The word "annuity" elicits a negative connotation for many people, but why? Social Security is structured as an annuity, and most Americans receive benefits through this system when they retire. The main concern we hear from clients about Social Security is that they worry it might not be available in the future.
So, what’s behind the misunderstanding of annuities? Common objections include high fees, lengthy surrender periods, and a perceived loss of control over assets. It's important to remember that annuities are insurance products, and they can offer various types of protection based on their design.
To navigate these misconceptions, working with a licensed securities professional who is also a fiduciary and provides impartial, objective advice can be incredibly helpful. While some annuities may have higher fees due to additional benefits like lifetime income, there are also options with no upfront or annual fees that can be quite cost-effective. Keep in mind that many annuities include surrender periods, which could incur costs if you need to withdraw funds early.
So how might an annuity fit into your investment portfolio? Clients seeking any of the following may want to investigate how an annuity can benefit them:
- Guaranteed rate of return
- Guaranteed lifetime income
- Protection against downside risk in the market
- May provide a lower cost alternative to other types of investment products
Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer. Withdrawals made prior to age 59½ are subject to a 10 percent IRS penalty tax, and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available subaccount portfolios will fluctuate, so the value of an investor’s unit, when redeemed, may be worth more or less than the original value. Optional features available may involve additional fees.