A common point of confusion many people have about annuities is whether an annuity contract is an investment or insurance. It’s an important issue because the characteristics that make an investment a proper choice to meet someone’s needs are entirely different from those that determine the value of an insurance product.
What does that mean for people considering options for protected income in retirement? Well, let’s start with definitions. Merriam-Webster says an investment is “an asset intended to produce income or capital gains.” Insurance, is defined as “coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.” In a nutshell, investment is about pursuing profit, while insurance is about avoiding loss.
We don’t buy insurance and expect to profit from it. No pure insurance will be profitable for the average buyer; if it were, the insurer would go broke. Instead, insurance will “pay off” if the “insured peril” actually happens. In life insurance policies, that’s the death of the insured. In fire insurance policies, it’s a fire. What’s the “insured peril” in an annuity? It’s not having enough income when you need it. Annuities are fundamentally contracts for income. Some, such as immediate annuities