Annuity myths and facts

Understanding the basics of annuities can help you make an informed decision that's right for you. From types to tax benefits, read our guide for everything you need to know about annuities.

Information courtesy of USAA Life Insurance Company and USAA Life Insurance Company of New York

Because annuities are insurance contracts that provide a guaranteed income,See note1 often after retirement, some people assume they only make sense for seniors, or that they're too complex.


But when used correctly, annuities can be a solid part of your retirement package. Here, the USAA Life Insurance Company and USAA Life Insurance Company of NY share some common misconceptions, explanations and potential benefits of annuities.

Myth: Annuities are too complicated to understand.

Fact: While individual plans may differ, annuities come in two basic forms: immediate and deferred. An immediate annuity generally requires a buyer to pay an initial lump sum to an insurer, who guarantees monthly payments beginning now and ending at a particular time (often at the individual's death). A deferred annuity delays payouts until a later date of your choice.

Myth: If you buy an immediate annuity and die early, payments stop and the insurance company keeps your money.

Fact: Immediate annuities can guarantee monthly payments for your life, or as long as specified. Some people choose a guaranteed payment period that continues until their spouse's death. Others choose to allow payments to continue until all of the initial investment has been paid back to them or their beneficiary, regardless of their death.

Myth: Deferred annuities can't provide as much as what other financial products can.

Fact: Deferred annuities can provide a unique blend of features, including:

  • Guaranteed growth.
  • Tax-deferred compounding.
  • Lower market risks.
  • Lifetime income.

Myth: Annuities are sold by salespeople motivated by high commissions.

Fact: While this may be true for some types of specialized annuity products, immediate and deferred fixed annuities generally don't carry high commission costs. Still, before purchasing any annuity, you should understand your situation, the annuity contract under consideration, and whether it's in your best interests without any sales pressure.

Myth: Guaranteed savings annuities are only for older or extremely conservative investors.

Fact: Younger generations are also seeing the benefits of annuities.

  • As pensions become rare, deferred annuities can help create future guaranteed income, while providing financial stability and portfolio diversity.
  • Deferred annuities offer a guaranteed monthly payment that can simplify the complex process of creating your own retirement income.
  • Tax-deferred earnings can help simplify your tax reporting.

Myth: I only need my money to last as long as my life expectancy.

Fact: In 2021 life expectancy at birth, was 73.5 years for males, and 79.3 for females. However, averages can be deceiving depending on your own health and background, and how old you are now. Let's assume you're already age 65 and retired, non-smoker and in average health. A 65-year-old male has better than a 50% chance of living until age 85. A 65-year-old female in the same condition has more than a 60% chance of living until age 85. And, if these two are a married couple, there's about a 34% chance at least one of them will live until age 95.

Therefore, depending on your current age and overall health, it may be a good idea to plan beyond averages.

Myth: Once you buy an annuity, you can't move it without paying taxes.

Fact: You may be able to move an annuity tax free using IRA rollovers and tax free exchanges under IRS rules. Federal tax rules and surrender charges may apply.