Before you buy an annuity, ask these nine questions
An annuity can be exactly the right tool. It can also be an expensive mistake. The difference is usually whether the buyer understood it before signing.
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What an annuity is, and is not
An annuity is a contract with an insurance company. You give the company money, and it makes promises in return, such as a lifetime income stream or interest tied to a formula. Some people use them to turn savings into a paycheck that cannot be outlived.
Guarantees are backed by the claims-paying ability of the issuing insurance company. Annuities are not FDIC-insured, and they are not right for every situation.
Ten questions to have answered before you sign
Tick each one once you have a clear answer in writing. If a question gets talked around, that is an answer too.
The nine questions
1. What problem does this solve? If you cannot name it in one sentence, pause.
2. What exactly is guaranteed, and by whom? Get it in writing, and look up the insurer's financial strength ratings.
3. What does it cost each year? Include rider fees, caps or participation limits, and any other charges.
4. What is the surrender schedule? How long is your money locked up, and what does leaving early cost?
5. How much can I take out without a penalty? Many contracts allow a limited yearly withdrawal.
6. What are the taxes? Gains are generally taxed as ordinary income when withdrawn, and withdrawals before 59½ may carry a penalty.
7. What happens to my spouse or heirs? Understand the death benefit and any survivor options.
8. How is the person selling it paid? You are entitled to ask, and the answer should not make you uncomfortable.
9. What are my alternatives? A good recommendation holds up when compared with other options.
If the answer to any of these is vague, that is information. A good annuity can explain itself line by line.
Common types, in brief
Fixed annuities pay a stated interest rate for a period. Fixed indexed annuities credit interest based partly on an outside index, with limits on both gains and losses. Immediate annuities convert a lump sum into income that starts right away. Each trades flexibility for certainty in a different way.
Already own one?
Do not rush to cancel. Surrender charges and taxes can turn a so-so decision into a costly one. A calm review of what the contract does, what it costs, and how it fits your income plan is the right first step.
What would you want looked at first?
Three questions, then a licensed agent reviews market risk, fees, and income timing with you.
No cost. No obligation. No money moved.
Common questions
Are annuities a good idea?
For the right person, in the right amount, they can provide guaranteed income. For others the fees or surrender periods outweigh the benefits. It depends on the specific contract and your situation.
What is a surrender charge?
A fee for withdrawing more than the contract allows during the surrender period. Always ask for the full schedule.
Are annuities safe?
Guarantees depend on the claims-paying ability of the issuing insurance company, and annuities are not FDIC-insured.
Should I have an annuity reviewed before I sign?
Yes. Before you sign, have the costs, guarantees, surrender schedule, and limits explained line by line, and take your time. A good contract will still look good after a second read.
This page is for general education only and is not investment, tax, or legal advice. Rules, limits, and ages change, and your situation is specific to you. Confirm current figures with the IRS, the Social Security Administration, OPM, or the TSP, and consult your own tax advisor or attorney before acting.
Bring your numbers. We'll bring the plain English.
Every situation has variations, and yours is one of them. The first conversation is free, and there is nothing to sign.
Or just call. A person answers: (518) 480-8848