The Truth About Annuities – Part 1

By Cathy DeWitt Dunn

Myth. Annuities are very complicated to understand and own.

Reality. The concept of a fixed index annuity is very simple. In return for a lump sum purchase of an annuity contract, an insurance company promises to pay you (at some specified point in time) an income stream…for as long as you live. Or, you can use a fixed index annuity just as a wealth accumulation vehicle where your money can grow tax-deferred. While you own your contract, you enjoy 100% principal protection plus the opportunity to participate in stock market gains. But, as they say, the devil is in the details. The annuity contract itself can be very complex. There’s a wealth of information available that can help you better understand your annuity purchase. To get you started, we’ve included a description of common annuity contract features as well as questions to ask when reviewing an annuity opportunity. And, we’re only a phone call away to discuss any questions you may have.

Myth. When you die, the insurance company keeps all of your money.

Reality. Most of today’s annuities, including fixed index annuities, provide death benefits. For annuities that offer an immediate income stream, if you pass on before the full contract value is paid out, your beneficiary will receive any remaining principal in your account. On deferred annuities, the death benefit includes any money left in the contract, plus any interest that has accrued prior to death. You have the option of purchasing contract riders that increase the death benefit of your annuity.

Myth. Fixed index annuities don’t provide any advantages over other financial products.

Reality.  It is true that you can accomplish a wide variety of retirement planning objectives using other financial products. However, fixed index annuities provide a distinct combination of advantages including principal protection, tax-deferred compounding, and death benefits. Some features of annuities— such as providing predictable guaranteed lifetime income—are non-existent in other investment products.

Myth. Annuities are for much older people or exceptionally conservative investors.

Reality. Fixed index annuities may be appropriate for individuals facing a wide variety of retirement planning scenarios. The lifetime income component is especially important to individuals in or near retirement. But, they can also answer some concerns of younger investors. Fixed index annuities have proven to be an excellent alternative to the stock market by providing exposure to market-based gains while eliminating losses.

Myth. Annuities have a lot of hidden fees and charges.

Reality. In most standard fixed index annuities, no direct fees are involved. The only fees that might be incurred are those that cover optional value-added riders, such guaranteeing a specific amount of income or providing an enhanced death benefit. A surrender charge may apply for cashing out an annuity early.

Myth. Surrender charges only benefit insurance companies.

Reality.  Penalties for closing your annuity early allow annuity providers to take a longer-term approach to making your money work for you. A surrender charge discourages you from withdrawing before a specified term. It’s important to understand what restrictions your contract stipulates for surrendering early. In some cases, contracts will allow you to withdraw up to 10% of your balance after the initial year of purchase without penalty. In addition, you may be able to take a loan against your annuity without suffering any surrender penalties.

To be continued: “The Truth About Annuities Part 2“