How Do You Buy an Annuity?

Buying an annuity isn't difficult.

Buying the right annuity is the important part.

There are numerous types of annuities, and they aren't interchangeable. Before filling out an application or choosing an insurance company, you need to determine exactly what financial problem you're trying to solve.

That's where the annuity buying process should begin.

Key Takeaways

• Define your financial objective before shopping for an annuity.
• Annuities are designed around contractual guarantees rather than market growth.
• Compare multiple carriers instead of automatically choosing a familiar company.
• The appropriate annuity type depends on both your goal and when you need the guarantee.
• Review the actual contract rather than relying on hypothetical projections.
• A licensed insurance professional is involved in completing the annuity purchase.

Step 1: Determine Whether You Need an Annuity

Don't start by asking:

"Which annuity should I buy?"

Start by asking whether you need one at all.

Annuities generally solve four primary objectives using the PILL framework:

• Principal Protection
• Income for Life
• Legacy
• Long-Term Care

If none of those contractual objectives apply to your situation, you may not need an annuity.

Step 2: Answer Two Questions

Two questions can narrow the field quickly:

What do you want the money to contractually do?

When do you want those contractual guarantees to start?

For example, someone who needs lifetime income beginning next month has a different need from someone who wants guaranteed lifetime income beginning seven years from now.

Someone seeking a guaranteed interest rate has a different objective entirely.

The answers determine which annuity category should be compared.

Step 3: Choose the Appropriate Type of Annuity

Different annuity types solve different problems.

For example:

• MYGAs can provide principal protection and a guaranteed interest rate.
• SPIAs can provide income beginning relatively soon.
• DIAs can establish guaranteed income beginning at a future date.
• QLACs can provide future lifetime income using eligible qualified retirement funds.
• Income Riders can provide contractual lifetime income attached to certain deferred annuities.

There isn't one annuity that is best at everything.

Step 4: Don't Buy an Annuity for Market Growth

Annuities should not be confused with market investments.

If your primary objective is market growth, stocks and other market-based investments are designed for that purpose.

Annuities are insurance contracts.

Their role is to transfer specific financial risks to an insurance company in exchange for contractual guarantees.

Keeping those two sides of your financial plan separate can prevent unrealistic expectations.

Step 5: Be Skeptical of Anything That Sounds Too Good to Be True

Annuities can be marketed with attractive stories involving:

• large bonuses
• hypothetical returns
• market upside
• projections
• back-tested results
• multiple benefits supposedly bundled into one product

Don't allow a sales illustration to determine your purchase.

Understand what is contractually guaranteed and what is hypothetical.

If you can't clearly explain why you're purchasing the annuity, don't rush into the contract.

Step 6: Compare Multiple Insurance Companies

Once you've identified the exact guarantee you need, compare multiple carriers offering that solution.

Annuities are commodity products.

For lifetime income, compare contractual lifetime income guarantees.

For guaranteed accumulation, compare contractual interest rates and terms.

The product with the most recognizable company name or most impressive brochure doesn't automatically provide the strongest guarantee.

Step 7: Work With Someone You Trust

The person helping you purchase an annuity should be appropriately licensed and able to explain the contract in understandable terms.

You should know:

• what the product guarantees
• what isn't guaranteed
• how long the surrender period lasts
• what liquidity is available
• how beneficiaries are treated
• whether riders have costs
• when the contractual benefits begin

If you don't understand the product, don't buy it until you do.

Step 8: Complete the Application

Once you've selected the appropriate annuity and carrier, you'll complete an application.

The application collects information required by the insurance company and applicable suitability requirements.

A licensed professional can walk you through the process and coordinate the necessary paperwork.

Step 9: Fund the Annuity

How the annuity is funded depends on where your money is currently held.

Funds might come from:

• an IRA
• another qualified retirement account
• a Roth IRA
• checking or savings
• an existing annuity

Different funding sources can have different tax consequences and transfer requirements.

The movement of money should be structured correctly, particularly when retirement accounts or existing annuities are involved.

Step 10: Review the Issued Contract

The process isn't finished simply because the application was submitted.

Once the annuity is issued, review the actual contract.

Confirm that:

• the premium is correct
• ownership is correct
• beneficiaries are correct
• riders are correct
• guarantees match what you agreed to
• the income start date is correct, if applicable

The contract is ultimately what governs the policy.

You May Already Own Lifetime Income

Before purchasing another lifetime income product, consider the guarantees you already have.

Social Security provides lifetime income.

A traditional pension also provides an annuity-like lifetime income stream.

Determine how much dependable income you already have and whether there's a gap that needs to be filled.

When Should You Buy an Annuity?

The appropriate time isn't determined solely by your age.

You buy an annuity when there's a financial problem that needs a contractual solution.

If you need principal protection now, that determines the timing.

If you need lifetime income five years from now, that determines the timeline.

Your need should drive the purchase.

Where to Compare Annuities

Use our annuity calculators to compare current contractual guarantees from multiple insurance companies.

Run the numbers first. Once you've identified the guarantee you need, you can compare carriers and determine which contract most efficiently solves the problem.

The Bottom Line

Buying an annuity starts long before you fill out an application.

First determine whether you need a contractual guarantee. Then identify exactly what you want the money to accomplish and when you need that guarantee to begin.

From there, compare the appropriate annuity type across multiple insurance companies, understand the contract, complete the application, and properly fund the policy.

The actual purchase is the easy part. Knowing why you're buying it is what matters most.

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