How Do You Buy an Annuity?
Annuities are a type of insurance contract that offer guaranteed income in exchange for a single lump-sum payment or monthly premiums. Annuities help you lower your risk in retirement by providing a minimum interest rate and payments for a set period of time.
But how do you buy an annuity? If you’re considering an annuity for your retirement portfolio, the process isn’t as straightforward as buying stocks or bonds. You’ll want to do your research, compare the different types of annuities and review how an annuity fits in your overall financial plan. Here are the steps you can take to buy an annuity.
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1. Review Your Financial Plan
Before you talk to a financial planner or start researching types of annuities, you’ll want to take a step back and consider your overall financial plan. While an annuity can be a piece of your retirement puzzle, there are several other parts you need to consider when determining what annuity to purchase.
It’s important to ask yourself what problem the annuity is solving in your financial plan.
Are you worried about outliving your money?
Do you want guaranteed income with lower risk than the stock market?
Does an annuity help with your tax planning in retirement?
It may be wise to meet with a licensed financial professional — such as a certified financial planner — to review your retirement plan and help clarify how buying an annuity fits into that plan.
2. Compare Types of Annuities
Once you’ve determined that you want to buy an annuity, it’s a good idea to compare the different types of annuities to figure out which one fits best with your financial goals. There are three main types of annuities to consider:
Fixed annuity: Fixed annuities offer a minimum interest rate and a fixed number of periodic payments — usually monthly. These annuities are regulated by state commissioners.
Variable annuity: Variable annuities allow you to invest a portion of your payments into a selection of investment options, such as mutual funds. Variable annuity payouts are determined by the amount of your payments, investment returns and expenses. These annuities are regulated by the Securities and Exchange Commission.
Indexed annuity: Indexed annuities are a type of hybrid investment and insurance product — with returns of the annuity based on an investment index, such as the S&P 500.
Most annuities are either immediate (you start receiving payments right away) or deferred (you start receiving payments at a predetermined date in the future). Choosing one over the other depends on your income needs, ability to make payments and other factors.
3. Look at Annuity Providers
Once you’ve narrowed down the type of annuity you’d like to buy, you’ll want to compare annuity providers to find one that fits your needs. While most annuities are sold through insurance companies, you may prefer to buy one through a trusted financial broker, such as Fidelity. There are also online marketplaces that allow you to compare annuities between multiple providers to help you find the best one.
Since annuities may provide income for decades, it’s a good idea to choose a financial institution with an excellent credit rating — ensuring they can continue making payments well into the future.
As with any insurance product, the details matter. It’s a good idea to choose a provider with the help of a trusted advisor. Some annuity providers may steer you toward products that may not be the best fit but pay higher commissions. It can be a good idea to work with an advisor to help you find a provider.
4. Review Annuity Fees
Annuities are infamous for having high fees and complicated fee structures that make it hard to determine how much you are paying. It’s important to ask any annuity provider for a detailed list of all fees and related expenses of the annuity you want to buy — including any investment fees if choosing a variable or indexed annuity.
There are several fees that may apply to your annuity, including:
Commissions: Your insurance agent or financial advisor may receive a commission for selling you an annuity. You should get this amount detailed before making a purchase. Fees typically range from 1% to 2% of the total annuity value.
Administrative fees: There may be a charge for the handling of your annuity by the issuer. This can be a flat fee or percentage charged on an annual basis.
Fund expenses: For variable and indexed annuities, the investment funds chosen may have their own annual expense ratio. This is typically a percentage of the funds invested.
Mortality and expense risk charge: This is a fee charged by the annuity provider for taking on the risk of the annuity insurance contract. It is typically a percentage of the annuity value, usually over 1% per year. This charge may also be paying the commission of your insurance agent so keep an eye out for high fees in this area.
Surrender charges: If you sell off part or all of your annuity for cash, there may be a surrender charge assessed. Surrender fees vary by policy, so make sure to get these charges detailed before choosing a policy.
Other fees: If you customize your annuity policy, there may be additional fees assessed — this includes any riders added to the policy.
5. Apply for an Annuity
Once you’ve selected an annuity and provider, it’s time to submit an application. The process is similar to applying for life insurance, as you’ll need to submit personal and financial information, including:
Full name
Address
Social Security number or other tax identification number
Date of birth
Name of annuitant (person receiving payments)
Beneficiaries
You may be required to provide additional personal or financial documentation, depending on your provider and the policy chosen.
6. Choose How To Fund Your Annuity
Once you’ve submitted a completed application, you’ll need to choose how to fund your annuity. There are several payment structures available, depending on your annuity chosen. Some annuities require a single lump-sum deposit, while others offer monthly payments over a period of time.
You’ll need to fund your annuity from your bank account or investment account — either by transferring funds over ACH or wire. You may be able to write a check to fund your annuity, depending on your provider. You may also be able to rollover funds from a 401(k) or IRA to fund your annuity, or even roll over another annuity using a 1035 exchange.
Some annuities are also available through an employer-sponsored plan. With this plan, your premiums come directly out of your paycheck.
7. Don’t Forget the Grace Period
If you buy an annuity and have second thoughts, most states offer a “free look” period on annuities. This period will vary by state, but is usually 10 to 30 days in length and allows you to cancel or change the policy without paying fees.
FAQ
Here are the answers to some of the most frequently asked questions about buying an annuity.
Can you buy an annuity on your own?
Yes, you can buy an annuity on your own but it may be wise to consult with a financial planner to find out how buying an annuity can fit into your financial goals.
How much does it cost to buy an annuity?
The cost to buy an annuity varies based on the type and terms. Several common fees to expect include:
Commissions: Can range from 1% to 2% of the total annuity value.
Administrative fees: This can be a flat fee or percentage charged on an annual basis.
Fund expenses: Typically a percentage of the funds invested.
Mortality and expense risk charge: A percentage of the annuity value, usually over 1% per year.
Surrender charges: Surrender fees vary by policy, so make sure to get these charges detailed before choosing a policy.
Other fees: If you customize your annuity policy, there may be additional fees assessed.
What is better than an annuity?
Options like mutual funds or stocks might offer better growth potential for some investors compared to annuities but they come with a different level of risk.
This article originally appeared on GOBankingRates.com: How Do You Buy an Annuity?
