10 Annuity Myths That Could Cost You Money: What’s True and What Isn’t

Whenever annuities come up in conversations about retirement planning, I hear the same myths repeated again and again. And while annuities are not perfect and certainly not right for everyone they are also one of the most misunderstood financial tools out there. If you’re considering an annuity or simply want clarity, here are the most common myths I hear and the real facts behind them.

Myth 1: “Annuities are always a scam.”
This is one of the biggest misconceptions. Yes, some annuities come with high fees and unnecessary complexity usually variable annuities. But others, like immediate annuities and basic deferred income annuities, are straightforward and low-cost. These contracts can provide predictable income without the confusing add-ons.

Myth 2: “If I die early, the insurance company keeps all my money.”
This is only true for life-only payout options. Many annuities offer refund provisions, period-certain guarantees, or beneficiary payouts. You just need to select the right contract structure. The idea that insurers always “take everything” is simply not true.

Myth 3: “All annuities lock up your money forever.”
Some deferred annuities do have long surrender periods, but not all annuities are built this way. Immediate annuities and fixed annuities often have little or no lock-up. And even in deferred contracts, you may be allowed to withdraw a portion each year without penalties.

Myth 4: “Annuities always have terrible returns.”
Variable annuities can underperform because fees eat into returns, but fixed annuities often offer competitive yields sometimes higher than CDs or high-yield savings accounts. Returns depend entirely on the type of annuity you choose.

Myth 5: “Annuities are tax-free.”
A very common misunderstanding. Annuities are tax-deferred, not tax-free. When you take money out, gains are taxed as ordinary income. Still, tax deferral can help your money grow faster over time.

Myth 6: “Annuities automatically protect against inflation.”
Most do not. If you want inflation protection, you need an inflation rider and riders usually cost extra. Without one, your income stays level even as prices rise.

Myth 7: “Insurer financial strength doesn’t matter because states guarantee annuities.”
State guarantee associations have limits, and those limits vary. If you’re investing a significant amount, you absolutely need to check an insurer’s financial rating. Treat this the same way you’d evaluate the stability of a bank.

Myth 8: “Once you buy an annuity, you’re stuck for life.”
Some contracts offer partial withdrawals, terminal illness waivers, nursing care waivers, or even surrender-charge-free access under certain conditions. The level of flexibility depends on the product—but you’re rarely as “locked in” as people assume.

Myth 9: “Annuities are only for ultra-conservative investors.”
Annuities can play a strategic role in a balanced retirement plan. Many investors use them to cover essential expenses so they can invest the rest of their portfolio more aggressively. It’s not about being conservative it’s about creating stability.

Myth 10: “Annuities are only for older individuals.”
Not anymore. Younger investors can benefit from deferred income annuities or QLACs (Qualified Longevity Annuity Contracts) to help manage future required minimum distributions. Planning early can mean more income later.

Annuities are neither miracle products nor scams they’re financial tools. Understanding what’s myth and what’s fact is the key to deciding whether they belong in your retirement plan. If you’re unsure how an annuity might fit into your income strategy, running the numbers with a fiduciary advisor can help you make the best decision for your goals.

All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.