Annuities seem to be a scary subject. Consumers are scared about getting burned because financial celebrities say annuities are evil. Carriers are scared about the impacts to their capital. Producers are scared about compliance and suitability rules. Yikes!

Are annuities really that scary? Not in the textbook sense. When you think back to the 10th grade, remember learning about annuities in math class? They were defined the same way Wikipedia defines them:

“In finance theory, an annuity is a terminating ‘stream’ of fixed payments, i.e., a collection of payments to be periodically received over a specified period of time.”

Annuities were a subject under the category of “time value of money.” They helped us understand how to turn a lump sum into a stream of payments and vice versa. You could just plug in interest rate assumptions, the number of payments and either the principal or the payment amount into a formula and solve. Remember the HP calculators in 1984 that did the math for you? The annuity was pretty straightforward and nothing to really be scared about. In a geeky way, it is sort of cool!

So why all the fear?

In an open-minded opinion, it’s the misalignment of intention that’s scary, not the annuity.

Let’s face it. The Annuity with the capital “A” is not the same as the annuity with the lowercase “a.” Generally, the annuity is just a math equation. It can be designed to last any length of time or a lifetime. Today, however, the industry has designed it to try and outwit its assumptions, with the return as the main attraction.

Variable annuities, GMIB Annuities, Indexed Annuities…these “innovations” are the ones with the capital “A.” They are used to defer taxes and possibly even make up for a boomer’s shortfall in retirement savings. In order for them to work, they have to sustain some pretty fancy assumptions. That means someone in the equation is taking a big risk.

Were those products driven by what consumers would buy or what carriers could sell? No wonder annuities are scary. Have we forgotten the purpose?

The purpose of the annuity is to manage large sums, whether owned or owed. That’s it!

Very few know that. In fact, a 2010 study indicates that the general population, Gen Y in particular, has no clue what an annuity is. The industry will blame it on complexity, but really the annuity is simple. Good advice comes from helping people see it that way.

Forget market return assumptions. Forget indexes. Imagine only how an annuity really works. Go ahead, plug in the numbers. Decide what is realistic. Determine how to fund it and how long to take the income. Only people scare people.

An idea without an insight is just an invention. An idea driven by insight is an innovation.