• Brian Bass

Annuities can provide confidence when markets correct.

Updated: Jan 28

During periods of extreme market stress, it can be easy to make emotional decisions as account values plummet. Having an annuity as part of a diversified portfolio can help to avoid making knee-jerk reactions and stay with the long-term investment strategy.


In their most simple form, annuities are contracts between an investor and an insurance company. The investor surrenders a lump sum of money to the insurance company in exchange for a guaranteed, predictable stream of income. There are many different funding options and variations to these contracts, but the endgame is a "paycheck" that lasts for the life or lives of the contract owner(s).

When emotions become intertwined with investment decisions, mistakes are often made.

The two types of annuities I want to discuss through the lens of behavioral finance are the Single Premium Immediate Annuity (SPIA) and Variable Annuity (VA) with a guaranteed income rider. Each has very specific characteristics and applications within a portfolio.


Single Premium Immediate Annuity


As the name implies, a SPIA is an annuity purchased with a single premium payment where income payments begin within a short period of time (typically the following month). These products are great for retirees who no longer want the responsibility involved in the complexities of managing their retirement income plan or for those who prefer to shift investment risk to the insurance provider. SPIAs are offered by virtually all major insurers and are priced (the rate of payout) according to market interest rates.


Variable Annuity - Guaranteed Income Rider


A variable annuity is a complex investment product that links its internal rate of return to a portfolio of stocks and bonds. Most of the time the owner has a wide variety of investment choices and can allocate funds up to a specified level of risk. These products often come with numerous bolt-on options and can provide a wide array of protections and benefits. The VA itself is a great vehicle for tax-deferred growth but when a guaranteed income rider is added, it becomes something very different.


The guaranteed income rider on the VA serves several functions. First, they typically provide some amount of guaranteed return on the value by which the amount of annual income is calculated. A guaranteed 5% simple interest credit, for example, can serve to increase the benefit base each year for the provided term. Second, while the market value of the product fluctuates, the benefit base is typically guaranteed by the insurer never to go lower than the purchase payments plus the annual interest credit. This can get incredibly complicated but the underlying idea is that the insurance company will provide a guaranteed return on your money as you approach the income start date. Finally, because the benefit base is guaranteed, an income rider essentially locks in the value of the invested capital as of the initial investment date.


Staying the Course


When emotions become intertwined with investment decisions, mistakes are often made. As investors near, enter and live through retirement, many of these emotional mistakes revolve around the fear of running out of money. When markets experience significant losses over a short period of time, people begin to panic over the thought of not having enough money to reach their goals. Arguably, this is where owning an annuity can make the most difference. When combined with a comprehensive, tax-efficient withdrawal strategy, the presence of guaranteed income can provide piece of mind that while markets may be down, the next "paycheck" is going to show up on its normal day.



All product guarantees, including optional benefit riders, are based on the claims paying ability and financial strength of the issuing insurance company. The optional riders associated with variable annuities carry additional costs and have restrictions. The riders are only available through the purchase of a variable annuity contract, and they must be utilized within the specific confines of the individual contract and may be voided if these guidelines are not followed. Please see the prospectus for complete details.


Investors should consider the investment objectives, risks, charges, and expenses of the variable annuity and the underlying subaccounts carefully before investing. The prospectus contains this and other information about the variable annuity. Read prospectus carefully before investing or sending money.