Buying an annuity is a major purchase. To generate a sufficient amount of income, people need to invest $10,000, $25,000, $50,000, even $100,000 or more to an annuity. And when they do, they have little to no access to those funds outside of the designated amount of income they generate.
Therefore, it’s important to find the right annuity for your specific needs. Like buying a car or house, it requires a lot of research, due diligence and trusting the right professional who will put your interests ahead of their own.
Below is a list of insider tips for how you can help ensure buying the right annuity for the best value.
Estimate how much you need and when. An annuity should fit with your overall financial and retirement goals. Before you buy an annuity, you need to assess your current status, estimate how much income you can draw from your current accounts, pensions and Social Security, and determine how much more you might need. Keep in mind that most of the money you allocate to your annuity will not be available for other purposes, so you should have other liquid assets available.
Shop around and research. Like any major purchase, buying an annuity should not be entered into lightly. Take time to comparison shop. Many companies and organizations have made it easier by posting calculators on their websites. With just a few inputs, you can compare the accumulation and payout rates of multiple annuity products, as well as optional features.
Even after you sign, you have time to change your mind. Insurance companies offer “free look” periods following the completion of the sales process. This allows you to change your mind and cancel the contract without any penalty. Some states have mandatory minimum periods; in California, for example, it’s 30 days from the day the policy is delivered to you. In other states it’s up to the insurance company to determine how long the free look period is. In some cases, the free look period will be longer for replacement annuities than if you’re buying one for the first time.
Don’t succumb to pressure tactics. Your agent might try to convince you to act now before a special rate or feature expires. In many cases, this “deadline” is based more on the expiration of an incentive bonus the agent can qualify for by having a certain level of sales in a given period. You need to have your questions answered and concerns satisfied before you make this large of a purchase, and you have the right to walk away any time before you sign the contract and during the free look period.
Don’t agree to a surrender period that doesn’t work for you. Some older seniors have fallen victim to buying annuities with lengthy surrender periods that kept their retirement funds tied up. For example, a 70-year-old who buys an annuity with a 15-year surrender period won’t have penalty-free access to those funds until age 85. Make sure you understand exactly when the surrender period expires.
Know the costs of exchanges. If you are using anything other than cash to fund the annuity, make sure you know the tax implications. For example, if you are exchanging a deferred annuity for an immediate annuity and you’re under the age of 59 ½, you will owe a tax penalty for taking early withdrawals. Also, if you are exchanging an annuity before its surrender period expires, you will likely have to pay the surrender charge.
Another strategy you might be encouraged to consider is rolling your IRA into an annuity. Keep in mind that the IRA is already providing tax-deferred growth, so you won’t qualify for any additional tax benefits by rolling it into an annuity. Furthermore, the fees on the annuity may be higher while the rate of return may be lower than what the IRA could generate.
Read the certificate of disclosure or prospectus. If you buy a fixed or fixed indexed annuity, the contract should come with a certificate of disclosure (COD). This is a document that lays out all the annuity’s provisions, including surrender charges, fees, and the interest credited to your account value. If you buy a variable annuity, you will receive a prospectus showing the options for investing in subaccounts.
Read the document carefully and highlight anything you don’t understand, so that you can ask your agent or the insurer before you sign the contract or the before the lookback period expires.
Assess the insurer’s financial strength. The guarantees provided by the annuity you buy are backed by the company’s ability to meet those obligations. There are state guaranty associations that can cover a fraction of your losses if the insurer goes out of business, but you will not recoup the bulk of your annuity’s value if that happened. Rating agencies like A.M. Best, Moody’s and Fitch give grades to insurers based on their financial strength and their ability to meet current and future obligations. The higher the rating, the more financially secure the company.
Ask questions. These are a list of questions you should ask the insurance agent, broker, or insurance company selling your annuity:
What and how much are the initial and annual fees?
How much are the surrender fees?
Are there free withdrawals and if so, how much can I take out without penalty?
What types of death benefits are available?
What waivers are available?