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Table of Contents
Most people have heard annuities explained, but would be hard-pressed to distinguish fact from fiction. But annuities can be financial tools that may be worth exploring. To give you a deeper understanding of their potential benefits, here are five common myths about annuities.
Myth 1: If I Have an IRA, I Don't Need an Annuity.
Annuities can provide tax-deferred growth, but traditional retirement accounts like IRAs are also tax-deferred, so there's a myth that there's no additional benefit to using annuities for tax qualified retirement assets.
Annuities have features that standard retirement accounts sometimes lack. For example, if you want to help grow your money at a certain rate, receive lifetime income payments or lock in a death benefit, you may be able to do so with an annuity. You should keep in mind that annuities are subject to potential surrender charges, fees and tax consequences on early withdrawals.
Myth 2: When I Die, the Insurance Company Keeps My Money.
Annuities come in several varieties, but with deferred annuities, you can generally withdraw money whenever you want. There may be a delay in receiving the funds and you may need to pay surrender fees, ordinary income tax and a 10 percent tax penalty if you're withdrawing before 59 1/2. You can also name beneficiaries who will receive the assets when you die.
When you "annuitize" a contract and create a guaranteed income stream, you lose the ability to take non-systematic withdrawals or leave your remaining account value to a beneficiary. If that concerns you, you could choose a "period certain" payout. This is one of a few ways to ensure payments continue to your beneficiary if you pass away before your annuity has ended.
Myth 3: My Money Is Locked Away With Surrender Charges.
Annuities are for the long term but that doesn't mean your funds are unavailable or subject to surrender charges.
With annuities, there are several ways funds can be available to you:
- Offers a free withdrawal amount that is generally a stated percentage of your contract value. This amount is typically free from surrender charges, but you'll want to refer to your specific contract for details.
- Helps provide access to the funds. For example, withdrawals are commonly free from surrender charges if you have nursing home expenses, are diagnosed with a terminal illness or need to satisfy IRS-imposed required minimum distributions (RMDs).
- Surrender charges generally don't last forever. This varies by contract, but charges typically decrease over the years until they no longer apply.
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Myth 4: Annuities Are Expensive.
Some annuities have earned a reputation for being expensive, but there are several options that have different fee structures. It's helpful to understand what you could gain in exchange for what you give up.
Some of the potentially valuable features that may be available from annuities include:
- Guaranteed lifetime income for individuals and couples.
- Exposure to market gains — although returns are not always guaranteed.
- Potential growth of a benefit base that can generate income later in life.
- Death benefits, including stepped-up benefit amounts, period certain payouts and more.
- Tax-deferral on assets that would otherwise be taxable if you buy a qualified annuity.
Fortunately, you get to choose the type of annuity you purchase and what features are included, and you may be able to opt out of the ones you don't need. Insurers are required to provide clear disclosures describing fees, and your financial representative can help explain the pros and cons of each option to you.
Myth 5: Annuities Are Just for Retirees.
Annuities may be popular with retirees, but they could be useful for all generations. Although immediate annuities tend to be the more common choice among retirees, deferred annuities are more common when saving before retirement.
Pension plans are no longer a standard offering for employees, so workers are likely on their own to create an income stream that lasts a lifetime. Annuities could help fill that gap.
Learn More About Annuities
If you've never heard annuities explained in detail, they can be easy to misunderstand. Knowing the facts behind these five common annuity myths can help you evaluate whether, and how, they might fit into your financial plan. If you have questions about an annuity you're evaluating, ask your financial representative about the features until all of your questions are answered.