An annuity is a long-term investment ideal for those who wish to protect themselves from financial troubles in the future and have a retirement plan in hand.
Over the years, there has been an increase in the fame of annuities. Even though annuities are now widely bought and sold, there are still many myths about annuities that need to be debunked and the true benefits of annuities be told.
Debunking annuity myths
1. They charge hidden fees
There are no hidden fees when you purchase an annuity. Depending on the type of annuity and the contract you finalize, there are charges such as surrender charges whenever you make a withdrawal greater than the free allowance.
Apart from that, some products might charge administrative fees, rider fees, tax benefit fees, and fee to enhance your contract to offer more annuity benefits to you.
2. Annuities are complicated and disadvantageous
Yes, understanding the different types of annuities is difficult as there are over 13 types of annuities, each having its own set of rules and regulations.
However, most annuities are relatively simple and easy to understand, especially if you take the help of a professional or an online annuity payment calculator.
Each annuity consists of the main contract and the optional lifetime income benefit that offers a guaranteed income payment.
3. You can lose money
Your money is not at risk of fluctuations in the market unless you go for a variable or registered linked annuity.
4. No liquidity
Most annuities allow charge-free withdrawals after one year of the accumulation phase, systemic withdrawals, and withdrawals to help you during periods of sickness, terminal illness, and hospitalization.
However, you will lose ownership of the annuity if you purchase the income annuity or annuitize your contract.
5. Annuities do not offer any after-death benefits to your beneficiaries
Annuities allow you to care for your loved ones even when you are no longer alive. Insurance companies transfer your money to your loved ones and let them receive the remaining amount or cash surrender value.
Annuities usually avoid probate, which is a judicial process to a person’s will. Probate is a lengthy and expensive process, and no deceased assets can be passed down to the beneficiaries until the court has checked the will’s validity and established an executor to distribute the assets.
6. You need to pay a fee to purchase an annuity
In most cases, you are not required to pay a fee to purchase an annuity. However, some services are removed through a commission from the insurance company when they sell an annuity.
If your insurance agent or professional financial advisor charges you a fee, you should find another advisor.
What are the benefits of annuities?
One of the major benefits of purchasing an annuity is that it allows you to save money without having to pay taxes on the interest in the future. Also, there are no limits to the number of contributions you can make to an annuity.
Annuities offer tremendous benefits in your post-pension age. Another advantage of annuities is that they offer guaranteed income steam to help you when you are retired. With an annuity as your backup plan, you do not have to worry about outliving your savings.
Annuities allow you to provide for your families after death as they provide death benefits. You can transfer your money to your loved ones, and rest assured that they will be well taken care of after your death.
How to choose the right annuity for yourself?
You need to consider four main factors when choosing what annuity would be ideal for you; timing, rate of return, payout type, and payout term.
In addition to that, you need to ask yourself the following questions:
- What are your financial need and goals for the future?
- How much money can you want to invest right now?
- When do you want the income payments to begin?
- Are you comfortable putting money into a plan you cannot access for many years?
The below-mentioned four steps will help you figure out which annuity plan is best for you.
1. Choose when you want the payout to begin
The first step in selecting the type of annuity you want is to decide when you want to start receiving the money.
You can either start receiving it immediately, and the payouts will begin shortly after you submit a lump sum payment. Or do you want the payouts to start later in the future?
2. Select the rate of return
There are three types of annuities based on the rate of return you want. This shows how much risk you are willing to take.
The income is based on a fixed guaranteed amount mentioned in the contract. The payments are fixed, and the insurance bears the risks and fluctuations in the market.
The payouts and the accumulation period are variable and subject to changes in the market rates.
Indexed annuities are hybrid characteristics of both the variable and fixed type of annuities. They provide a guaranteed interest rate and an interest rate connected to the market index. Select the time frame of the payouts.
There are five types of payout options
Lifetime-You receive income payments for your entire lifetime and then terminate as soon as you die.
A lifetime with the remaining funds being transferred to your beneficiaries-You will receive payments throughout your life, and if you pass away, your beneficiaries will receive the remaining amount of payments.
Period certain-These types of annuity payments are guaranteed for a fixed amount number, such as 5, 15, or 20 years. Payments end once the set number of years has passed.
Joint-Joint annuities consist of two annuity holders. This is why payments last for the lifetimes of both participants. The payments may remain the same or be reduced after the passing of the primary participant.
Select the type of payout you desire
There are two types of payout options available.
The annuity owners receive all the payout in one go. Fees may apply in such type of annuity payout method.
You receive monthly payments for the time period agreed in the contract between you and the insurance company.
In a nutshell
Annuities are a great retirement plan and offer many benefits in your post-pension age and to your beneficiaries after your death. By following the above-mentioned four steps, you can easily decide the type of annuity that is ideal for you.