Questions to Ask Before Buying an Annuity
Know exactly what you're buying before you sign
Deciding to purchase an annuity is a significant step in your retirement planning journey. Annuities can provide real financial confidence through guaranteed income, but they're also complex, and not all are created equal. Before you sign on the dotted line, you need to know exactly what you're buying. Use these five categories of questions to make sure any product you consider actually aligns with your long-term goals.
1. The Cost of Doing Business: Fees and Expenses
Annuities aren't free, and the fee structure can sometimes be opaque. You'll want to know how much of your money is actually going toward your future versus administrative costs.
What are the total annual fees? Ask for a breakdown including mortality and expense (M&E) risk charges, administrative fees, and any rider fees for extra benefits.
What is the surrender charge schedule? Most annuities have a waiting period where you'll pay a penalty if you withdraw more than a certain amount of your money. Ask how many years this lasts and what the percentage penalty is each year.
Is there a commission? While many advisors are fee-based, some annuities pay a commission to the person selling them. It's okay to ask how they're being compensated for the recommendation.
2. Income and Guarantees: What's the Payoff?
The primary reason most retirees buy an annuity is for the guarantee. However, "guaranteed" can mean different things depending on the contract, and all guarantees are subject to the terms and claims-paying ability of the issuing insurance company.
What is the "guaranteed minimum" versus the "projected" return? Marketing materials often show best-case scenarios. Ask to see the worst-case scenario: the minimum the contract is legally required to pay you.
Is the income for life or a set term? Some annuities stop paying after a certain number of years, while others provide a "Life Only" or "Joint and Survivor" payout. Make sure you know what happens to the payments if you or your spouse pass away earlier than expected.
Can I access my principal in an emergency? Find out if the contract has a liquidity feature that allows you to take out a portion of your cash without penalty in the event of a terminal illness or nursing home stay.
3. Inflation Protection: Keeping Up with Rising Prices
A fixed check might feel great today, but years from now, that same amount of money might not buy nearly as much at the grocery store or go as far as you need it to for your health expenses.
Does this annuity offer a Cost-of-Living Adjustment (COLA)? Some annuities allow you to add a rider that increases your payment by a set percentage each year to help combat inflation.
How much does the inflation rider cost? These features aren't free. Ask how much your initial payment will be reduced in exchange for having that future growth.
4. Company Strength: Who Is Backing the Promise?
An annuity is only as strong as the insurance company that issues it. Unlike bank accounts, annuities aren't backed by the FDIC. They're insurance contracts, not deposits.
What are the company's financial strength ratings? Ask for the current ratings from agencies like A.M. Best, Moody's, or Standard & Poor's.
What is the Comdex score? This is a composite score from 1 to 100 that averages an insurer's ratings across the major agencies, giving you a quick, standardized snapshot of the company's relative financial strength.¹
What happens if the insurer fails? Every state has a life and health insurance guaranty association, coordinated nationally by NOLHGA (the National Organization of Life and Health Insurance Guaranty Associations). These associations provide a safety net for policyholders if an insurance company becomes insolvent, though coverage comes with state-specific limits.²
5. The "Why" Factor: Suitability
How does this fit into my specific tax strategy? Annuities grow tax-deferred, but withdrawals are often taxed as ordinary income. Ask how this will impact your tax bracket in retirement.
What goal does this solve that my current portfolio doesn't? An annuity should have a specific job in your plan, whether that's "flooring" your essential expenses with guaranteed income or providing a death benefit for your heirs. If you can't name the specific goal, that's worth pausing on before you buy.
Frequently asked
What fees should I expect to pay on an annuity?
Fees vary by product and typically include mortality and expense (M&E) risk charges, administrative fees, and any optional rider fees. Ask for a full breakdown, along with the surrender charge schedule (the penalty period for withdrawing more than the contract allows) before you commit.
What's the difference between a guaranteed minimum and a projected annuity return?
The guaranteed minimum is the amount the contract is legally required to pay you, regardless of market or index performance. The projected return is typically a best-case illustration. Always ask to see the worst-case, guaranteed scenario, not just the projection.
What is a Comdex score and why does it matter?
A Comdex score is a composite index, ranging from 1 to 100, that averages an insurance company's financial strength ratings from major agencies like A.M. Best, Moody's, S&P, and Fitch into a single, easy-to-compare number. A higher score indicates the company ranks stronger than a higher percentage of its peers.
Are annuities protected if the insurance company fails?
Annuities aren't backed by the FDIC, but every state has a life and health insurance guaranty association that provides a safety net if an insurer becomes insolvent, coordinated nationally by NOLHGA. Coverage limits vary by state, so it's worth asking your advisor what your specific state's limit is.
How do I know if an annuity actually fits my financial plan?
An annuity should solve a specific problem in your plan: most commonly, providing guaranteed income to cover essential expenses or building a tax-deferred death benefit for heirs. If you can't clearly identify what job the annuity is doing that your current portfolio isn't already doing, it's worth a deeper conversation with a financial professional before purchasing.
Sources
- Comdex Score methodology, EbixExchange/VitalSigns, as summarized via keypersoninsurance.com/insurance-ratings-guide and myannuitystore.com/comdex-score
- National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), How You're Protected, nolhga.com/policyholders/how-youre-protected
We are a financial services firm helping our clients prepare for retirement through the use of insurance products and strategies. We do not offer tax, estate planning, or legal advice. Always consult with a qualified professional before making any decisions about your personal situation. We are not affiliated with any US government agency. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company.
Annuities are not a bank or credit union deposit or obligation, are not FDIC or NCUA-insured, are not insured by any federal government agency, may lose value, and are not guaranteed by any bank or credit union.