(Forbes) Over the years, annuities have gotten some bad press. People come into our office regularly, saying annuities are a terrible product, often with some common misconceptions. To help clear up any confusion, here are seven of those misconceptions, and the truth!
There are too many hidden fees.
There are several different types of annuities, which means that they do not all work the same way. The three major ones are variable, fixed, and fixed indexed annuities. Out of these three, the one that typically has the highest fees is the variable annuity. Some fixed and fixed index annuities have fees, but not all.
I don’t have access to my money.
This is one of the biggest objections that we hear when it comes to annuities, but the truth is you dohave access to your money.
In each company’s policy, it’s stated what the penalty-free percentage is per policy year. There is what is called a surrender charge schedule, which will show you what a charge would be in a specific year and how long the surrender charges last. You have access to your money, but if you are still in the surrender charge period and go over the penalty-free amount for that policy year, you might have a surrender charge.
The insurance company makes all the money and I don’t.
Some people think that the insurance company comes out ahead of the client. The thing to remember is that the insurance company takes all the risk because they eat any losses that happen in the market instead of you. These contracts are normally structured with caps and participation rates (par).
So yes, you don’t always get 100% of the gains, but sometimes you will, depending on the caps. Would you rather have zero loss and a portion of the gain or have 100% of both the losses and gains? That’s the trade-off.
If I die, my money dies with me.
The only way that this scenario would happen is if you annuitize the contract, choosing the life-only option, before passing away. We do not suggest that for any of our clients; essentially what happens is that you turn the rights to your money over to the insurance company. If you pass away, your remaining money in the account can go to the beneficiary or beneficiaries in several different ways.
Inflation will outweigh my returns.
If you had a fixed annuity with a low fixed rate, this could happen to you. When it comes to a fixed index or a variable annuity, there is more potential for growth, so depending on how the market performs, just like in any other investment, that would determine your actual growth.
You only buy an annuity for monthly payments.
I have seen articles that actually state that the only way to draw money from an annuity is to take monthly payments. That is one way to take distributions, but not the only way. Most annuity contracts are flexible; based on each insurance company’s individual rules, you may be able to take lump sums or monthly payments or any combination of the two.
If the market drops, it will bounce back!
This is by far the biggest objection that we get from prospective clients! Let me just simply put it to you this way: If you had $200,000 in the market and the market dropped 50% in a year, you now have only $100,000. If the market bounces back 50% the next year, will you have your $200,000 again? The answer is no, you would have to have a 100% increase in the market to get back to where you started. I personally don’t recall that the market has ever increased 100% in a year.
For example, let’s say you are in a fixed indexed annuity with a 50% participation rate and the same scenario happens; after the 50% loss, you were still at $200,000, but then the next year you had the 50% increase. Since you have a participation rate of 50%, you would capture 25% interest. That would mean that you now have $250,000; if you were in the market, your account would be worth $150,000. For simplicity’s sake, a cap has not been applied in this example.
It’s important to understand that not every company and product work the same. There is not a “one size fits all” product or magic bullet for everyone. The best way to meet someone’s financial needs is on an individual basis, looking at their whole financial picture. Annuities are not for everyone, but until you hear the information for yourself, how will you know if an annuity is right for you?