Posted by There are many misconceptions surrounding annuities.
Too many product categories, the differences between “traditional” and “modern” annuities, and lagging market education are the three main factors that generate these misunderstandings.
Myth 1. “All annuities are the same”
Annuities share many common features, but each annuity type has its own rules that apply.
The initial annuity is a one-time payment or installment payment to the insurance company. In return, the insurance company promises to provide the policyholder with monthly or annual income on a regular basis in the future, emphasizing "income".
Modern annuities not only inherit these basic functions, but also independently develop the function of "cash value accumulation and growth" and emphasize "financial management".
Therefore, for investors, all annuities on the market mainly provide two major functions. One is the "financial management" function to increase growth potential; the other function is to provide lifelong retirement cash flow income.
We need to determine what kind of annuity insurance product to choose based on age and financial goals.
(>>>Recommended reading:Comparison of American Annuity Insurance Types, Prices and Advantages and Disadvantages )
Myth 2. “I have to wait until I am 60 before I can get money.”
Most modern annuity insurance accounts allow policyholders to withdraw money from the account for free, and there are no fees such as surrender penalties.2 .
Income annuities are a special case and can be purchased at any age. The policyholder deposits a premium into this type of product, and then immediately starts receiving lifetime income from the insurance company.
Some annuity contracts will stipulate a penalty period. After the penalty period, the entire amount of the annuity account can be withdrawn without cost.
During the contract period, you may face fees and penalties for early withdrawal of account funds. Therefore, you need to consult and confirm with an insurance financial advisor before withdrawing.
Myth 3. “Annuities have high hidden fees”
In fact, many annuities have no management fees or annual fees.
This has pros and cons. The advantage is that the product has strong market competitiveness; the "disadvantage" is that few institutions or brokerage companies are willing to actively sell these annuities.
Today when I wrote the article, a user from California complained to me that he could not find a place to purchase the annuity product he wanted, and financial institutions near his home mostly recommended other financial products to him.
Some annuity products charge different fees based on additional benefits (riders). For example, some financial annuity insurance products may have additional clauses for withdrawing guaranteed lifetime income. A fee will be payable when this provision is activated in the future.
Misunderstanding 4. What should I do if my annuity dies unexpectedly after I start receiving money?
When filling out the annuity subscription contract, you can set up a beneficiary. If you die before you start receiving money, the insurance company will pay the claim to the beneficiary.
When starting to receive money, we must select an annuity income option and specifyBeneficiary.
If you choose the "10-year", "15-year" or "20-year" annuity income option and start receiving retirement benefits, if you die midway, the beneficiary will continue to receive the annuity income until the income contract expires.
If you choose the "lifetime payment" annuity income option, this is a bet with the insurance company. If you die midway, the insurance company will stop paying; if we live a very long life, the insurance company will continue to pay until we die.
The "pay for life" income option is just one of many income options available in an annuity contract, but is the most common.
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Myth 5. “Annuities are for the elderly”
Another biggest advantage of annuities is that there is no tax on annual appreciation, so they can be a tool for capital accumulation and income flow that maximizes time advantages.
Young people have a significant time and age advantage and can use annuity accounts as a tax-deferred channel to save for the future and make the most of the characteristics of this financial channel.
Middle-aged people aged 45 to 55, despite the short-lived market interest rate last month, can lock in an annuity income account for up to 10 years with a guaranteed rate of return of 10% per year, setting a new high in recent annuity financing interest rates.
(>>>Related reading:How do I transfer my 401k out if I quit my job and change jobs? ｜4 ways to deal with old company retirement accounts and a comparison of their advantages and disadvantages)
Myth 6. “Annuity taxes are troublesome”
Funds in an annuity financial account grow in a tax-deferred manner. To put it simply, during the accumulation period, we don’t have to deal with the trivial matters of annual returns and capital gains.
At the same time, this approach offers more potential for retirement income growth.
Comparing IRAs and 401(k) retirement accounts, although they also offer tax deferral, they are subject to annual IRS restrictions, cumbersome rule updates, and the amount of money that can be deposited is not large.
Annuity accounts do not have IRS premium limits and are long-term, tax-deferred products.
If you don’t accept losses, don’t want to receive a 1099 investment and financial management tax form every year, and don’t like the hassle and complexity, an annuity insurance account is a good choice.
(>>>Recommended reading:Column | How to use IRA and 401k to buy retirement annuity? Full analysis of penalty-free strategies)
Column summary
"Six Misunderstandings About Annuities" reveals common misunderstandings surrounding annuities. This misunderstanding is caused by the differences between modern annuities and traditional annuities, as well as completely lagging market education.
From the variety of annuity types, to the flexibility of withdrawal options, to fee structures and tax advantages, I explain how annuities can offer features not typically found in other financial avenues, such as tax deferral, guaranteed retirement income, and protection on death. Claims.
Annuities are a powerful financial outlet and retirement planning tool. In 2024, clarifying which are facts and which are myths will help us identify the tools that are suitable for us and better plan and ensure future financial security. (Full text ends)
1Withdrawals before age 59 1/2 are subject to an IRS penalty.
2 Surrendering the policy during the surrender penalty period will incur a surrender penalty and result in the loss of part of the principal. Surrender penalty amounts vary by state and annuity product.
3 Under current law, annuities enjoy tax-deferred tax incentives. Annuity interest rates fluctuate with the market, and the interest rates provided in the article are not guaranteed. Annuities are not required to be tax deferred in a qualified plan account. Annuities may be subject to taxes during the income or withdrawal phases. When applying for an annuity account, please discuss and communicate with professionals with professional knowledge.
