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Here’s a reality check on 3 common misunderstandings about annuities

by Alliance America
August 25, 2023


Annuities have long been regarded as a fundamental component of retirement planning, offering a sense of financial security through guaranteed income streams. They offer a unique combination of features not readily available in other financial products.

What is an annuity?

An annuity is an agreement made between a person and an insurance firm, primarily aimed at addressing long-term savings and income goals, often related to retirement. Essentially, an annuity works like this: You provide a certain amount of money to the insurance firm, either all at once or over time, and in exchange, they pledge to give you regular payments either right away or later down the road.

Why buy an annuity for retirement?

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One key reason to purchase an annuity is the need to have secure sources of income during retirement. A primary fear many retirees face is outliving their savings. Annuities can alleviate this fear by providing a guaranteed income stream for life, ensuring that retirees will not run out of money, regardless of how long they live.

Annuities have earned their reputation as a preferred retirement tool due, in part, to their inherent ability to be tailored to individual financial needs and goals. Annuities come in various forms, such as fixed, variable and indexed annuities, each offering its own set of features and benefits. They also can provide tailored payouts. Depending on the annuity contract, retirees can choose to receive income immediately or defer it to a later time. They can also determine the frequency of payouts, be it monthly, quarterly or annually.

The ability to defer taxes makes annuities attractive. The interest earned on annuities is tax-deferred, meaning that taxes are not due until money is withdrawn. This allows the principal to grow faster since it earns interest on the amount that would have otherwise been paid as taxes. By deciding when to take withdrawals, retirees have more control over their taxable income, which can be a strategic advantage in managing tax brackets and liabilities.

Fixed annuities in particular provide a guaranteed interest rate, shielding retirees from the uncertainties of market fluctuations and providing protection from economic volatility. Variable and indexed annuities, while linked to market performance, often have features like guaranteed minimum income benefits, offering some level of protection against market downturns.

Many annuities come with built-in death benefits. This ensures that if the annuitant dies before depleting their annuity's value, the remaining amount or a guaranteed sum will pass on to their named beneficiaries.

Annuity contracts often allow for additional riders to be attached, at an extra cost, to enhance the annuity's benefits. This could include things like increased income benefits, long-term care coverage or additional death benefits.

In many jurisdictions, annuities also can offer protection from creditors, ensuring that an individual's retirement assets are safe from potential lawsuits or debt collections.

These features have made annuities a popular tool in the retirement planning arsenal. Their ability to provide guaranteed income, along with a host of other customizable benefits, makes them an attractive option for those looking for security and predictability in their retirement years. However, like all financial products, they come with pros and cons, and it's crucial for individuals to understand these intricacies and consult with financial professionals before making any decisions. When used correctly and strategically, annuities can indeed serve as a robust cornerstone in retirement planning.

However, misinformation about these complex products is rife. Let's set the record straight by debunking three of the most prevalent misunderstandings surrounding annuities.

What are common misunderstandings about annuities?

Misunderstanding: Annuities are only for retirees.

Reality: While annuities are commonly associated with retirement planning, a common misconception is that they are limited to and are exclusively designed for retirees. While they indeed serve as valuable tools for those in their post-working years, positioning annuities as only suitable for retirees overlooks their broader utility and benefits. In fact, many younger individuals purchase annuities as part of a long-term strategy to grow their wealth, taking advantage of the tax-deferred growth that certain annuities offer. They can be a valuable tool for individuals at various life stages, depending on financial goals.

Besides, planning for retirement is not something reserved only for those nearing their 60s. Younger individuals, even in their 30s or 40s, can benefit from the structured, long-term saving mechanism that annuities provide.

Misunderstanding: Annuities are just too expensive.

Reality: A common criticism often directed at annuities is that they are "too expensive." Annuities come in various shapes and sizes, and so do their fee structures. While it's accurate that some variable annuities can have higher fees due to management charges and riders, many other annuities, such as fixed and indexed annuities, come with much lower costs. Always compare products and understand the associated fees in relation to the benefits and guarantees provided. In some scenarios, the security an annuity offers can outweigh the associated costs.

Painting them broadly as prohibitively costly is a misunderstanding that doesn't capture the complete picture. Annuities provide a unique combination of investment growth, tax deferral and guaranteed income streams. When comparing the costs of annuities, it's essential to compare them with a combination of financial products that provide similar benefits, not just one singular product.

Not all annuities are created equal. Fixed annuities often have lower fees than variable annuities, which may come with sub-account management fees and other charges. Indexed annuities also have a different cost structure. It's crucial to know what type of annuity one is considering.

One of the hallmarks of annuities is the guarantee – whether it's a guaranteed interest rate, guaranteed minimum return or guaranteed lifetime income. These guarantees come at a cost, but for many, the price is worth the peace of mind. When assessing the cost, it's essential to weigh it against the value of these guarantees.

Because annuities offer tax-deferred growth, investors won't pay taxes on the interest or gains until they make withdrawals. This deferral can lead to significant tax savings over time, which might offset some of the costs associated with the annuity.

The misunderstanding that annuities are categorically "too expensive" simplifies a complex topic. Like all financial products, annuities come with costs, but they also offer unique benefits. It's essential for prospective buyers to understand these costs in the context of the value provided and to compare them with the expenses and benefits of alternative investments. As always, consulting with a knowledgeable financial professional can help clarify the cost-benefit analysis of annuities.

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Misunderstanding: You can’t access your money in an annuity.

Reality: One of the prevailing misconceptions about annuities is that once you've invested your money in them, you no longer have access to those funds. Contrary to this oversimplification, many annuities provide mechanisms for withdrawals. While there might be surrender charges if you withdraw beyond a specific amount within a designated period, annuities often allow for annual withdrawals up to a certain percentage without incurring penalties. Additionally, certain life events, such as the diagnosis of a terminal illness, might permit larger penalty-free withdrawals.

Most annuities do come with a surrender period, typically ranging from five to 10 years, during which withdrawals beyond a certain amount may incur a surrender charge. However, this doesn't mean the money is inaccessible. It merely means there's a financial disincentive to withdraw more significant sums during this period. Many annuity contracts allow annuitants to withdraw a certain percentage (for example, 10%) of their account value annually without incurring any surrender charges, providing some liquidity.

If an annuitant chooses to "annuitize" their contract, they transform their account balance into a stream of periodic payments, which can be received monthly, quarterly or annually. While this does convert the lump sum into a stream of payments, it's a form of accessing the funds, not losing them.

Meanwhile, some annuity contracts may have provisions allowing for penalty-free withdrawals under specific hardship circumstances, such as being diagnosed with a terminal illness or being admitted to a nursing home. Also, there are riders available, often at an additional cost, that can provide enhanced liquidity options. For instance, some riders may offer larger penalty-free withdrawals or other features that allow for greater access to funds.

In the event of the annuitant's death, many annuities offer death benefit provisions. This ensures that beneficiaries receive the remaining funds or a guaranteed amount, proving that the money isn't "locked away" but can be passed on.

Also, some annuities might permit the owner to take out a loan against the annuity's value, providing another way to access funds without technically making a withdrawal.

While annuities are designed as long-term financial instruments, and there might be penalties or charges for early or large withdrawals, they do offer various features and provisions to access funds. Prospective annuity buyers should always carefully review contract terms and understand the conditions under which they can access their money. Speaking with a financial professional can also offer clarity on the liquidity features of different annuity products.


Annuities are multifaceted instruments that can play a pivotal role in financial planning. As with all financial products, it's essential to separate fact from fiction. By understanding the realities behind these misunderstandings, individuals can make more informed decisions, ideally in consultation with financial professionals, to determine if and how annuities fit into their broader financial landscape.

While commonly linked to retirement, annuities aren't exclusive to retirees. They can be effective for younger individuals, promoting long-term wealth growth.

While some annuities have higher fees, many, especially fixed and indexed annuities, are more affordable. It's vital to consider the fees relative to the benefits.

Contrary to popular belief, annuities often have provisions allowing limited withdrawals without penalties. Although there are surrender periods with charges on early withdrawals, various features and riders provide liquidity. Additionally, annuities can offer loans against their value and transfer funds to beneficiaries upon the holder's death.

Alliance America can help

Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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