Before you sign an annuity contract, there are five questions every buyer should ask. Most people never ask them. The answers will tell you whether the product is right for you, whether you are paying a fair price, and whether the person selling it has your best interests in mind.
These questions apply to every type of annuity: fixed, indexed, variable, or immediate. They are not complicated, but they require direct answers. If an agent is reluctant to answer any of them clearly and in writing, that is itself important information.
1. What Are the Total Annual Fees?
Annuity fees are not always obvious. They can include mortality and expense charges (typically 1.0-1.5% per year for variable annuities), administrative fees (0.10-0.30%), sub-account management fees for variable annuities (0.50-1.50%), and rider fees for income or death benefit guarantees (0.50-1.25% per rider per year). A variable annuity with an income rider and a death benefit rider can easily carry total annual costs of 3-4%.
Fixed and indexed annuities often have no explicit annual fee, but they have implicit costs built into the cap structure or spread. Ask for a full fee disclosure in writing, including any charges that reduce your credited interest.
2. What Are the Surrender Charges and When Do They Apply?
Surrender charges are penalties for withdrawing money before the end of the surrender period. They typically start at 7-10% and decline over 7-10 years. On a $300,000 annuity in year one, a 9% surrender charge means you would pay $27,000 to access your own money.
Ask for the complete surrender charge schedule. Also ask about the free withdrawal provision, which typically allows you to withdraw 10% of your account value per year without a surrender charge. Understand what happens to the surrender charge if you need to access more than that amount.
3. What Is the Carrier's Financial Strength Rating?
An annuity guarantee is only as strong as the insurance company behind it. Unlike bank deposits, annuities are not federally insured by the FDIC. They are backed by the claims-paying ability of the issuing insurance company and, secondarily, by state guaranty associations (which have coverage limits that vary by state).
Ask for the carrier's AM Best rating. A rating of A- or better is generally considered strong. Be cautious of carriers rated B+ or below. You can verify ratings independently at ambest.com.
4. Are the Income Projections Guaranteed or Illustrated?
Annuity illustrations often show two sets of numbers: projected values (what might happen based on historical or assumed performance) and guaranteed values (what the contract actually promises). For indexed annuities, income projections are often based on historical index performance that may not repeat.
Ask specifically: "What is the guaranteed minimum income if the index performs at 0% for the entire accumulation period?" The answer to that question tells you what you are actually buying. If the guaranteed income is significantly lower than the projected income, you need to understand that gap before signing.
5. What Is Your Commission on This Product?
Annuity agents typically earn commissions of 5-8% of the premium, paid by the insurance company. On a $400,000 annuity, that is $20,000-$32,000 in commission. This is not inherently wrong, but it creates an incentive to sell higher-commission products.
Ask directly: "What is your commission on this product, and did you consider other products with lower fees or commissions?" A fiduciary advisor will answer this question without hesitation. An agent who deflects or becomes defensive is giving you useful information about the nature of the recommendation.
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