Broker Check

The Ten Biggest Misconceptions About Annuities

July 31, 2013
This month, I wanted to share an excellent article written by a fellow advisor, Tony Walker. This article is based on his experience that has involved working both “sides of Wall Street” and his conclusion that Fixed Annuities are a great option for retirement:

Misconception #1: Fixed annuities come with huge surrender penalties.

The insurance company charges surrender penalty if the annuity is redeemed ahead of schedule. That just makes good business sense! Because if they didn’t, the insurance company would be taking higher risks and would not be as safe a place to keep your retirement money. If they lose, we all lose!

Misconception #2: All annuities charge high fees.

Of course, if you are talking about variable annuities, they do sometimes come with very high fees. The reason a variable annuity charges high fees is because multiple parties are involved in their manufacture and distribution. I wanted to make it clear that variable annuities and fixed annuities are quite different from one another. Fact: the majority of fixed annuities charge no fees or very minimal fees. End of story.

Misconception #3: Annuities are difficult to understand.

When you drill down to the basics, fixed annuities are not that complicated: you give your money to an insurance company, and they in return pay you interest, via a contract, for a certain period of time. If you break that contract, they spell out exactly what they are willing to pay you.

Misconception #4: The money I put in an annuity is all tied up.

Let’s face it, unless you put your money under a mattress or possibly in a checking/money market account in a bank, your money is “tied up”. There are always some strings attached to getting 100% of your money back. Annuities are flexible and provide many options, and you always know exactly what you’re getting into. I like knowing “how much” with certainty rather than the “uncertainty” of how much!

Misconception #5: Nothing is left for my family when I die.

With a pension, income lasts for the employee’s life and sometimes, the spouse’s life. Upon their deaths, nothing goes to their children. That’s just how it is structured: for maximum income for their lives. You can do the same thing with most annuities… and only an annuity -- not a stock, bond, mutual fund or other non-annuity investment. Only annuities offer the option of converting your money to a guaranteed lifetime income you cannot outlive.

Misconception #6: The different types of annuities are confusing.

Again, if you know nothing about annuities or you’re listening to someone who is willing to tell you more than they know about annuities, this is true. It is best to get your information from someone who has worked with different types of annuities for several years and has experience with each type.

Misconception #7: Annuities are not good for older folks.

Face it, as people grow older, most of them want to protect their money, not throw it into the market or someplace risky. That’s why I think fixed annuities can be excellent for older folks. What types of annuities should they be looking at? In my opinion, only fixed interest, fixed indexed or immediate annuities should be used for people who don’t want to gamble with their retirement money.

Misconception #8: Annuities are not safe.

Annuities are backed by the same insurance companies that protect your house, car, life, health and virtually everything else of value. A review of the factual history of fixed annuities shows that they are very safe. I have never had a problem with any annuity contract. In fact, even during the great depression, there is no history or record of any insurance companies failing to pay claims on their contracts. This period was the most turbulent time of our country’s history. Pretty good track record, wouldn’t you say?

Misconception #9: Annuities pay huge commissions to agents.

For consumers, there is no way to avoid paying someone to help them with their money and make good decisions for their circumstances. The reason I like fixed annuities is because, in most cases, the insurance company issuing the annuity pays me a “one-time” commission up front. That means that 100% of your money is working from day one. I prefer working hard to earn a one-time commission and then continue to service the client and take care of them.

Misconception #10: Annuities are good replacements for life insurance.

While the primary purpose of an annuity is income, life insurance is meant to provide "tax-free, cold-hard cash" upon death. In fact, the ideal scenario is to have a retirement game plan that includes both annuities AND life insurance. While annuities may provide a cash balance to your heirs upon your death, or even have what is termed a "death benefit", the money is not passed tax-free. This is not the same as individually owned life insurance that pays your beneficiaries tax-free money at your death.

In conclusion:

Used correctly, fixed annuities can protect the hard-earned retirement money of people who are more interested in a return OF their money than the return ON their money.

Source:  "The Ten Biggest Misconceptions About Annuities" by Tony Walker, Copyright 2010.