5 Questions to Ask Before Buying an Annuity
“What am I actually paying for this?”
That is a fair question about anything you own. It becomes especially important when the answer affects your retirement income for years.
On our radio show, I discussed a woman who came to us with two variable annuities. As we reviewed the costs, we found several layers: insurance expenses, an administrative fee, underlying investment expenses, and a fee for an optional lifetime withdrawal benefit.
The percentages discussed added up to 3.65% annually. For perspective, applying that percentage to a hypothetical $100,000 balance would equal $3,650 in one year. Actual charges depend on the contract, the balances used to calculate each fee, and how those balances change.
Fees deserve attention. So do the benefits you receive for paying them. Before buying an annuity or replacing one you already own, here are five questions I would want answered.
1. What will I pay, and what am I getting for it?
Ask for a complete explanation of the costs in dollars as well as percentages.
Depending on the contract, that may include insurance charges, administration, investment expenses, and optional benefits. Some contracts have fewer explicit ongoing fees but still involve tradeoffs, such as limits on interest credited or charges for early withdrawals.
I want to know whether the benefits serve a need you actually have. A feature can sound appealing and still be unnecessary for your situation.
The goal is to understand the full value of the contract. Looking only at the lowest fee can leave out meaningful differences in benefits and restrictions.
2. What income is guaranteed, and under what conditions?
Ask when income can begin, how much it will be, and what you must do to maintain the benefit.
You also need to distinguish the account value from a benefit base used to calculate income. A benefit base may be a calculation figure rather than money available to withdraw as a lump sum. A withdrawal percentage applied to that figure is not an investment rate of return.
If you are married, ask whether payments continue after the first spouse dies and whether the amount changes. If the payment stays level, ask how your broader plan will address inflation.
Annuity guarantees depend on the insurance company's financial strength and claims paying ability. I want that understood as clearly as the payment amount.
3. How much access will I have to my money?
Retirement income matters, but so does the ability to handle a surprise expense.
Ask how much you can withdraw without a surrender charge, how long restrictions last, and whether a market value adjustment could apply. Also ask how additional withdrawals affect income benefits. Avoiding a surrender charge does not necessarily mean a withdrawal leaves every other benefit unchanged.
Before committing money, I want to see what remains accessible outside the contract. You should have a realistic way to pay for the expenses that will not wait for a surrender period to end.
4. If I already own an annuity, what would I give up by replacing it?
A new proposal may offer different fees or income features. That is a reason to compare carefully.
An existing contract may contain valuable guarantees you cannot recover once you surrender it. Replacing it may trigger charges, begin a new surrender period, or change the benefits available to your beneficiaries. Tax treatment also needs to be reviewed before moving money.
I would want a written comparison of keeping the current contract and making the proposed change. Include the costs, the benefits lost, the benefits gained, and the restrictions under each choice.
A larger advertised payment alone is not enough to settle the question.
5. How does this fit my written retirement income plan?
The woman I discussed on the show had a bigger concern than fees. She wanted to understand how her retirement withdrawals would work. She was asking for a plan she could follow.
That is where I think the conversation belongs. What income do you need? What is already coming from Social Security or a pension? How will withdrawals, taxes, unexpected expenses, and a surviving spouse be addressed?
If an annuity is recommended, ask why that type and that insurer were selected. Ask what alternatives were considered and how the person recommending it is compensated.
You do not need to become an expert in every contract provision. You do deserve an explanation you can understand, with enough detail to make a thoughtful decision.
If you have an annuity statement sitting in a drawer and would like help making sense of it, our team can walk through the questions with you. Reach out through LegacyRetirementGroup.com whenever you are ready.