The Truth About Annuities

Taking the Hassle Out of the Holidays

Are you looking at annuities for an income security option? There’s certainly no shortage of financial advice on them out there. Especially bad financial advice.

And as financial guru Suze Orman notes, it’s a different world. Employers no longer look out for you in your working days – and then offer a pension throughout retirement. Now they ask you to help fund your retirement. Or you may be tasked with funding your retirement entirely on your own.

The future of Social Security is unclear. Whether it will be solvent in the years ahead is unclear. For people approaching retirement age, the pressure is on. As Suze Orman puts it: “Tomorrow… is becoming much more urgent for all of us. And for many of us, tomorrow may be closer than we think” ( The amount of retirement security we have tomorrow depends on the choices we make today.

In that context, let’s look at annuities. Annuities are often pushed as a financial solution to cover you when you’re on the cusp of retirement. Or even when you’ve retired. They are an option which many retiring investors opt for. But the hard truth about annuities is they aren’t a fit for everyone.

As Suze Orman says, they are helpful in some financial situations ( And in others, they aren’t quite as sensible. Annuities can differ heavily in terms of the value they deliver. Just like with any other financial product, it’s important to beat back the smoke screen and educate yourself.

Truth about Annuities and Avoiding Scams

If you’re looking at different annuity products, here are some basics to help. This information can help you avoid costly annuity scams.

On her website, Suze Orman offers a definition for annuities. “An annuity (regardless of what kind of an annuity it is) is a contract (policy) between you as the policy holder and an insurance company.” Based on the annuity product you purchase, you are given contractual guarantees by the insurance carrier. The minimum amount invested in an annuity usually starts at $5,000.

An annuity is the only financial vehicle in which you can earn a guaranteed lifetime income. They can last for as long as you live or for a specific determined period. The rate at which an annuity pays out is called the annuitization rate.

The individual who purchases the annuity contract is known as the owner. They determine and change the beneficiary (who will receive all money in the annuity upon owner’s death) and the amount of distribution. The insured is known as the annuitant. They receive the annuity benefits.

Now for different annuity options. Nowadays there are 5 annuity types: fixed annuities, multi-year guarantee annuities, fixed index annuities, variable annuities, and SPIA/immediate annuities.

Other Annuity Basics

Except for immediate annuities, all annuities have income tax deferral on the interest or gains your original deposit has earned, until the money is withdrawn. In most contracts, according to governmental regulations, you have to be 59.5 years of age to withdraw funds without incurring any 10% penalty.

Most annuities are also subject to a surrender period. This refers to a specific time period in which you have to keep the majority of your money within the annuity. Otherwise it’s subject to surrender charges, or penalties for taking too much out.

Surrender periods tend to last for 5-10 years. And most annuity contracts permit you to withdraw at least 10% per year out of the account’s accumulated value – even during the surrender period.

If you withdraw more than 10%, the amount you withdraw above the 10% is what is subject to the surrender charge.

Learn Truth about Annuities by Asking Right Questions

We cover far more information on our Different Annuities page. Aside from the basics mentioned above, another important part is asking your advisor the right questions.

Questions to ask include:

  • Are you looking at a single premium or flexible premium contract?
  • What is the annuity’s initial interest rate? How long is its guarantee?
  • Are there surrender charges or penalties if a contracted is ended early and all of the money is withdrawn? If there are, how much are they?
  • Does the initial interest rate have a bonus rate included? If so, how much is it?
  • Can partial withdrawals be done without any surrender penalties for reasons like death or terminal illness?
  • And others

In short, there’s no shortcut for educating yourself. Like Suze Orman advocates: become informed today, and you’ll be taking the first steps forward to a secure future tomorrow. If you’re ready for personal guidance on planning for your future, meeting with a financial professional can help.

Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

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