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10 Questions to Ask Before You Buy an Annuity
An annuity can be a good tool, and it is also a long commitment. Ask these questions of anyone who recommends one, including us. Get the answers in writing.
What problem is this annuity meant to solve for me?
Lifetime income, closing the gap in your essential bills, or growth without market losses are different goals, and they call for different contracts. If no one can answer this plainly, stop.
How long is the surrender period, and what is the charge each year?
Ask for the schedule in writing: the charge in year one, year two, and so on until it reaches zero.
How much can I take out each year without a charge?
And what happens if I need more because of a nursing home stay, a terminal illness or another emergency?
What fees will I pay?
Ask about every yearly charge, including fees for optional riders, and how each one affects my account value.
How is my interest credited, and can it change?
For an indexed annuity: what is the cap, participation rate or spread, how often can the company change it after I buy, and what is the lowest it can go?
If there is an income rider, how is my income figured?
Is the amount used to calculate my income money I could actually withdraw? When can income start, and does it ever increase?
What happens when I die?
What would my spouse or children receive, how would they receive it, and would any charges or taxes apply?
How will this be taxed?
What is taxed when I take money out, and does moving money from my 401(k) or IRA into this annuity create any tax?
How strong is the insurance company?
Any promise in an annuity is only as strong as the company making it. Ask for its financial strength ratings and where to check them.
How is the person recommending this paid, and what else did they consider?
You deserve a plain answer about commissions and fees, and to know why this is better for you than the other options, including doing nothing.
One more thing: the free look period
Most states give you a set number of days after you receive the contract to cancel it for a refund. Ask how many days you have, and read the contract during that time.
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Want a second opinion?
Bring an annuity you own, or one you were offered, and we'll go through these questions with you.