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April 2022

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Annuity Myths and Realities

Myth: Annuities are complicated.

Reality: Although indexed annuities have different crediting methods, with the correct anniversary dates and math formula they can be solved. Variable annuities typically use mutual fund subaccounts that can be tracked. Fixed annuities–particularly MYGAs–are the easiest to decipher since it’s an interest rate for a set period of time (similar to a bank CD). Annuities with income riders work like a pension or Social Security income, which can guarantee you a lifetime stream of income.

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Mistakes to Avoid with Annuities

Mistake: Assuming all annuities are the same.

Annuities issued by different insurance companies and all operate differently. Always read the contract or prospectus, and if you don’t understand how the contract works, don’t buy it.

Mistake: No beneficiary or naming the estate as beneficiary.

When no individual is named as beneficiary or the estate is the named beneficiary, the annuity proceeds go to the owner’s estate. This would subject the annuity to probate and distribute according to your will or under state law. An important reason people purchase annuities is to avoid the probate process, so a beneficiary designation is intended to bypass probate. However, if no beneficiary exists, the proceeds go to the estate and distributed accordingly.

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Reasons to Purchase an Annuity

You can’t lose the money you used to purchase the annuity. Besides surrender charges, principal protection means you will always walk away with your contract value no matter what.

While this is true with immediate, fixed, indexed, and long-term care annuities, variable annuities don’t offer this guarantee. This is the reason why it’s important to choose the right one or you might otherwise suffer potential consequences.

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What is an income rider?

An income rider is a lifetime income guarantee added to either an indexed or variable annuity. Its main function is to avoid annuitization, allowing you to have greater control and flexibility without having to be locked into a payout that never ends. Regardless, the insurance company is obligated to pay income guarantee as long as you’re still living, even if the annuity contract value is depleted.