Common Myths About Annuities Debunked

19 June 2025

When it comes to financial planning, annuities often get a bad rap. There are countless misconceptions floating around that make people hesitant to consider them as a viable option for retirement income. But here’s the truth—annuities can be a powerful tool if you understand how they work.

Let's cut through the noise and debunk some of the most common myths about annuities once and for all.

Myth #1: Annuities Are Too Expensive

One of the biggest myths about annuities is that they come with sky-high fees, making them an unwise investment. While it's true that some annuities have fees, not all of them do.

The Truth:

There are different types of annuities, and some, like fixed annuities, have little to no fees at all. Variable and indexed annuities may have additional costs, but these often come with added benefits like market participation or guaranteed income. Like any financial product, the key is to understand what you're getting into and choose the right annuity for your needs.

Instead of dismissing annuities because of potential fees, ask: What value do I get in return? If an annuity guarantees lifetime income, isn't that worth considering?

Myth #2: Annuities Lock Up Your Money Forever

Some people think that once you put money into an annuity, you’ll never see it again. Not true!

The Truth:

Most annuities allow you to make partial withdrawals or offer liquidity options. While it’s true that some annuities have surrender periods (a set timeframe where hefty withdrawals may come with penalties), many offer flexible access to funds when structured properly.

Some even include free withdrawal allowances, meaning you can take out a percentage of your money without penalty each year. And if liquidity is a major concern, there are annuities designed specifically for flexibility.

Don't let the fear of being "locked in" stop you from considering an annuity—there's likely an option that suits your needs.

Myth #3: Annuities Are Only for Retirees

Annuities are often marketed as retirement income solutions, so it's easy to assume they only benefit older individuals.

The Truth:

Annuities can be useful at any age, depending on financial goals. Younger individuals can use them as a tax-deferred way to grow wealth over time. Since annuities allow you to accumulate earnings without immediate taxation, they can be a smart long-term investment strategy.

In addition, some people use annuities as a safe alternative to traditional investments. Whether you're looking for security, tax advantages, or guaranteed future income, annuities aren't just for retirees—they can fit into various financial plans.

Myth #4: If I Die, the Insurance Company Keeps My Money

Many fear that if they pass away shortly after purchasing an annuity, their hard-earned money goes straight to the insurance company.

The Truth:

This myth comes from a misunderstanding of how annuities are structured. Some annuities—like life-only annuities—stop payments when the owner dies. However, most modern annuities offer death benefit options that allow beneficiaries to receive the remaining funds.

Many contracts include:
✔ Refund options ensuring your heirs receive what’s left
✔ Guaranteed period payouts that continue payments for a set duration
✔ Joint annuities that provide income for surviving spouses

So, no—your money doesn’t just "vanish" when you die. There are plenty of ways to ensure your savings pass to your loved ones.

Myth #5: Annuities Have Terrible Returns

People often compare annuity returns to stock market investments and assume they’re getting the short end of the stick.

The Truth:

Annuities aren’t designed to replace stocks—they serve a different purpose. They provide guaranteed income and principal protection, something the stock market can’t promise.

If you're buying an annuity for high-risk, high-reward growth, you’re looking in the wrong place. But if you want steady income that lasts a lifetime, annuities are exactly what you need.

Indexed annuities, for example, offer growth potential tied to market performance but with downside protection. So while returns might not skyrocket like a hot stock, they also won’t plummet when the market crashes.

It’s about security, not speculation.

Myth #6: I Can Get The Same Benefits From Other Investments

Why lock money into an annuity when you can just invest in stocks, bonds, or real estate?

The Truth:

While other investments can generate returns, none offer guaranteed lifetime income like annuities. Stocks can crash, rental properties can sit vacant, and bonds can lose value due to inflation.

Annuities are income insurance—they ensure you never run out of money, no matter what happens in the economy. You might retire in a bear market or live longer than expected, and an annuity can protect you from these risks.

In short, annuities aren’t meant to replace traditional investments, but rather complement them as a safety net for your retirement.

Myth #7: Annuities Are Too Complicated

Annuities come in different shapes and sizes, and for some, that complexity is intimidating.

The Truth:

Sure, annuities have nuances, but so do 401(k)s, mutual funds, and insurance policies. The difference? Annuities often come with guarantees and benefits that other financial products lack.

You don’t need to be an expert to benefit from an annuity—you just need the right guidance. A knowledgeable financial advisor can walk you through your options and help you choose the best fit.

If you can navigate a mortgage, tax strategies, or even a car lease, you can understand annuities. It's just about breaking down the details.

Final Thoughts: Should You Consider An Annuity?

Annuities aren't for everyone, but they also aren’t the big, bad financial product some make them out to be. The key is understanding what annuities offer, how they work, and whether they align with your financial goals.

If you want guaranteed income, tax advantages, and a hedge against market uncertainty, an annuity may be a great fit. Like any financial decision, it's crucial to do your homework and work with a trusted financial professional to ensure you're making an informed choice.

Next time someone tells you annuities are a rip-off, you’ll know better.