Annuities can be an important part of some financial plans, but choosing one is a decision that deserves careful consideration. With different types of annuities, fees, guarantees, surrender periods, and contract features, it can be difficult to know what questions to ask.
Rather than focusing only on potential benefits, it’s important to understand how the product works, what it costs, and how it fits into your overall financial strategy.
Start With the Purpose
The first question should be simple: What role is the annuity supposed to play in your financial plan?
For some individuals, the goal may be creating a source of future income. For others, an annuity may be considered for tax-deferred growth or specific contractual features.
The purpose should come before the product.
An annuity that makes sense for one person may not make sense for another, even when their financial circumstances appear similar.
Understand the Type of Annuity
“Annuity” is a broad category. Fixed, variable, and indexed annuities can have very different structures, risks, fees, and potential outcomes.
That’s why it is important to look beyond the word annuity and understand the specific contract being considered.
Ask:
- How does the contract earn interest or investment returns?
- What are the potential risks?
- What benefits are guaranteed?
- Are there optional features or riders?
- How and when can income payments begin?
- What happens if you need access to your money?
Understanding these details can help you make a more informed decision.
Pay Attention to Fees and Charges
Costs can have a meaningful impact on a financial product over time.
Depending on the type of annuity, there may be contract charges, investment expenses, rider fees, or surrender charges. Some contracts may also have restrictions on withdrawals during a specified period.
Before purchasing, ask for a clear explanation of all applicable costs and charges—not just the headline features.
If you don’t understand a fee, ask what it pays for and how it could affect your results.
Don’t Overlook Liquidity
Retirement planning requires more than looking at potential income. You also need to consider access to your money.
Some annuity contracts can limit withdrawals or impose charges during a surrender period. That doesn’t automatically make an annuity unsuitable, but it does make liquidity an important part of the conversation.
Consider whether you may need those funds for:
- Unexpected expenses
- Healthcare costs
- Major purchases
- Family needs
- Changes in your retirement plans
A product should fit your liquidity needs rather than create unnecessary constraints.
Understand the Guarantees
The word “guarantee” deserves careful attention.
Guarantees are based on the terms of the specific contract and, generally, the claims-paying ability of the insurance company that issued it. A guarantee is not the same thing as a promise that every investment outcome will be positive.
Ask exactly what is guaranteed, when the guarantee applies, and what conditions or limitations are associated with it.
Consider the Bigger Picture
An annuity shouldn’t be evaluated in isolation.
Your overall financial picture may include retirement accounts, taxable investments, Social Security, pensions, cash reserves, real estate, insurance, and other assets.
The question isn’t simply:
“Should I buy an annuity?”
A better question may be:
“Does this particular annuity make sense as part of my overall financial strategy?”
That shift in perspective can lead to a more thoughtful conversation about your goals and priorities.
Take Your Time
Financial decisions don’t always need to be made immediately.
If you’re considering an annuity, take time to review the contract, compare alternatives, understand the costs, and ask questions. Make sure you understand both the potential benefits and the limitations before making a decision.
A good financial strategy isn’t about choosing the product with the most attractive feature. It’s about choosing solutions that are appropriate for your circumstances and consistent with your long-term goals.
The Bottom Line
Annuities can offer valuable features for some investors, but they are complex financial products and aren’t appropriate for everyone.
Before purchasing one, understand the purpose, costs, risks, guarantees, liquidity provisions, and how the contract fits into your broader financial plan.
The more you understand before making a decision, the better positioned you may be to determine whether an annuity belongs in your financial strategy.
This material is provided for informational and educational purposes only and is not intended to provide personalized investment, tax, or legal advice. Annuities involve fees, risks, and limitations. Guarantees are subject to the terms of the contract and the claims-paying ability of the issuing insurance company. Specific features, costs, and restrictions vary by contract. Please consult with qualified professionals regarding your individual circumstances.