Annuities

An annuity is a contract with an insurance company: you pay a premium (either as a lump sum or a series of contributions), and in exchange, the insurer guarantees a stream of periodic payments for a set term or for life. Annuities are frequently sold, but rarely bought; they are heavily pushed by commission-hungry brokers, meaning you must approach them with extreme skepticism.

For high-net-worth investors, commercial annuities are rarely the primary driver of wealth. An investment portfolio of low-cost equity index funds and municipal bonds offers far higher growth potential, lower fees, and total liquidity. However, annuities can serve as a behavioral tool to build a guaranteed cash flow floor, transferring longevity risk to the insurer.

If you are a high-income Californian facing a combined marginal tax rate near 50%, deferred variable annuities can act as a tax-deferral wrapper. Your assets grow tax-deferred, though you surrender capital control and the eventual distributions will be taxed as ordinary income rather than capital gains. If you go this route, buy direct from a no-load provider — the fee comparison at the end of the RILA discussion below is the entire decision.

One more constraint the sales material will not raise: an annuity is an unsecured obligation of the issuing insurer, and your backstop if it fails is the state guaranty association, typically covering $250,000–$500,000 of present value per insurer per state. Above that, you are an unsecured creditor. Size positions to the guaranty limit and split a large allocation across several highly-rated carriers instead of concentrating everything with a single issuer.