Fact or myth blog

Facts and Myths Surrounding Annuities

“The bottom line is that it’s imperative to thoroughly research the details of any annuity and make sure you understand them before you invest.” said Michael Rittershaus in this article and I couldn’t have said it better myself.
At the end of the day everyone wants their market share whether it be annuities, stocks, bonds, ETF’s or currency sales. People will say just about anything to strike fear in the heart of the investor and ultimately swing the vote in the direction of whatever they are selling. My goal is to demystify the annuity realm and help hard working Americans understand how this tool works and why it could be a viable solution for them.
While some of what Michael wrote is true, I’d like to shed some light on the shady areas -
### Annuity Fees:### Annuity Fees are mainly found in a Variable Annuity Contract. The prospectus, as mentioned in the article, can be upwards of 150pages. Daunting, to say the least. Your Financial Advisor (FA) should already be outlining every fee within the contract structure and how they are applied. If your FA isn’t doing this, you may want to consider a new planning partner but either way, never be afraid to ask. It’s your money after all!
Fixed and Guaranteed Annuities traditionally do not have fees associated with them. What they do have is a surrender schedule. When an insurance carrier agrees to a stated interested rate for a certain period of time, they assign a surrender schedule that matches the term you selected. If you leave the contract before the surrender is up, you will face a penalty known as a surrender penalty.  It is important to understand that in this case the annuity is being used as an advanced savings plan. Instead of holding money in a bank account at near zero interest per year, you can move it to a fixed guaranteed annuity for a higher rate of return, guaranteed without fees.
Fixed Index Annuities can be fee or non-fee based depending on your preference. More and more we are seeing “performance based” index annuities come to market which afford the client more than just 100% principle guarantee and downside protection. Performance based annuities are creating true growth potential beyond a low, fixed cap rate. As a result, some of the options affording greater access to upside have fees or spreads associated with them. The difference is important to understand:

Fee is deducted each year regardless if there is a gain in the contract Spread is only deducted to the extent that there is a gain in the contract

In this instance, the charges aren’t all bad. There are certainly tradeoffs for moving to this product type. One tradeoff being you will not participate in the full upside of the market but you are also not risking loss with a market downturn. The Cap or Ceiling of a strategy allocation, is the tradeoff for 100% principle guarantee and protection from market downturns. I’d say that’s a win in the consumers’ eye.
The “pitfalls” exposed at the end of the article is another attempt to scare you from a strategic planning tool to help secure some of your hard earned dollars and lock in guaranteed income that cannot  be outlived.
Myth:Fixed Annuities forfeit any remaining money to the insurance company rather than pay it to beneficiaries if the owner dies before the contract expires.
Fact: This applies only when a Fixed Annuity has been annuitized with a Life Only payout option, meaning it pays during the owners Life, only. There are several Income and Death Benefit options available, #Knowthefacts.
Same is true for a Single Premium Immediate Annuity (SPIA) and a Deferred Income Annuity (DIA) when a Life Only option is elected.

Payout options include: Life with Period Certain, Life with Cash Refund & Life with Installment Refund. Read more about these options here.

In this day and age, there are new options and product offerings for locking in and guaranteeing income that cannot be outlived. The above “life only” rules wouldn’t even apply.
Myth: Equity Index Annuities (EIA) have strict caps on maximum annual returns.
Fact: EIA is now known industry wide as Fixed Index Annuities (FIA) and they do have cap & participation rates associated with each allocation strategy. Each year at contract anniversary, the carrier reserves the right to increase, decrease or hold steady on the stated rate. The client also has the option to move between the strategies at the same point each year. Another plus? I’d say so! And let’s not forget that there is always a Fixed Guaranteed strategy option. The Cap or Ceiling of a strategy is the tradeoff for 100% principle guarantee and downside protection. There is no risk of loss with this product type.  Some products are more competitive than others and depending on the clients risk tolerance, the FA should be able to match accordingly.

There are a few things we know for sure, like insurance companies are always going to make money, or else why would they be in this business? We also know that after 2008 there was a shift in how consumers viewed investment products with little to no guarantees. As a result, insurance companies have responded with innovative ways to offer the consumer what they want: Safety, Security, Downside Protection with Upside Potential AND Guarantees!

Commission fees are often associated with the sale of an annuity. The commission, however, does not come out of the client’s premium. An important distinction.

To conclude, Annuities are a tool like any other from stocks, bonds, money market accounts to mutual funds.  Each tool serves a different purpose and has a strength of its own. Annuities absolutely allow an avenue for funding with protection mechanisms in place along with the opportunity to lock in and guarantee a lifetime income stream. Since retirees face an income replacement dilemma, it only makes sense that an Annuity would become the tool of choice for this phase of life.

To learn more about The Milner Group advantage, connect with one of our experienced consultants today.

Posted in Annuities
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