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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.

Myth: Annuities carry hidden fees.

Reality: While this statement can be true, it depends on the type of annuity you purchase (immediate, fixed, indexed, or variable). Usually, this statement is in reference to variable annuities, which carry yearly fees of about 2%-3.5% while indexed annuities usually have a spread. Some might have additional fees with optional riders for lifetime income, death benefit, or liquidity so it’s best to understand these before purchasing them. These features can provide additional benefits and more value but are not required. Annuities do have surrender charges on withdrawals greater than the free percentage amount, which is generally 10%.

Myth: Annuities don’t have access to the principal during the surrender charge period.

Reality: Many annuities usually allow for penalty-free withdrawals of 10% and amounts in excess of the penalty-free amount may be subject to surrender charges. Specific insurance companies might even offer an optional rider to get your principal before the surrender charge period. Others have no-cost riders incorporated into the contract if you meet certain conditions in regards to terminal illness, nursing home, home health care, or 2 out of 6 ADLs. These liquidity features may vary by state and insurance company.

Myth: The insurance company keeps the balance when owner/annuitant dies.

Reality: For annuities that haven’t been annuitized–including fixed, indexed, and variable annuities–the balance, or death benefit, is paid to the named beneficiary. Even if the annuity is still within the surrender period, those charges are waived if the owner/annuitant dies.

Myth: Annuities provide no additional value when held by a retirement plan, such as an IRA or Roth.

Reality: If the only goal is tax deferral, an annuity may not be appropriate. However, depending on the risk tolerance, using it as a bond alternative, or the need for lifetime income, annuities can definitely be the right fit for an IRA, Roth, or any other type of retirement plan.

Myth: There is no guarantee that an annuity avoids probate.

Reality: One of the most important features of an annuity is that it can avoid probate if the beneficiary form is structured correctly. If the estate is named, it will go through probate. It’s pertinent to do a review in order for this not to happen.

Myth: The 5%, 6%, 7%, or 8% guaranteed rate offered is an interest rate.

Reality: The 5%, 7%, 8%, or higher guaranteed rate should never be interpreted as an interest rate, because it is not. Those amounts are in reference to the income rider crediting percentage rates, part of a mathematical formula to calculate lifetime income. Contingent on where interest rates are at the time, those will vary per insurance company. Certain insurance agents and financial advisors advertise them inappropriately as an interest rate but it’s incorrect and unethical to do so.

Myth: Annuities can lose money since they are tied to the stock market.

Reality: This is true with variable annuities but not with immediate, fixed, and indexed annuities. With an indexed annuity, your money is not invested in the stock market but provides the potential to earn interest linked to an index, such as the S&P 500. The contract value never loses money and is credited with zero if the index decreases but can grow if the index increases.

Myth: Insurance agent or financial advisor commissions are paid from the annuity premium.

Reality: Normally the insurance company pays the insurance agent or financial advisor a commission and there is no requirement to pay them directly in order to buy an annuity. Unlike front-end load variable annuities which are applied at the time of purchase, immediate, fixed, indexed, and other variable annuities don’t have these charges. The full premium is available to earn interest from the annuity’s effective date.

Myth: Annuity interest rates are higher if purchased directly through the insurance company.

Reality: Insurance companies have already allocated money towards sales and marketing, which includes commissions paid on annuities. Unlike other types of insurance products where rates might be different, annuity interest rates are the same regardless if purchased directly or through an insurance agent or financial advisor.

Myth: Annuities offered through organizations have the best interest rates.

Reality: Different organizations might offer different types of annuities or have promotions which may seem unique. When comparing interest rates and features across several insurance companies, those affiliated with different organizations may not be as high and can be a sales and marketing gimmick.

Myth: All insurance agents and financial advisors are fiduciaries offering almost all options.

Reality: Unfortunately, many insurance agents and financial advisors are obligated to sell what’s offered through their insurance companies or broker-dealers first. In reality, most don’t operate under a fiduciary standard and will typically sell what pays the highest commission. Also, both insurance companies and broker-dealers might have revenue sharing which adds another conflict of interest. Although the DOL Fiduciary Rule introduced forms PTE 84-24 and PTE 2020-02 where commissions and recommendations have to be disclosed, many insurance agents and financial advisors have been manipulating the system to bypass operating under a fiduciary standard.

About the Author

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Carlos Dias Jr.

Carlos Dias Jr. is a financial advisor, public speaker, and president of Dias Wealth, LLC. Carlos is a nationally syndicated contributor for Kiplinger and has contributed, been featured, or quoted in several publications including Forbes, MarketWatch, Bloomberg, CNBC, The Wall Street Journal, U.S. News & World Report, USA Today, and others. He’s also been interviewed on various radio and television stations. Carlos is multilingual, fluent in both Portuguese and Spanish.


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Carlos is a very professional and knowledgeable financial planner. He focused on my financial goals and answered all my questions. He helped me better understand my future retirement plans, as well as how my life insurance
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