Questions to Ask BEFORE Buying An Annuity

By Cathy DeWitt Dunn

Choosing the right annuity to help support your retirement income needs can be confusing and a little intimidating especially when so many different kinds of annuities offer such a dizzying variety of contracts. To help simplify the process, here are six questions to ask before buying an annuity, regardless of whether it is variable, fixed, or indexed:

1. Should you put your money in an annuity or something else like a mutual fund?

The answer to this question depends a lot on where you are in your lifelong investment plan. If you are in or nearing retirement, generating guaranteed income and protecting your principal are probably very important to you. So, while mutual funds are typically less expensive, they do not provide the guarantees included in an annuity contract. They also do not provide guaranteed lifetime income. Certain annuities also offer 100% principal protection, protection from stock market downturns, a minimum death benefit, and life-long income guarantees. Remember, an annuity can sometimes be a great supplement to an overall retirement plan. It should never be all or nothing.

2. Fixed index annuities vs variable annuities––which one is better?

With variable annuities, you get fluctuating (variable) interest rates and placement of premiums in numerous sub-accounts (like bonds, stocks, money market instruments, etc.) associated with the level of risk you prefer. While a variable annuity may offer significant upside if the stock market is going well, be aware that variable annuities do not offer protection against market downturns. Your money is at risk.

Alternately, fixed index annuities guarantee you never lose your principal, i.e. unless you bought your annuity from an insurance company that goes belly up and leaves its customers high and dry. Additionally, purchasers of an FIA who are over 59 1/2 years of age can annually withdraw as much as 10 percent of their account balance while paying no penalty fees. FIAs also allow you to annuitize your contract so that you can withdraw monthly distributions for the rest of your life, your spouse’s life or for a certain period the time, even though distributions may exceed the interest earned or the contributed principal.

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3. Does the insurance company offering annuities have an established reputation and excellent credit ratings as issued by AM Best, Standard and Poor’s or Fitch and Moody’s?

Once you decide that an annuity may make sense for you, perform a quick check of the insurance company on AM Best’s website to ensure you are purchasing an annuity from a company with at least an “A” rating. Insurance companies often try to pass themselves off as being “trustworthy”, “transparent” or “established as an industry leader”. Watch out for these over-the-top words when determining how the company presents itself on a website.

4. How much is the annual cost of the contract?

Ask about all fees and expenses associated with the contract before making a purchase. Be aware that deferred annuities typically charge administrative and mortality fees in addition to fees for optional benefits indicated by the purchaser. Moreover, variable annuity contracts also charge fees for indirect or direct asset management.

Retirement Income Analysis

5. How long is the surrender period?

The amount of time investors must keep their annuity contracts at a particular insurer before they no longer required to pay fees on withdrawals is called the surrender period. Usually included in the overall value of the contract, surrender periods let insurance companies benefit from higher yields stemming from long-term investments. However, surrender periods also “lock up” funds that prevent annuities from being used as short-term investments or from becoming a source of ready cash.

6. Is it better to buy an annuity from a professional financial service or an insurance company?

Unless you have experience in drawing up annuity contracts and understand industry terminology found in such contracts, you should probably consider working with a credentialed and licensed financial company that has experience and insight into recommending and completing the kind of annuity contract best suited to your needs.

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Annuity product guarantees rely on the financial strength and claims-paying ability of the issuing insurer. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.