Debunking common annuity myths

Clear up common misunderstandings about annuities and learn how they can be used to help you reach your financial goals.

An annuity is a long-term retirement investment product issued by an insurance company. It’s a product that can offer many benefits — such as guaranteed income in retirement, portfolio protection from market volatility and estate planning advantages — but some investors may also find it challenging to understand. Not only are there many different types of annuities, but misconceptions about the product are widespread.

We can help you evaluate whether an annuity is appropriate for you, given your financial goals, time horizon and risk tolerance.

Here are some common myths about annuities — debunked:

Myth #1 – Annuities are only for retirees

It’s true that annuities are commonly purchased by retirees, but there are different types of annuities for different life and investing stages. Here are a few considerations:

Those still working may want to consider …

Retirees may want to consider …

Deferred annuities, which can be an alternative vehicle for retirement savings. Deferred annuities allow the owner to make tax-deferred contributions — and benefit from tax-deferred growth — over a longer time-period. A deferred annuity may be especially helpful for those who’ve already reached their contribution limits for a 401(k) or IRA. Deferred annuities also offer the option to convert to a guaranteed stream of income.

Immediate annuities, which can be an attractive option because the owner pays the principal (usually in a lump sum) and instantly begins receiving a guaranteed stream of payments that can last for a preset amount of time or even for a lifetime.

Bottom line: You don’t have to wait until retirement age to consider whether an annuity can help you achieve your financial goals.

Myth #2 – It’s smarter to just invest in the market

One criticism of annuities is the idea that they fail to generate the same returns as investing in the market. However, this critique fails to account for the fact that a person can have many different objectives for their investments and that:

Fixed annuities are often used to hedge against market risk. With fixed annuities, you receive a specified rate of return because your principal is not invested in the markets, so your returns will not fluctuate accordingly. In fact, one of the most significant benefits of fixed annuities is that they can provide a reliable return when markets are down, helping to insulate you from potential volatility.
You can purchase a variable annuity, which is invested in the market, so that you don’t miss out on the potential for growth. However, just as if you were invested in the market through a mutual fund, you do risk losing your principal with these types of annuities.
Structured annuities can provide both growth potential and a level of protection. Structured annuities can offer exposure to equity markets, while also giving you a level of protection that can help eliminate some of the risk that comes with investing.

Bottom line: An annuity can help you meet many different types of investment goals. Which type of investment option is “smarter” for you will depend on your risk tolerance, income needs and overall financial goals.

Advice spotlight

An annuity can be one of multiple retirement income streams. To balance your desire for investment growth with your need for income, you could consider annuitizing a portion of your retirement portfolio. This helps ensure a guaranteed, steady stream of income and can allow you to focus the rest of your portfolio on growth.

Myth #3 – Annuities are overpriced

While some annuities do come with fees, they can vary widely depending on the issuer and the type of annuity. Structured annuities, for example, may not charge fees¹, depending on the indexed accounts chosen and whether the money is kept in the account until maturity. Further, many find that the benefits an annuity offers — including the ability to grow tax-deferred and the potential to generate guaranteed income — to be worth the value.

Bottom line: Fees associated with an annuity are not necessarily more costly than those associated with other investment accounts.

Myth #4 – Annuities don’t offer enough liquidity and flexibility

Many annuities have a surrender charge period, and it’s commonly believed that you can’t access your money without incurring a penalty during this time. However, there are ways to withdraw money penalty-free during the surrender charge period. For example, some annuities allow investors to withdraw up to the amount they initially invested with no penalty. Other annuities may have a stipulation for investors to withdraw up to 10% of the current value of the annuity each year. You would have access to your full contract value without surrender charges once the annuity is out of its surrender charge period.

Bottom line: The level of liquidity will depend on the annuity contract and whether you are within the surrender charge period. If liquidity is important to you, choose a type that can offer the flexibility you’re seeking.

Advice spotlight

When searching for an annuity provider, look for an insurance company with a long history of meeting its obligations to clients. You’ll want to ensure the company that issues the annuity and backs the guarantees has a solid credit rating from independent rating agencies.

Myth #5 – Annuities aren’t tax-efficient

Similar to other retirement accounts, annuities can offer tax benefits that help support your goal of a tax-efficient investment strategy. Most annuities offer tax-deferred growth, meaning you fund the product with pre-tax dollars and pay taxes only on withdrawals. However, you may be able to purchase an annuity within your Roth IRA or Roth 401(k), which means that withdrawals may be tax-free if specific requirements are met.

Bottom line: Annuities can offer the same tax benefits as other tax-advantaged retirement accounts.

Myth #6 – When I die, the insurance company keeps my money

While some immediate annuities are designed to stop payments when the purchaser dies, many continue to make payments to beneficiaries. And, like annuities themselves, there is flexibility in the types of death benefits available.

With a structured, fixed or variable annuity, your beneficiaries will usually inherit the value of your annuity upon your death. And most offer a standard death benefit that guarantees your beneficiaries will receive at least the amount you invested, adjusted proportionally for any withdrawals that were previously made. Many annuities offer optional death benefits (for an additional fee) that allow you to maximize the amount you leave behind.

Bottom line: If protecting your legacy is a priority, consider an annuity that offers death benefits that suit your needs and wishes for passing on your wealth.