Under an annuity contract, you, the purchaser, and the life insurance company enter into to a long-term commitment. Before purchasing, carefully review your finances, retirement goals, and anticipated needs. Participate in any retirement savings plan available through your employer. Then determine how much additional savings you can put aside in an annuity.
Answer the following questions and follow the suggested tips. The American Council of Life Insurers also suggests that you discuss these matters with a financial planner, insurance agent, or broker.
Questions to ask
Do you need to supplement your current i ncome? You can convert assets to steady income right away with an immediate annuity. Many retirees purchase an immediate annuity with cash from a retirement plan, home sale, life insurance benefit, or savings account. You choose whether the income payments continue for life or a specified number of years.
Do you need less income in early years of retirement than you will later on? A deferred annuity allows your savings to grow tax deferred until the date you chose to receive payments. An immediate annuity that provides a cost-of-living adjustment can also address the need for more income later in retirement.
What is your tolerance for risk? In a deferred annuity, you decide whether savings accumulate at a guaranteed rate, an indexed rate, or bear the risk of market fluctuations.
Do you need to ensure income or asset protection for a spouse after your death? Certain annuities offer death benefit protection and the option of continuing payments to a spouse after your death. Some also provide death benefits if you die before income payments begin.
Tips
When purchasing a fixed annuity, ask about the credited interest rate, how often it changes, and the minimum guaranteed rate.
When purchasing an index annuity, investigate the index, formula, and conditions applied to the interest period. Ask how often indexed interest is credited, how factors might change, and the minimum guaranteed values set forth in the contract.
When purchasing a variable annuity, review the investment options and read the prospectus for each subaccount. A prospectus, which by law must be given to potential buyers, outlines objectives and risk levels as well as operating expenses and financial statements.
Ask if there are fees for partial withdrawal or full surrender of your contract. Find out how much the charges are and for how long they apply.
Compare similar contracts from several companies. Features, terms, and conditions vary from company to company. Comparing contracts and the relative cost of features may help you make a better decision.
Ask if there is a guaranteed death benefit. Some deferred annuities include death benefits that can exceed the account value; some do not. Know what is guaranteed, how and when the benefit will be paid, and whether increased benefits can be purchased.
Ask how long the "free-look" period is. The free-look period is the time you have to review the contract and return it if you have made the wrong choice. If you decide to cancel, the company then voids the contract and refunds your initial contribution or the market value of the contract. Free-looks usually last at least 10 days, but rules vary from state to state and not every state guarantees free-look rights.
Evaluate the company issuing the annuity. Only life insurance companies can issue annuities, although they may be sold by other financial institutions such as banks and brokerage firms. Make sure the issuing company is licensed in your state and that the company is reputable, financially strong, and service-oriented. Several services rate the financial strength of life insurance companies, such as A.M. Best Company, Fitch Ratings, Moody's Investor Services Inc, Standard & Poor's Insurance Rating Services, and Weiss Ratings. Ratings can be found in most public libraries or on a service's Web site. (A small access fee may be charged.)
Make sure your agent is licensed to sell annuities. To sell a fixed annuity, an agent must have a license issued by the state insurance department. To sell a variable annuity, the agent must both be licensed by the state and be a registered representative of a broker-dealer that is a member of the National Association of Securities Dealers (NASD).
If you have a question or concern about your annuity contract after you have purchased it, talk to your agent or company representative. If you are having a problem with your agent, talk to a manager at the agency or contact the company represented by the agency. When contacting a company, direct your inquiry to the customer service department at the company's home office. Customer service offices handle inquiries, solve problems, and direct people to appropriate departments. Your annuity contract will contain contact information.
If you continue to have problems with an issuing company, contact the department of insurance in your state. A state insurance department directory can be found on our site.