Common Myths About Annuities
Six things people believe about annuities that deserve a closer look.
Annuities are one of the most misunderstood products in the retirement conversation. Most of the confusion comes from a few ideas that get repeated often enough that people stop questioning them.
Below are six of the ones we hear most often at the kitchen table, along with what the contracts actually tend to say. None of this is a recommendation for any particular product. Annuities differ a great deal from one carrier and one contract to the next, and the only version that matters to you is the one in front of you in writing.
Myth 1: Annuities are full of hidden fees
The word hidden is doing a lot of work here. Depending on the type of annuity, there may be no annual charge at all, and where charges do exist they are disclosed in the contract and in the product summary before you sign anything. The cost most people run into is a surrender charge, which applies if you take out more than the contract allows during the surrender period. Optional riders, such as a guaranteed lifetime income benefit, often carry their own annual charge because they add a feature the base contract does not include. All of that should be spelled out for you in plain numbers, and if it is not, that is a reason to slow down and ask.
Myth 2: Annuities are too complicated to understand
Some annuity contracts really are dense reading, and the industry has not always done a good job of translating them. The underlying idea, though, is one most people already know. An annuity with a lifetime income benefit works in a similar spirit to Social Security or a pension, where you exchange a sum of money for a stream of payments you cannot outlive, subject to the conditions in the contract. The details around crediting methods and rider math take some walking through, but the purpose of the product is not hard to grasp once someone explains it without jargon.
Myth 3: My money is in the stock market and I could lose it
This one depends entirely on which kind of annuity you are looking at, and the distinction matters. With a fixed indexed annuity, your money is not invested in the market directly. The interest you are credited is linked to the performance of an index, and if that index falls, the contract does not credit you a negative amount for that period. You can end up with a year of no interest, which is a real outcome worth understanding, but the mechanism is different from owning the index itself. Variable annuities work differently and do carry market risk, so it is worth being precise about which product is being discussed.
Myth 4: Once I buy an annuity, my money is locked away
Most annuity contracts allow a penalty-free withdrawal each year, commonly a percentage of the account value, with surrender charges applying only to amounts above that. Many contracts also include riders that open up access to more of your money if you meet certain conditions, such as a terminal illness diagnosis or an extended nursing home or home health care stay. These provisions vary by carrier and by state, and some are included at no additional charge while others are not. The honest version of this answer is that an annuity is a long-term commitment and should be funded with money you do not expect to need in a hurry, but describing it as locked away overstates the case.
Myth 5: The insurance company keeps whatever is left when I die
This belief traces back to older immediate annuity arrangements where payments simply stopped at death, and it has stuck around long past its usefulness. With a fixed or fixed indexed annuity that has not been annuitized, the remaining account value generally passes to the beneficiaries you name on the contract, and surrender charges are typically waived at death. Because the money passes by beneficiary designation rather than through your will, it often bypasses probate, which is one of the reasons annuities come up in estate planning conversations. Keeping your beneficiary designations current matters more than most people realize.
Myth 6: I have to pay the agent out of my own pocket
You do not write a check to the agent to buy an annuity. The full premium you pay goes into the contract and is available to earn interest from the effective date. Agents are compensated by the insurance carrier through a commission that is not subtracted from your premium. That does not mean compensation is irrelevant to the conversation, and you are entitled to ask any agent how they are paid and what that might mean for the recommendation you receive. A professional who is comfortable answering that question is usually a professional worth listening to.
Where to go from here
Whether an annuity belongs in your plan depends on your income needs, your time horizon, your tax situation, and what else you already own. Industry research consistently finds that retirees worry about outliving their savings, and an annuity is one of several tools built to address that concern, but it is not the right tool for everyone. If you want to talk it through with someone who will explain the tradeoffs and tell you when the answer is no, we are happy to have that conversation. You can reach us at (760) 642-1892, email info@
Annuity guarantees are backed by the claims-paying ability of the issuing insurance company. This article is educational and is not financial, legal, or tax advice.
Product features, charges, riders, and liquidity provisions vary by carrier and by state. Withdrawals may be taxable and, if taken before age 59 1/2, may be subject to an additional federal penalty. Refer to the contract for exact terms. Myth topics on this page were informed by consumer education material published by Fidelity & Guaranty Life Insurance Company.