The 5 Biggest Myths About Annuities
The following educational materials are intended for informational purposes only and are not intended to constitute personalized financial advice.
Annuities are often one of the most misunderstood financial products. They tend to generate strong opinions — both positive and negative. The truth is, when annuities are properly understood and used for the right purpose, they can play a valuable role in a retirement strategy. Let’s clear up some of the biggest myths and misunderstandings.
Myth #1: “Annuities are only for retirees.”
Reality: Annuities aren’t limited to people already retired. A significant number of annuity buyers are still working when they purchase an annuity and are preparing for retirement within the next 5–10 years. Many people in their 40s and 50s also use them for tax-deferred growth or protection against downside market risk. The typical annuity buyer isn’t necessarily retired — they’re just proactively planning for retirement.
Myth #2: “Annuities lock up your money forever.”
Reality: Annuities typically have a set period of time, known as the surrender charge period, in which withdrawing money is penalized (often 5–10 years). However, annuities often allow specific annual penalty-free withdrawals — usually around 10% per year. After the surrender charge period ends, you have full access to your funds. Annuities are long-term tools, and it’s important to understand both your own needs for access to your money and the access guidelines specific to the type of annuity that you purchase.
Myth #3: “If I die early, the insurance company keeps my money.”
Reality: In most modern annuities, your remaining accumulation value includes death benefits that allows proceeds to go to your beneficiaries. Modern annuities are designed with protection and legacy in mind. Annuities with a named, living beneficiary will not be subject to probate.
Myth #4: “All annuities are the same.”
Reality: There are several types of annuities, and they work very differently. Here are a few of the common annuity types:
● Fixed deferred annuities pay a rate declared by the company that may be guaranteed for one year or multiple years and are subject to change after the guarantee period ends
● A fixed indexed annuity offers interest crediting options that measure interest based on the positive movement of an external financial index during a crediting period (usually 1 year), if any, subject to a limit in the form of a cap or participation rate.
● Variable annuities invest in market subaccounts and can go up or down.
● Some Fixed Indexed and Variable annuities include income riders that provide lifetime income.
Saying all annuities are the same is like saying all cars are the same — a sedan, a pickup, and a sports car all serve different purposes.
Myth #5: “Returns are too low compared to the market.”
Reality: It’s easy to compare annuities to the stock market – especially during strong market years when headlines highlight double-digit returns. On the surface, annuities can seem less attractive because they don’t always capture the full upside of market gains. Annuities are not designed to “beat the market”- they’re designed to provide predictability and protection as part of a holistic overall approach to retirement. Annuities are not intended to maximize returns, but to build peace of mind into retirement portfolios for when markets are volatile.
The Bottom Line
Annuities are insurance products designed to help with growth, protection, and/or income — especially in retirement. They are one piece of a retirement strategy — not the whole plan. Many people use them to cover essential expenses with guaranteed income, while keeping other investments for growth and flexibility. Understanding how each type works is the key to deciding whether one fits into your financial picture.
When you strip away the myths, annuities are simply tools. And like any tool, they work best when used for the right job. To learn more about how an annuity might fit into your retirement landscape, contact a financial professional.