How to Buy an Annuity
A step-by-step guide to purchasing an annuity — what to look for, questions to ask, and how to avoid common pitfalls.
Before You Buy
An annuity is a long-term financial commitment. Before purchasing one, make sure you've covered the basics:
- Emergency fund: Have 6-12 months of expenses in liquid savings outside the annuity
- Debt: Pay off high-interest debt first (credit cards, personal loans)
- Tax-advantaged accounts: Max out your 401(k) and IRA before considering an annuity
- Clear goals: Know what you want the annuity to accomplish (guaranteed income, growth, principal protection)
Important
Never put all of your retirement savings into a single annuity. A common guideline is to allocate no more than 25-50% of your retirement assets to annuities, keeping the rest in more liquid investments.
Steps to Purchasing an Annuity
Step 1: Define Your Goals
Determine what you want the annuity to do. Are you looking for guaranteed lifetime income? Tax-deferred growth? Principal protection? Your goals will determine which type of annuity is right for you.
Step 2: Choose the Right Type
Based on your goals and risk tolerance, select the appropriate annuity type. Review our Types of Annuities guide for a detailed comparison.
Step 3: Research Insurance Companies
Your annuity is only as strong as the company behind it. Look for insurers with high financial strength ratings from agencies like A.M. Best (A or higher), S&P, and Moody's. Check their claims-paying history.
Step 4: Compare Products
Get quotes from at least 3-5 different companies. Compare interest rates, fees, surrender schedules, rider options, and payout rates. Don't just compare the headline rate — look at the total cost of ownership.
Step 5: Read the Contract Carefully
Before signing anything, read the entire contract. Pay special attention to surrender charges, fee schedules, death benefit provisions, and any exclusions. If you don't understand something, ask.
Step 6: Use the Free-Look Period
Most states require a "free-look period" (typically 10-30 days) after purchase during which you can cancel the annuity and get a full refund. Use this time to review the contract one more time with fresh eyes.
What to Look For
When evaluating an annuity, pay close attention to these factors:
- Financial strength of the issuer: A.M. Best rating of A or higher
- Surrender schedule: How long is the surrender period? What are the charges each year?
- All-in fees: Total annual cost including M&E, admin, investment management, and rider fees
- Guaranteed minimums: What's the minimum interest rate or income benefit guaranteed?
- Withdrawal flexibility: Can you take 10% per year without penalty?
- Death benefit: What happens to remaining funds if you pass away?
Questions to Ask Before Buying
- What are the total annual fees, including all charges and rider costs?
- What is the surrender schedule, and how much can I withdraw penalty-free each year?
- What is the guaranteed minimum interest rate or income benefit?
- How is the death benefit calculated, and who are the eligible beneficiaries?
- What happens to my annuity if the insurance company goes bankrupt?
- How does this compare to other annuities you offer, and why is this one the best fit for me?
- What commission do you earn from selling this product?
- Can I see a projection of my income payments under different scenarios?
Understanding Annuity Fees
Annuity fees vary significantly by type. Here's what to watch for:
| Fee Type | Typical Range | Applies To |
|---|---|---|
| Mortality & Expense (M&E) | 1.0% - 1.5%/year | Variable annuities |
| Administrative Fees | 0.1% - 0.3%/year | Variable annuities |
| Investment Management | 0.5% - 2.0%/year | Variable annuities |
| Rider Fees | 0.5% - 1.5%/year | Optional on any type |
| Surrender Charges | 1% - 8% (declining) | All types |
Fee Impact
A variable annuity with total annual fees of 3% means your investments need to earn 3% just to break even. Over 20 years, the difference between 1% and 3% in fees on a $200,000 annuity can exceed $100,000. Always know your total cost.
Working With Agents vs. Buying Direct
Through an Agent/Advisor
- Pro: Personalized guidance and product selection
- Pro: Help with claims and service issues
- Con: Agent earns commission (typically 3-7% of premium)
- Con: Potential bias toward higher-commission products
Direct from Insurance Company
- Pro: May have lower fees (no commission built in)
- Pro: Simpler, more transparent products
- Con: Limited to one company's products
- Con: Less personalized guidance