Annuities are probably the most misunderstood financial product. Stories and opinions vary widely all over the financial universe. Some think they are a rip-off and others think they are truly a great product that everyone should own.

What is the truth? Both statements can be true! Which one is true or will be true in your case depends on your basic understanding of how they work and the many differences between annuities themselves.

If you are educated on how they work and you know the goals for that part of your financial and retirement plan, then you can make an educated decision as to if annuities are a good place to put money or not.

The problem usually arises when products are sold without the clients understanding the benefits and drawbacks of an annuity.

Let’s go over the Readers Digest version of some simple truths and myths about annuities.

We believe in full disclosure so you should know that we have put clients in annuities all over the country. We have also chosen (with the client’s knowledge of course) not to put the client in an annuity because it wasn’t a good fit for that money or their future goals and dreams.

Generally speaking, if you have money that you would like to protect from market loss (only fixed or fixed indexed annuities offer this benefit not variable annuities) and yet still have that money have a chance at solid growth either based on stock market indexes or a simple fixed rate of interest, then an annuity might be a good fit for you.

If you would like to turn a chunk of money into a guaranteed lifetime income for you and your spouse, an annuity might be a good fit.
 
If you need access to the bulk of that money for big purchases or investments in the next 1 to 4 years, then an annuity might not be a good fit for you at this time.

Most products will have a surrender charge if you access more than 10% of the account value in any given contract year during the first 5 to 10 years. When you think of an annuity, think of a longer-term retirement vehicle.

If you have qualified money i.e.: 401k, 403b,457, TSP, Roth and any other type of qualified money that is being used for growth and eventual retirement, an annuity could be a great fit for some of that money to be protected, grow, and eventually used for a monthly paycheck in retirement.

Are These Criticisms of Annuities True?

1) You can lose a lot of money inside of the annuity…………….True in
variable annuities and untrue in fixed or fixed indexed annuities

2) Annuities have a lot of fees every year……………………Possibly true for variable annuities but usually untrue for fixed annuities.

Fixed indexed annuities will generally have no fees unless the client opts for a special rider such as a lifetime guaranteed income payment or a
 long-term care increase in payment guarantee etc.

Those will generally have a 1 to 1.5% annual fee for that kind of rider

3) Your money will be “tied up” in the annuity…………………..True, but understand what tied up means and what kind of money should be used to buy the annuity. Most annuities will have a surrender charge if you cash in more than 10% of the account value in any given contract year.

Meaning if you withdraw up to 10% of the account value there is no surrender fee from the insurance company (could be a fee from Uncle Sam depending on your age and the type of account that bought the annuity)

This is retirement money and generally you want that money to be protected, grow, and eventually send you a steady check every month when you cut back working or retire altogether.

Yes, you want some of your money “tied up” If you used short term money that was the problem in the first place so make sure this is discussed with your advisor to decide the kind of money you would use to invest.

The surrender period where any penalties would exist are dependent on the type of annuity and the length of the contract. Ten years is the most common but they can be as little as 3 years and as many as a 15 year surrender period.

Once the surrender period is passed you are free to use all of the the money anyway you see fit. That might include reallocating all the money or maybe starting your lifetime paycheck machine from the account.

4) The agent who sold the annuity to you makes a lot of money…………………..yes, the agent gets paid from the life insurance carrier for the sale of the annuity.

However, this money is paid by the insurance carrier and NOT the annuity purchaser.

If the client uses the annuity as proposed originally (longer term protect, grow, and disburse later) then the agents commission is not paid by the client.

Remember the surrender charge from above? It is charged to recoup the life insurance companies costs if you change your mind early. In that instance you would pay a portion of the commission in the form of a surrender fee.

That fee slides down over time and depending on the program it would be zero in 5 to 10 years. Also remember that if you need the bulk of the 
money in an emergency and had to cash in to any account you will be at the mercy of market value at that time.

If the market has come down, you might have to sell at a big downturn. Would you rather pay a 5% surrender fee in an emergency but receive full market value after the 5% or more than you put in the account or be at the mercy of a market that is down 15 to 50% when you must sell?

There are other considerations to consider when deciding if the right annuity could be useful in your situation. Contact us for a free no obligation consultation to see if an annuity might be appropriate for some of your retirement plans.

We also offer clients a free “analyze my annuity” feature where we can look at any existing annuities you have and tell you how exactly they work and whether it makes sense to keep them in place or not based on your goals. Simply go to www.analyzemyannuity.com and put in the information requested and one of our team will be back in touch with you shortly.