Myth #1 - Every annuity is a variable annuity.
The performance of a variable annuity is based on how the stock market performs. Fixed and immediate annuities are not based on stock market performance. They offer guarantees through fixed minimum interest rates, thereby offering protection against loss of principal and earnings.
Myth #2 - Fixed annuities will never outperform inflation.
Fixed annuities guarantee a set interest rate over a specific period, which is often used to give long-term investments more growth return and tax advantages than bank certificates of deposit. Some investment advisors do not recommend fixed annuities because of their perception of future inflation; they feel that some risk must be taken to grow savings to maximize personal wealth. However, for investors who cannot afford to lose any of their life savings, risk should never be a substitute for long-term planning and new income generation.
Myth #3 - Indexed annuities are often sold inappropriately.
The indexed annuity (IA) was created as a hybrid accumulation vehicle, combining some of the growth potential of the stock market with the safety features of a fixed annuity. While potential upsides may be capped at 7 to 12 percent, investors do not have to worry about losing their life savings. IAs generally offer several options that guarantee minimum interest rates paid, regardless of performance.
Myth #4 - Annuities are all about penalties, surrender charges and fat commissions.
Surrender charges are a much maligned advantage of fixed annuities-not a disadvantage. If you have to sell a stock, bond, mutual fund or other investment vehicle 1 year, 2 years or more down the road to meet an unexpected emergency, can you say for certain what that investment will be worth at the time? The advantage of the fixed annuity, including IAs, is that the minimum value after surrender charges is clearly stated in the contract and in the disclosure statements. The value can only be higher, never lower, than what is expressly stated.
Like the 401(k) and the IRA, the annuity takes advantage of special legislation, which provides incentives for people to save more money for retirement. Annuity providers offer higher interest rates, guaranteed security, tax deferred accumulation and positive benefits for tax and distribution planning. Regarding commissions, the annuity is not a high compensation product. It is structured differently from other accumulation vehicles and over time generates similar commissions to other comparable products. Actually, since the market embraced the IA in 2001, EIA commissions have been steadily declining, going from 10.7 percent of premium in 2001 to 7.7 percent in 2005.
Myth #5 - Never invest IRA money in an annuity.
Consumers frequently hear the recommendation to disregard any advisor who recommends an annuity within an IRA. However, when safety is paramount and loss to principal is not an option, the annuity offers a higher rate of return than other investments. Many fixed and indexed annuities outperform other non-security investments while removing risk to principal and savings. The features of the product, not tax deferability, are why many clients choose the products for IRAs.
Myths #6 - Only deal with registered investment advisors.
Some of the criticism toward annuities comes from professional asset managers who earn their commissions as a percentage of the total money they manage and keep at risk for growth. Too often, seniors are talked into placing their money into vehicles that could instantly reduce their life savings. There is a big difference between the professional investor who wants to aggressively grow a $1 million-dollar portfolio and the retiree with $150,000 who likely needs every dollar to get through retirement without outliving savings. The latter may achieve their retirement goals just fine working with a licensed insurance agent or advisor who is not necessarily an RIA.
Myth #7 - Insurance agents aren't qualified to offer financial planning.
A securities license is only needed when selling speculative investments with the potential for loss. Many insurance providers focus on fixed and indexed annuities for retirement, in which loss to principal and earnings is not an option for their clients. They also undergo continual training and professional courses.
Myth #8 - Commission-based planners must be biased.
Financial firms created fee-based planning to ease client fears of non-objectivity. Their goal was to maximize medium term earnings and residual income, while having more control over client investments. Ironically, many within that field do not actively represent or sell fixed, indexed, or immediate annuities for retirement purposes, even in cases where there is no appropriate level of risk.
Myths #9 - Only deal with big, familiar names.
Brand visibility doesn't automatically mean the best rates, service and performance. Restrictive affiliations and objective advice do not normally go hand-in-hand.
Myth #10 - Carriers are pushing IA sales over other products.
This myth was addressed by Old Mutual Financial Network's president, Bruce Parker, in a recent presentation at the Annual Producers Forum and Expo in Milwaukee. A common annuity misconception resides around the idea that since index annuities are more profitable, companies put all of their money into selling only these products. The reality is that in order to maintain longevity in this business, a company must have a combination of diversification of product mix and balance of their product portfolio.
