Ask These 10 Questions BEFORE Buying an Annuity

As you explore different options to secure your financial future, annuities often come up as a popular choice. But before you take the leap, it’s important to understand what you’re getting yourself into. There are many types of annuities and there’s really no “one-size-fits-all.” Here are some basics to know and all the essential questions you should be asking before buying an annuity.

1. What Type of Annuity Is Best for Me?

Annuities come in various forms. Each type offers different features and benefits. Consider your financial goals, risk tolerance, and income needs to determine which type aligns best with your retirement plan.

• Immediate Annuities – An immediate annuity is funded by one lump sum of money. Payouts can begin as early as one month after purchase. It’s used as a fixed, reliable income source as a supplement to other retirement income.
• Deferred Annuities – In contrast to immediate, these are paid out in the future. Money is paid to the insurance company during the accumulation phase. During accumulation, money grows on a tax-deferred basis. Annuitants only pay tax when withdrawals are made.
• Fixed Annuities – A fixed annuity promises to pay a specific and guaranteed interest rate on account contributions. Fixed annuities are generally considered predictable and safe for retirement.
• Variable Annuities – A variable annuity’s interest can fluctuate based on the performance of an investment portfolio. There is usually more risk involved as well as higher fees.
• Fixed Index Annuities – A fixed index annuity is unique in that it offers some market growth while carrying little risk. It comes with a guaranteed minimum payment which is determined by the interest rate floor. Regardless of how the market performs, you receive that guaranteed minimum.

2. How Does the Annuity Generate Income?

Before buying any financial product, you should understand how it generates income. Ask about the available payout options. Some offer lifetime income, fixed period, or lump sum. Inquire about any guarantees, potential growth, and how the income is calculated.

3. What are the Fees?

Most financial products come with fees and annuities are no exception. Be sure to know the upfront charges and annual fees as well as any surrender fees and administrative costs. Understanding the costs will help you evaluate the long-term value of your options.

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4. Is There a Minimum Investment Requirement?

Some annuities have minimum investment requirements. Ask about the amount needed to purchase the annuity and any subsequent minimum contribution amounts. This should help you determine if the product fits within your budget.

5. What are the Terms and Conditions?

Annuities often come with surrender periods, during which penalties may apply if you withdraw your funds early. Make sure you know the surrender terms, including any associated fees.

6. Are There Any Features or Riders Available as Add-Ons?

Annuities may offer riders that provide additional benefits, like a death benefit or long-term care coverage. Ask about these options and evaluate their relevance to your specific plan for retirement.

7. How Will Inflation Affect My Annuity?

Inflation erodes the purchasing power of your money over time. Inquire about any inflation protection features the annuity offers, such as cost-of-living adjustments (COLA) or inflation riders. Understanding how the annuity accounts for inflation will help you understand the product you’re purchasing.

8. What Happens to the Annuity When I Die?

Ask about the options for your beneficiaries, including whether they can continue receiving payments or if a lump sum is paid out.

9. How Reliable is the Company You’re Buying From?

Annuities are typically offered by insurance companies. It’s important to assess the stability and reliability of the company you’re purchasing from before buying. Research their financial ratings and consider their track record.

10. Can I Make Changes After the Purchase?

Life is full of surprises, and your financial needs may evolve. Ask about the flexibility of the annuity, including whether you can make changes to the contract after purchase. Inquire about options for increasing or decreasing contributions or adjusting payout terms.

More Retirement Planning Help

If you need more help with retirement planning, then check out these resources:

New RMD Rules for 2023

How to Choose the Right Financial Advisor

Should Annuities Be Part of Your Retirement Portfolio?

What is a Straight Life Annuity?

Bob Carlson’s Retirement Watch