Debunking Myths About Indexed Annuities

Annuities are great investment tools offering secure, tax-deferred growth and income for savings and retirement. An annuity is a financial contract with an insurance company, you pay in a certain amount of money, and they pay it out to you over a certain period of time.

Annuities come in three types: fixed, variable or indexed. A fixed annuity pays a certain, defined amount, based on your contributions. You know exactly what the rate is in advance, and what your payments will be. A variable annuity can be based on a range of investments, usually stock mutual funds. The rate of return is based on the performance of those securities.

The third type of annuity is an indexed annuity, which invests in and pays off based on the performance of a financial index, like the S & P 500. The rate of return is directly linked to the performance of the index. For the most part, these indexed annuities represent a good compromise linking the security of an annuity with the long-term growth potential we've seen in stock indices over the last 50 years.

Although annuities are simply a financial contract, there are many myths surrounding them. Here are the top myths about indexed annuities:

You can lose all your money if the market crashes
While an indexed annuity's growth is based on the growth of the index it relates to, when the index goes down, so does the value of your investment. However, annuities normally include a guaranteed payout, payments made are not completely lost.

You don't have to pay taxes on the income
Some annuities are tax-deferred which means you do not pay taxes on the money when you invest it in the annuity. You do pay taxes when you withdraw or begin the payout phase, but the idea is, you will be retired and at a lower tax rate than when you were making the contributions.

If you die before the payout period, you lose all your money.
Annuities come with a death benefit that pays a specific amount to your family. This amount may be the net amount of payments you have made into the annuity, but there are paid upgrade options that provide a higher benefit.

Annuities have too many hidden charges and fees.
Like many financial products, annuities do come with fees and charges. The fees and charges can add up and impact the rate of return. Review the paperwork carefully and check with the agent about all the possible fees or charges you may incur.

Insurance agents don't know about retirement planning.
Annuities are sold by insurance agents, since annuities are offered from insurance companies. Be sure you are comfortable with the agent, and look for one who seems more like a teacher than a salesman. Always keep in mind they do earn a commission, so their opinion will be biased. Do your own research and due diligence to confirm an annuity is a good choice for your personal situation.