Questions to Ask Before Purchasing an Annuity

Educational PurposeAn annuity is a long-term contract between an individual and an insurance company. Before purchasing one, the consumer should understand the financial need being addressed, how the contract works, what is guaranteed, what may change, how money may be accessed, and what the contract may cost. A sales illustration or verbal explanation should not replace a careful review of the contract, disclosures, applicable prospectus, and insurer information. Annuities can differ significantly in their income provisions, surrender periods, fees, crediting methods, investment risks, and beneficiary benefits.

1. What Financial Need Am I Trying to Address?

Begin with the purpose—not the product.

Possible objectives may include:

• Creating income for retirement.
• Covering an essential-income gap.
• Receiving income for life.
• Providing income for a surviving spouse.
• Protecting part of retirement savings from direct market losses.
• Pursuing tax-deferred accumulation.
• Delaying income until later retirement.
• Leaving a benefit to beneficiaries.
• Other: ______________________________________

An annuity should solve a clearly identified financial need. A feature that sounds attractive may not justify the contract when it does not fit the purchaser’s income needs, liquidity requirements, time horizon, or other retirement resources.

2. What Type of Annuity Is It?

Ask for the complete product classification.

Is the proposed annuity:

• Immediate
• Deferred
• Fixed
• Multi-year guaranteed
• Fixed indexed
• Variable
• Registered index-linked
• Deferred-income or longevity annuity
• Other: ______________________________________

The type determines how value may grow, whether losses are possible, when income begins, which disclosures apply, and what guarantees may be available. Variable annuities and registered index-linked annuities are securities and may involve investment losses, while fixed products rely primarily on insurance-company guarantees and contract terms.

Ask the financial professional:

“Please explain this product without using only its marketing name. How is it legally and financially classified?”

3. What Exactly Is Guaranteed?

The word guaranteed may refer to different features.

Ask whether the guarantee applies to:

• Principal
• A minimum interest rate
• A declared rate for a specific period
• Lifetime income
• A fixed-period payment
• A minimum withdrawal benefit
• A death benefit
• An income base
• Another contract value

Then ask:

• Under what conditions does the guarantee apply?
• Can withdrawals reduce it?
• Can the guarantee expire?
• Is a rider required?
• What happens if contract rules are not followed?
• Is the guaranteed figure available as cash?

An income base or benefit base may be used only to calculate future payments and may not equal the amount available for withdrawal or surrender.

Annuity guarantees depend on the issuing insurance company’s financial strength and claims-paying ability. They are not the same as a federal bank-deposit guarantee.

4. Which Values or Features Can Change?

Ask the financial professional to identify every feature that is not guaranteed.

Depending on the contract, the following may change:

• Renewal interest rates.
• Participation rates.
• Interest caps.
• Spreads or margins.
• Investment values.
• Rider values.
• Contract fees.
• Income amounts.
• Index options.
• Crediting methods, when permitted by the contract.

For index-linked annuities, the owner usually does not receive the index’s full reported return. Caps, participation rates, spreads, crediting formulas, and the possible exclusion of dividends may affect the amount credited.

Ask:

“Show me the guaranteed minimum, the current rate or feature, and the conditions under which the current amount may change.”

5. How Will My Money Grow—or Lose Value?

The answer depends on the product.

Fixed annuity

Ask:

• What rate is guaranteed?
• How long is it guaranteed?
• What is the minimum renewal rate?
• How are future rates determined?

Fixed indexed annuity

Ask:

• Which index is used?
• Are dividends excluded?
• What is the participation rate?
• Is there a cap?
• Is there a spread?
• What is the floor?
• How often is interest calculated?
• Can these terms change?

Variable annuity

Ask:

• Which investment options are available?
• Can principal be lost?
• What are the underlying investment expenses?
• What happens during a market decline?
• Are transfers between investment options restricted?

Registered index-linked annuity

Ask:

• How much loss could I experience?
• Does the contract use a buffer or floor?
• What happens when the index declines beyond the protected amount?
• What limits apply to gains?
• What happens if I withdraw before the crediting period ends?

Variable annuities and registered index-linked annuities may lose value. Index-linked features can also be complex and may substantially limit credited gains.

6. How Long Must I Keep the Contract?

Ask for the full surrender-charge schedule in writing.

Also ask:

• When does the surrender period end?
• Does each additional contribution begin a new surrender period?
• Is there a market-value adjustment?
• What amount may be withdrawn without an insurer surrender charge?
• Are withdrawals calculated by contract year or calendar year?
• Do special waivers apply?

Deferred annuities commonly impose surrender charges when money is withdrawn during a specified period. Some contracts may begin a new surrender period when an additional premium is paid.

7. How Much Money Can I Access?

Ask for a clear explanation of liquidity.

These figures may not be the same.

Ask:

• May I take partial withdrawals?
• What happens after an excess withdrawal?
• Will future lifetime income decrease?
• Will the death benefit decrease?
• Will previously credited interest be forfeited?
• Could a market-value adjustment apply?
• Can I fully surrender the contract?
• What taxes may apply?

Withdrawing money may reduce the contract value and return and may also produce surrender charges, taxes, tax penalties, or changes to contract benefits.

8. What Are All the Costs?

Request a complete list of direct and indirect costs.

Possible charges include:

• Administrative fee
• Mortality and expense charge
• Underlying investment expenses
• Income-rider fee
• Death-benefit rider fee
• Surrender charge
• Transfer or transaction charge
• Advisory fee
• Premium tax, when applicable
• Other: ______________________________________

Some contracts may not show a separately stated annual fee but may limit growth through caps, spreads, participation rates, declared rates, or other contract formulas.

Ask:

“What is the total annual cost in dollars and as a percentage, based on the amount I am considering?”

Also ask whether fees:

• Are deducted from the contract value.
• Reduce the income base.
• Continue after income begins.
• Increase in the future.
• Apply even when the contract loses value.

Variable annuities can contain multiple layers of insurance, administrative, investment, and rider expenses.

9. How and When Will Income Begin?

Ask:

• What is the earliest income-start date?
• Is there a required waiting period?
• Does delaying income increase the payment?
• Is income created by annuitization or a withdrawal rider?
• Is the income election permanent?
• Can the income-start date be changed?
• Can payments increase or decrease?
• Will payments cover one person or two?

Duration:

• One lifetime
• Two lifetimes
• Fixed number of years
• Life with a guaranteed period
• Other: ______________________________________

Annuities may provide payments for a set period or for one or more lifetimes, depending on the selected option. The choice can materially affect payment size, access to the contract value, and what beneficiaries receive.

10. Is the Income Amount Based on Cash Value or an Income Base?

Some income riders use a separate benefit or income base.

Ask:

• Is the income base available as a lump sum?
• How is the base calculated?
• Does it receive a stated increase before income begins?
• Is that increase guaranteed?
• Does the increase continue after withdrawals begin?
• Which percentage is applied to calculate income?
• Does the percentage depend on age?
• Can the insurer change the withdrawal percentage?
• What happens after an excess withdrawal?

Do not assume that a displayed income base represents money that can be withdrawn.

11. What Happens When I Die?

Ask what happens if death occurs:

• Before income begins.
• During the accumulation period.
• Shortly after income begins.
• After annuitization.
• After the contract value reaches zero.
• While a lifetime-income rider remains active.

Possible outcomes may include:

• Remaining contract value
• Stated death benefit
• Return of premium
• Continued payments for a guaranteed period
• Continued joint-and-survivor income
• No remaining benefit under a life-only option
• Other: ______________________________________

Ask whether beneficiary protection:

• Reduces the income payment.
• Requires an additional fee.
• Ends after certain withdrawals.
• Is based on contract value or another calculation.
• Is paid as a lump sum or continued payments.

12. How Will the Annuity Be Taxed?

Ask:

• Is the contract qualified or nonqualified?
• Is the money pretax or after-tax?
• How will withdrawals be taxed?
• How will scheduled payments be taxed?
• Could an additional federal tax apply to early distributions?
• How will beneficiaries be taxed?
• Will required minimum distribution rules apply?
• Does my state tax annuity income?
• Would placing the annuity in an IRA provide any additional tax benefit?

Tax deferral generally postpones taxation rather than eliminating it. Withdrawals may be taxable, and distributions before age 59½ may be subject to an additional federal tax unless an exception applies.

A qualified tax professional should review the anticipated treatment before money is transferred or income begins.

13. Am I Replacing an Existing Annuity or Other Financial Product?

When the recommendation involves an exchange or replacement, ask for a written comparison.

Ask:

• What surrender charge will I pay on the old contract?
• Will a new surrender period begin?
• Which guarantees will I lose?
• Will the new contract provide enough additional benefit to justify the change?
• Will the seller receive compensation?
• Is the exchange expected to qualify for tax-deferred treatment?
• Have I received a complete replacement comparison?

A qualifying Section 1035 exchange may defer immediate recognition of certain gains, but it does not remove existing surrender charges or prevent a new surrender period from beginning.

14. How Is the Financial Professional Compensated?

Ask directly:

• Will you receive a commission?
• How much will you or your firm receive?
• Is compensation paid immediately or over time?
• Do different products pay different amounts?
• Will you receive additional incentives?
• Are there advisory fees in addition to product compensation?
• Are you representing one insurer or comparing several insurers?
• Are you acting as an insurance agent, broker, investment adviser, or in another capacity?

Compensation does not automatically make a recommendation inappropriate, but it may create a conflict that the consumer should understand.

15. Is the Seller Properly Licensed and Registered?

Confirm the professional’s:

• Full legal name.
• Firm name.
• Insurance license.
• Securities registration when applicable.
• Professional background.
• Customer complaints or disciplinary disclosures.

State insurance departments provide tools for checking insurance-agent licensing. FINRA’s BrokerCheck may be used to research professionals who sell securities or provide certain investment services, including sellers of variable annuities and registered index-linked annuities.

16. How Financially Strong Is the Insurance Company?

Ask:

• What is the insurer’s full legal name?
• Which company is legally responsible for the guarantees?
• What are its current financial-strength ratings?
• Have the ratings recently changed?
• Are multiple insurers involved?
• What state regulates the insurer?
• Where can I review complaint and regulatory information?

Financial-strength ratings are opinions rather than guarantees and may change. Because contractual guarantees depend on the issuing insurer’s claims-paying ability, the insurer should be evaluated independently of the salesperson or marketing organization.

17. What Alternatives Were Considered?

Ask the professional to explain what other approaches were reviewed.

Possible comparisons may include:

• Keeping money in the current account.
• Delaying the purchase.
• A different type of annuity.
• Systematic retirement-account withdrawals.
• Cash or short-term reserves.
• Bonds or other fixed-income investments.
• Diversified investments.
• Pension-income options.
• Delaying retirement or Social Security.
• Reducing anticipated retirement expenses.
• A combination of strategies.

18. Will I Have Enough Money Outside the Annuity?

Before purchasing, confirm that adequate accessible funds will remain for:

• Emergency expenses
• Healthcare
• Home repairs
• Vehicle replacement
• Taxes
• Family responsibilities
• Travel or relocation
• Planned major expenses
• Other short-term needs

Annuities are generally designed for long-term goals. Using money that may be needed during the surrender period can expose the owner to charges, taxes, and reductions in future benefits.

19. What Is the Free-Look Period?

Ask:

• How many days do I have to review and cancel?
• When does the period begin?
• How must cancellation be submitted?
• Where must the contract be returned?
• How will the refund be calculated?
• Could market performance affect the refund?
• Are state-specific rules applicable?

Variable annuity contracts generally provide a short free-look period, often at least 10 days, although the length and refund rules may vary by state and contract. During this period, the purchaser may review the contract and cancel without an insurer surrender charge, subject to applicable rules.

Use the free-look period to read the actual contract—not merely the illustration.

20. Can I Explain the Contract in My Own Words?

Before signing, the purchaser should be able to explain:

• Why the annuity is being purchased.
• What type of annuity it is.
• How value may grow.
• Whether value may decline.
• What is guaranteed.
• Who supports the guarantee.
• When income may begin.
• How income is calculated.
• How much money remains accessible.
• How long surrender charges apply.
• What fees or growth limitations exist.
• What happens after an excess withdrawal.
• What beneficiaries may receive.
• How the contract may be taxed.
• What alternatives were considered.
• What would be lost in a replacement.

When the purchaser cannot explain these items clearly, more review is needed.

Learn. Understand. Decide with Confidence.