Annuities–7 Facts, Myths, and Other Ideas Made Clear
Before I got into the life of helping people understand insurance options, I worked at a bank–two banks actually. I was a teller handling the standard transactions that most people get processed at a bank–cashing checks, deposits, withdrawals, fraud desputes, customer service. However, another job I had was to refer people to the personal banker who would talk about other products–loans, home equity lines of credit, CDs, annuities, and investments. Loans are things that people had in all walks of life, so it was a topic that was easily understood. I had CDs and knew enough to know that I didn’t have enough equity in my house at the time to get a line of credit. However, when it came down to investments and annuities, annuities seemed to put a sour taste in my mouth from the get go. Of course, this taste was due to some of the following myths or misunderstood concepts about annuities.
1. Annuities are not good investments.
Many investment strategists and celebrities will say this. Is it true? The easy answer is, “yes and no.” There are a few things that one should consider when asking this question.
First, annuities aren’t investments, so they can’t be “good” investments. That would make the answer “true.” Saying annuities aren’t good investments is like saying cabbages make horrible steak. Let me rephrase that. Fixed and indexed annuities (the ones most people refer to) are not investments in and of themselves. Variable annuities do tie in to mutual funds like investments though.
Second, they are protection vehicles before they are growth vehicles. It’s good to have a financial vehicle fixed and guaranteed in addition to your more risky strategies. There are also ways that an annuity can be stretched over multiple generations to provide income well over the value of the original premium.
2. If you die before the money is paid out, the bank keeps your money.
This is mostly false. Let me explain. Firstly, insurance companies, not banks, back annuities. Secondly, there are several options that you have with annuities. You can just allow it to grow tax-deferred until a later date and then “annuitize” the funds, turning the funds into a steady stream of income, or just let the interest accumulate until death, paying out the funds to a beneficiary (whether it be a person, a charity, or a trust). Other uses exist if you want to create a fund or leave a legacy to multiple generations.
There is only one option, available at the time the owner wants to turn the funds into income, that validates this fear. This annuitization option is called “life only.” I don’t like it myself. This option works like this: It pays out the highest payout you can receive until you die. Then the payouts stop completely, whether the amount of all the payouts equal the initial amount or not. Of course, if you live beyond life expectancy, you will never outlive your money and can get back more than you put in. This is great for healthy individuals who want to make the most out of the income an annuity can provide and have no heirs, family, or charity they want to leave money to.
Other options include:
- period certain
- life with installment refund
- life with cash refund
- joint and survivor
- life with period certain
- and other creative options.
Of the few I’ve named above, all of them but one ensure that all the money is paid out, four give the opportunity to get back MORE than the original balance, and one pays out to a spouse upon death. These options are YOUR options and not a choice the insurance company makes.
3. You always lose money unless you choose a fixed option.
Not true at all. Here’s the deal: Anything variable can lose money. This doesn’t mean that it will always lose money. However, if losing money is your concern, you can try either a fixed OR indexed product. A fixed annuity, of course, has a set interest rate that it earns. This is like a bank CD (Certificate of Deposit), but with different terms and rules (and interest rates that are easily higher than CD rates).
While indexed annuities are affected by the stock market, they are only affected by the gains in the stock market. So, if the market is doing really well, so is your annuity. The thing to remember about the bad years is this: if the stock market does not do well or loses money, your annuity has a guaranteed interest rate (even that guaranteed interest rate is 0%, it means you will not lose money if the market tanks. The key thing to remember is this: annuities are insurance products, and insurance companies are in the business of guarantees and protection. In the right annuity you are protecting your finances, not risking them.
4. Annuities aren’t always FDIC insured.
This is indeed a fact. However, to understand the weight of this, one has to also consider what it means to be FDIC insured.
What is the FDIC? The FDIC is the Federal Deposit Insurance Corporation. Notice that it is, indeed, an insurance company. If people are relying on an insurance company to protect a bank, they surely have the trust of an insurance company itself to protect their money.
The rule is, banks that are FDIC insured, $250,000 is guaranteed under this policy (this is the simplified version because you can have multiple $250,000 vehicles insured at the same time at the same bank within certain rules). If your bank fails, the FDIC can secure an account at another bank with the amount of protected funds fairly quickly. If you have unprotected funds, it can take years for them to pay those back, as it depends on how quickly the failed bank’s assets are sold.
If you look at their website, you can see that it was established in response to bank failures.
Here’s the key phrase: “failed banks.” Anyone can see banks failing these days. If you have an annuity with a company that is at least A rated with Weiss Ratings, you probably don’t have much to worry about in the way of failing. If you start an annuity with a lower-rated company, there is a higher risk of your uninsured funds being lost.
5. Annuities tie up my money forever.
This is a common misconception that many get from those “cash now” commercials. At most, the money is tied up until you are 59 1/2 years of age. Wait, even that’s not true! You have access to your funds if you need them, but you have to pay an extra 10% penalty if you are under that age.
Most annuities, if you’re thinking after age 59 1/2, have surrender periods–some range from 5 to 15 years. If you completely cash out your annuity before that time is up, then you are hit with a penalty called a surrender charge (usually a percentage based on the amount of years you have left in that original period). If you leave it in there for the full term, you don’t have anything to worry about. But wait, there’s more! Many people don’t realize that there are provisions in some companies that allow you to draw out a certain percentage penalty-free per year. If you are concerned about never being able to touch your money after retirement, you should search for a company that allows penalty-free withdrawals. Some companies will allow you to withdraw as much as 10% per year! Imagine if you took out 5% per year, and the annuity earned 5% per year. You would get money each year and the principle would not go down! This is true especially if the next topic is a myth.
6. All annuities have hidden fees.
And it is! Some annuity companies have 100% completely fee-free products. There are no hidden fees particularly with companies rated with a high financial strength rating. The companies are still able to make money without fees due to their conservative investment strategies and things such as caps on the interest you earn. Look at your investment statement if you haven’t lately. Some major brokerage companies charge 1-2% for managing your funds. One particular client would be paying $15,000 over 10 years in fees with their old investment firm. With the right annuity company and product (and agent), they were able to save this $15,000, never lose money, and still benefit from times when the stock market performed well. The key is talking to an agent you trust, which leads me to the last point.
7. Annuities are complicated.
This is both true and untrue. There are a lot of moving parts to annuities. There are lots of moving parts to healthcare as well. The key is getting someone to wade through all the moving parts and get you to the goal you are looking for. It all comes down to the agent and the company. Keep this in mind, out of all the insurance application forms I have with my company, the annuity application forms are some of the shortest. There is generally no underwriting involved and, in most cases, no check even has to be written (in the case of rolling over or transferring funds from one company to another). Instead of thinking of which options you want or what terminology to use, when thinking about your retirement, you should always approach your agent with what you want it to do and not do (i.e. I want to leave some money to my children, or I need at least $x.xx in addition to my pension to be comfortable, or I want the highest guaranteed growth possible with $x). If your agent is knowledgeable, the rest is easy for you.
As this was meant to be a brief general overview of some common misconceptions, there is a lot of detail I intentionally left out. What questions do you have in these topics? What experiences do you have that you would like to share? What are you looking to learn next? Please comment below!https://simpleseniorhealth.com/annuities-7-facts-myths-and-other-ideas-made-clearhttps://simpleseniorhealth.com/wp-content/uploads/2015/06/Down-Market-e1434512269533.jpghttps://simpleseniorhealth.com/wp-content/uploads/2015/06/Down-Market-150x150.jpgGeneralLife InsuranceBefore I got into the life of helping people understand insurance options, I worked at a bank--two banks actually. I was a teller handling the standard transactions that most people get processed at a bank--cashing checks, deposits, withdrawals, fraud desputes, customer service. However, another job I had was to...Raphael email@example.comAdministratorRaphael resides north of Indianapolis, Indiana. He is an independent insurance agent. He is also the worship leader at his church, a husband, and step-father of one awesome 15-year-old girl. You can contact him at firstname.lastname@example.org.Simple Senior Health