducated poor that are scared and do not know any better.
Cash refund annuity. These work like straight life annuities, but if there is any money left over when you die your beneficiary receives any money left in your account. The downside is that your monthly payment is a lot less. The insurance company makes their money in fees rather than keeping your balance when you die.
Joint Survivor Life. With this type of contract, two individuals are the annuitants, and the payments continue as long as one of them is alive. This breed is marketed to couples successfully because logic dictates that one spouse will usually outlive the other. For married couples that didn’t save as much as they should have over their careers, this type of annuity is likely the best option.
These are just a few of the available types. Since these things are dreamed up by big companies and marketed to all kinds of people, the variety is virtually endless. There are some advantages, especially if you make a lot of money and need a place to hide it, or if you want to protect money from bankruptcy, FAFSA, and other risks. For most people, especially those in the helping professions, these things are a terrible idea. They are loaded down with fees, and most of your “profit” goes to the company that sold you the annuity. The money is tied up until you reach retirement age, and you can only get at it by paying some costly penalties. Because these are contract based, you cannot make an intelligent decision unless you understand the agreement; these things are so complicated an MBA would weep on reading it.
Not all annuities are bad, but most of them are. Some investment vehicles are called an annuity because of regulatory mumbo-jumbo, and these can be quite good. When managing my retirement account, I have at times invested in TIAA’s Real Estate Account. Right there on the cover of the prospectus, it says “annuity.” The prospectus is 286 pages long, but experience has taught me that this particular vehicle acts like a mutual fund with the equity backed by real estate rather than common stocks.
TIAA puts all of its cards on the table; they provide financial statements just like any other investment. This fund has made 6.45% since inception. That says to me that it is safer than stocks during a bear market, but I would not want to leave the bulk of my funds in there because of the low yield relative to other opportunities. This fund does, however, offer an excellent way to gain real estate exposure in a diversified portfolio.