Annuity vs. Perpetuity

Annuities and perpetuities are insurance products that offer investors guaranteed streams of income in exchange for an upfront payment. Annuities are widely accessible and highly popular with retirees, but perpetuities are extremely rare.

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  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Professional

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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  • Edited By
    Lamia Chowdhury
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    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial editor at Annuity.org. Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

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  • Financially Reviewed By
    Stephen Kates, CFP®
    Stephen Kates, CFP®

    Stephen Kates, CFP®

    Principal Financial Analyst for Annuity.org

    Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

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  • Updated: October 30, 2023
  • 3 min read time
  • This page features 2 Cited Research Articles

Is an Annuity a Perpetuity?

While all perpetuities are annuities, not all annuities are perpetuities.

An annuity is a financial contract between an individual — the contract owner — and an insurance company — the issuer. In exchange for an upfront payment or a set of installment payments, the insurance company provides a named annuitant, usually the contract owner, a series of income distributions.

The distributions can be immediate or deferred and variable or fixed, depending on the nature of the contract. Regardless, the frequency of the payments is fixed, and they end at a specified point in time. Generally, the expiration date is defined as a certain number of years or the lifetime of the annuitant.

With a perpetuity, the duration of the income distributions is indefinite. In other words, they continue forever — into perpetuity, which is the origin of the instrument’s name.

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How soon are you retiring?

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What is your goal for purchasing an annuity?

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Key Differences Between Annuities and Perpetuities

The critical difference between an annuity and a perpetuity is the length of time income distributions are provided. As noted above, an annuity has a definite payout expiration date, while a perpetuity makes payouts indefinitely.

Another notable difference relates to their availability. There are many different types of annuities, with a range of features designed to meet the diverse needs of investors, especially retirees. At the highest level, they are categorized as either fixed, fixed indexed or variable.

Fixed annuities are the safest and most predictable, but they are relatively low-yielding. Fixed indexed annuities offer more upside potential, while providing a guaranteed minimum rate of return. Variable annuities offer the highest return potential, but they are exposed to downside risk.

Unlike annuities, perpetuities are extremely rare. In fact, it is difficult to pinpoint a single insurance company that currently markets such products. Today, the perpetuity vehicle appears to be merely a theoretical concept.

Annuity Example

A 55-year-old man buys a deferred fixed indexed annuity as part of his retirement plan. The contract, which names him as the annuitant, specifies a 10-year accumulation period to allow the initial investment to grow and monthly income distributions for life. When the man reaches 65 years old, the monthly payments will begin and continue until he dies.

Perpetuity Example

A 55-year-old man buys an immediate perpetuity with semiannual payments. The contract, which names him as the payment recipient, specifies fixed distributions to be made each Jan. 1 and July 1 forever, assuming the issuing insurance company continues to exist. When the man dies, his heirs will inherit the perpetuity contract and collect the payments.

Is An Annuity Right For You?

Our short quiz provides clarity on whether an annuity is a smart choice for your retirement portfolio.

Which Is Right for You?

An annuity is ideal for a person who needs to ensure he or she has a consistent stream of income for a finite amount of time, such as the period between retirement and death. In this scenario, it can be a highly effective way to mitigate longevity risk, which is the danger of outliving your savings.

A perpetuity would be a good choice for a person who wants to leave an income stream to a loved one or charitable organization after death. However, as noted previously, it is difficult to purchase a perpetuity because no insurance companies currently sell them.

That said, there are two investment vehicles that approximate a perpetuity: a perpetual bond and a preferred stock. The former, which is a debt security, offers a coupon payment that continues forever, assuming the issuing entity remains solvent. The latter, which is an equity security, offers a perpetual dividend payment, subject to the discretion and financial well-being of the issuing entity.

Neither an annuity nor a perpetuity is inherently a good or bad investment. Either can be sensible depending on your individual circumstances. If you need help determining whether one is right for you, consider consulting with a fiduciary financial advisor.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: October 30, 2023
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