Annuity Myths and Where They Came From

Annuity myths, what are they, where do they come from, and what do you need to know so you can make better decisions with your money?
Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, host of the Retirement Income Show and CERTIFIED FINANCIAL PLANNER™ Professional (CFP®).

There are many annuity myths out there, and when I sit with people on a daily basis to help them plan for their retirement, almost never have I sat with somebody, and I’m talking over a thousand people, that really truly understand a lot of the financial instruments that are available to them in retirement. And one of the most misunderstood instruments is the annuity.

Now, I’m going to go through some of the common myths here and then I’m gonna share a story of something that happened to me when I was first getting into the industry a long time ago.

The first myth. If I die, the insurance company keeps my money that I’ve invested into the annuity. That’s not true. For the wide majority of annuities in the marketplace, when you die the full account value, meaning every dollar you’ve put in, any interest that you’ve earned, minus any withdrawals that you’ve taken, is the lump sum death benefit. Now, different annuities have different terms and conditions, some of them give enhancements, some of them give options and choices, some of them have annual fees, some of them do not have annual fees, which can affect the death benefit. But the wide majority of annuities, when you pass away, your full account value will go to whomever you name as beneficiary, and it will bypass probate. So the will will have no impact on that annuity. You have to make sure you name a designated beneficiary and you also want to make sure you name contingent beneficiaries so you have two sets of beneficiaries.

Myth number two. I will have no access to my money if I invest in an annuity. Once again, this is not true for the wide majority of annuities. Most annuities on the marketplace today give you anywhere from five to 10% per year access to the money that you deposit in the account, plus any interest earned. So if you want some money safe and you want a future income and you put $300,000 into a fixed annuity or a fixed indexed annuity, typically you’re gonna have access to about $30,000 per year if you need to access that money. As the account grows, you’ll have access to a larger number of dollars because 10% of a higher number gives you more liquidity.

Okay number three. Annuities have high fees. This one has come from the variable annuity world. So you have fixed annuities, there are fixed indexed annuities, there are variable annuities, then you even have immediate annuities. The myth that all annuities have high fees comes from the variable annuities. Most variable annuities do have high fees, and we never recommend variable annuities to clients simply because we think they’re a little bit risky, they have high fees, and the guaranteed lifetime income features aren’t really competitive.

So we don’t recommend variable annuities, but once again, the wide majority of annuities out there charge no annual fees. So the next time you hear somebody say that annuities have high fees, you can point them to this video because the truth is the wide majority of annuities on the marketplace today do not have high annual fees.

Myth number four. I must take it as an income for life. So one of the big myths out there is that when you deposit money into an annuity, you must turn that deposit into a guaranteed lifetime income stream. And once again, that is simply not true. Most annuities on the marketplace today, you make your deposit, it’s going to earn some interest in some type of shape or fashion, and then once the exit fee schedule, the surrender charge fee schedule is over, you can take all your money and do whatever you want to do with it, you do not have to turn it into a guaranteed lifetime income.

Now the surrender charge schedule could be five years, it could be seven years, it could be 10 years. If you live in a state outside of Texas, it could be even longer. Texas is what we call a 10, 10 state, so the longest surrender charge period you can have is 10 years in the state of Texas. But understand that annuities can be used for accumulation tools or income tools or accumulation and income tools, but you absolutely do not have to take your deposit and the interest that it earns and turn that into a guaranteed lifetime income if you do not want. You can take the money after the surrender charge period and do whatever you want with it. It’s your money, okay.

Myth number five. All annuities have low caps. So this refers to the fixed indexed annuity, and this is pushed out there by a lot of people who are anti-annuity, and either they have a vested interest, meaning they sell stocks and bonds only or their uneducated, and I see this a lot of times when it comes to articles written in magazines, big publications, they get this wrong all the time and it’s kind of funny to me, but it also infuriates me to a certain extent because they’re spreading misinformation.

So the truth is some annuities do have low caps. What does that mean? A low cap means you have a limited amount of interest that you can earn, but the other side of the story is many annuities out there have no caps, meaning you have an unlimited interest earning potential. Now, I’ve seen people with fixed indexed annuities, the worst I’ve ever seen them do is earn a 0% interest credit. But many times we’ve seen people earn double digit returns in a single year with an uncapped strategy or an annuity with no cap, and that money is safe and gets locked in, meaning it can never be lost again.

So once again, every annuity has its own terms and conditions, but when we hear these broad general myths out there, it’s important to be able to one, differentiate between that may apply to one type of annuity, but not all types of annuities. And most of the things that we read and we see, from my experience on the internet, from our friends, from people who are well intentioned that we may respect in other regards of life, a lot of times they simply have misinformation, or they’ve been told something bad, or they’ve read something that applied to one type of annuity and they presume that it applied to all types of annuity and that’s simply not true.

So where did a lot of these come from? The immediate annuity, so I mentioned this earlier, so now the immediate annuity has been around for hundreds of years. Governments used to offer these to their citizens, 2, 3, 400 years ago, I’ve even read stories about the Roman government offering immediate annuities or similar type to people way back then. And the concept with an immediate annuity is you give the life insurance company a lump sum of money, and in exchange, immediately, they start giving you a guaranteed lifetime income. Typically it starts 30 days later, and you’ll receive a check every month for the rest of your life.

Now, this is where a lot of the myths come from that you hear about today’s annuities. When you have an immediate annuity, and you say, I’m going to give you $300,000 and in exchange, I want an income for life that starts immediately. You have some options, you can choose a life income, a life with 10 years certain, a life with 20 years certain, or a life option with 30 years certain.

Now, if you choose the life option, this is going to give you the most amount of annual income as long as you live. The 10 year certain will give you a little bit less, 20 years is lesser, and then the 30 year certain option gives you the least amount of annual income. But what this 10, 20 and 30 year cert means is if you make the deposit and then you get hit by a bus the very next day, somebody is going to receive a payment for 10 years, absolutely certain.

If you choose this option, and you make the deposit, get hit by a bus the very next day, somebody is going to receive an income for 20 years certain, but this income will be less than this income, and this income that you’ll receive would be less than this one. With the life option, it gives you the most amount of income. So if you choose this option, and you get hit by a bus the very next day, guess what, there is no death benefit.

And this is where the myth that when I deposit money into an annuity and then I die, there’s no death benefit comes from. I’ll never forget, when I first got into the business, I had a family come in to see me and their father had passed away. They said, Troy I need some help going through all this stuff and really making sense of it. And they had this annuity statement and they saw that their father had recently put a half a million dollars into it. We called the insurance company, and they said I’m sorry, there’s no death benefit with this contract, and the guy was irate. I mean, he was livid, he was furious. And I had to explain to him that what happened was when your father decided to put money into this immediate annuity, he chose the life only option, which means he did not expect to pass away, especially so soon. So he chose the option that gave him the most amount of income, knowing that if he did die, that there would be no death benefit.

So that still didn’t necessarily satisfy him, because he thought he was going to get a half million dollars, but over time, he understood that this was the choice that his father had made and unfortunately it didn’t work out for him. So the immediate annuity is the likely culprit for many of the annuity myths that you hear out there.

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