June is Annuity Awareness Month. This is a timely opportunity to take a closer look at a financial product that’s changed considerably in recent years. Even as the misconceptions surrounding it have not.
Annuities are no longer simply vehicles for guaranteed lifetime income. They have evolved into a broader category of products that may serve different roles in a retirement plan. From tax-deferred accumulation and market participation to downside protection and portfolio hedging. Understanding what annuities are today, and what they are not, is a more nuanced conversation than it once was.
Here are five misconceptions worth examining.
Misconception 1: “Annuities are only about lifetime income.”
Lifetime income remains one of the reasons people consider annuities. And for many retirees, a guaranteed income stream is genuinely valuable. But it’s no longer the only reason, or even the primary one, for many purchasers.
Annuities have evolved greatly as financial products. Many are now used primarily for tax-deferred accumulation. For participation in market index performance with defined limits on loss. Or as a hedging tool within a broader retirement portfolio. According to Investor.gov, annuities may be worth considering when planning for retirement or seeking to convert assets into income, but the range of ways they may serve those goals has expanded considerably.
Misconception 2: “All annuities are the same.”
Annuities vary considerably in structure, risk profile, and purpose. FINRA notes that the different types of annuities, fixed, variable, and indexed, come with different risks and potential rewards. Among the most significant developments in the annuity marketplace in recent years is the growth of Registered Index-Linked Annuities, or RILAs.
A RILA is a contract between an investor and an insurance company where the interest earned is linked, in part, to the performance of a market index over a set period of time. Notably, RILA returns are typically subject to defined limits on both potential losses and potential gains, a structure that positions them between the full market exposure of a variable annuity and the more limited growth potential of a fixed product.
Misconception 3: “The money in an annuity is locked away forever.”
While annuities are generally designed as longer-term financial arrangements, they’re not necessarily inaccessible. Annuities may come with surrender charges, fees that may apply if funds are withdrawn during a specified period after purchase. The structure of any individual contract, including withdrawal provisions and any applicable charges, varies by product and provider.
Misconception 4: “Annuities are not subject to regulation.”
Annuities are subject to regulatory oversight, though the nature of that oversight depends on the type of annuity. All annuities are regulated by state insurance commissioners. Variable annuities and RILAs are also regulated at the federal level by both the SEC and FINRA. And they must be sold through licensed broker-dealers. The SEC has published guidance specifically to help consumers better understand RILAs and has implemented a tailored disclosure framework to ensure investors receive clear, plain-English information about these products before making a purchasing decision.
Misconception 5: “RILAs are too complex to be worth understanding.”
Registered Index-Linked Annuities are among the fastest-growing financial products in the retirement planning space. Annual RILA sales reached approximately $47.4 billion in 2023 alone, more than quintupling since 2017, and the fourth quarter of 2023 marked the first time RILA sales surpassed variable annuity sales. That growth reflects a meaningful shift in how financial professionals and their clients are thinking about retirement planning.
The appeal of RILAs lies in their structure. A RILA links returns to the performance of a market index, such as the S&P 500, while imposing defined limits on both gains and losses. This “buffered” approach allows for participation in market upside while providing a degree of protection against downside risk, occupying a middle ground between the full market exposure of a variable annuity and the more conservative positioning of a fixed product.
RILAs are classified as securities and are subject to regulation by both the SEC and FINRA. FINRA cautions that the bounded return structure can be difficult to fully understand without professional guidance, which is precisely why these products are best evaluated in the context of a broader conversation with a qualified financial professional who can explain how a specific RILA’s caps, buffers, and crediting periods may align with a given client’s retirement goals.
A More Informed Conversation Starts Here
Annuities have changed. The conversation around them should reflect that. Whether the goal is tax-deferred accumulation, market participation with defined risk limits, or a guaranteed income stream, the range of products available today is broader and more nuanced than it has ever been.
If you have questions about annuities, including whether a RILA or another type of annuity may be worth exploring as part of your retirement plan. Speaking with a qualified financial professional at Barnum Financial Group is a helpful first step.
Disclaimer: Neither MML Investors Services nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters.
