Editorial staff
Buying an annuity is one of the biggest financial decisions you'll make for retirement. You're locking up substantial money for years, sometimes decades. The wrong choice can cost you thousands in fees or leave you without access to your funds when you need them most. Asking the right questions before signing protects your financial future.
Smart annuity buyers don't rely on sales pitches. They ask detailed questions about fees, withdrawal rules, company strength, and how the product truly works. These questions help you avoid costly mistakes and find the retirement annuity that genuinely fits your needs.
Essential Suitability Questions
Before any annuity sale, agents must determine if the product suits your situation. This isn't just paperwork - it's legal protection ensuring the annuity matches your financial goals and circumstances.
Core Suitability Questions You Should Expect:
- What are your financial objectives for this purchase?
- Do you expect to take any withdrawals that will incur penalties?
- How would you describe your risk tolerance?
- What's the source of premium for this annuity?
- Do you have adequate liquid assets for current and future needs?
These questions aren't invasive - they're required. Agents who skip this process are violating regulations designed to protect you. If an advisor rushes through suitability or seems annoyed by these questions, consider finding someone else.
Fee Structure and Cost Analysis
Annuity fees can destroy your returns if you don't understand them upfront. Different annuity types have vastly different fee structures that can directly impact your money's growth.
Critical Fee Questions to Ask:
What are the total annual fees? Variable annuities typically charge 2-4% annually, while fixed annuities may have no annual fees. Get the complete picture, not just highlighted features.
What surrender charges apply? Most annuities charge penalties for early withdrawals, typically 7% in the first year, decreasing over time. Ask for the complete surrender schedule and any exceptions.
Are there free withdrawal provisions? Many annuities allow 10% annual withdrawals without penalties after the first year. Understand exactly how much you can access penalty-free.
What rider costs are involved? Optional features like income guarantees or enhanced death benefits add 0.5-1.5% in annual fees. Make sure you need these features before paying for them.
For reference, Canvas annuity ratings show they offer competitive rates partly because they charge minimal fees on their MYGA products. However, their B++ AM Best rating raises questions about long-term financial strength.
Withdrawal Rules and Liquidity
Understanding when and how you can access your money prevents costly surprises later. Annuity withdrawal rules are complex and vary significantly between products.
Key Withdrawal Questions:
When can I withdraw money without penalties? Most annuities impose surrender charges for 6-8 years. Additionally, the IRS charges a 10% penalty for withdrawals before age 59½.
How much can I withdraw annually? Many contracts allow 10% penalty-free withdrawals after the first year. Some products offer higher percentages or different rules.
What happens in emergencies? Some annuities waive surrender charges for nursing home confinement, terminal illness, or disability. Ask about all available exceptions.
How are withdrawals taxed? Earnings come out first and are taxed as ordinary income. If you withdraw before 59½, expect the 10% IRS penalty on top of regular taxes.
The Prudential Defined Income Variable Annuity offers guaranteed income but limits liquidity once income payments begin. Make sure you understand these restrictions before committing.
Insurance Company Financial Strength
Your annuity is only as good as the company backing it. Insurance company ratings indicate their ability to meet long-term obligations.
Financial Strength Questions to Ask:
What are the company's ratings from major agencies? Look for ratings from AM Best, Moody's, S&P, and Fitch. A-rated or higher companies show strong financial stability.
How long has the company been in business? Established companies with long track records can provide more confidence for long-term contracts.
What happens if the company fails? State guarantee funds protect annuity owners up to certain limits, typically $250,000-$500,000 depending on your state. Higher-rated companies can reduce this risk.
Brighthouse annuity reviews show the company maintains solid A ratings from major agencies, though customer service complaints are common. Strong financial ratings don't always mean great customer experience.
Product-Specific Performance Questions
Different annuity types work in fundamentally different ways. Make sure you understand exactly how your money will grow and what guarantees actually mean.
For Fixed Annuities:
- What's the guaranteed minimum rate after any promotional period?
- How often can the company change interest rates?
- Are there market value adjustments that could reduce withdrawals?
For Variable Annuities:
- What investment options are available and what are their expense ratios?
- What guarantees apply if investments perform poorly?
- How do living benefit riders actually work?
For Indexed Annuities:
- What are the participation rates and caps on returns?
- How is interest credited - annually, monthly, or at maturity?
- What happens if the index performs negatively?
Questions About Alternative Options
A good advisor discusses alternatives, not just annuities. If someone only recommends annuities without exploring other options, be skeptical.
Alternative Comparison Questions:
- How does this annuity compare to CDs or bonds?
- What about systematic withdrawals from a diversified portfolio?
- Would a different type of annuity better meet my needs?
- How does this fit with my Social Security and pension income?
Red Flags and Warning Signs
Certain behaviors should immediately raise concerns about the advisor or product being offered.
Warning Signs to Watch For:
- Pressure to "act today" or claims of limited-time offers
- Reluctance to explain fees or provide written documentation
- Promises of returns that seem too good to be true
- Recommending you replace existing annuities without clear benefits
- Using misleading titles like "certified senior advisor" without proper credentials
Documentation and Review Period
Never sign an annuity contract without thoroughly reviewing all documents. Most states provide a "free look" period allowing you to cancel within 10-30 days.
Documentation Questions:
- Can I see the complete contract and prospectus before signing?
- What's the free look period in my state?
- Will you provide a written summary of all fees and features?
- How do I cancel if I change my mind during the review period?
Making Your Final Decision
After asking all these questions, take time to process the information. Don't let anyone pressure you into immediate decisions. Compare multiple products and consider getting a second opinion from a fee-only financial advisor.
The right annuity should clearly address your specific retirement income needs while fitting your risk tolerance and liquidity requirements. If you can't get clear answers to these questions, keep looking.
For more guidance on finding the right annuity products and avoiding costly mistakes, visit the American Association for Long-Term Care Insurance for additional consumer resources and education.
Ready to find the right annuity with complete transparency? Visit Annuity Gator for independent reviews, detailed product comparisons, and unbiased guidance to help you ask the right questions and make informed decisions about your retirement income strategy.
Editorial staff
