By Ryan Owen, Expert Contributor
Americans, by and large, don’t understand annuities. More than 4 in 10 consumers could not answer even one question about annuities, according to the results of a recent study published by LIMRA’s Secure Retirement Institute. Just 25 percent of Americans performed well on the survey, correctly answering seven or more of its 10 annuity-related questions.
Economists say annuities are an efficient way to fund retirement. However, lack of knowledge may be scaring Americans away from annuities when they are considering their financial goals.
Below are seven little-known annuity facts that every consumer should understand when they are constructing a financial strategy.
1. Annuities Are the Only Financial Product That Can Guarantee Lifetime Income
Annuities are unique because they can create guaranteed income that you cannot outlive. The income will continue even after you’ve collected your entire premium and any expected earnings. No other financial product can provide that promise.
2. You Can Buy an Annuity with Money from Retirement Accounts
Money saved in workplace retirement plans — like 401(k) and 403(b) plans — can be used to purchase annuities. Although few employees explore annuities and even fewer plans offer them, annuities provide people with some certainty around income in a world where defined benefit plans like pensions have all but disappeared.
3. State Guaranty Associations Insure Consumers If the Insurer Goes Out of Business
While the security of the money you place in an annuity very much depends on the health and solvency of the issuing insurer, there is recourse if the insurer goes under. It is true that the FDIC does not insure annuities. However, state guaranty associations protect most annuities issued by insurers. It is important to note that because these associations function at the state level, coverage limits for your annuity vary according to your state.
4. Payments Do Not Always End When the Purchaser Dies
Many products sold by insurance companies come with provisions for what happens if the person buying the product dies. Annuities are no different. Based on the provisions of the annuity contract, the insurer may continue making regular payments to beneficiaries or issue a lump-sum payment if the person who purchased the annuity dies.
5. Taxes on Earnings Aren’t Due Until You Withdraw Money from the Annuity
Annuities grow tax-free until the annuity owner begins withdrawing funds. This means that annuity owners can fully reinvest capital gains, dividends and interest without worrying about tax payments as long as the money stays in the annuity.
6. Owners Can Choose to Take Automatic Withdrawals from Their Annuities
Annuities offer systematic withdrawals so that annuity owners can receive income payments automatically and on a periodic basis. For some annuity owners, the promise of taking these penalty-free withdrawals multiple times during the year rather than as a once-a-year lump sum helps with cash flow and budgeting.
7. Annuities Can Be Suitable for People with Varying Levels of Risk Tolerance
Annuities can be optimized to fit your financial needs and the level of market risk you’re willing to take. For example, a conservative investor, or someone with a low risk tolerance, may be a prime candidate for a fixed annuity, while an aggressive investor, or someone with high risk tolerance, may find a variable annuity more suitable.
LIMRA’s study results show that Americans’ lack of knowledge about annuities may be keeping them from fully and effectively considering annuities when creating their financial portfolios. While annuities may not be for everyone, the best financial strategies and retirement plans come from informed decision-making.
About the Author
Ryan Owen is a Certified Internal Auditor® and a Chartered Property Casualty Underwriter. He earned his master’s in business administration from the Moore School of Business at the University of South Carolina. He served as a manager for Liberty Mutual Insurance and a senior manager for American Tower Corporation and Sun Life Financial. He is a member of the Editorial Freelancers Association and the New Hampshire Writers’ Project. He has 17 years of experience preparing, editing and finalizing business and investment communications in several Fortune 500 companies.
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- Callan. (2019, April). 2019 Defined Contribution Trends Survey. Retrieved from https://www.callan.com/research-library/?pagination=1&query=%20Defined%20Contribution%20&research-date=2019&research-format=Survey
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- LIMRA. (2020, April 27). Secure Retirement Institute Study: Most Consumers Baffled By Annuities. Retrieved from https://www.limra.com/en/newsroom/news-releases/2020/secure-retirement-institute-study-consumers-baffled-by-annuities/
- LIMRA. (n.d.) 10-question true/false LIMRA quiz. Retrieved from https://limra.co1.qualtrics.com/jfe/form/SV_cO28xdl9WgxJPil
- Office of Retirement and Disability Policy. (2010). The Future Financial Status of the Social Security Program. Retrieved from https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html