Debunked: 9 Myths About Annuities
Tax season is finally over, and it’s safe to say that we’ve all got money on the brain. How can we protect it? How can we make a return on our investments? Are annuities all they’re chocked up to be?
As with any kind of money-saving or investing tool, there are a lot of myths and misconceptions floating around.
Our staff hit Founder John Hockaday with 9 of the most common annuity concerns, and he sat down to debunk them once and for all.
1. Annuities are too complicated.
Anything can be simple or complicated, but when it comes down to it, it really isn’t. If you sit down and talk about this with your agent, you’ll find that they’re really, really simple.
When you bring in all the different flavors of annuities, the conversation can get complex. But the kind that we do day-in and day-out for the senior market is just so simple.
Seniors are looking for safety, a guarantee on return, and access to that money. We don’t want surprises.
Multi-Year Guaranteed (MYGA) annuities are really 95% of what we do for our seniors. They’re easy to understand.
If you don’t understand something when it comes to your money, you aren’t going to do it. And that’s why we do so much annuity business — everyone can walk away with confidence in it.
2. If you die too soon, your money is gone.
Not true. That reminds me of a pension or social security. Annuities aren’t that way at all.
If you die, there’s a beneficiary, and they’ll receive the proceeds.
Whatever amount of money is in there, the beneficiaries are going to get it. If you’re married, you can continue it. It’s called a “spousal continuation.” The spouse can inherit it and just keep running with it.
It’s not like it goes away — you don’t lose on this.
3. You can’t access annuities for emergencies
On the kind that we write, most give you access to the interest. Most also give access to a withdrawal privilege. You can add that feature when you sign up.
If it’s a terrible emergency, you can always surrender it and get your money back. You’re going to get a penalty for that, and the amount will depend, but when you sign up, your agent will spell that out for you.
Now, a lot of the annuities we write let you access the money penalty-free if you need to stay in a nursing home. That’s a huge concern for seniors, and it’s a huge bonus of the annuities we do. KSKJ and Sentinel do this, for example.
The only downside is that your rate is reduced. For Sentinel, it’s a 0.15% rate reduction. So, it’s a small reduction for a lot of peace of mind. A lot of people will take that trade off without thinking twice.
4. Investing in stocks and bonds gives you a higher return than an annuity
That can definitely be true. But the flip side of that is that there’s risk involved. That’s the trade. There is no risk with MYGA annuities. It’s always going to be worth a little more than what it was the day before.
Every time you go to bed, you’re going to make a little bit of money. You’re never going to go the other way.
That’s why most seniors aren’t as concerned about making more money as they are about preserving what they’ve made.
5. An annuity is a bad choice if you want to leave something for your heirs
I don’t think it’s a bad choice. It’s a choice. You have a named beneficiary, so you can choose who gets what and how much.
There are different ways to transfer wealth — life contracts (income tax-free), for example.
The thing to know about an annuity is that the gain in the annuity will be taxed to the beneficiary.
So, let’s say you’re my kid and I die. My annuity pays you $100,000. Let’s say there’s $50,000 of cost basis in it, so it’s made $50,000 of gain.
You’ll have to report that extra $50,000 as income when you receive that money.
BUT, I’ve been doing this for forever. I’ve never had a son or daughter say “Gosh, I just got this check for $100,000, but…”
You have the money to pay the tax, you know? It’s a gift.
Another good thing about an annuity that stands out is it avoids probate. So, you name a beneficiary, and when you die, you get that money fast. It’s usually 2 or 3 weeks.
All you need is the death certificate and a claim form.
If it gets probated by your attorney, you’ll have probate costs and long delays before you get that money.
It’s not a bad choice at all to use an annuity for transferring wealth.
6. Annuities have high and hidden fees
The kind that we write have no hidden fees. In other words, if you’re going to buy a 5-year annuity from me, and you give me $100,000, that entire chunk of money will start earning money tomorrow. It’s not like they take out money from you to pay me.
All of your deposit will start earning interest the next day.
Now, are there surrender charges? Absolutely.
If it’s a 5-year contract, and if you decide you want all your money back before that 5 years is up, they’re gonna hit you with a surrender charge.
The amount depends on the carrier and the time you want to pull everything out, and your agent will go through that with you before you decide to sign up.
Just to give you a general idea, here’s an example of how surrender charges can work.
7. Agents sell annuities for the high commissions
The kind of annuities we write — MYGA annuities — they just aren’t high commissions.
There are annuities that pay high commissions. The type that have 15-, 17-, even 20-year terms — those annuities have much higher commissions.
But, we don’t write those kinds. We’re working with seniors — seniors are comfortable for the most part going out on a 5-year contract. That’s generally pretty comfortable.
But if you’re talking to a 75-year-old and you put them in a 12-year contract, you’re not looking out for them.
So, the annuities we write are not written for high commissions. They’re written because it’s often the best and safest option for the client.
8. Annuities are too expensive
Most of the annuities we write have a $5,000 minimum to get it started. Some even go lower than that.
You don’t need hundreds of thousands of dollars to get an annuity going.
9. Annuities are only for conservative investors
They’re not only for conservative investors, but conservative investors like them.
Let’s say you’re retired. To have all your money at risk… it’s dangerous.
There’s wisdom in not having all your eggs in one basket. Even if you have lots of money in the stock market, there’s definitely wisdom in making sure at least some of your money is safe.
Want to look into annuities? Have some unanswered questions?
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