Common Annuity Mistakes

Not Naming a Beneficiary

A major potential mistake is opting not to name a beneficiary when you purchase an annuity. This may not seem particularly important, but having no named beneficiary in your contract can create a significant headache down the road for your heirs.

Different annuity contracts operate in different ways, but generally speaking, when you name a beneficiary, they are entitled to the remaining value of your annuity when you die. This is often paid out as a lump sum or in a series of payments.

If you have no listed beneficiary or death benefit in your contract, then any remaining cash will likely remain with the insurance company after you die.

If you have a death benefit as part of your contract but no listed beneficiary, there is a chance your annuity will simply become part of your estate and have to go through the probate process before your heirs can access its value.

Annuities are typically exempt from probate, so failing to name a beneficiary can eliminate one of the key advantages of an annuity contract.

Annuities are a complex financial product but the biggest mistakes people make are usually simple unforced errors like overlooking confusing terms, performance data, or relevant protection features for yourself or your heirs. Pay attention to the details of the contract because everything you need to know is in there.

What should you do if you don’t understand what you are reading? Ask as many questions as needed to feel comfortable and if you don’t get satisfactory answers that clear it up, then its time to go in a different direction.

Stephen Kates, CFP®Principal Financial Analyst for Annuity.org

Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

Failing To Best Protect Your Spouse

Many annuity customers purchase a product in the hope of protecting not just themselves but their spouse as well. However, much more goes into this than simply naming them as your beneficiary.

For example, spousal continuation allows your spouse to become the annuity owner after you die. The product continues to remain active and functions for your spouse exactly as it did for you.

However, spousal continuation is only allowed if your spouse is the sole beneficiary. If you, for example, name your spouse and children as beneficiaries, then your spouse’s only option upon your death would be to split up the annuity’s remaining value.

You can also select different payment setups to directly benefit your spouse. A joint and survivor annuity, for example, can be tied to two people. This allows the product to remain active even after the first person dies.

Failing To Do Your Homework

One important thing to remember about annuities is that, while they are products, you typically cannot purchase them easily or quickly.

Annuities are complex financial instruments that can provide a lot of value to buyers, but they are not always easy to understand if you don’t have previous experience with these products.

A big mistake customers are at risk of making is signing up for a product they don’t fully understand or failing to work with an advisor and ending up with an annuity they didn’t really need.

Combining your own research with the expertise of an insurance professional or agent helps set you up for a successful purchase.

Not Understanding Surrender Charges

The surrender period is a key aspect of purchasing an annuity, so customers need to know how it works. It can be a critical mistake to purchase an annuity without understanding what money you will have access to and when.

Annuities are typically multi-year products, and the surrender period is the stretch of time when you will face a penalty if you attempt to withdraw cash from your annuity.

This penalty varies by product, but you can generally withdraw 10% of the value of your annuity during the surrender period without incurring it.

Surrender periods typically last several years, with a penalty that decreases each year. It will be much more costly to withdraw money in Year 1 of a contract than in Year 5.

It’s important to clearly understand when you’ll have access to your money before committing to an annuity, so you don’t find yourself in a situation where you desperately need the funds but can’t retrieve them.

Choosing the Wrong Type of Annuity

The term “annuity” refers to a broad range of products that operate in very different ways. It’s critical to understand what type of annuity you actually need.

Annuity Types

Type of Annuity	Purpose
Fixed	Growth of money at a guaranteed and fixed rate
Fixed Index	Growth of money tied to an index, with the initial investment protect from loss
Immediate	Convert a lump sum into a series of guaranteed payments that begin immediately
Variable	Money is invested and grows tax-deferred

The right customer for a variable annuity, for example, may have nothing in common with someone wanting to purchase a single premium immediate annuity.

To avoid purchasing the wrong type of annuity, focus on your financial goals rather than a specific product. Whether you aim to grow your money with minimal risk or convert a lump sum into immediate payments, keeping your goals in mind will guide you to the right choice.

Knowing your goal helps you identify the product best suited to achieve it.

Paying High Fees

Part of your research should be to explore what level of fees are normal for the type of annuity you are interested in, particularly since this can vary vastly between types.

Variable annuities, for example, are often associated with higher and more numerous fees. A simple product like a MYGA, on the other hand, likely shouldn’t have a lot of bells and whistles attached to it.

Working with a reputable advisor helps ensure you don’t end up purchasing a product with fees that go beyond what is expected or reasonable.

You can also avoid this by being certain to purchase the type of annuity you actually need for your financial plan.

Timing the Market

Attempting to time the market is a common investment mistake that goes beyond annuities. The truth is that rates go up and down, and it can be very difficult for an everyday customer to expertly time when to buy.

You may miss out on an attractive rate because you thought it might eventually go higher, only to see it decline instead.

One annuity strategy to help with market timing is known as laddering. This involves splitting up the money you wish to use on an annuity into several different piles and using them to purchase multiple annuities over time.

This lessens your risk by allowing you to capture multiple moments in the market. It also gives you the chance to set up future payments such that your income grows over time.