by Steve Goodman
CPA, MBA – President & Chief Executive Officer
Contact Steve today for more info.
Questions to ask an insurer before buying an annuity:
What is the current interest rate and for how long is it guaranteed?
What is the guaranteed minimum interest rate and for how long is it guaranteed?
What is the surrender period?
This is the time period during which you must keep your annuity contract at the insurer without paying fees on excess withdrawals. A minimum level of annual distribution — typically from 5-15% of the initial investment amount — is usually allowed from an annuity without incurring a surrender charge. Withdrawals above this limit may be subject to surrender charges ranging from 5%-15% of the amount withdrawn. The amount of the surrender charge typically decreases over time.
Annuities are not intended to be a source of cash for emergencies or a short-term investment due to surrender charges, so be sure you understand all the rules concerning withdrawals from the contract.
Are shorter surrender charge period versions of annuities available?
Yes, but keep in mind that the longer the surrender period, the higher the commissions to the agent. You should try to keep the surrender charge period as short as possible.
What questions should I ask about an annuity salesperson?
Be sure to ask about his or her educational and professional qualifications, as well as how the annuity salesperson is getting compensated. Some annuity contracts are sold no-load, or without a commission paid to the salesperson — in this case, it’s especially important to find out how the salesperson is being compensated.
Can I dictate how my beneficiaries will receive money after I die?
You can arrange for your beneficiaries to receive payments on an annuity that will continue beyond your death.
What is the “free look” period?
This is a period of time during which you can cancel an annuity contract and receive a full refund. After you have received the contract, you will have a period of time to review it and change your mind if you want. Contact your state insurance department about your state’s specific free look period guidelines.
Will I see similar strategies from different insurers?
There are numerous insurers offering similar annuity strategies. Therefore, your agent should show you multiple choices from different insurers so you can make valid comparisons. If you’re working with an independent agent, he or she should already be providing you with multiple choices. If you’re working with a captive agent who primarily represents just one insurance company, get more choices from another agent.
Will the agent stand by his or her promises?
Many annuity sales pitches sound too good to be true — and sometimes they are. A good practice is to write down what you believe the agent is saying. After describing how you think the product will work, show this to the agent and have him or her sign and date it. This will help ensure that you’re both on the same page and there are no misunderstandings.
What is the commission?
This is the payment your broker receives for selling you an annuity contract.
Will I be charged a fee if I make early withdrawals from my annuity?
You could be charged a surrender fee, which is a penalty for making early withdrawals from an annuity in excess of the permitted free withdrawal amount. Surrender fees are sizable charges tacked on to the back end of the contract — they often start at 7% and decline each year until eventually reaching zero.
Most annuities advertise free annual withdrawals, so you may be able to withdraw a small percentage each year without paying a surrender fee. However, if you need to withdraw all of your money, or if you decide an annuity wasn’t the right choice for you, unwinding the contract may be very costly.
If you purchased a fixed annuity, you may also be subject to a Market Value Adjustment (MVA) in addition to a surrender fee. The MVA will be negative during a rising interest rate environment and positive during a declining interest rate environment.
Note that annuity surrender periods vary in length — some are as short as three years and others are as long as seven years or more. There are also “no-load” annuities without surrender periods.
Before purchasing an annuity, it’s best to make sure you can commit to keeping the annuity for the length of the contract
CPA, MBA – President & Chief Executive Officer
About Steve Goodman
For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.
He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.