Questions to Ask Before Buying an Annuity
For someone near or in retirement who has been pitched an annuity and wants to question it before signing. The questions follow the order of the decision: what the product is, the income it pays, the fees and the person selling it, how you get out, tax and heirs, and the checks to make before you sign, ending with three to ask yourself.
Want questions from the whole vault instead? Try the random question generator.
The questions
Each question, and why to ask it
The product
What type of annuity is this: fixed, fixed indexed, variable, or an immediate or deferred income annuity?
Why ask it
The word annuity covers contracts that behave very differently, from a set interest rate to a value that moves with the markets. A good answer names the type in a sentence and matches the name printed on the contract. 'Retirement income solution' is not a type, so ask again until you get one.
What problem of mine is this meant to solve that my savings do not solve already?
Why ask it
A good answer starts from something you said: a gap between your pension and your bills, a fear of outliving your money, nerves about the markets. A worrying one starts from the product's features. If no problem of yours gets named, you are being shown a product that is looking for a buyer.
Can I end up with less than I put in, and what would have to happen for that?
Why ask it
A variable annuity can fall with the funds inside it. A fixed or indexed one usually shields the starting amount from the markets, yet fees, rider charges and an early exit can still leave you with less than you paid. When you hear 'you cannot lose money', add 'even if I leave in year two?' and see whether the answer holds.
Which numbers on this illustration does the contract promise, and which are only projections?
Why ask it
Illustrations tend to print two sets of figures side by side: what the insurer must pay, and what it might pay if markets or its own rates cooperate. Have the seller mark each column with a pen. A purchase that only makes sense on the projected column has answered the question for you.
Which insurance company issues it, and how is that company rated for financial strength?
Why ask it
An annuity is one insurer's promise, sometimes for decades, so the name behind it matters more than the brochure. Write down the rating from more than one agency and where it sits on that agency's scale, because the same letters rank differently from one agency to the next, then look them up at home. If every question about the company gets steered back to the rate, notice it.
If the insurer failed, what would protect my money, and up to what amount?
Why ask it
The safety net for annuities may not be the one that covers bank deposits, and its limits depend on where you live. In some places a seller is not allowed to use that protection as a selling point, so a brief answer here is not evasion: get the name of the program and check the cap with your insurance regulator. A purchase larger than the cap can be split between two insurers.
Can you walk me through what happens to my money, year by year, from the day I pay to the day I die?
Why ask it
This turns a pitch into a timeline: when the money goes in, how long it is locked, when income starts, and what is left at the end. Draw it on paper together. The years where the explanation goes vague are usually the years where the restrictions sit.
How does the money grow before income starts, and what is the lowest rate the contract allows?
Why ask it
On a fixed contract you want the rate, how many years it is locked, and the floor it can fall to afterwards. A rate locked for fewer years than the surrender period leaves you tied in while the company resets it. On a variable contract the answer is a list of funds, and the value can go down.
If it is tied to a market index, what are the cap, the participation rate and the spread, and can the company change them after I buy?
Why ask it
These three terms decide how much of an index's gain reaches you, and it can be well short of the index itself. Renewal is the part people miss: find out what the company may reset each year and what limit the contract puts on each reset. This year's cap on its own shows you the deal on its best day.
What is the simplest annuity that would do the same job, and why are you not recommending that one?
Why ask it
A plain income annuity or a fixed-rate one is easy to compare between insurers, which is one reason it gets pitched less. There can be a sound reason for the more elaborate version, and you should hear it in terms of your situation. 'It has more features' is a description, not a reason.
Income
How much will it pay me each month, starting when, and is that figure written into the contract?
Why ask it
Get an amount in dollars, a start date and a page number. A figure described as 'expected' or 'based on current rates' is not one the insurer has to pay, so ask for the contractual one beside it and plan on the lower of the two.
Does the income last for my whole life, for a fixed number of years, or only until the account runs out?
Why ask it
Those are three different promises, and the same word, income, gets used for all of them. Only the first covers the risk of living to a great age. If the payments depend on the account value holding up, ask what happens in the year it reaches zero.
Can the income cover my spouse as well, and how much lower is the payment if it does?
Why ask it
A joint payout keeps paying while either of you is alive, and it starts lower for that reason. Put the single and joint figures next to each other, and find out whether the survivor keeps the full amount or a share of it. Bring your spouse to hear this one; the person it protects should be in the room.
Will the payments rise with prices, and what does an increase option cost me at the start?
Why ask it
A level payment buys a little less every year, so have today's amount restated as what it would buy in twenty years at an inflation rate you pick. Then price a payment that steps up annually. It starts lower, so find the year it overtakes the level one and ask yourself whether you expect to see it.
When can I switch the income on, and what do I gain or lose by waiting a few more years?
Why ask it
Deferring usually raises the payment, because the insurer expects to pay for fewer years. Three start ages on one sheet show how much each year of waiting buys. Some contracts also set a latest date by which income must begin, so check whether yours does.
Once the income starts, can I stop it, change it, or take what is left as a lump sum?
Why ask it
Converting a balance into lifetime payments is often permanent, and the seller should say so without being pushed. Other contracts pay income as withdrawals and leave you some access. Know which kind you are signing before any money moves, because this is the answer that cannot be fixed later.
If there is an income rider, what is the difference between the benefit base and the cash I could walk away with?
Why ask it
A rider's growth rate usually applies to a figure that exists only to calculate payments, and you cannot withdraw it. Find both numbers at year ten of your own illustration and write one under the other. A seller who calls the roll-up rate a return on your money is either confused or hoping you are.
What could I do that would shrink the income or cancel the guarantee?
Why ask it
Taking out more than the permitted amount in a year, even once, can cut future payments by more than you withdrew or end the guarantee altogether. You want the rule read from the contract, one example worked on your amount, and the phone number that would tell you, in a hurry, how much is safe to take.
What do other insurers pay for the same purchase amount at my age?
Why ask it
For a plain income annuity the comparison comes down to one number, the payment, and three quotes dated the same day with the same options make it a fair one. An indexed or variable contract has no single number to compare, so line up the contractual minimums instead.
At what age would the payments add up to more than I paid in?
Why ask it
Divide the purchase amount by a year of income to get a rough count of years. Lifetime income is insurance against a long life, so breaking even is not the only test, but the age should not come as a surprise. Set it against your health and how long your parents lived, which the seller cannot do for you.
Fees and the seller
What are all the yearly charges, added together, as a percentage and in dollars on my amount?
Why ask it
Charges can sit under several names: an insurance charge, an administration fee, fund expenses, and a fee for each rider. Get one total in writing. 'There are no fees' on a fixed or indexed contract usually means the cost is built into the rate or the cap, and the follow-up is where the insurer and the seller make their money.
What does each rider cost, what is the fee calculated on, and can it go up?
Why ask it
A rider fee is often charged on the benefit base, which can be larger than the real account value, so the dollar cost can climb while the account shrinks. The contract should state a maximum fee; ask for that figure, not today's. Then have the illustration run again with the maximum in it.
Which of these riders would you leave off if the money were yours?
Why ask it
Each rider insures one particular fear, and each comes out of your return. Someone thinking about fit will drop one or two after hearing your situation, for instance an enhanced death benefit when nobody depends on you. If every rider turns out to be essential, you are hearing a bundle, not advice.
Is there a bonus on this contract, and what do I give up in exchange for it?
Why ask it
An upfront bonus is paid for somewhere: a longer surrender period, lower caps, or a clause that takes part of it back if you leave early. The same insurer's contract without the bonus, set beside this one, shows the price. Check too whether the bonus lands in money you can withdraw or only in the benefit base.
How are you paid on this sale, and what does the commission come to in dollars?
Why ask it
The insurer usually pays the commission, so 'it costs you nothing' can be true on paper and still miss the point: the money comes out of the terms you are offered. Someone who gives the figure calmly is easier to trust. Refusing to say is an answer as well.
Would you earn more on this contract than on one with a shorter surrender period or fewer features?
Why ask it
Longer lock-ups and more complicated designs often pay the seller more. That does not make the recommendation wrong, but it tells you which way the pull runs. Have the shorter, plainer option priced next to this one and compare what each leaves you after ten years.
How many insurance companies can you sell for, and why this company's contract over the others?
Why ask it
Some agents sell one company's products and some can place business with many, so the answer tells you how wide the search was before it reached you. 'This one is the best' means more from someone who can name the runner-up and say what it lacked. If the seller represents a single insurer, collect one outside quote before deciding.
Are you required to act in my best interest on this sale, and where can I look up your license?
Why ask it
The duty a seller owes you depends on the license they hold and on where you live, so get it in plain words, along with the name of the regulator and its public register. Someone licensed only for insurance may not be allowed to recommend a fund or a bond instead, which means their shortlist began narrower than yours should. Do the lookup at home, and read any complaints or disciplinary history the register shows.
After I sign, what will you do for me each year, and who do I call if you have moved on?
Why ask it
Much of the pay on an annuity can arrive at the sale, which leaves little reason to stay in touch. A yearly look at renewal rates, withdrawals and beneficiaries is a reasonable thing to be promised. Get the insurer's own service number as well, since the contract may outlast the seller's career.
Getting out
How long is the surrender period, and what is the charge in each year of it?
Why ask it
The schedule should come as a table, with the percentage and the dollars on your amount for every year. Put your own age next to each row: a ten-year schedule signed at 72 runs until 82, and plenty can change in a household by then.
How much can I take out each year without paying a surrender charge?
Why ask it
Many contracts allow a free portion each year. The details to pin down are whether it is a share of what you paid in or of the current value, whether it starts in the first year, and whether an unused amount carries over. Compare the dollar figure with a real bill, such as a new roof.
Is there a market value adjustment on top of the surrender charge?
Why ask it
Some contracts adjust an early withdrawal according to how interest rates have moved since you bought, and when rates have risen the adjustment typically goes against you. A worked example with rates two points higher makes it concrete. If the seller has not heard of the term, read that page of the contract together.
If I needed every dollar back in year three, how much would I actually receive?
Why ask it
One number replaces a page of terms. It should take in the surrender charge, any market adjustment, any bonus taken back and whatever tax would be withheld. Write it on the illustration yourself, and notice how long the seller takes to produce it.
Are the charges waived if I go into a nursing home, become terminally ill, or die?
Why ask it
Waivers like these are common, and they come with conditions: a waiting period after purchase, a minimum length of stay, an illness a doctor must certify. They may also be unavailable in some places. Read the clause itself, since a summary sheet tends to list the waiver and leave out the conditions.
Is there a free-look period, how long is it where I live, and how would I cancel within it?
Why ask it
Many places give a buyer a set number of days to return a contract for a refund, and both the length and what comes back vary. Get the last day in writing and note it on the day the contract is delivered. Use the window to read what you signed, with nobody across the table.
What happens when the rate term ends: does the contract renew by itself, and on what terms?
Why ask it
Some fixed-rate contracts roll into a new term, with a new surrender schedule, unless you act inside a short window. Find out how long that window is, how you will be told it has opened, and what the lowest renewal rate could be. Put the date somewhere a family member would also see it.
Tax and heirs
Does it matter for tax whether I buy this with retirement account money or with ordinary savings?
Why ask it
The tax treatment follows the source of the money and the rules of your country, so the seller should establish which case is yours before quoting any tax benefit. Where the money already sits in a tax-deferred account, deferral is nothing new, so ask what else the annuity adds there. Take the answer to whoever prepares your tax return.
How will each payment or withdrawal be taxed, and is there a penalty for taking money before a certain age?
Why ask it
Gains from an annuity may be taxed differently from gains on stocks or funds, and which part of a payment counts as gain can depend on how the money comes out. 'I can't give tax advice' is a fair reply, as long as it comes with a suggestion to see someone who can before you sign.
If I am required to take withdrawals from my retirement accounts at a certain age, how does this contract handle them?
Why ask it
Where such rules exist, the amount has to come out whether or not the contract makes that convenient. The points that matter are whether those withdrawals escape surrender charges, whether they reduce an income guarantee, and who works out the figure each year.
If I pay for this by cashing in another annuity or a life policy, what do I lose on the old one, and is the move taxed?
Why ask it
A replacement can mean a surrender charge on the way out, a fresh lock-up on the way in, and the loss of terms an older contract no longer offers. Whether the transfer itself is taxed depends on how it is done and on the rules where you live. Be most careful when the contract being replaced was sold to you by the same person a few years ago; in many places the seller has to complete a replacement form comparing the two, and you can ask to read it.
What do my heirs receive if I die before the income starts, and what if I die after?
Why ask it
Before income starts there is usually a death benefit, often the account value, sometimes more for a fee. After it starts the answer can be nothing at all, unless you chose a payout with a set period or a refund option. Have both cases put in dollars for a death five years in, so the payout choice is made with the numbers showing.
What does adding a period certain or a cash refund do to the monthly payment?
Why ask it
These options keep paying your beneficiaries for a set number of years, or return what is left of the purchase amount, if you die early. Each one lowers the payment by an amount that depends on your age, so get it quoted three ways: life only, with a period, and with a refund.
Who is the owner, who is the annuitant and who is the beneficiary, and what happens when each of us dies?
Why ask it
Those can be three different people, and the contract pays out on the death it specifies, which is not always the one a family assumes. Have the seller go through each death in turn, using your actual names. Check the beneficiary line again after any marriage, divorce or death in the family.
If my spouse inherits the contract, can they keep it going, and what choices would other heirs have?
Why ask it
A surviving spouse is often allowed to take the contract over, while children and others may have to draw the money out on a timetable and pay tax on the gain. The details turn on the contract and the tax rules where you live, so ask how it works there. If leaving money behind matters to you, weigh this answer more heavily than the payout rate.
Before signing
How much of my savings are you suggesting I put in, and why not half that amount?
Why ask it
A reasoned answer begins with the gap between your essential bills and the income you already have for life, and sizes the purchase to fill it. Money in an annuity is hard to get back, so the amount matters as much as the product. A suggestion to commit most of what you have deserves a second opinion before anything else.
After this purchase, how much would I still have within easy reach for emergencies?
Why ask it
Work out the figure together: cash and investments you could reach in a week, with no charge. If the answer leans on the annuity's free withdrawal amount, the cushion is too thin. A careful seller asks about this before you do.
What would the same money do in a bond ladder, in certificates of deposit, or in a balanced fund with regular withdrawals?
Why ask it
You are asking for a side by side: the income, the access, what is left for heirs and what could go wrong with each. Anyone who can make the honest case for the alternatives is more believable about the annuity. If the seller is licensed for insurance only, take this question to someone who is not.
Would delaying my public pension or Social Security buy me more lifetime income than this does?
Why ask it
Where waiting raises a public pension, it is another way of getting more income for life, and how it compares depends on the rules where you live, your health and your spouse. The seller earns nothing if you choose it. Notice whether the idea gets a real comparison or a quick dismissal.
What is the worst realistic outcome for me with this contract?
Why ask it
Specific answers are the good ones: you need the money in year four and pay to get it, inflation halves what the payment buys, the caps are cut and it earns very little, you die at 70. Each points to a clause you can read. 'There is no downside' is a reason to stop listening.
Who is this annuity a poor fit for?
Why ask it
Every product has people it does not suit: someone in poor health, someone with little saved outside it, someone whose pension already covers the bills. Two or three should come without hesitation from anyone who knows the contract. Then check, plainly, whether you are on that list.
Can I take the contract, the illustration and the disclosure documents home and decide next week?
Why ask it
Rates do change, so ask how long this quote is held. That is a fair reason to set a date and not a reason to sign today. An offer that disappears if you take it home to read was not built to be read.
Can I explain this contract to my spouse or an adult child without the brochure in front of me?
Why ask it
This one is for you, not the seller. Try it out loud before signing: what you pay, what you get and when, what it costs to leave, what is left when you die. Wherever you stall is your next question, and if you still cannot do it after two meetings, the product is too complicated for the job.
Has anyone who earns nothing from the sale read the contract?
Why ask it
Another one to put to yourself. An hour with a fee-only planner, an accountant or a lawyer costs little next to the sum involved, and they can read the surrender and rider pages cold. Mention the plan to the seller and watch the reaction: encouragement is a good sign.
Which would I regret more: buying this and dying in five years, or skipping it and living to 95?
Why ask it
Nobody can answer it for you, and it is the real decision under all the numbers. Lifetime income pays off for people who live long and costs those who do not, which is how insurance works. If you cannot choose, a smaller purchase that covers only the essential bills takes both regrets seriously.
How to question an annuity before you buy
Practical guidance for the conversation itself
Before the meeting
Work out the gap first
Add up your essential monthly bills, then subtract the income you already have for life, such as a public or workplace pension. The difference is the most an annuity needs to cover. Walk in with that figure and the conversation is about filling it, not about how much you have saved.
Ask for the paperwork ahead
Request the illustration, the product summary and the full contract by email before you meet. Read the surrender schedule and the rider pages first, and mark what you do not follow. A seller who will only show documents in person is choosing how you read them.
Decide what stays out
Before anyone suggests an amount, settle how much you want within reach for repairs, health costs and family. Write it down. A line you drew at home is much easier to hold than one you are inventing across a desk.
Put the factual questions in writing
The whole list is too many for one sitting. Send most of The product and Getting out, plus the fee questions, ahead by email, where the answers become a record. Keep the meeting for the ones where you want to watch the answer: the commission, the worst outcome, who it does not suit.
In the meeting
Ask for dollars on your amount
Percentages are easy to nod along to. For every charge, payment and penalty, ask what it comes to on the sum you would put in, and write the figure down yourself. A seller who knows the product can do the sums on the spot or will offer to send them.
Have each answer pointed to on a page
What is said in the room is a description, and the contract is the deal. When you hear an answer that matters, ask which page says so and note the number. If the page says something different, the page wins.
Bring a second pair of ears
A spouse, an adult child or a friend hears different things and can take notes while you listen. They also make it easier to say that the two of you will talk it over. If your spouse's income depends on this contract, they should be there anyway.
Leave without signing
Take everything home, even if you expect to say yes. Ask how long the quoted rate is held and set a date to reply. The questions that come to you in the car on the way home belong to the decision too.
Comparing two or three offers
Same amount, same age, same day
Rates move, so quotes collected weeks apart cannot be set against each other. Ask for figures from at least three insurers for one purchase amount, one start date and the same payout option, all dated together.
Compare the promised columns only
Line up what each contract must pay at its minimum rates and maximum fees. Projected values rest on assumptions each company picks for itself, so they flatter whichever illustration was the most hopeful.
Weigh the company against the rate
The highest payment sometimes comes from the insurer with the weakest rating. For a promise that may run thirty years, a slightly lower payment from a stronger company can be the better trade. Check where each purchase sits against the protection limit where you live.
Put your real alternatives on the list
Set each offer beside leaving the money where it is and drawing from it, and beside delaying a public pension if that is open to you. An annuity has to beat those at the job you want done, not only beat the other annuities.
Reasons to walk away
A deadline that suits the seller
A bonus that ends on Friday or a rate that is 'about to drop' is pressure, whether or not it is true. A contract that lasts ten years can wait ten days.
'No fees' and 'no risk'
Every annuity pays the insurer and the seller somehow, and every one has a way to disappoint: a lock-up, inflation, caps that fall. A seller who will not name the cost and the risk has not finished explaining the product.
Most of your savings in one contract
A recommendation that leaves you with little outside the annuity serves the sale more than it serves you. Get a second opinion from someone paid by the hour before going any further.
Answers that change when written down
After the meeting, ask for the main points by email: the income, the charges, the surrender schedule. If the written version is hedged where the spoken one was confident, believe the written one.