How to Choose Between Index Annuity Companies

An annuity is an agreement between a person and an insurance company in which the person receives a lump sum payment now or in the future, or a series of payments over time, in exchange for the person's cash now or a series of contributions over time. An equity-indexed annuity (indexed annuity for short), is tied to a stock market index. Contributions to the indexed annuity are invested in a stock market index and the annuity's returns are tied to the returns of the stock market.

Difficulty: Moderate

Instructions

1. Decide if you want the personal touch from a local company or if you don't mind your account being handled by a company halfway across the country.

2. Search for index annuity offers from different companies. A good search tool is Annuity Advantage (see Resources).

3. Pay attention to the details. Find out if the rate of return is fixed or variable, how long you must contribute premiums before the payout phase begins and what the participation rate is. Index annuities that do not have a 100 percent participation rate have reduced returns.

4. Determine the cost. Decide how much you want to invest and in which manner. Options include as a standalone investment or within your individual retirement account (IRA). Account for the fees associated with owning the annuity. Also remember that even though annuities are tax deferred, you will pay income tax at the prevailing rate during the payout phase. Further, if your annuity is outside of your IRA, your contributions are not tax deductible.

5. Set up your account and fund it. Sign the dotted line either virtually or on paper and transfer funds from your checking account to pay your premiums. Better still, set up automatic payments.

References

• Annuities: What's to Like?

Resources

• Annuity Search Tool