Buying An Annuity

annuities6Annuities can be purchased through insurance agents, financial planners, banks and life insurance carriers. However, only life insurance companies issue policies.

Here is a closer look:

Agents are insurance professionals who are licensed by your state insurance department. Some agents work exclusively for one insurance company, while others represent several.

If you decide to use an insurance agent, find one who is knowledgeable about annuities and has a reputation for excellent customer service. The agent should be able to advise you and answer all your questions. If you are thinking about buying a variable annuity, the agent should also have a license to sell variable annuity products. Since variable annuities are considered securities, you should receive a prospectus describing the investment alternatives available to you.

Banks and brokerage firms
Products developed by life insurance companies are often marketed through banks and stock brokerage firms. Make sure the person who sells you the annuity is a licensed life insurance agent. In the case of a variable annuity, the agent should also be a licensed securities dealer. If you buy an annuity through a bank or brokerage firm, you should ask about the types of annuities the insurer issues and the financial strength of the insurance company.

The annuity business, like the insurance industry itself, is very competitive. There are hundreds of insurers and many different types of products available to you. Before buying an annuity, contact your state insurance department to see whether it offers an annuity buyers guide for your state.

There are four important things to consider:

1. Financial Solidity
Select a company that is likely to be financially sound for many years, by using ratings from independent rating agencies.

2. State insurance department license to do business
Make sure that the insurer you select is licensed to issue annuities in your state. Ask whether the specific type of annuity you are considering is available in your state.

3. Service
Expect excellent customer service. Your insurance company representative should answer your questions promptly and provide useful information that addresses your concerns. This way, you can make a well-informed decision on the annuity that best meets your needs and objectives.

4. Choice of investments and riders
Some insurers offer annuities with an array of investment choices and a large variety of riders. Compare these options. Some options may increase the price of the annuity. Decide on an annuity that best meets your needs.

Selecting an insurance agent is an important decision. Like picking a doctor or a lawyer, you need to work with people who you are comfortable with and have considerable knowledge about their profession.

Ask your friends, relatives and business associates for names of insurance agents that have an excellent reputation. But, do not stop there. Find out what life insurance carriers they represent. If you are not interested in the companies they represent, you will need to find another agent.

Make sure that the agent:

  • Devotes the time needed to understand and serve your annuity needs.
  • Demonstrates clear knowledge about the various types of annuities that are available and can plainly explain your choices.
  • Has a proven track record of excellent customer service.
  • Is licensed by your state insurance department.

Most state insurance departments require insurance companies to provide a “free-look” period after you have purchased the policy. It is typically a 10-day span in which you can pull out of the contract and obtain a refund based on contract terms or state law. You should use this time to review the policy, ask your insurance agent or stockbroker any additional questions and make a final decision as to whether the annuity you selected was right for you.

If you take money out of an annuity, there may be a penalty called a surrender fee or a withdrawal charge. This fee is higher if you withdraw funds within the first years of an annuity contract. The penalty, however, drops gradually each year. Since immediate annuities are purchased to provide income, they usually can’t be “surrendered” and will therefore not be subjected to a fee.

A typical surrender fee schedule could be:

  • 7 percent if you withdraw funds in the first year,
  • 6 percent in the second year,
  • 5 percent in the third year,
  • 4 percent in the fourth year,
  • 3 percent in the fifth year,
  • 2 percent in the sixth year,
  • 1 percent in the seventh year,
  • and zero in the eighth year and beyond.

The purpose of the fee is to allow the insurer enough time to recover its expenses, largely commissions, in setting up the annuity contract. It also serves to discourage annuity buyers from using deferred annuities as short-term investments for quick cash.

Some contracts may permit you to pull out a portion of the funds annually, usually up to 10 percent without a surrender charge. If this option is important to you, ask your insurance agent or company representative about this before deciding to invest your money in a specific annuity. Also, ask if there may be any other fees or charges.

An important decision in purchasing an annuity is deciding how you want to be paid. You can select annuity payouts for a set period of time or continue for your lifetime. With some options, a beneficiary can be designated to receive payments upon your death. You have several choices including:

Straight life
You will get income for your entire life—even after all the money you put into the annuity has been used up. However, if you die before the money in your account has been used up, nobody, not even your dependents, will collect payouts. The straight life annuity might be right for you if you need to maximize the amount of income you receive and either don’t have dependents or are not planning to use the annuity for the purposes of estate planning.

Joint and survivor
This type of annuity pays you as long as you live. After your death, it will pay the joint annuitant for the rest of his or her life. You can choose the benefit your survivor will get upon your death, but this option reduces the payout amount you get.

Refund annuity
This payout option is gaining in popularity. It provides income for life. If, however, you die before you receive an amount equal to all of the premiums you paid, your beneficiary gets the portion you had not yet collected.

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