What to Ask for Before Buying an Annuity


Annuities are life insurance contracts with features and benefits that make them much more complicated than other types of investment products. Consequently, buyers should ask their insurance agent plenty of questions for a thorough understanding of the contract before investing in it. Different types of annuities are available, including fixed,variable and immediate annuities. Each product presents prospective owners with different fees and benefits.

What Kind of Annuity Is This?

Immediate annuities are funded at inception and owners cannot add more funds at a later date. Some deferred annuities allow additions after the initial purchase, but owners should find out the type of contract they are being offered. Immediate annuities start monthly income payouts as soon as the contract takes effect, whereas deferred annuities do not. Therefore, people seeking income should make sure they have a product that can help their immediate needs.

What Are The Surrender Terms?

Deferred annuities, such as fixed and variable annuities, have surrender charges if the contract owner decides to withdraw funds during the accumulation phase. This phase often lasts up to 10 years. The surrender charges vary but can amount to 7 or 8 percent. Some annuities allow partial penalty-free withdrawals. In most fixed contracts, the buyer can request a penalty-free return of principal at any time, but fixed annuities with high rates often require the buyer to waive this right. People must find out the applicable time frames and surrender charges before signing a contract.

What Happens If I Die?

Variable annuities have a standard death benefit that allows a beneficiary to receive a return of principal, adjusted for charges and withdrawals, if the owner dies during the surrender period. However, some variable annuities offer enhanced death benefits that cost a fee but offer larger payouts. Many immediate annuities are classified as "life-only," meaning payouts stop when the owner dies and there are no death benefits or refunds of principal for surviving family members. Joint accounts with rights of survivorship continue until the second owner dies. Regular joint annuities normally cease when one owner dies. Buyers must understand the account titling and death benefits before signing a contract.

What Are The Fees?

Variable annuities enable contract owners to invest funds in the stock market. These annuities also offer minimum income guarantees if the market performs poorly during the term of the contract. These and other benefits are attractive but come at an annual cost that often amounts to 3 or 4 percent of the account value. Indexed annuities, which are tied to stock indexes, often have surrender terms lasting 15 or 20 years and early surrender penalties of up to 20 percent. People who may need funds for emergencies should find out about all the possible fees before signing a contract.

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