Annuity myths & misconceptions your clients may believe

As a financial advisor, you’ve likely talked to many clients about annuities and how they can play a beneficial role in an individual’s overall retirement income strategy. It’s also possible that you’ve been met with some objections or needed to provide some clarity between perception and reality.

Investors sometimes misunderstand how annuities work or have only heard half-truths about the role they could play in a diversified investment portfolio. Your guidance and expertise can help them understand the facts and determine how an annuity might help them reach their retirement goals.

To help with those conversations, we’ve identified some common misconceptions and provided a few points of clarity to help separate fact from fiction.

Myth: Annuities are expensive and have high fees.

Reality Check:

Many types of investments have fees. It might be something small like a checking account maintenance fee or advisor fees for a percentage of assets under management, and more. Investors can also expect to pay fees for annuities, but your clients likely won’t experience the sticker shock they think they will.

Newer, innovative annuities generally have varying fee structures based on their features and benefits. Fixed annuities are not as complex as variable annuities and may have lower fees as a result. Variable and index-linked annuities may have higher fees, but they may also offer more benefits and greater growth potential. The important thing is that clients fully understand their “all-in” fees up front, including any potential surrender fees, so that they can make an informed decision.

Myth: I have to give up too much control over my finances.

Reality Check:

When it comes to the risks of market downturns and potential losses, an annuity may actually provide investors with more control. When they understand that some annuities provide the benefit of potential gains when markets go up and a limit on losses (a floor) when markets drop, they may reconsider. During times of volatility, such a prospect may be highly appealing.

Annuities may also help protect clients from the risks of deflation, sequence of returns and outliving their savings. While annuities typically only constitute part of a complete retirement strategy, they may be a smart way to ensure basic living expenses are covered while balancing risks and rewards.

Myth: When I die, the insurance company gets any remaining annuity money.

Reality Check:

Almost all types of annuities include a beneficiary designation so that a client’s loved ones receive a payout upon their death, with very few exceptions. They can designate one or more beneficiaries who will receive the remainder in either a lump sum or a series of payments.

It’s important to note, however, that a client has the responsibility to name his or her beneficiaries to ensure remaining funds are distributed according to their wishes. It’s also critical that your clients make their loved ones aware of their investments and where assets are held to help make a smoother transition.

Myth: Annuities tie up too much of my money.

Reality Check:

While there are some guaranteed lifetime annuities that may not provide access to all the funds, there are some annuity products that may allow policyholders to withdraw needed funds for emergencies or unexpected expenses. Understanding their options and distinguishing these products may help ease investor fears.

It’s generally agreed that about three to six months’ worth of expenses should be set aside in liquid assets as part of an emergency fund. Investing other funds in annuities that have growth potential may also be a good strategy for your clients.

Myth: Low interest rates undermine the benefits of investing in annuities.

Reality Check:

Annuities may provide higher returns than other asset classes, especially when contrasted with the low interest rates they’ll likely receive from money market funds or traditional savings accounts.

To maximize interest rate-based payments, however, a laddering strategy — dividing a total planned annuity purchase into chunks and buying installments over time — may be an option for some clients. For example, a third of the desired annuity income might be purchased now, a third in a few years when interest rates might be higher, and following suit with the purchase of the remaining third a few years after that.

While interest rates may impact annuities, the benefits of investing in annuities isn’t just about leveraging interest rates. Again, there are some types of annuities that offer growth potential while protecting against market volatility, inflation and longevity risks. Help clients identify what matters most to them and make decisions based on their values, not just potential interest rates.

Apart from these common misconceptions, annuities offer other benefits that may help your clients in the long-term. That’s why it’s important to dispel myths your clients may believe in addition to those mentioned here. We created a guide that can help: Debunking the Top Six Myths About Annuities: Separating Fact from Fiction. Download, print and share it with your clients. Simply click the link below.


Blog Sub Logo

Get updates & insights

Enter your email below to subscribe!