How to Purchase an Annuity

These are complex financial instruments that require careful consideration and attention before, during and after the sale.

Things You'll Need to Do

1.  Decide who will own the contract, who will be the annuitant, and who will be the beneficiary(ies).

2.  Consult with an estate planning attorney or qualified tax adviser if the selling agent cannot answer your questions about those three important contract entities to your satisfaction.

3.  Sign the annuity application papers only after reading all associated paperwork and, in the case of a variable annuity, after you have received a current prospectus.

4. Be prepared to make your first deposit with the application by virtue of a personal, certified or cashier's check.

5. When you receive your annuity contract, read it carefully and file it with your other important legal documents.

Tips & Warnings

  • Sometimes people who cannot medically qualify for life insurance choose an annuity to provide a death benefit to heirs.
  • Annuities can be held in living trusts.
  • You can have more than one beneficiary, owner or annuitant.
  • If you purchase a fixed annuity, make sure the underwriting insurance company has received the highest ratings from agencies such as AM Best, Standard & Poors, Moody's Investor Services, and Duff & Phelps.
  • Treat your annuity like an insurance policy and file accordingly.
  • Annuities aren't for everyone - make sure you choose an appropriate type of contract for your financial situation. Avoid buying an annuity if you think you might need most or all of the money you intend to invest for emergencies.
  • Though changes in contract titling can be made at any time, problems may arise if annuitant, owner and beneficiary designations are not made with care.
  • Unlike with life insurance policies, the death benefit of an annuity is not entirely tax-free to the beneficiary.
  • Though most agents are honest and ethical, beware of those that prey on the elderly and propose annuities when bank CDs mature. Less savvy investors may be attracted to the tax-deferred growth of an annuity without having it clearly explained to them that if they need their money, they may not be able to get all of it without paying a company-imposed penalty; also, they may be forced into purchasing life insurance even though they don't need another policy.
  • Be careful when designating a trust as the owner of an annuity, and consult with a qualified trust adviser or an attorney who specializes in estate settlement.
  • If you're purchasing an annuity as part of a 1035 exchange (see the glossary), be extremely careful that all IRS paperwork is completed and properly filed with the appropriate companies and agencies, and that you keep copies of everything you sign.

Annuities are best suited for long term investors.  Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax.  Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if not left in for a predetermined amount of time.  Any guarantees on principal invested are based upon the claims paying ability of the underlying insurance company.