BTW - By The Way, IMPO - In My Professional Opinion - the answers to the title questions are "No" and "No."
According to Christine Benz (and I agree,) annuities spark "both deep confusion and heated debate." There are many reasons for this fact. Starting with the additional fact that there are now many flavors of annuities, and usually some variations of each flavor.
"The most straightforward annuity is the (SPIA) Single Premium Income Annuity, or SPIA. The proposition here is that you turn over a large chunk of cash to the insurer, which then begins sending you a monthly payment, either immediately or up to 13 months after the purchase."
Concrete Financial Example using theoretical 5%.
- Lump sum: $500,000
- Interest rate offered: 5%
- Guaranteed Lifetime Income: $25,000 annually
How might the above be in the hypothetical client's "best" ("fiduciary") interest.
. . . . .
Let's hypothesize that "Mrs. Smith" is a 70 year old very healthy widow living in an inexpensive part of the country and owns her home outright no mortgage. Let's further assume her late husband had an OK career so she can draw his Social Security of $2,000 per month in addition to the SPIA income of $25,000 per year. We will also simply state that this situation is not one that many people in major US cities might wish to find themselves in. Some others might be very OK with it. But in many of the more inexpensive parts of the country, barring any financial catastrophe, Mrs. Smith has a chance of living out her life in dignity.
It is also the case that most people in this situation would feel they had very little margin for error. She might probably want a good supplemental health insurance policy to cover what Medicare doesn't. And hopefully she can cook for herself and enjoys it. Even better if she has a nice social circle based around e.g. church where she can healthfully socialize without the ongoing regular expense of restaurants, which could be a budget-buster.
A totally different example:
A court & judge have to provide lifetime income for a much younger person who has been in an unfortunate car accident. Without complicating this example unnecessarily, a conservative judge and / or guardian might want to make certain that a person who was unable to live a completely normal life and take care of herself regarding a job, living independently, etc. would want to make sure that at least one source of income was guaranteed, stable and with no surprises. One "flavor" that I haven't yet mentioned might be an SPIA with a COLA added to it. A possibility.
Here is a 3rd. A variation on a theme:
Mrs. Smith takes ill. Her medical expenses are covered by Medicare and a Supplement. But she can no longer completely take care of herself. In the parlance of Long Term Care, she is unable to perform "2 of 6 ADL's - "Activities of Daily Living" without the physical help of another person. Luckily, such a person exists. Mrs. Smith has a close friend whose daughter-in-law has the ability to fit in some care-giving with the rest of her life. While on the one hand Mrs. Smith's daily living expenses go down, she will have to pay the caregiver. This situation is a moving target over time and different in different states. Maybe easier to do in some states than in others.
Medicare will not pay for Long-Term Care. But Medicaid will. The current situation, while, again, perhaps different in different states, is fundamentally draconian. "Informal" caregivers almost certainly are paid less than formal, fully licensed ones. But the alternative for the Mrs. Smiths of the country might be to go into a facility. Most people with "normal" brain and emotional function but physical incapacities would prefer to stay in their own homes. If the $500,000 were liquid, Medicaid typically wouldn't help until it is "spent down." With an ongoing income annuity - let's make it easy and say it is "Medicaid friendly," Mrs. Smith could stay in her own home, receive informal care and potentially be there quite a long time because neither the Social Security or the SPIA income will ever "run out."
But wait a minute ....
Adding some complexity. Mrs. Smith's daughter might object. What happens if Mrs. Smith has a stroke or fatal heart attack? What happens to the $500,000. Answer - not quite the same thing as the Social Security, which ends. Mrs. Smith can buy a SPIA with 15 years certain. There are financial trade-offs. But if her untimely death occurred in year 2, then the beneficiary would receive that same income for 13 more years. Problem not exactly solved with a lump sum. But not a zero inheritance!
There is often no one right answer for any situation. Maybe 2, 3 or even 4. If we change up the facts a bit and give Mrs. Smith $1,000,000 rather than $500,000, many would consider keeping the SPIA for $500,000 and investing the other $500,000 a little more aggressively. At the given original numbers, Mrs. Smith probably needed all the income and had little or no margin for error. In some ways a more challenging situation, but in others not really. She needs the income. She can get the income. With no investment fluctuation as long as the insurance carrier guarantee holds up. Some would sleep better at night that way.
These examples are hypothetical only, and do not represent the actual performance of any particular investments.
The guarantee of an annuity is backed by the claims paying ability of the issuing insurance company.