9 Questions you Must Ask Before Buying An Annuity

There are many different types of annuities. There are situations that an annuity would be the right decision and there are situations that an annuity would be the wrong decision. Annuities can be very confusing. There are hundreds if not thousands of different annuities with different features and benefits. Before buying any annuity, make sure you get the answers to the following questions.

1. What company is it and what are their ratings?
An annuity is only backed by the quality of the company writing it. Find out the rating of the company and make sure it has a rating that you are comfortable with. Ratings go from AAA down. I suggest you stay with a company that is A rated or better.

2. What is the surrenders charge?
Annuities do not charge sales charges up front. Instead if you take the money out before a certain time you must pay a surrender charge. You must be very clear how much that charge is and for how long. The surrender charge is usually on a sliding scale, with the first year or two the highest percentage, then the rate lowers every year. Annuities that have over a 10% surrender charge and/or a charge that last for more than 10 years is often excessive. Make sure you know these numbers before you buy the annuity.

3. What are the penalty free withdrawal provisions?
Most annuities have a penalty free withdrawal. From my experience, the better companies usually have a 10% yearly penalty free withdrawal provision. That means that you can take up to 10% of your accumulated value (the money in the annuity) without having to pay a surrender fee. I have see onerous annuities that have only a 10% lifetime annuity. Find out what the penalty free withdrawal provision is before you buy the annuity.

4. Are there any other circumstances that would waive the surrender fee?
Some annuities have provisions that allow you to access your money with surrender charges for unemployment or nursing home. Find out what the provisions are in your annuity before the purchase.

5. How will I earn money in the annuity?
This is one of the trickiest parts of an annuity. A fixed annuity is pretty simple. You receive a fixed interest rate for the guaranteed period at which time it will adjust to the new fixed rate.
Equity Index Annuities are tied to the "Index" for examples the S&P 500 and a formula is used to calculate the gains. Make sure you understand the formula. It is really important that you understand how this product works if you plan on buying it. In specific ask about crediting method, participation rates and cap rates.
Variable annuities are linked to a managed portfolio and get credited the same way that any equity base product works similar to mutual funds.

6. Are there any limitations on what I can earn?
This is really very important for Equity Index Annuities that have caps on the amount that you can earn in one year and participation rates. Make sure you understand these before you buy.

7. How does the Death Benefit work?
If you die what happens to the annuity? Do your heirs have to annuitize and take their inheritance as a stream of income or can they receive the cash? If the annuity goes down does the death benefit still pay the higher amount. Find out the death benefit of the annuity.

8. Do I have to annuitize to gain the full benefit of the contract?
When you have passed the surrender period can you get the gains? Some companies force you to take your money as a stream of income. Make sure there are no strings at the end of the surrender charge.

9. Why is this strategy better for me than another one?
With so many annuities out there. Find out why your representative has picked this annuity. There are a lot of good answers. If you see a deer in the headlights look, you might want to continue shopping.

Annuities can be a great addition to a portfolio. They can create fantastic streams of income that a person can never outlive. Just make sure that the annuity is right for you.