There are a lot of myths about annuities. With so many types to choose from, figuring what is factual and what isn't about them can be a challenge. To help you understand how annuities work, here are six of the most common misnomers about them.
Although annuities share many common attributes, each annuity type has its own set of rules. In general, an annuity is a contract between you and an insurance company in which you make a lump sum payment or series of payments and, in return, you receive a regular income stream at some point in the future. There are a range of options, but typically they fall into two categories – an immediate annuity and a deferred annuity. With an immediate annuity, you make a lump-sum deposit and immediately start drawing income. With a deferred annuity, you pay premium to an insurance company and when elected, the company provides pay out options to receive an income stream at a later date.
Many annuities give you the option to withdraw a portion of the contract without a penalty.1 Some annuities may require a waiting period before you can access the full value of the annuity.2 You may be subject to fees and penalties for an early withdrawal so you would want to check on specific features with your financial professional.
Most annuity types have no maintenance or annual fees. Some annuities have varying fees depending on the type of annuity and any additional benefits it may provide. Annuities can offer valuable features that aren’t typical of other retirement options, like tax deferral, income guarantees, or even a guaranteed minimum death benefit. Work with your financial professional to help you understand any fees associated with the annuity and the benefits it can offer and compare against other products.
You can choose an annuity payout option, which offers a death benefit to your beneficiaries. Everything the annuity can and cannot do is included in your contact. Many people correctly understand that an insurance company keeps the remaining annuity value if the "life-only" payment option is selected within an annuity contract. The life-only payout option is just one of many payment options you can choose from for an annuity contract.
Annuities can be excellent tools for tax-deferred growth accumulation over time and an income stream. Many young workers can use annuities as a tax-deferred way to save for their future.3 No two situations are the same. It’s important to seek tax advice from a qualified tax professional before purchasing an annuity to understand any withdrawal penalties that may apply.
Interest credited on an annuity can grow on a tax-deferred basis until you begin taking out funds. You may have the potential to build more retirement income over the long term. While IRAs and 401(k)s also offer tax deferral, those contributions typically are subject to IRS contribution limits. Fixed annuities commonly have no annual IRS contribution limits. Fixed annuities are long-term, tax-deferred products and can be a valuable option if you are looking to grow your retirement.
1 Withdrawals taken prior to age 59 1/2 may be subject to IRS penalties.
2 A surrender during the surrender charge period could result in a loss of premium. Surrender charge structure may vary by state.
3 Under current law, annuities grow tax deferred. An annuity is not required for tax deferral in qualified plans. Annuities may be subject to taxation during the income or withdrawal phase. Neither North American, nor any agents acting on its behalf, should be viewed as providing legal, tax or investment advice. Rely on your own qualified adviser.
Fixed index annuities are not a direct investment in the stock market. They are long term insurance products with guarantees backed by the issuing company. They provide the potential for interest to be credited based in part on the performance of specific indices, without the risk of loss of premium due to market downturns or fluctuation. Although fixed index annuities guarantee no loss of premium due to market downturns, deductions from your accumulation value for optional benefit riders or strategy fees or charges associated with allocations to enhanced crediting methods could exceed interest credited to the accumulation value, which would result in loss of premium. They may not be appropriate for all clients. Interest credits to a fixed index annuity will not mirror the actual performance of the relevant index.
The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.