One of the few things people know about Social Security is that contribution is mandatory, and when they get old enough to retire, they will receive a certain amount of money per month for as long as they live. An annuity has some similarities; when properly designed, it can provide guaranteed income in retirement and help reduce the risk of running out of money.
As with all things, annuities have positive and negative aspects. Here are some of the common myths, along with the facts.
MYTH: ANNUITIES CARRY HIDDEN FEES
Annuities, like almost all financial products, can include fees, although not all annuities charge a fee. Most annuities do have declining surrender charges. However, all fees are spelled out upfront, and your advisor should disclose them in full.
MYTH: ANNUITIES ARE COMPLICATED
Annuities are, in fact, among the most straightforward and easiest-to-understand financial products. 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.
MYTH: ANNUITIES ARE TIED TO THE STOCK MARKET, SO I COULD LOSE MY MONEY
A fixed indexed annuity is not invested in the market, but it provides the potential to earn interest linked to an index. Indexed annuities have a zero floor- which means when the market goes up, you are credited with the gain, but when the market goes down you are not charged with the loss.
MYTH: IF I BUY AN ANNUITY, I DON’T HAVE ACCESS TO MY MONEY
Annuities do contain declining surrender charges, but they also contain provisions allowing you to access a portion of your money without penalty during the surrender period. Depending on the annuity selected, liquidity features may be included that waive penalties or surrender charges in the event of terminal illness or a need for a nursing home or home health care.
MYTH: WHEN I DIE, THE INSURANCE COMPANY KEEPS MY REMAINING MONEY
Unlike Social Security, when a lifetime guaranteed rider has been added to your annuity, the remaining account value is passed to your beneficiaries when the primary insured dies. Although there is a charge, some annuities can provide enhanced death benefits.
MYTH: I HAVE TO PAY THE INSURANCE AGENT OUT OF MY POCKET TO BUY AN ANNUITY
You are not required to pay the insurance agent to buy an annuity. insurance agents are compensated with a commission paid directly from the company; the commission is not deducted from your account balance.
You can buy annuities using qualified or non-qualified money, and taxes on your gains are not payable until you begin withdrawals. A fixed indexed annuity also is a great alternative to a bank CD. While both have surrender charges, only an annuity offers you the ability to take advantage of market gains and shield you from the potential of market loss.
There are many different types of annuities; they can provide you with immediate or deferred income. Some can provide two times the income in the event you are unable to perform two activities of daily living. You can purchase an annuity with the intent to never access your money but allow it to safely grow and leave it to your heirs.
Selection of an annuity requires a review of your financial needs and situation, as no two circumstances are identical. Meet with a financial professional you know, like, and trust; tell him or her the truth about your financial condition. Share your dreams and desires. Only after a thorough review can your advisor make a recommendation that aligns your financial resources with the legacy you want to leave behind.
As with all financial products, an annuity is not right for everyone. Don’t believe the hype; take the time to learn the facts.