Over the past several years, annuities have become more popular as a means to help prepare for retirement, as well as a source of lifetime income* for retirees. Yet, probably more than any other financial vehicle, there are many myths that surround annuities, which unfortunately, has led some people away from the benefits that they can provide.
Of all the myths about annuities, though, these seem to be five that are frequently heard:
All annuities charge high fees.
Much like any other type of financial vehicle, annuities can and often do charge fees. But the amount that is charged will depend in large part on the type of annuity you own, as well as any additional features that you add on.
For example, variable annuities will oftentimes charge an up-front commission, along with yearly management fees for the investments that are inside. The investments themselves may also charge an annual fee.
Just as with any other financial vehicle, though, it is important to ensure that you know what, and how much, you may be charged prior to moving forward with the purchase of an annuity.
Funds are "locked up" in an annuity and are unable to be accessed.
If you purchase an immediate annuity, you will begin receiving income payments shortly after you buy it. If you purchase a deferred annuity, there is an accumulation period, which is between the time you pay the premium(s) and the time the distribution period begins. If you do need to withdraw money from your annuity during the accumulation period, you may be able to do so, although any early withdrawals could result in loss of principal and credited interest due to surrender charges. However, most annuities will still allow you to access to at least a portion of your funds every year, and often times the longer you own an annuity, the more the surrender charge percentage decreases, and eventually will disappear. But it’s important to keep in mind that any these distributions taken may be subject to ordinary income tax and, if taken prior to age 59 ½, an additional 10% federal tax.
The insurance company keeps all of the funds if the annuitant dies.
Provided that the contract has not yet been annuitized (i.e., converted over to an income stream), an annuity can offer a guaranteed death benefit that will pass on to your beneficiary. The amount of this death benefit is typically the greater of either the contract value at death, or the amount of money that you have contributed into the annuity.
You may even be able to "step up" the amount that your beneficiaries receive. While there is usually an additional cost for this, this feature can help ensure that you can leave something behind for those you care about.
Annuities should not be held in a qualified retirement plan or an IRA.
While an annuity won't really provide any additional value for those whose primary goal is tax deferral, an annuity can still offer several benefits, even if held in a retirement plan or an Individual Retirement Account.
For example, an annuity can provide some nice added features that are not found with other financial vehicles in these types of accounts, such as a death benefit - which can guarantee that the funds will pass on to your survivors upon death, and living benefits - which can offer an income for life. It’s important to note that any early withdrawals can affect the principal amount, which could then affect how much, if any, death benefit would be left after you pass for your beneficiaries.
All annuities are alike.
Just as with mutual funds, bonds, and other financial vehicles, all annuities are not exactly the same. Although the primary purpose of any annuity is to provide a supplemental source of retirement income, there are a wide variety of annuities to choose from, depending on what your ultimate current and future financial goals are.
For instance, a fixed indexed annuity can provide the opportunity for market-related interest growth when its underlying index performs well. A fixed annuity can provide a set amount of interest growth, and ensure that you receive a certain amount of income for the remainder of your lifetime*.
The Bottom Line
Having a good understanding of any financial vehicle is essential prior to moving forward with it. This can help you to make more efficient choices regarding how to proceed with planning for your financial future.
We are an independent financial services firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives.