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.
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.
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.
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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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.
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.
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.
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.
Ask about the options for your beneficiaries, including whether they can continue receiving payments or if a lump sum is paid out.
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.
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.
If you need more help with retirement planning, then check out these resources:
How to Choose the Right Financial Advisor
Should Annuities Be Part of Your Retirement Portfolio?
What is a Straight Life Annuity?
Originally published May 16, 2023
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