Annuity myths and truths
June is National Annuity Awareness Month. Annuities can offer flexibility both in how you save for and receive money in retirement. It comes down to knowing that there are different types of annuities, each designed to address a specific need or life stage.
According to LIMRA, U.S. annuity sales were $113.5 billion during the first quarter of 2024, 21% higher than the first quarter of 2023. Yet I often hear from people who are confused by annuities or overwhelmed by the many product offerings. As Chief Product Officer at Group 1001 Life and Annuity, here are some of the most common misconceptions I hear and the reality.
Myth: Annuities are expensive with high fees.
Reality: Many annuities have no fees whatsoever. Products like multi-year guaranteed annuities and many fixed indexed annuities do not charge fees to the policyholder. There are annuities with fees, and those fees are generally used to cover additional benefits such as lifetime income offerings. The fee is used by the insurer to help cover the cost of insuring the lifetime income benefit.
Myth: Annuities are complicated.
Reality: Some annuities are complicated, but many are relatively straightforward. Annuities such as multi-year guaranteed annuities are quite simple. These products offer a guaranteed interest for the term of the annuity. These offer similar benefits and use cases to certificates of deposits but offer the additional advantage of tax deferral. In other words, the interest isn’t taxable until withdrawn from the contract.
Myth: Annuities are only for retirees.
Reality: Annuities can help savers, too. Annuities can be an extremely useful part of building a retirement portfolio. Whether you are accumulating savings or trying to establish a stream of guaranteed lifetime income, annuities can be helpful. Additionally, the tax-deferred growth accumulation of annuities can provide a faster accumulation of retirement savings and defer taxes until retirement.
Myth: I can easily create lifetime income from my retirement accounts.
Reality: We don’t know how long we are going to live or how well retirement account assets are going to perform in the future. Therefore, it’s very difficult to predict how much you can safely withdraw from your retirement accounts on an annual basis. Some historical rules of thumb like 4% per year are designed to cover most scenarios including those that combine poor market performance and a lengthy retirement. Annuities can often deliver a higher level of retirement income than these rules of thumb because the insurance company is taking the risk and pooling large numbers of policyholders.
Myth: The insurance company keeps my remaining money when I die.
Reality: With most types of annuities, there are specific death benefits. Some of these annuities even provide options for beneficiaries to select a lump sum or ongoing payments. When planning estates, people most often think about life insurance, but annuities can have features useful for this as well. There are, however, specific types of annuities (life contingent single premium immediate annuities) that can be structured to make payments only as long as you live. The benefit of this is to achieve the highest possible income payment while you are alive, but the tradeoff can be reduced or non-existent death benefits. As with anything, there are tradeoffs with different options.
Myth: Once I invest in an annuity, my money is locked up and can’t be touched.
Reality: Nearly all annuities allow you to withdraw some of the money – usually up to 10% of the amount or the earnings on the contract (whichever is greater) without any penalty. You also generally can withdraw amounts in excess of that amount but will incur surrender or early withdrawal penalties. An annuity is a longer term commitment than some other savings vehicles which allows the insurance company to provide attractive rates of return compared to other options. While you have some ability to get your money back early from an annuity, it is best to be confident that you can invest for the full term of the contract.
As you can see, there are many myths and realities around annuities. Annuities have evolved and continue to evolve. Today’s annuity marketplace is more diverse than ever before. Today’s products include many combinations of benefits, elements of flexibility, and ways for policyholders to save money, invest for retirement, and convert retirement savings into a guaranteed lifetime income stream. Because of all the benefits and uses, it’s important to do your research and speak with a financial professional you trust to determine whether a specific financial product is right for you.
Dale Uthoff is the Chief Product Officer for Group 1001 Life and Annuity. Dale oversees all product efforts for the Group 1001 Life and Annuity Business Unit. This includes product development and product management for fixed, indexed, and variable annuity products sold by Group 1001 companies. The opinions expressed herein are his own and not necessarily of the company.
