One of the few things people know about Social Security is that they’re required to pay a portion of their earnings into the government social insurance program in hopes of receiving a monthly income upon their retirement. An annuity, when properly designed, also can provide guaranteed income in retirement and reduce the risk of outliving your savings.
Like all things, annuities have positive and negative aspects. Here are some common myths about annuities, along with the facts.
ANNUITIES CARRY HIDDEN FEES
Annuities, like almost all financial products, may include fees – although not all annuities charge a fee. Most annuities have declining surrender charges. However, all fees and surrender charges are spelled out up front, and your advisor should disclose them in full.
ANNUITIES ARE COMPLICATED
Annuities are one of the most straightforward financial products. Your financial advisor should have no trouble answering your questions and be more than happy to provide literature substantiating their explanations. An annuity can be designed to provide a guaranteed lifetime withdrawal benefit that works similarly to Social Security or a pension and provide you with a lifetime stream of income.
ANNUITIES ARE TIED TO THE STOCK MARKET, SO I COULD LOSE MY MONEY
Newer fixed indexed annuities are not invested in the market. Instead, they use indexing options that allow market-like returns while protecting against market loss. Indexed annuities typically have a cap and a zero floor, which means when the market goes up you are credited with the gain based on your selected strategy and applicable cap. When the market goes down, you are not charged with the loss. Market loss has a greater impact than gains; a 20 percent loss requires a 25 percent gain just to get back to even.
IF I BUY AN ANNUITY, I DON’T HAVE ACCESS TO MY MONEY
Annuities generally include surrender periods and charges. These charges generally decline each year and disappear after a set period, depending on the annuity you purchase. Most annuities contain provisions allowing you to access up to 10 percent of your money per year penalty-free during the surrender period. Many annuities also include liquidity features that waive penalties or surrender charges in the event of a terminal illness or need for a nursing home or home health care.
WHEN I DIE, THE INSURANCE COMPANY KEEPS MY REMAINING MONEY
Unlike Social Security, whatever balance remains in your annuity at your death will be paid to your designated beneficiary. Certain options also let you purchase a guaranteed lifetime rider, which guarantees that once you annuitize your policy, no matter what the market does, you will receive a monthly benefit. In addition, certain annuities offer an income enhancement benefit that provides up to double the lifetime annual payment for up to five years for qualifying health events. Any remaining contract value passes to your designated beneficiary at no additional charge upon your death.
I MUST PAY THE INSURANCE AGENT OUT OF POCKET TO BUY AN ANNUITY
You should never directly pay your insurance agent a fee for any product you purchase. Agents are compensated by the company based on their contracts; the commission on insurance products is not deducted from your account balance.
A BANK CD IS A BETTER OPTION
People tend to think of a bank CD as a safe investment. However, in the current interest rate environment, a CD offers about the same growth as a savings account while allowing no access to your money until the CD matures. A fixed indexed annuity is a great alternative. An annuity offers you greater potential for growth while shielding you from potential market loss and providing the option to access up to 10 percent of your money without penalty prior to annuitization.
Strict guidelines govern annuity purchases to ensure your purchase is in your best interest, and that after your purchase, your remaining liquid assets will be sufficient to meet your ongoing obligations. Take the time to meet with a financial professional you know, like, and trust, and tell him or her the truth about your financial condition. Share your dreams and desires. Only after a thorough review can he or she make recommendations that align your financial best interest with the legacy you desire to leave behind.
As with all financial products, an annuity is not right for everyone. Don’t believe the hype; take time to learn the facts.