6 annuity misconceptions: Myth vs. fact

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Annuities can be a useful financial product for retirement planning. Not many people know it, but annuities can even be a way to save outside of retirement. Read on the true facts about annuities as we debunk some common annuity myths so you can decide if these investment vehicles are right for your portfolio.

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A brief overview on annuities

Let’s talk about annuities and how they work. Typically, annuities are financial products distributed by insurance companies. An individual can buy an annuity by making a lump-sum payment or a series of payments to the company. This guarantees that the individual will receive a lump-sum payment or a series of regular payments in return. Usually, these payments come in the future, making it a great option for supplementing retirement income.

There are many different types of annuities that offer different pay structures and come with their own set of pros and cons. Annuities may not be right for everyone, but they can be a great addition to your investment portfolio under the right circumstances.

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Understanding annuity myths & facts

This leads us to myths and misconceptions about annuities. Like many investment products, annuities can sometimes be intimidating.

The complexity of annuities and the contracts some insurance companies implement have given annuities a bad reputation over the years. However, these financial products can be highly beneficial with the right provider and the right annuity contract.

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#1: Annuities are a bad investment

Annuities get a bad rap for being a poor investment choice. While they’re not right for every investor, they can be very useful for diversifying your investment portfolio and setting yourself up for a comfortable retirement.

Annuities offer several advantages, with one of the most well-known benefits being a steady stream of stable retirement income. They also offer an investment vehicle for tax-deferred growth, allowing you to earn tax-free income and investment gains until you withdraw your money. Death benefits also offer an additional layer of security for loved ones. Overall, annuities are far from a bad investment if you choose the right contract and the right provider.

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#2: Annuities are complex

The complex language and payment structures of annuities often scare off potential investors who could benefit from them. While it’s true that there are many types of annuities with many optional features, they’re not much more complicated than other investment products.

It’s also good to remember that complexity isn’t inherently negative, as the occasional complexity of these contracts allows annuities to be versatile and flexible. Also, working with a financial advisor can help you understand anything you don’t understand about your annuity contract. Even better, digital solutions like Gainbridge® eliminate the complex language, fees, commissions, and obstacles associated with traditional annuity investing.

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#3: Annuities have high minimum investment requirements

Another myth about annuities is that they require a high deposit to invest in one. When you start looking into the world of annuities, you’ll likely find many options accessible to many. Some types of annuities or special features can be more costly, but these features are usually optional, and the type of annuity you invest in is up to you.

There are also a variety of providers for annuities, so you can compare and find competitive rates that best fit your investment strategy. If you invest in the right annuity, you will likely find it much more accessible than you expect and can provide you with great benefits like steady income, tax-deferred growth, and more.

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#4: Annuities are only for retirees

While it’s true that annuities are popular for providing stable retirement income, this isn’t their only use. Annuities can be useful for individuals who want more savings options. Particularly, annuities are great for individuals who regularly max out their IRA or employee retirement plan. If you want to put more toward long-term savings, annuities allow for flexible tax-deferred growth.

In the future, these tax-deferred investments can become an income stream for you. They can be leveraged at various life stages if you find the right annuity for your financial goals.

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#5: Annuities offer no flexibility

Annuities can offer considerable flexibility thanks to add-on features known as annuity riders. Annuity riders can be used to customize an annuity contract based on specific financial goals or needs you may have. However, it’s important to keep in mind that this flexibility usually comes with an additional cost.

An example of a common annuity rider is a guaranteed minimum income benefit rider. This rider ensures the policyholder has a minimum floor on payments to guarantee consistent income regardless of their circumstances after the contract has been annuitized. Another common rider is a cost of living rider, which incrementally increases payments over time, so the effect of inflation is minimized when you start receiving payments. Beyond riders, annuities also have customizations, such as when you begin receiving payments, the frequency of payments, and more.

Annuities can be very flexible, but you should always make sure to understand any implications of your customizations.

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#6: Annuities are taxed heavily

Finally, there’s the myth that annuities are taxed heavily. You may find annuities to be beneficial from a tax standpoint. While it’s true that the payouts you receive from your annuity are taxed as regular income, your initial investment can grow on a tax-deferred basis, depending on the annuity. If the income tax rate is lower than the capital gains tax rate, you can save taxes on the income you defer using an annuity.

Also, if individuals are in a lower tax bracket during retirement, that would further tax savings. In other words, they won't be taxed heavily if you’re strategic about your annuity investments. If anything, they can be tax advantageous.

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How to make an informed decision on annuities

As with any financial decision, it’s important to have true information about annuities before investing your money into one. Now that you better understand some of the biggest misconceptions surrounding annuities, you can go into your research with more confidence. Remember, it can also be helpful to seek the help of a financial advisor when investing in an annuity. Most importantly, when buying annuities, you should always invest with a reputable and highly-rated provider, like Gainbridge®.

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Get started with Gainbridge® today

Annuities may have gotten a bad reputation, but we’re here to change that. Gainbridge® is building annuities meant for the 21st century. Through an online platform, you can buy annuities direct, getting rid of the commission or fees a broker would take, putting the power, and higher returns, back in your hands.