What to Ask Before You Buy an Annuity

Many people reaching retirement are looking for ways to improve their financial security.

It is unsurprising that many people are considering buying an annuity.

If chosen well, an annuity can prevent a person from outliving their finances. What’s more, it can provide increased protection against a volatile stock market.

As annuity will convert current wealth into a steady income, it is vital to make an informed decision.

Also, as life insurance and annuity scams are on the rise, an investor should not rush into a plan.

So, it is important to ask yourself the following seven questions when buying an annuity.

1. What is the Annuity Process?

An annuity is a big financial commitment, so you must have a firm grasp of the process.

You will be buying an insurance product, so you will need to pay one lump sum or make a series of payments.

Once you have made the payment(s), your money will start to grow at either a fixed or variable interest rate.

The insurer will then make regular payments to your account for the rest of your life.

The insurance should also entitle your chosen beneficiary to the amount. Your loved one will either receive the annuity value or the guaranteed minimum, whichever is the greater amount.

The annuity contract is a big commitment. You’ll be unable to withdraw the money until you’re 59 1/2 years old.

If you do choose to withdraw the amount, you’ll experience a penalty of 10% on the lump sum. You may also have to pay a surrender fee.

2. What are the Different Types of Annuities?

Not all annuity contracts are the same. Deferred annuities may fall into 1 of 3 brackets: fixed, variable or equity-indexed.

Fixed annuities will provide a guaranteed rate of return for a select period. You may choose between one to ten years.

While the rates might be subject to fluctuation, you are guaranteed to receive the fixed rate.

It’s one way to ensure you will not lose any money, but you will not have any room to grow your finances.

Variable annuities offer a little more flexibility, so they can also be a little riskier.

The contract is not dissimilar to investing in a mutual fund. While there is a potential to enjoy financial growth, it can also result in the plummeting of the pot.

You’ll also, more than likely, pay higher fees. The beneficiary will also owe tax on the amount.

An equity-indexed annuity is a little like a fixed annuity, as you will receive a fixed payment.

The difference is a contract can provide room for financial growth, as it’s attached to an index.

3. How Many Annuities Should I Buy?

The annuity should provide a stable income that provides you with basic living needs.

Identify how much money you’ll spend on housing, utilities, food, and transportation. You should also factor in healthcare costs, too.

You could even opt for deferred Social Security claims, so this covers your basic needs.

The annuity could then provide a supplementary income. So you can buy vacations, gifts, or home improvements.

4. What Age Should I Start Buying an Annuity?

There is nothing wrong with planning for your retirement early.

Most annuities are often aimed at people in their 50s or 60s, as they are close to retirement age.

As well as your age, you should also take a look at the market before you buy an annuity.

Annuities often have a low-interest rate, so it’s best to take out a contract when interest rates jump.

However, don’t wait too long or you could end up with no stable source at all.

5. What is the Surrender Period?

Before you embark with an annuity contract, take a look at the surrender period.

This is the length of time you will have to keep the contract before you can make a withdrawal without surrender charges.

Most contracts provide a distribution level from 5 to 15% of the initial investment sum.

You can access this on an annual basis without a surrender fee.

Should you exceed the designated withdrawal sum, you will receive a 5 to 15% charge. This charge will most likely decrease the longer you have had the contract.

It is not uncommon for investors to become frustrated that they cannot access their cash.

That’s why it is important to remember an annuity is not a cash resource. It aims to provide financial security.

6. Will Annuity Benefit My Partner?

It’s natural for married couples to consider their partner when buying an annuity.

You might be glad to learn you can invest in the protection with your partner in mind.

Most reputable insurers will provide joint-and-survivor coverage. This will allow you to buy protection at a varying rate, which will be payable to a survivor.

You may be able to choose from 50%, 66% or 100%. What’s more, the initial annuity payments might be lower compared to single-life contracts.

The investment may offer peace of mind that a partner will have financial protection.

7. How Does Inflation Work?

The inflation rate will determine the amount of money you will receive.

Many people will often take out inflation protection when buying an annuity. This can increase the payments with the rate of the consumer price index or an annual set percentage.

Inflation protection isn’t cheap, though.

Compare the market expectation of inflation against the inflation protection cost.

If the market projects a 2% inflation rise, receive an SPIA quote that has an annual 2% set up. You can then compare it against the same income with an annuity adjusted for inflation.

You can then identify the protection markup against an unexpected inflation rise.


Buying an annuity should never be undertaken without making an informed choice.

It is a big financial decision that could impact your retirement years.

You must explore all avenues before making such a big commitment, or you may literally pay the price.

So, only contact reputable insurance providers and consider inflation with care.

You must also factor in your beneficiary or spouse to ensure they’re protected when you die.

Have you taken out an annuity contract? Do you have any advice to share? Leave a comment below.