5 Myths and Facts About Annuities

Before addressing some of the myths and true facts associated with annuities, it is important to understand exactly what an annuity is. The dictionary defines annuity as the payment of a monetary amount in fixed amounts during the year.

License: Creative Commons image source
License: Creative Commons image source

Myth 1. Insurance companies keep all future payments after the owner’s death.

According to data at USAA, annuity ownership guarantees payment for life or a specified period of time as set forth in the annuity contract. Upon the owner’s demise, heirs receive the total value plus interest, but must pay taxes due prior to liquidation. If the contract includes a guaranteed return of premium clause, the amount paid to you and your heirs will always equal the amount originally invested. The only exception applies to immediate annuities because payment begins one month following contract signage and ceases upon the signer’s death.

The monthly amount paid by the insurance company issuing the annuity is based upon the age of the annuitant. Issuers traditionally use a life expectancy formula to calculate the possible number of payments to be made. Any payment to heirs is not affected by the wait period associated with last will and testament probate or subject to inheritance tax issues.

Myth 2. Annuities have the same advantages and disadvantages as other financial products.

In actuality, annuities are guaranteed to grow in value, are tax deferred and provide an income for life in the form of a monthly retirement check. Financial advisers maintain that no other financial instrument guarantees a lifetime income.

With the exception of the on-going management fee associated with a variable annuity, there are no undisclosed fees, and specified fees incorporated into the original contract are used by the insurance company to safeguard the guarantee of payment.

The is no limit to the amount of money the annuitant is allowed to contribute to an annuity versus the limit imposed by IRS regulations for a 401K or IRA plan.

All or a portion of the annuity’s value can be converted to cash, negating the need to apply for a bank loan. An annuity may also be used as collateral.

Unless the annuitant is younger than 59.5 years of age, the 10 percent penalty for early withdrawal is waived. In most states, withdrawal from a 401K or IRA can not begin prior to age 70.6.

Myth 3. Annuities do not keep pace with inflation.

Since the monthly annuity payment increases as the annuitant ages, it is not possible to outlive retirement savings. In addition, the cost of living adjustment included with the majority of annuities is more secure than Social Security because they are not tied to the need for income taxation reform necessary for this program to remain solvent. Annuities allow for flexibility of contribution by an annuitant that wage withholding regulations pursuant to social security deduction does not. The monthly annuity stipend is not affected by negative activity associated with Consumer Price Index movement.

Myth 4. Annuity Investment Ties Up Money.

While annual access to funds is made available, there is no requirement that this money be withdrawn. On the other side of the coin, the early withdrawal penalty associated with an annuity functions as a rational behavior check.

A visit to Suze Orman is worth the time to benefit for the advice of financial guru, Susie Orman who maintains that there are more myths associated with annuities than with any other financial investment vehicle. In today’s world, people who leave one employer for another are wise to take their 401K with them since the former employer’s obligation to match contributions ceases.

Myth 5. All annuities include a tax deferment clause.

Aside from the ownership of an immediate annuity, which does not come under this clause, because a qualified annuity is purchased with pre-tax money, deferment remains in place until any withdrawal is made. A non-qualified annuity is subject to tax on any withdrawal amount that is greater than the original deposit.

If you’re looking for more information on annuities you should visit this site. This organization holds a distinctive record for 12 years of service to clients contemplating partial or total liquidation of an annuity in order to obtain cash money. The website contains a wealth of use information for investors of all experience levels and financial means.

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