How to Buy an Annuity

Step 1. Define the goal

An annuity should address a specific retirement risk. Common goals:

• Replace a pension that is not available.
• Cover essential expenses with guaranteed income separate from market exposure.
• Protect a portion of retirement savings from market loss in the years approaching retirement.
• Lock in a guaranteed rate for capital that does not need to be liquid.
• Reduce required minimum distributions while building late-life income (QLAC).
• Insure against living substantially past actuarial life expectancy.

If the goal is "market growth," an annuity is rarely the right tool. Direct investment in low-cost index funds typically produces more growth at lower cost.

Step 2. Pick the annuity type

Match the goal to the product category:

Step 3. Request quotes from multiple carriers

Annuity rates and payouts vary materially between carriers. A 5% to 15% difference between the highest and lowest quote for the same age and premium is typical. Request quotes from at least three highly rated carriers.

For each quote, request the following in writing:

• Product brochure
• Statement of understanding (or product disclosure)
• Current rate card (for MYGAs) or current cap/participation sheet (for FIAs)
• Surrender schedule
• Free withdrawal terms
• Rider charges and benefit base growth rates (if relevant)
• For variable annuities: the summary prospectus and the full prospectus

Step 4. Compare quotes apples-to-apples

A meaningful comparison requires matching every contract feature exactly:

• Same product category (FIA vs FIA, SPIA vs SPIA)
• Same premium amount and source (qualified vs non-qualified)
• Same payout type (life only vs life with 10-year period certain vs joint and survivor 50%)
• Same start date or deferral period
• Same rider election (with or without GLWB, with or without enhanced death benefit)
• Same surrender period length

Even small differences in any of those variables can change the quoted income by 5% or more.

Step 5. Read the contract documents before signing

Reading every page of an annuity contract takes 1 to 4 hours. The time investment prevents tens of thousands of dollars of error.

Items to flag during the read:

• Surrender schedule in years and percentages
• Market value adjustment formula (if applicable)
• Free withdrawal amount and the year it begins
• Rider fees and what they are deducted from (contract value vs benefit base)
• Cap rate or participation rate renewal range (the maximum and minimum the carrier can declare)
• Crediting method (point-to-point, monthly sum, etc.)
• Death benefit treatment
• Annuitization rates (if income rider not elected)
• Required notices for required minimum distributions (qualified contracts)

Any term that is not in writing in the brochure or contract is not binding regardless of what was said verbally.

Step 6. Suitability questionnaire

State insurance regulations require an annuity sale to be suitable for the consumer. The suitability questionnaire collects:

• Age, income, total liquid assets, net worth
• Existing retirement income sources
• Tax bracket
• Risk tolerance
• Liquidity needs over the next 5 to 10 years
• Financial experience
• Source of premium funds

The carrier reviews the questionnaire before issuing the contract and may decline if the annuity is not suitable. The questionnaire is also the consumer's record of disclosure if a dispute arises later.

Step 7. Application and funding

After suitability, the consumer signs the application and funds the contract. Funding methods:

• 1035 exchange from another non-qualified annuity (tax-free transfer)
• Direct rollover from IRA, 401(k), 403(b), 457(b) (tax-free transfer)
• Wire transfer or check from a non-qualified source (no tax event)
• 60-day rollover from a qualified account (must complete within 60 days to avoid tax)

The carrier issues the policy once the application is approved and funded. The policy package includes the contract, the policy summary, and the schedule of benefits.

Step 8. The free look period

State law requires a free look period (typically 10 to 30 days depending on state and product) during which the contract can be cancelled for a full refund. Use the period to:

• Verify the policy matches the brochure and the quote.
• Confirm rider elections are correctly listed.
• Confirm beneficiaries are correctly designated.
• Confirm surrender schedule, cap rates, and rider fees are as represented.
• Verify the policy issue date matches the application.

If anything is wrong, return the contract within the free look window for a full refund. After the free look ends, the surrender schedule and all contract terms become binding.

Who to buy from

Three types of producers sell annuities:

• Captive agents. Represent one carrier. Can only quote that carrier's products. Common at mutual insurance carriers (MassMutual, New York Life).
• Independent agents. Represent multiple carriers through an independent marketing organization (IMO) or field marketing organization (FMO). Can shop multiple carriers for the consumer.
• Registered representatives. Required for variable annuity sales. Hold securities licenses (Series 6 or 7) in addition to insurance license. Subject to FINRA rules.

For non-variable annuities, an independent agent typically provides better coverage of the market than a captive agent. For variable annuities, both insurance and securities licenses are required.

Red flags to walk away from

• The producer will not provide the brochure or prospectus before the meeting.
• The product is described as having "no fees" when riders are clearly attached.
• The producer recommends placing more than 50% of liquid net worth into one carrier or product.
• The producer pushes a decision in the meeting and discourages time to read.
• The producer is unable or unwilling to answer questions about caps, participation rates, or surrender terms.
• The producer recommends an annuity inside an IRA solely for tax deferral. The annuity tax deferral is redundant inside an IRA.
• The free look period is described as a hassle rather than as the consumer's right.

Sources

• NAIC Annuity Consumer Information
• National Association of Insurance Commissioners
• SEC Investor Bulletin: Variable Annuities
• FINRA Variable Annuities Resource Page
• State-specific free look period rules (vary by state, 10 to 30 days)