When it comes to annuities, people often wonder, “Is this annuity an investment or insurance?” It’s a fair question, and one that can be confusing. Annuities have unique features that make them seem like both, but at their core, they serve a specific purpose. Let’s break this down to make things clearer.

Defining Investments and Insurance

To understand annuities, it helps to first look at what investments and insurance are separately.

Investments: An investment is something you put your money into with the hope that it will grow, either through income or capital gains.

Insurance: Insurance is designed to protect you from a loss. Its purpose is to make you whole again if something bad happens, like damage to your house or a car accident.

With most insurance policies, you don’t get a benefit unless something goes wrong, like a fire in your house. No one buys insurance expecting to make money—they buy it to avoid losing money.

Annuities Can Be Both: A Unique Product

This is where annuities are different. They combine both ideas—insurance and investment—into one product.

Annuities can protect your principal, which is like the insurance part.

They can also grow your money, which is the investment part.

Some annuities, like fixed index annuities, multi-year guaranteed annuities (MYGAs), and income annuities, protect your money while helping it grow. These are still considered insurance products, even though they can earn you gains.

When Annuities Are Investments: Variable Annuities and RILAs

Not all annuities work the same way. Some, like variable annuities and Registered Index Linked Annuities (RILAs), are a bit different. These are more like investments because there’s a chance you could lose money.

Here’s a simple comparison:

Annuity Type	Risk of Loss	Considered Insurance or Investment?
Fixed Index Annuity	No	Insurance
Multi-Year Guaranteed Annuity (MYGA)	No	Insurance
Variable Annuity	Yes	Investment
Registered Index Linked Annuity (RILA)	Yes	Investment

So, if you could lose money, it’s more like an investment. If your money is always protected, it’s considered insurance.

How to Measure Annuity Returns

Annuities are often compared to investments like CDs or other securities. One way we measure annuities is by looking at their returns, which tells us how much they pay back over time.

For example, a multi-year guaranteed annuity (MYGA) might offer a fixed interest rate, much like a bank CD. If we look at an income annuity, we measure it based on how much income it can provide over time and how much return you’d need to get the same income from an investment.

Let’s consider a simple case:

A couple funds an income annuity with $100,000.

Over 10 years, they receive $7,000 per year in income, totaling $70,000.

After their passing, there’s a death benefit of $30,000.

In this case, the internal rate of return (IRR) is 0%, but it did exactly what it promised—it returned all the money either through income or death benefits.

A Closer Look: Income and Return Examples

Now, what happens if just one person from the couple lives to age 95? In this case, the internal rate of return would be 6.4%. That means the income they received would be equivalent to a 6.4% return on their original $100,000 investment.

If we compare that to an investment product, let’s consider the fees and returns:

To match this annuity’s 6.4% return, an investment would need to earn 8% per year after management fees.

Management fees for investments typically range from 1% to 1.5%.

Here’s a simple example:

Scenario	Needed Annual Return	Fee Considered?
Annuity (Income for Life)	6.4%	No
Investment (With Fees)	8%	Yes (1.5% fee)

Are Annuities Investments or Insurance? A Final Answer

So, is an annuity an investment or insurance? The answer is that annuities are insurance products. They are designed to protect you by transferring risk—just like other types of insurance.

With life insurance, you’re transferring the risk of dying too early to the insurance company. With income annuities, you’re transferring the risk of living too long and outliving your money.

Annuities provide guaranteed income for life with no market risk. They are a safety net for your retirement and offer something that no traditional investment can guarantee.

The Purpose of Annuities: Transferring Risk

One key point to remember is that annuities aren’t about maximizing returns like traditional investments. They are about transferring risk to the insurance company so you can have peace of mind in retirement. You won’t know your real return on investment (ROI) until the end of your life, but you can be sure that you’ll have guaranteed income no matter how long you live.

That’s something no other investment can offer, except for variable annuities with an income rider—and even then, they usually pay less than fixed annuities with an income rider.

Conclusion: Ready to Learn More?

If you’re ready to understand how annuities can fit into your retirement plan, check out my video series, “20 Percent More Spendable Income in Retirement”. After watching, you can schedule a quick call with me to see if the Atlas Annuity Strategy will work for you. Simply click on the Schedule a Call button.

Episode 47: Is An Annuity An Investment or Insurance?