The annuity buying process
While the decision of whether to buy an annuity and which one to purchase should not be entered into lightly, the buying process itself is surprisingly simple and one of the least cumbersome financial transactions.
If you’re working with a licensed insurance professional or broker, he or she should spend time with you to learn about your current financial situation and your retirement goals. The advisor will likely ask general questions about your current income, assets, plans for retirement, and your risk tolerance. The advisor will come away from this first meeting with an idea of what you currently have available for retirement income, what you will likely need for retirement and what sort of gap there is between the two. He or she will also want to know when you might want to begin receiving retirement income.
With that information at hand, the advisor will use his or her expertise as well as recommendations from some of the professionals he or she works with to determine the type of annuity that is best for you. The advisor should also survey several companies to find the right mix of features along with the optimal balance of crediting rates and fee structures.
Because of the wealth of information available on the Internet, including annuity calculators, you can also conduct your own product research. This will help you determine what typical annuities are crediting in interest, their payout rates and optional features they provide. Having this information can help you feel more confident in your agent’s recommendations.
The agent will likely then conduct a second meeting to make a product recommendation. If you’re comfortable with the annuity product the agent recommends, the next step is filling out the application. Unlike life insurance contract, annuity applications are fairly straightforward. There is no underwriting involved with annuities, so you don’t have to answer health questions. And because you’re not borrowing money, there are no credit forms.
Most annuity applications are just a few pages with basic information requested. As long as you have the information ready, you should be able to complete the application in about 30 minutes or less.
Some of the decisions you will have to make regarding the annuity application include:
Who will serve as the contract’s beneficiaries? In cases when some portion of the annuity value can be passed on after your death of there’s a actual death benefit, you will need to designate primary and contingent beneficiaries. Contingent beneficiaries receive death benefits if the primary beneficiary(s) die before the annuitant.
How will you fund the contract? You will need to indicate where the funds are originating to fund the annuity, such as a rollover from a retirement account, a transfer from a money market account, or cash.
How will you allocate your premium? If you are purchasing a variable annuity, you will need to indicate how you want to invest your premium among the sub accounts offered by the insurance company. If you are purchasing an indexed annuity, you will need to allocate percentages of your premium among the different crediting strategies offered by the product.
In addition to filling out the application form, your agent may also provide you with additional documents during the buying process. Examples include:
Statement of understanding or certificate of disclosure. This is a detailed description of the contract’s features and provisions. Some of the information contained in this document include:
- Surrender charge schedule and percentages
- How the annuity’s value is determined
- Income options
- How the payout rate is determined
- Optional benefits and their cost
NAIC Annuity Buyer’s Guide. Many states require that agents provide at the time of sale the National Association of Insurance Commissioners Annuity Buyer’s Guide. This is a booklet that explains the basics of annuities in general to help buyers better understand the products.
The agent will submit the application along with your premium to the insurance company. The insurance company will review the application to determine if it’s suitable for you, which in most cases is a formality. Delays may occur, however, if there is information missing or discrepancies on the application form.
How long it takes to receive the annuity contract will depend largely on how you are funding the contract. If you’re paying cash and those funds are accessible and there are no problems with the application, you could be issued a contract in a few days.
On the other hand, if you are using a 1035 exchange where you’re using funds from another annuity contract or other tax qualified account, then your contract won’t be issued until the insurance company receives those funds from the other financial institution. This can sometimes take a month or longer.
Once everything has been approved, the agent will deliver the annuity contract. Once you receive the contract, you will have 10 to 30 days, depending on the contract and your state of residence, to review the contract. During this period, known as a free-look period, you can change your mind and return the contract for a full refund without incurring a penalty. Once the free-look period expires, canceling the contract will result in a surrender penalty based on the contract’s provisions.
If you purchased a deferred annuity, you should receive annual statements from the insurance company showing how much interest was credited and the overall contract value. Most insurance companies also provide a secure Internet portal where you can see these values at any time.