Deciding whether or not to buy an annuity is an important financial decision. Most of the time annuities are purchased based on a recommendation by an insurance agent or financial adviser. But before buying an annuity, ask yourself 10 important questions:

1. Did I shop around?

Whether you just met your financial adviser or you’ve been working with her for decades, it’s important to shop around before you purchase an annuity. Typically annuities involve the re-positioning of hundreds of thousands of dollars and it makes sense to check out the competition to make sure you are getting the best deal. In my experience as a financial wholesaler, I’ve learned that financial advisers have a habit of recommending the same annuity product over and over again because it is comfortable and easy. That is the wrong approach. Instead, a financial adviser should take all aspects of your personal situation into account and then make a recommendation based on your exact needs… and that is not always the same annuity product. You should review recommendations from at least 3 financial professionals and then make your decision.

2. Why is an annuity right for me?

Annuities are not right for everyone. Make sure you understand the reason why you want to purchase an annuity and the true benefits that you will receive. Many annuities offer reasonable growth and the potential for income in retirement. If that is your goal an annuity could work for you. Some people have more complex financial situations that require them to maintain a higher level of liquidity and an annuity might not be the right recommendation for them.

3. Do I trust the person who recommended the annuity?

For the most part, financial advisers and insurance agents are high-level professionals that can be trusted. Sure, an agent or adviser will get paid when you purchase, but that is normal for any profession. Just be sure to check references if you don’t go way back on a personal level with the adviser. You should be cautious if it is difficult to obtain references – any good financial adviser has a book of clients who are very happy with their work. Lastly, never make a check out to an individual’s firm. If you are buying XYZ Annuity from XYZ Insurance Company then don’t make the check out to your adviser’s firm.

4. How is income from an annuity taxed?

Ask your agent this question. Taxation of annuity income is not a difficult topic and your agent should certainly have a firm understanding of taxation prior to making a recommendation. Don’t be surprised if your agent says “I don’t give tax advice.” This is standard procedure in our litigious world. That said, just make sure your agent has a pretty good idea of your tax situation before they craft an annuity recommendation. Here is a hint: one of your agent’s first questions should be whether your funds are qualified money (IRA, 401(k), 403(b), Roth IRA) or non-qualified money(checking account, savings account). It makes a big difference.

5. What is the time commitment in an annuity?

Annuities always have a time commitment called a “Surrender Charge Period.” Be sure you know what the surrender charge period is on an annuity before you purchase. There are annuities with as short as 3 year commitments and as long as 16 year commitments. In our current low interest rate environment, you should definitely think twice before purchasing an annuity with a commitment longer than 10 years. Also ask if there are “rolling surrender charges.” Some annuities (but not most) start the surrender charge period over again after the initial surrender period is up.

6. What are the fees in an annuity?

Fees vary within annuities. Many annuities have no fee at all, while some variable annuities have fees as high as 4.5% per year. Make sure you ask your adviser what the fee is and how it is calculated each year. If there is a fee, make sure that it is paying for a benefit you want and need. There is no need to pay unnecessary fees. This goes back to shopping around.

7. How flexible is an annuity?

A lot of annuities have a “free withdrawal provision” within the annuity during the surrender period. This means that even though funds are locked up for a period of time, a certain percentage is available each year for withdrawal without surrender charges. Ask your adviser if there is any flexibility in case of an emergency. Typical free withdrawal provisions are 10% per contract year.

8. Are my goals with an annuity realistic?

Many agents are guilty of describing annuities in a too-good-to-be-true light. Make sure you manage your expectation with how well your annuity will perform. There are indexed annuity crediting strategies that can offer double-digit returns with no market risk. That’s great but please realize that it is not typical to achieve double-digit gains on a regular basis. If your goal is safety coupled with reasonable growth, then you are on track to managing your expectations.

9. What happens to an annuity if I die?

Let’s say you put $300,000 into an annuity and it works out great for retirement income. You don’t want all that money to go away if you die, right? Many people want to make sure their spouse, children and grandchildren get some benefit from the annuity as well. Ask your adviser what happens to the funds if you should pass.

10. How strong is the insurance company issuing the annuity?

Ask for information about the company issuing the annuity. Check on the financial ratings of the company with large ratings companies like AM Best and Standard&Poors. Go to the company’s website and browse around. The insurance company that offers an annuity is making a big financial promise, so it’s important to buy from a big, healthy company.
By Troy Baccus