Top ten lists have been around a long time, perhaps the most famous being the Ten Commandments. It wasn’t until 1985 when a former weatherman turned comedian name David Letterman put his spin on them that we started having so much fun. He opted to read them from what he called his “home office”, which at the time was in Scottsdale, Arizona. His thinking was that if no one liked them, he could just shrug and say, “Well, they’re from the home office.”
We’ve got a top ten list coming from our home office, too, only there’s nothing funny about it. Annuities tend to generate strong feelings – love, hate, disgust. Here’s an easy way to compare what you think you know about them with the facts.
REASON #10: Annuities are a type of life insurance product.
It’s easy to think of life insurance as something that reminds you of death. Nobody wants to think about that! Here’s the biggest difference, however: while life insurance can protect your family against the risk of dying too soon, an annuity can protect you against the risk of living too long.
REASON #9: Annuities aren’t a securities investment.
Securities investments participate in the stock market which is risky and exciting. Annuities, on the other hand, are the only financial instrument that can guarantee you a lifetime paycheck. To give you that lifetime paycheck, annuities participate either directly or indirectly in the market.
- Variable annuities participate directly in the market, but you are restricted as to which investments you can choose, and they can lose you money.
- Indexed and fixed annuities grow your money through indirect participation in the market by earning limited interest based on the performance of a stock market index. Fixed and indexed annuities do NOT lose money as a result of market performance.
REASON #8: There are too many different types of annuities.
There are TWO main types of annuities.
The two main types are:
Immediate: Immediate annuities are just like they sound. They can pay an income right away, within the year that you sign the contract. Most immediate annuities are annuitized, which means that in exchange for the regular, guaranteed income, you no longer have access to the money.
Deferred: Deferred annuities wait to pay you an income, meanwhile, your money grows. Most deferred annuities allow you to lock in a guaranteed growth rate, and some of them offer you guaranteed income without having to annuitize the lump sum.
REASON #7: Annuities are way too complicated.
There are two sub-types of annuities: fixed and variable.
Fixed Annuities: Fixed annuities in-of-themselves come in two sub-types: fixed and indexed. Both of them offer an interest rate that is either fixed or limited in some way and cannot go above a certain amount. These are insurance products (not securities products) designed to hedge against or keep up with inflation. The average rate of inflation currently is 3.22 percent.
Variable Annuities: Variable annuities are investments sold by stockbrokers and financial professionals who are licensed to sell securities products. They are designed to provide market-like performance coupled with the guarantees you can get with insurance products. Because of the market risk, life insurance companies charge a fee for their guarantees known as an M&E fee, risk fee, or Mortality and Expense fee. The average M&E fee for variable annuities is 1.25 percent. Fixed and indexed annuities do not charge this fee.
REASON #6: Annuities are very expensive.
If you have an expensive annuity, then you likely the variable type with its average annual fees of 3.54 percent. There are five main costs associated with variable annuities:
- A possible upfront sales charge (called a sales charge or front-load fee similar to mutual fund A Shares).
- A sliding-scale surrender charge should you wish to get out of the annuity. Surrender charges usually start around 10 percent.
- Insurance charges such as the M&E fee, administrative costs, and possible distribution fees.
- Management fees such as sub-account fees or the expense ratio similar to mutual fund fees.
- Annual expense fees for the income rider or Guaranteed Lifetime Withdrawal Benefit (GLWB) rider.
REASON #5: If I have a long-term care event, I won’t be able to get to my money.
Most deferred annuities have special provisions in the event of a long-term care event. Typically, they waive the annuity’s surrender charges in the event of a disability, confinement to a nursing home, and a diagnosed terminal illness. You typically don’t have to pay for this benefit.
REASON #4: I can lose my money in an annuity.
With fixed and indexed annuities, you cannot lose money as a result of poor market performance. Most fixed and indexed annuities also have a minimum stated interest rate.
You can lose money in a variable annuity.
A Guaranteed Lifetime Withdrawal Benefit (GLWB) rider (or income rider) can guarantee that even if the account value falls below zero, the income payments will continue as specified by the contract.
REASON#3: If I want to get a guaranteed income, I have to buy an income rider.
This is true for variable annuities, and in many cases, the investor isn’t aware that they are paying the fee for the income rider. To have your annuity contract reviewed by a professional, GO HERE.
You can receive guaranteed income WITHOUT having to buy an income rider from immediate annuities and some deferred annuities. Ask your financial professional to shop around and compare the features and benefits of adding a rider versus not adding a rider.
REASON#2: Fixed-indexed annuities do not earn enough.
Fixed-indexed annuities are not intended to compete with mutual funds or variable annuities. Their goal is to do better than fixed annuities, which earn on average 1 or 2 percent.
REASON#1: If I put my money in a deferred annuity, I’ll have to pay a surrender charge to access my funds in the event of an emergency.
Because deferred annuities are designed to grow your money over a period of time, insurance companies charge surrender fees to protect them against unanticipated claims before the investment has matured. Most deferred annuities DO, however, allow you to access up to 10 percent of your account value annually without charging you a penalty or fee.
We hope this article has helped to dispel some common misconceptions about annuities. If you still have questions, feel free to browse our database, read our recent articles, or contact one of our planning experts. We love annuities and would be happy to answer any questions that you might have.