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Annuity myths

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Annuities Institute offers a list of the top 10 myths associated with annuities.

  1. Every annuity is a variable annuity. Often, all types of annuities are lumped together with variable annuities, despite differences in risk properties. Nearly half of all annuities purchased have nothing to do with stock market performance, and offer guarantees through fixed minimum interest rates and future protection against loss of principal and earnings.
  2. Insurance agents aren’t qualified to offer financial planning. Some investment managers will diminish the value of annuities because insurance representatives do not need a securities license to provide investment advice. However, a securities license is only utilized when selling speculative investments where the potential for loss exists.
  3. Fixed annuities will never outperform inflation. Some investment advisors are against fixed annuities because of their perception of future inflation. They feel that some risk must be taken to grow savings to maximize personal wealth. For investors who cannot afford to lose any of their life savings, risk should never be a substitute for long-term planning and new income generation as needed.
  4. All commission-based insurance planners are biased. It wasn’t all that long ago that fee-based planning was created by large financial firms to ease client fears of non-objectivity. Their goal was to maximize medium term earnings and residual income, while having more direct control over client investments.
  5. Annuities are all about penalties and surrender charges. Like the 401(k) and IRA, the annuity takes advantage of special legislation passed by Congress which provides incentives for individuals to save more money for their retirement. The long-term savings approach allows annuity providers to offer higher interest rates, guaranteed security, tax deferred accumulation and positive planning benefits for tax and distribution planning. No one would typically write negative articles about how an IRA or 401(k) incurs unnecessary penalties for accessing money prior to age 59 1/2 , so why would they criticize annuities for similar parameters?
  6. Never invest your IRA money in an annuity. A frequent caveat found within tips on how to qualify your financial advisor is to automatically disregard anyone who ever recommends an annuity within an IRA. The should-be obvious exception to this is when safety is paramount and loss to principal is not an option, and a fixed annuity offers a higher rate of return than other forms of traditional savings. More often than not, fixed and indexed annuities outperform other non-security investments when risk to principal and earnings is not an option. The annuity would have been selected for its interest paying capabilities as a growth investment, not as a tax deferred tool within a tax deferred account.
  7. Only deal with big names you are familiar with. While people typically gravitate towards big companies with names that are instantly familiar, brand visibility doesn’t automatically mean the best rates, service and performance. Many planners can be placed into two categories when it comes to helping select annuities for a retirement plan: those that exist only to sell products that their parent company creates, and those that remain independent to ensure they have access to the widest possible range of products on behalf of their clients.
  8. Only registered investment advisors can be trusted. Some of the criticism towards annuities comes from professional asset managers who earn their commission as a percentage of the total money they manage and keep at risk for maximum growth. There is a significant difference between the professional investor who wants to aggressively grow their million dollar portfolio, and the retiree with $150,000 that will likely need every dollar and more to get through their retirement without outliving their savings.
  9. Indexed annuities are often sold inappropriately. The opinion of some stockbrokers is that equity index annuities are not suitable for retirement planning, and that they are often sold inappropriately to seniors. A top complaint is that they limit the total earnings an investor can receive during upswings in market performance. The EIA though was purposely created as a hybrid investment product that combined the growth potential of the stock market with the safety features of a fixed annuity. While upsides may be capped at 7 percent to 12 percent, an investor never has to worry about losing principal or earnings, and typically has several options by which to guarantee minimum interest rates paid regardless of market performance.
  10. Our financial designator is better than yours. Many planners and consumers rightfully look to financial designators as an indicator of professional service, dedication and commitment to excellence on behalf of clients. Some investment groups go as far though as stating that only two designators should be utilized for financial planning, and that the rest should be instantly dismissed. Ironically, many of the members within two of these bodies do not normally carry insurance licenses, as they focus on risk-based investments for aggressive growth purposes. They offer little support to risk-adverse seniors looking for maximum security and safety for their life savings.