A tool isn’t good or bad. It depends on how you use it. Annuities are one very misunderstood tool, in part perhaps because of their misuse. Annuities are a financial instrument that can have value when properly used. However, a number of planning errors can be made by misusing annuities—not because they are bad products but because the financial advisor may have not been sufficiently knowledgeable or was not looking out for the client’s best interest. On the other hand, we can miss out on valuable opportunities if we don’t know the tools at our disposal (and how to use them!)

This month, we take a look at 5 more common perceptions about annuities and explore whether they are based on truth or a myth.


The issue or suitability of instruments is based primary on financial objectives, not a stage of life. Each specific individual has to weigh their needs and desires against the pros and cons of each financial instrument when deciding how to make their portfolio. When people retire, they generally want less risk. Annuities are low risk but have the additional benefit of offering higher interest potential than other low-risk financial instruments. Yes, there are some negatives like limited liquidity and surrender charge periods However, annuities are a good choice if the attractive features of an annuity outweigh the negative feature of limited liquidity. For those younger than 59½, there’s an added consideration. They are subject to a 10% income tax penalty on interest withdrawn from annuities (like IRAs), and they may be more interested in higher risk vehicles that offer a higher growth potential. Still, there are relatively young consumers who have a risk comfort level consistent with that of retirees—due to fear of investment risk or perhaps an inability to work. The lifetime income features of annuities may be attractive to those in the younger population interested in retirement income who are not entitled to pensions
So let’s dig in again to consider the best perception and weigh, Truth or Myth?


The complexity of annuities varies across the broad range of choices. Annuities like those that pay a specified interest percentage or provide a specified payment for a stated period of time are simpler. Other annuities can be more challenging to understand—particularly those with interest results that fluctuate year-to-year based on the performance of various investment options and those with riders that offer additional benefits. You as a consumer should never purchase any financial instrument or make any purchase that you don’t understand the details of. Fixed annuity companies require their financial representatives to be properly trained to sell their products and monitor the suitability of each product placed. Government regulations protect consumers by allowing them to cancel their annuity policy and have their funds returned after they purchase an annuity and are afforded time to review their contract.


This argument is based on the tax-deferred interest feature of annuities which seems “redundant” when annuities are funded with IRA money which is already tax-deferred. Conversely, an IRA is the best account to fund an annuity because the limited liquidity feature of an annuity aligns with consumers’ reluctance to be taxed when making a withdraw from an IRA—regardless how it may be invested. Consumers are better advised to place less liquid money into an annuity than to be incentivized by the tax-deferred features of annuities, particularly if they expect to take sizable distributions from the account. (Side note: consumers need to be aware that the tax-deferral feature of an annuity should be managed so it does not create a large potential tax liability if the interest is allowed to accumulate and is not periodically withdrawn.) Looking at the overall risk profile of a portfolio, an important tax benefit of funding IRAs with no-risk annuities is a larger percentage of high-risk stocks can be placed in non-IRA accounts and be taxed at capital gain tax rates. Since stocks held in non-IRA accounts are taxed at the lower capital gain rate than the ordinary income rates if they are held in an IRA, purchasing annuities with IRAs could provide a potential overall tax savings to consumers.


A long-life expectancy is a relevant consideration for annuities that provide lifetime payments, since payments cease and the value of the annuity vanishes upon the passing of the individual on whose life the payments are based (the ‘annuitant’). Income annuities are generally inappropriate for individuals with a short life expectancy. Some income annuities provide additional benefits if the owner needs assistance with the daily activities of living associated with long-term care or requires a nursing home confinement. These policies will provide more benefit to owners the longer they live, but even with a shortened lifespan resulting from an illness, some income annuities can provide a much higher payout than owners paid into them. The benefit of a long life is not tied to growth annuities like it is to income annuities.


There are two broad classes of annuities: growth and income. Annuity companies cannot “keep” your hard-earned money regardless which of the two you may have. The account value of growth annuity is paid out upon the owner’s passing. Income annuities have a greater variety of death benefit arrangements. Some income annuities pay out the remaining account balance in a lump sum or continue payments to beneficiaries for a stipulated period of time after the owner’s passing. There are other income annuities specifically set up as lifetime income annuities. Because of their purpose, to provide income for life, then there is a provision that payments will stop upon the owner’s passing. In these contracts, an individual consciously exchanges a lump sum of money for an income and no longer has an “account balance” (similar to a pension). In these arrangements the annuity company is not “keeping the owner’s money” because at the time of the transaction, the owner of the annuity chose to exchange the lump sum for income. At the time the money became the property of the annuity company, the company assumed the risk associated with paying the annuity owner throughout a very long life. Hopefully that clears up a bit of the foggy misperceptions around annuities. However, unless you’re a trained professional, you probably still have a bunch of questions. That is why you need a competent and committed professional to help you understand if annuities are right for you and which specific features of annuities are best for your particular needs

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