Annuities: Facts Over Myths

Before adding an annuity to your income strategy, it’s important to separate myth from reality. Annuities are insurance contracts designed to provide lifelong income, protect your savings from market losses, and offer tax-deferred growth. Still, a number of misconceptions persist—often due to complexity or outdated information.

This guide breaks down the most common annuity myths and provides the facts you need to make a confident, informed decision.

Top Annuity Myths vs. Facts

Quick Myth/Facts List

• Myth: Annuities are only for retirees.
  Fact: Annuities can be used to protect assets and grow income, even years before retirement.
• Myth: Once you buy an annuity, your money is locked up forever.
  Fact: Most annuities offer withdrawal provisions, beneficiary options, and flexible income features.
• Myth: All annuities have high fees.
  Fact: Fixed and fixed index annuities often have little to no annual fees.
• Myth: My beneficiaries won’t receive anything if I pass away.
  Fact: You can choose payout options or riders to ensure benefits for your loved ones.
• Myth: Market downturns will wipe out my annuity.
  Fact: Fixed and fixed index annuities shield your principal from market losses.
• Myth: I won’t have access to funds if an emergency comes up.
  Fact: Many annuities provide penalty-free access for emergencies, RMDs, or specific needs.
• Myth: Interest rates on annuities are always low.
  Fact: Fixed annuities can offer rates competitive with (or higher than) many bank products.
• Myth: There’s no protection if the insurance company fails.
  Fact: State guaranty associations and reserve rules offer additional layers of protection.
• Myth: I can’t change my mind after purchase.
  Fact: Most contracts include a free-look period for review and cancellation if needed.
• Myth: All annuities are built the same way.
  Fact: Each annuity type serves a different goal and risk comfort—there’s no one-size-fits-all.
• Myth: High surrender charges are unavoidable.
  Fact: Surrender charges usually decrease each year and contracts often allow for some penalty-free withdrawals.

Breaking Down Common Annuity Myths

Myth #1: You can easily get lifetime income from “better” financial vehicles.
Fact: Annuities are the only financial vehicle that can offer guaranteed lifetime income. Features like mortality credits enable higher payouts for survivors than you could achieve with bonds or other strategies.

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Myth #2: Annuities cost too much.
Fact: Annuity costs depend on the type and features you select. Many basic annuities have minimal fees. Optional riders for enhanced benefits come at a cost, but are not required. Choose the features that fit your needs and budget.

Myth #3: Don’t buy an annuity before retirement.
Fact: Buying an annuity while still working can protect your nest egg from market volatility, especially in the critical “retirement red zone.” Delaying income can result in higher future payouts.

Myth #4: The insurance company keeps your money when you pass away.
Fact: Unless you select a “life-only” payout, most annuities provide options for beneficiaries to receive income or remaining contract value. Review all payout and beneficiary features before choosing.

Myth #5: Fixed index annuities are just like the stock market.
Fact: Fixed index annuities are insurance contracts, not investments. They link interest to a market index, but do not expose your money to direct market risk or losses.

Myth #6: You can’t access funds for emergencies.
Fact: Most contracts allow penalty-free withdrawals for RMDs, emergencies, or specified situations.

Myth #7: Fixed annuities have unattractive interest rates.
Fact: Rates can be quite competitive, especially compared to other guaranteed products. Shopping different carriers may result in better yields.

Myth #8: There’s no protection if my insurer fails.
Fact: State guaranty associations and strict regulatory reserve requirements help protect policyholders up to certain limits.

Myth #9: You’re stuck after buying an annuity.
Fact: A free-look period allows you to review and, if needed, cancel the contract after purchase. Some annuities include features or riders for flexibility.

Myth #10: All annuities work the same way.
Fact: Each annuity type has unique features—matching the right product to your needs is key.

Myth #11: Surrender charges are always high and unavoidable.
Fact: Surrender charges often decrease each year and can be avoided with annual penalty-free withdrawals built into most contracts.

Better Manage Your Retirement Risk

Respected retirement researcher Wade D. Pfau, Ph.D., CFA®, in his whitepaper Managing Risk with Fixed-Indexed Annuities in the Pre-Retirement Years”, writes:

Fixed index annuities can also “function as an asset class within an accumulation portfolio to better manage downside risks, while still allowing for participation in the market upside. The ability to better manage downside risks can lay a foundation to either reduce the asset level necessary to successfully retire, or to enhance the returns produced by a given asset base.”

Frequently Asked Questions