It seems that annuities are one of those financial products that people love to hate. And while there are certainly some valid criticisms of the annuity market, there are also a lot of misconceptions about annuities that need to be debunked. In this post, we’ll take a look at some of the most common misunderstandings about selling annuities and why they’re wrong.
It Is Hard to Sell Annuities
One of the most common reasons people give for not annuitizing is that it’s too hard to sell an annuity. If you’re not careful, this one might seem almost plausible; we’ve all heard the horror stories about how insurance agents and advisors pile high-commissioned sales pitches on their clients, and it’s easy to see how that could end up in a bad situation for all concerned.
But in reality, it’s much easier to sell annuities than you might expect because of how they work. The core idea of an annuity is that you invest some money now in return for regular payments, usually monthly, over the next period. So when you’re assessing your needs and planning your future financial life, what’s important isn’t who sells you an annuity but whether it’s right for you in the first place.
Annuities Lack Renewals
Another common concern about selling annuities is that they may be more difficult to refute. Annuities are often sold with an expiration date, which means that after a certain period, the annuity expires and stops paying out if you haven’t bought another one by then.
This is not as bad as it sounds at first glance. For one, many annuities incorporate low-risk investment options that can produce substantial returns for many years into the future. If you have thirty years until your retirement date and you buy an annuity with a guaranteed 8% return, it might well last long enough to provide you with all of the income you need in retirement.
Annuity Taxation Is Very Complex
Another popular reason for not buying an annuity is that they are subject to very complex tax rules. If you want, there’s certainly enough minutiae in the annuity taxation rules to keep you busy studying for years. Still, the reality is that you don’t necessarily need to worry about it.
For example, one rule is that all income derived from annuities is treated as ordinary income, which could mean higher taxes for people whose other income is low. That’s true, but it doesn’t have to be a huge problem because annuity payments are still tax-deferred, which means the money compounds until the time of distribution. On top of that, the interest is often long-term, which means you probably were earning tax on it anyway.
Annuity Payments Are Taxable
One belief about annuities that is definitely false but that gets thrown around a lot since it sounds somewhat plausible is that all payments from the annuity are taxable. Annuity benefits are not taxed as ordinary income, so there’s no worry about this for early retirees.
And even if you’re using the annuity to fund an ongoing expense, it can still be a good idea to take payments from the annuity rather than converting it all at once. That’s because thresholds for higher tax rates are not triggered until you make much larger amounts of distributions (for example, it’s $45,000 for married but only $23,800 for single).
Annuities Are not Flexible.
One of the most pernicious myths about annuities is that they are inflexible and without options. Annuity contracts provide numerous ways to access your money, including lump-sum payouts, partial payouts over time, systematic withdrawals, temporary income for a specified period, or working with an insurance company to draw out annuity contracts.
They also often provide ways to protect yourself from risk and volatility by offering inflation-adjusted payouts and guaranteed retirement income – and it’s even possible to secure a refund of the amount you paid into an annuity if you decide not to keep it.
Like anything else in the world of finance, annuities are not perfect. They provide no investment guarantee, and they can be expensive to buy, although this cost should be weighed against the benefits. But if you’re considering purchasing an annuity for your retirement planning, don’t let any myths get in your way – it’s easy to see that most of what you hear about annuities isn’t true.