Take The Annuity Test: 12 Surprising Facts About Annuities

You might say that opinions are like belly buttons: everybody has one. When it comes to annuities, opinions run rampant. But how much do you really know?

According to a FINRA analysis of U.S. investor knowledge, only 10 percent of participants could answer eight or more questions correctly. It’s not your fault if you’re confused about annuities. Information about how they work and how investors are charged fees is often misrepresented by the salespeople who stand to earn commissions on these products. We’d like to present you with the facts. Test your annuity acumen today and make sure you’re not missing out.

1. What is an annuity?

  1. A check in your mailbox.  
  2. A black hole that swallows your money.
  3. A type of life insurance contract.

ANSWER: While an annuity can result in a check in your mailbox, the correct answer is C. As a type of life insurance product, annuities can help protect you against the risk of living too long.

2. True or False: An annuity is the only financial vehicle that can guarantee you an income check for the rest of your life, no matter how long you live.

ANSWER: True. Annuities have been used for hundreds of years to structure regular pension-like payments to investors.

3. How many different types of annuities are there?

  1. Seven
  2. Too many to count
  3. Two

ANSWER: While annuities are categorized in many different ways, they can be boiled down to basically two types: immediate and deferred.

4. What is an immediate annuity?

  1. An annuity that pays income immediately
  2. An annuity that immediately converts your cash to income
  3. An annuity that annuitizes your money

ANSWER: All three statements could be said to be correct. An immediate annuity is a good choice for the investor who needs income right away, allowing income payments to begin (typically without the purchase of an income rider) within the first year of purchase.

5. True or False: All annuities annuitize your money so you can’t ever get it back out again once you invest.

ANSWER: False. If you purchase an income rider, then typically speaking you may still access your principal.

6. What is a deferred annuity?

  • An annuity that pays you income later
  • An annuity that grows tax-deferred
  • An annuity that invests in the stock market.

ANSWER: Because all annuities grow tax-deferred, the best answer here is A. Deferred annuities allow your money to grow, usually at a guaranteed rate, so you can begin taking your income later based on a larger pot of money. The variable annuity is an example of a deferred annuity that invests in the stock market.

7. True or False: All annuities are market-based investments.

ANSWER: False. Fixed and indexed annuities earn a declared rate of interest set by an insurance company, whereas variable annuities are market-based investments.

8. If you have an annuity with a guaranteed rate of return, that means:

  1. You can NOT lose money due to stock market fluctuations
  2. You CAN lose money to stock market fluctuations
  3. You’ve been tricked by an annuity salesperson

ANSWER: Depending on your situation, all of these statements could be true. The confusion is due to the variable annuity, which can still lose money due to market fluctuations even if you are paying extra for a guaranteed interest rate. Many investors misunderstand this. (If you have a question about an annuity that you own, GO HERE.)

9. True or False: You cannot lose money due to stock market fluctuations if you have a fixed or fixed-indexed annuity.

ANSWER: True. Unlike variable annuities, fixed and indexed annuities do not invest directly in the stock market and as such, they are not considered market-based investments.

10. How do fixed-indexed annuities earn interest growth?

  1. They don’t earn interest growth because they are not a market-based investment.
  2. They earn limited interest gains based on the performance of a stock market index.
  3. They invest directly in a stock market index such as the S&P 500.

ANSWER: The correct answer is B: Fixed-indexed annuities allow investors to earn market-linked gains without participating directly in the market itself. The most common market indexed used with indexed annuities is the Standard & Poor’s 500 Composite Stock Index (the S&P 500), but other indexes such as the Dow Jones Industrial Average (DJIA) are also used. Generally speaking, these gains are “capped” by a participation rate, but they give investors a more secure place to grow the money they need for retirement income.

11. True or False: Fixed-indexed annuities can compete with mutual funds because of their market performance.

ANSWER: False. Fixed-indexed annuities are not designed to compete with market-based investments; rather they were designed to help the investor at or near retirement to earn returns that keep up with inflation.

12. What the heck is a hybrid annuity?

  1. A clever metaphor for an annuity with a gasoline engine and an electric motor.
  2. A combination of a fixed and fixed-indexed annuity.
  3. A marketing term that signifies a fixed indexed annuity with a lifetime income option.

ANSWER: While the term hybrid is often used willy-nilly in the annuity world, we tend to go with option C. The hybrid annuity was created because people wanted an option for guaranteed lifetime income without having to annuitize the stream. You might also hear variable annuities described as a hybrid, but be advised you can still lose money to the stock market with a variable annuity.  

The main function of an annuity is to give you an income. Deferred annuities might be designed to give you that income to you. It can also be designed to grow money for income to your beneficiaries. Because of all the different subtypes of annuities—such as fixed, variable, and fixed-indexed—annuities can be complicated investments to understand. If you have a question about an annuity you own or are thinking of purchasing, reach out to one of our advisors. We’d be happy to answer your questions, no strings attached. Our mission is to provide unbiased annuity information so you confidently make good decisions with the money you’ve worked so hard to earn. Thank you for taking our little test. If you learned something, pass it on! We’re always happy to empower consumers with knowledge.  

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