Addressing Common Annuity Myths: Part 1
Setting the Record Straight on Fixed Index Annuities with Income Riders
The following content is excerpted from the book, Momma’s Secret Recipe for Retirement Success,” by Dan Ahmad, Jim Files, and Jack Canfield, with valuable contributions from other leading professionals from around the world. This excerpt was written by John Kirker, fiduciary financial advisor, and reviews ten common annuity myths – specifically, annuity lies people believe about fixed index annuities with income riders.
This is Part One of our two-part Common Annuity Myths series.
If your goals are to:
- Protect your money against 100% of all stock market losses.
- Guarantee you won’t run out of income for as long as you live.
- Receive the same or higher income for as long as you live regardless of stock market volatility or how long you live.
- Pay a relatively low total annual fee of approximately 1%.
- Have the opportunity to earn a competitive rate of return.
- Defer 100% of the taxation on any growth until you take distributions.
- Never subject current or previous gains to future stock market losses.
- Pass 100% of all remaining funds at your death to your beneficiaries.
One of the only, if not the only, financial instruments you can use to do all of these things is a fixed index annuity with an income rider.
This description is 100% true. It can’t be challenged based on conjecture or fact. The Webster online dictionary provides the following definitions:
So, if something is unfounded or false, by definition you probably should not believe it. If someone tells you something untrue, trying to fool you, you probably shouldn’t listen to them. People will tell you myths about fixed index annuities with income riders because they don’t really understand how they work, or lies because they want to sell you something else. In this section, we wish to debunk these myths and expose the lies. The myths most told and the lies most spread about fixed index annuities with income riders include:
(1). Myth/Lie: You will pay very high fees.
Truth: This is not true with a fixed index annuity with an income rider as typical fees average right around 1.0%. A 1% fee is very low compared to the 3.0% or higher total fees we see the average consumer paying to have their portfolio managed, or to the 4.0% or even 5% fees we often see consumers paying for a variable annuity.
(2). Myth/Lie: There is a big commission that comes out of your money invested to pay the agent.
Truth: There are no commissions deducted from your assets to pay the agent commissions. If you buy a fixed index annuity with an income rider for $1,000,000, you will get the full $1,000,000 deposited into your contract. The insurance company pays the agent, you don’t.
(3). Myth/Lie: You can’t access your money for a long time. It’s completely and totally locked up.
Truth: In the vast majority of plans, you can access funds after 12 months by either turning on your guaranteed lifetime income or taking up to 10% per year penalty-free. Some plans even offer access to income as soon as 30 days from deposit. What you can’t do is take out 100% of your money for a certain period of time without a surrender charge, just like a CD when you withdraw prematurely.
(4). Myth/Lie: If you take guaranteed lifetime income payments, and then pass away, the insurance company keeps your money and your beneficiaries get nothing.
Truth: In a fixed index annuity with an income rider, if you start taking guaranteed lifetime income using the income rider, and then pass away, 100% of the funds remaining in your account at death will be paid to your beneficiaries; the insurance company will not keep any of your money.
(5). Myth/Lie: You lose total control of your assets.
Truth: In a fixed index annuity with an income rider, you retain total control of your assets and do not relinquish them to the insurance company. You can turn income on when needed as the plan allows. You can take penalty-free withdrawals when needed as the plan allows. You can turn income on earlier or later as the plan allows. You can change beneficiaries at any time. You can take a lump sum of the net surrender value at any time. You can change your indexing options as time goes on. Finally, you can pass all remaining assets to your beneficiaries when you pass away.
(6). Myth/Lie: You will not get any growth.
Truth: In a fixed index annuity with an income rider, you have the opportunity for your assets to grow at a competitive rate based on a low-risk asset. You will not get full index returns, but you will have the opportunity to receive a portion of index gains without ever having to risk or expose any of your principal to a stock market loss. Your annual gain, called an index credit, will be calculated and limited by caps (maximum returns), spreads (a hurdle rate), or participation rates (percentage). The limits are necessary to provide you with 100% principal guarantees. In 2017, when the S&P 500 Index was up 19.42%, it was fairly normal for fixed index annuities with income riders to provide 8% to 12% returns, but it is also important to understand returns are not guaranteed.
(7). Myth/Lie: The insurance company can change anything they want in your contract at any time.
Truth: In a fixed index annuity with an income rider, the insurance company can’t change anything about your contract ever. Your annuity contract is a legally binding enforceable written contract. All guarantees in your contract cannot be changed. This is one of the few assets that gives you guarantees in writing that can’t be changed.
SEE ALSO: Annuities 101
(8). Myth/Lie: Your income will always remain flat and never increase.
Truth: In a fixed index annuity with an income rider, you have the option of purchasing plans that provide you the opportunity for annual income increases. Some plans provide the option for a small fixed annual increase to your payments, similar to a pension. Some other plans allow you to receive annual income increases based on your annual earnings, and once you receive a “raise,” your increased income becomes your new guaranteed lifetime income and cannot be reduced in the future.
(9). Myth/Lie: You can’t access guaranteed lifetime income immediately or in a short time period.
Truth: In a fixed index annuity with an income rider, some plans will allow you to turn on your guaranteed lifetime income within 30 days of plan setup. For example, depending on your age, you may be able to buy a fixed index annuity with an income rider for $1,000,000 and start receiving $50,000 of annual guaranteed lifetime income within 30 days.
(10). Myth/Lie: You can still lose principal in a stock market crash.
Truth: In a fixed index annuity with an income rider, you will never lose principal due to any stock market crash. If you owned a fixed index annuity with an income rider between 2000 through 2002 or 2007 through 2009, when the stock market lost -50% both times, you wouldn’t have lost even one penny.
Have You Been Believing Annuity Myths?
Many people believe unfounded notions about annuities, and specifically about fixed index annuities with income riders. Always be sure to do your own research on any financial products and speak with a trusted financial advisor if you have questions about whether an annuity is right for you.
If you found these annuity myths eye-opening, be sure to check back for the forthcoming second installment in our Annuity Myths series, where we’ll share eight more common annuity myths/lies you may mistakenly believe. In the meantime, you can always find more content on our blog or in our educational Peak TV series.