Annuity myth bustingThursday 25 June 2020 | Reading Time: 3 minutes
Annuities are often misunderstood. They can be seen as difficult financial products to navigate due to misinformation, rumors, and myths. As a result, many people are put off from the idea of purchasing an annuity. But in truth, annuities can be used to help you generate income and provide growth opportunities while protecting from market downturns. To help you understand annuities better, here are 6 misconceptions you may have heard about them.
Myth: Annuities are all the same
No! All annuities are not the same. Although annuities share many common attributes, each annuity type has its own set of rules. In general, an annuity is a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, you will receive a regular stream of income at some point in the future. There are a range of options, but typically they fall into two categories – an immediate annuity and a deferred annuity. An immediate annuity allows you to make a lump-sum deposit and immediately start drawing
income. With a deferred annuity, you give an insurance company money and the company pays it back at a later date based on a guaranteed interest rate. Typically, you’d start getting payments that don’t begin until years down the road.
Myth: Annuities have expensive fees
False! Most annuity types have no maintenance or annual fees. Those that do will have varying fees depending on the type of the annuity and additional benefits it may provide. Make sure you understand the type of annuity you’re considering and the benefits it offers, then weigh those against other products. Annuities can offer valuable features that aren’t typical of other investment options, like tax deferral, income guarantees, guaranteed minimum values and/or a guaranteed minimum death benefit. Make sure you understand any fees associated with the annuity.
Myth: I can't take money from an annuity when I need it
Wrong! Many annuities give you the option to withdraw a portion of the contract without a penalty. Some annuities may require a waiting period before you can access the full value of the annuity. You may be subject to fees and penalties for early withdrawal, but many insurance companies allow you to take up to 10 % of the accumulation value per year without paying fees.
Myth: If I die, all the annuity money is lost
Nope! Many people believe an insurance company will keep the remaining value upon death. This is true of a "life-only" payment option within an annuity contract, but life-only is just one of many payment options you can choose from an annuity contract. If you don’t want the insurance company to keep your contract value when you die, you can choose an annuity payment option with that feature. Everything the annuity can and cannot do should be written in your policy.
Myth: Annuities are just for old people
Incorrect! Annuities can be excellent tools for accumulation and income, no matter your age. Many young workers are using annuities as a tax-deferred way to save for their future. Every situation is different, it’s important to seek tax advice from a qualified tax professional when purchasing an annuity to understand any withdrawal penalties that may apply.