5 Myths about Annuities

Posted by: Anne Morrison | Mar 28, 2015

Myths about Annuities

When you’re about to make a major purchase such as buying an annuity, you need to understand the ins and out of the product and know it for what it really is. However, common myths and misconceptions can get in the way may prevent you from understanding what this product does and how it can help you achieve your financial goals.

If you’re about to purchase an annuity or simply looking through options that can help you secure income in retirement, here are common myths about this insurance contract that you need to know.

1. Annuities are difficult to understand.

With several types of annuities in the market today, it’s normal to think that this product is confusing and all the information related to it can be overwhelming to digest all at once.

However, if there’s one thing you need to have a full grasp on about annuities, it would be this: They are products designed to provide you a steady stream of income in retirement. You do that by putting an amount into it, either through lump-sum or periodic payments, in exchange for a contract stating that you will receive payouts at a specific date.

When you recognize this, you will have an easier time understanding the different types of annuities and find the right one that suits your specific needs and situation.

2. In case I die while receiving annuity payments, the rest of my money goes to the insurance company.

Most people hesitate to purchase an annuity because they think that the insurance company will simply keep the rest of their money if they die while annuitizing. However, this is not really the case.

Today, there are many ways that allow your beneficiaries to receive remaining values in your annuity, through a guaranteed period option. With this feature, your beneficiary will receive payouts from the annuity for the remaining of the set period. You can also extend the payment stream to your spouse through joint or survivorship options. More so, there are refund options that allow your beneficiaries to receive a full refund of the premiums paid in the contract minus annuity payments, if any.

3. Annuities have hidden fees and charges.

When you purchase an annuity, you will receive a contract. In this document, everything is disclosed, including fees and any other charges that you need to shoulder. It is also indicated if some fees are compulsory or will only be charged on a case to case basis, just like early withdrawal charges.

Read the fine print and understand everything written on the contract. If there are parts that seem confusing to you, consult a professional. You can also do extra research to understand annuity language better.

4. You can’t move your annuities without paying taxes

You can move your annuity through IRA rollovers or 1035 exchange tax-free. However, there may be surrender charges that you need to pay.

5. It’s hard to access money in an annuity.

The money you put in an annuity is yours, and you can get it anytime you want. However, there may be additional charges should you decide to withdraw your money prior to the set payout date. The good news is most annuities allow you to withdraw up to 10 percent of your money each year after letting the account mature for one year without incurring any penalties.

All of us want to have a guaranteed source of income for as long as we live, and that’s what annuities can do. However, not all are keen on purchasing this product all because of these misconceptions.  As you look at these contracts again, make sure that you have these myths dispelled so that you can decide better if it’s a product that can reinforce your financial plan, especially in retirement.

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