Common Annuity Myths

Annuities are surrounded by myths and misinformation—often fueled by outdated advice or one-size-fits-all opinions. Unfortunately, these myths can prevent people from exploring annuities as a valuable part of a secure, income-focused retirement plan. The truth is, today’s annuities offer greater flexibility, transparency, and growth potential than ever before. Let’s clear up the confusion so you can make informed decisions about your financial future.

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Common Myths About Annuities

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Annuities are Only For Retirees

Myth: Annuities Are Only for Retirees

While annuities are often associated with retirement, they can benefit individuals at many stages of life—not just those already retired. Today’s annuity options are more flexible than ever and can serve as powerful tools for both accumulating wealth and securing guaranteed income.

For Those Still Working:
Deferred annuities are ideal for long-term savers, especially those who have already maxed out contributions to their 401(k) or IRA. These annuities grow tax-deferred, helping you build additional retirement savings outside of traditional accounts. Later, you can convert them into guaranteed income for life or for a set period—on your own timeline.

For Those Nearing or in Retirement:
Immediate annuities allow you to turn a lump sum into guaranteed income that starts right away. This is perfect for those who want to create a dependable cash flow and reduce reliance on market-based withdrawals.

Whether you’re planning ahead or need income now, annuities can be tailored to fit your goals. It’s not about age—it’s about using the right tool at the right time. Annuities aren’t just for retirees; they’re for anyone who wants security, tax advantages, and predictable income in their financial strategy.
Investing in the Market is Always Smarter Than Annuities

Myth: Investing in the Market Is Always Smarter Than Annuities

It’s a common belief that annuities can’t compete with the returns of traditional market investments. But this view misses the bigger picture—not every financial strategy is about chasing the highest return. Annuities and market-based investments serve different purposes, and for many people, the right approach is a blend of both.

Here’s how annuities can complement—and in some cases, strengthen—your overall financial plan:

1. Fixed Annuities: Stability Over Volatility
Fixed annuities offer guaranteed interest and principal protection, making them an attractive option for those looking to safeguard their savings. They provide steady growth without exposure to stock market fluctuations—especially valuable during volatile or declining markets.

2. Variable Annuities: Growth with Market Exposure
Variable annuities allow you to invest in market-based subaccounts, offering long-term growth potential similar to mutual funds. While they carry investment risk, they also offer optional riders for income or legacy protection—adding structure and security to an otherwise risky asset.

3. Structured Annuities: The Best of Both Worlds
Structured annuities (or registered index-linked annuities) provide limited market exposure with downside protection. They offer a balance between growth and safety—giving you the ability to benefit from moderate market gains while reducing the risk of significant loss.

Annuities aren’t meant to replace the market—they’re meant to enhance your financial strategy by adding stability, predictability, and income protection. The smartest portfolio isn’t just aggressive or conservative—it’s built around your risk tolerance, income needs, and retirement goals.
Annuities Are Overpriced
Myth: Annuities Are Overpriced

It’s true that some annuities come with fees—but the idea that all annuities are overpriced is a misconception. In reality, the cost of an annuity depends entirely on the type of annuity and the features it includes. Many modern annuities offer valuable benefits with little to no cost at all.

Structured Annuities: Low Fees, Strong Protection
Many structured or indexed annuities have low or no annual fees, especially if you don’t add optional income riders. These products offer a powerful combination of market-linked growth potential and downside protection—with fewer costs than you might expect.

Value vs. Cost
When evaluating an annuity, it’s important to consider the value it provides:

Tax-deferred growth

Guaranteed income for life

Principal protection in down markets

Legacy benefits and income riders

Compared to advisory fees on managed portfolios or mutual fund expense ratios, annuity costs can be very competitive—particularly when you consider the security and income guarantees they deliver.

Annuities aren’t inherently expensive—they’re structured to deliver long-term stability and protection, and when chosen carefully, they can offer exceptional value relative to their cost.
Annuities Lack Liquidity and Flexibility

Myth: Annuities Lack Liquidity and Flexibility

One of the most common misconceptions about annuities is that your money is completely locked up. While annuities are designed as long-term financial tools, many contracts offer built-in flexibility and access features—even during the surrender charge period.

Penalty-Free Withdrawals
Most modern annuities allow you to withdraw up to 10% of the contract value per year without penalty. Some even let you access your original premium contributions during the surrender period, providing more liquidity than many people realize.

Post-Surrender Flexibility
After the surrender charge period ends—often in as little as 3 to 7 years—you’ll have full access to your annuity’s value with no penalties. At that point, your annuity becomes a fully liquid asset, with the option to convert it into income, take withdrawals, or transfer it elsewhere.

Customizable Liquidity Features
Some annuities offer optional riders or waivers for qualified hardships, nursing home stays, or terminal illness—giving you added flexibility if life takes an unexpected turn.

The key is choosing the right annuity with the terms, surrender period, and liquidity options that fit your needs. With proper planning, annuities can offer both long-term security and short-term flexibility—without locking you out of your money.
Annuities Aren't Tax Efficient

Myth: Annuities Aren’t Tax Efficient

Contrary to popular belief, annuities can be a highly tax-efficient tool within a retirement strategy. Like traditional retirement accounts, annuities offer tax-deferred growth, allowing your money to compound over time without annual taxation on gains. You only pay taxes when you begin taking withdrawals—often in retirement, when your income and tax bracket may be lower.

When funded with after-tax dollars, a portion of your withdrawals (representing your original premium) is even excluded from taxation. And when held within a Roth IRA or Roth 401(k), qualified withdrawals from a Roth annuity can be entirely tax-free—combining the long-term security of an annuity with the tax advantages of a Roth account.

Annuities offer flexibility to support both tax-deferred and tax-free strategies, depending on how they’re structured. When used correctly, they can play a powerful role in reducing your lifetime tax burden and enhancing retirement income efficiency.
When I Die, the Insurance Company Won't Keep My Money

Myth: When I Die, the Insurance Company Keeps My Money

A common myth about annuities is that if you pass away, the insurance company keeps the remaining balance. While this may apply to certain immediate annuities with no refund or period-certain options, most modern annuities are designed to protect your legacy. With structured, fixed, or variable annuities, your beneficiaries typically inherit any remaining contract value, and most products guarantee they’ll receive at least the amount you originally invested—minus any prior withdrawals.

For those who want to maximize the benefit passed on, many annuities offer optional enhanced death benefit riders, allowing you to increase the value left to your loved ones. These features can be tailored to align with your estate planning and legacy goals, ensuring your annuity remains a valuable asset—not a lost one. The right annuity doesn’t just provide lifetime income—it also helps preserve wealth for the next generation.

Use the calculator below to determine your guaranteed lifetime income

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Common Annuity Myths: What Most People Get Wrong About Annuities

Annuities are one of the most misunderstood financial tools out there. From “annuities are too expensive” to “you lose your money when you die,” the myths are everywhere—and they’re keeping people from taking advantage of powerful retirement benefits. In this educational breakdown, we expose the most common annuity myths and explain what’s actually true. If you’ve been hesitant to explore annuities because of something you heard, this is the reality check you’ve been waiting for.

Common Annuity Myths debunked!

The most common questions we receive about Annuities.

FAQs: Common Annuity Myths

Myth: All annuities are the same.

No. Major types include fixed annuities (e.g., MYGAs), fixed indexed annuities (FIAs), immediate/deferred income annuities (SPIA/DIA), and variable annuities. They differ in risk, growth method, liquidity, and fees.

Myth: Annuities are only for retirees.

Pre-retirees use multi-year guaranteed annuities for safe accumulation and to ladder maturities; others add income riders for future guaranteed payouts.

Myth: You’ll lose principal if the market drops.

Fixed and fixed indexed annuities protect principal from market losses (subject to the insurer’s claims-paying ability). Variable annuities can lose value because they invest in market subaccounts.

Myth: You can’t access your money for years.

Most contracts include annual free withdrawals (commonly 5–10%) and may waive charges for nursing home or terminal illness. Full liquidity is limited during the surrender period, so design and timeline matter.

Myth: All annuities have high, hidden fees.

MYGAs and many FIAs have no ongoing policy fee; optional riders can add a cost. Variable annuities typically include mortality & expense and fund fees. Always review the disclosure and rider charges.

Myth: Bonuses are “free money.”

Upfront or benefit-base bonuses often come with trade-offs—longer terms, lower participation rates/caps, or rider fees. Know whether the bonus increases account value, income base, or both.

Myth: Indexed annuities invest directly in the S&P 500.

They credit interest based on an index formula using caps, spreads, or participation rates; your money stays in the insurer’s general account, not the market.

Myth: You must annuitize to get income.

Many contracts offer lifetime income riders that provide guaranteed withdrawals without irrevocably annuitizing. SPIAs/DIAs do require annuitization.

Myth: Annuity income always stops when you die.

You can choose joint life, period-certain, cash-refund, or installment-refund options to protect a spouse or estate. Death benefits on accumulation annuities pass to beneficiaries per the contract.

Myth: Annuities are tax-free.

They’re tax-deferred. Earnings from non-qualified annuities are taxed as ordinary income when withdrawn (LIFO rules). Qualified annuities inside IRAs/401(k)s are fully taxable when distributed.

Myth: RMDs don’t apply to annuities.

They do for qualified (IRA) annuities. If you annuitize an IRA contract under IRS rules, scheduled payments typically satisfy that contract’s RMD; other IRA balances still have their own RMDs.

Myth: Annuities are FDIC-insured.

They are not FDIC-insured. They’re backed by the issuing insurer’s financial strength. State guaranty associations may offer limited protection; coverage varies by state and you shouldn’t rely on it as a primary reason to buy.

Myth: You’re locked in forever by surrender charges.

Surrender periods are finite (often 3–10+ years). Free withdrawals, hardship waivers, and 1035 exchanges (when suitable) can provide flexibility. Match the term to your time horizon.

Myth: Annuities can’t keep up with inflation.

Options include indexed crediting for growth, inflation-adjusted SPIA payments (where available), or investing part of a plan in growth assets while using annuity income to cover essential expenses.

Myth: You can’t move an annuity without taxes.

Non-qualified annuities may be moved tax-deferred via a 1035 exchange to another annuity when appropriate. Surrender charges and new terms still apply—compare carefully.

This content is educational, not individualized tax, legal, or investment advice. Product features vary by carrier and state; review the disclosure and contract before purchasing.

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