3 Myths About Annuities
Many people have heard about annuities, but some are skeptical about them for some reason. Maybe it’s because they almost sound too good to be true. But once you understand how they work, you begin to understand why they are a very popular and integral part of many people’s retirement strategies. At Mountain Financial, we often find out that, when we explain to our clients how annuities work, they often choose to purchase some type of annuity.
If you are one of those people who looks askance whenever someone tries to tell you about the benefits of annuities, it may be because you have been led to believe some of the myths surrounding them. Unfortunately, these myths never seem to go away. Here are three common myths about annuities and the realities that refute them.
Myth 1: Annuities are Too Complicated for Ordinary People to Understand
While the actual contractual details of annuities can be dry and complicated to read through, annuities themselves are very easy to comprehend.
An annuity is a contract between you and an insurance company. In this contract, you agree to pay a lump sum of money or to make premium payments over time to the insurance company. The money you contribute is invested by the insurance company for your benefit.
In return, the insurance company promises to make periodic payments to you of a specific amount starting at a certain future date. These payments will continue until you die, even if you live long past your anticipated life expectancy. Annuities are thus like privately-funded pension plans that you cannot outlive.
There are several different types of annuities, and each of them has specific features. For example, joint and survivor annuities allow you and your spouse to receive payments as long as either of you is alive. How your particular annuity works will depend on what you want. Don’t let the details bog you down at the outset. Just understand the basic mechanics of how annuities work, and then give yourself plenty of time to resolve the details with your insurance company based on how you want your annuity to operate.
Myth 2: If I Die Early, the Insurance Company Keeps All the Money
One concern that some people have is that if they purchase an annuity and don’t live long enough to collect any or much of the funds they have invested, the insurance company will get to keep all the money. This concern is misplaced.
The first thing you should remember is that annuities are contracts between you and the insurance company. You have control in how the annuity is structured and therefore can make sure that it is set up with terms that you are comfortable with. Another thing to remember is that this is a life insurance product. While the hope is that you have the ability to utilize the funds during your lifetime, rest assured that the remaining portion of your funds will be distributed to a beneficiary of your choosing whether in lump sum or over time. The insurance company does NOT keep all the money that you do not use. The reality is you can arrange for your annuity to continue to make payments after you pass away to other beneficiaries, and many people opt to do just that.
At the same time, you may choose not to have payments extend beyond your death or beyond some other period – say five years or ten years. This may be a more attractive option if you want to ensure that you obtain the largest financial benefit for yourself during your life rather than save the money for your beneficiaries. But even if you decide you would rather have payments terminate upon your death does not mean that the insurance company necessarily “keeps all the money.”
Myth 3: Annuities Always Benefit the Insurance Companies, Not You
As the example above illustrates, whether you or the insurance company comes out with a financial benefit will depend largely upon how long you live.
So why would an insurance company be willing to take the chance? It is based on statistical information. Over the long run and spread across a large population of annuitants, insurance companies earn a net profit on annuities, which is why they sell them. But this does not mean that any particular annuity always benefits the insurance company; plenty of annuitants come out far ahead.
You can think of annuities as a type of retirement plan you purchase that can give you a guaranteed income for the remainder of your life. An annuity can provide you with great peace of mind, confident that you will not outlive your income. If you can keep yourself in relatively good health, chances are that you will benefit significantly from an annuity and likely gain a greater return on your investment than you could have ever done by other means.
To find out more about annuities and to have your questions answered and doubts dispelled, contact Mountain Financial today.
