Things To Do Before Buying an Annuity, According to Experts

It’s important to remember that annuities come in all shapes and sizes, and there is no one-size-fits-all approach to buying one.

However, there are a number of things you can do to prepare yourself for a successful purchase before actually entering the buying process.

Annuity.org spoke with financial professionals experienced in the annuity space to learn more about what customers need to do before they buy an annuity.

Understand What Your Goal Is

The first thing you need to understand before thinking of buying an annuity is what goal you hope to achieve with your purchase.

What financial issue, ailment or situation are you attempting to alleviate?

“Just like when you go see the doctor, you’ve got to know what’s wrong with you. Do you have a stomachache? Did you sprain your ankle?” Paul Garofoli, Regional Vice President for Individual Annuities at the Standard Insurance Company, told Annuity.org. “Similarly, you need to know what — if any — financial ailment you might have so that whatever the remedy is can be properly prescribed.”

Understanding your goal will help you determine two things: whether an annuity is right for you and, if so, which types may suit your needs.

If your goal, for example, is to find a conservative way to grow your money without a lot of risk, then a fixed index annuity may help you.

If you are concerned about longevity risk and want to create income in retirement, a single premium immediate annuity might help.

Have a Strong Grasp of Your Financial Situation

Buying an annuity isn’t like buying something off Amazon. To be sure that one makes sense for you, you should have an in-depth understanding of your current financial situation.

This can be particularly true if you are interested in an annuity as part of your retirement plan.

“You need to know what income you have coming in for retirement, from your Social Security and your pension,” John Stevenson, Certified Financial Fiduciary and owner of JohnStevenson.com, told Annuity.org. “You need to know what kind of income you want for the rest of your retirement years and if you want that to rise with inflation.”

Understanding your current financial standing can help you determine how an annuity might fit into the picture. It also is something you will almost certainly be asked about during the buying process.

Annuity carriers typically will take you through a suitability process where they must verify that the product you are interested in makes financial sense for you. You’ll likely have to provide information about your finances.

The more you already know going in, the easier and less surprising the process may be for you.

“It’s having a good idea of your cash flow,” Garofoli said. “Money in, money out. Your overall financial picture. Assets vs liabilities.”

Do Your Own Research

Unsurprisingly, it makes a lot of sense to research what annuity options are out there before entering the buying process.

“They need to research and see everything that is available,” Stevenson said.

This doesn’t mean you have to become an annuity expert. However, establishing a base level of knowledge helps you to ask more informed questions of an agent, advisor or carrier and also to understand what companies and products you may be interested in.

Common Annuity Topics to Research on Your Own

• Types of Annuities
• Annuity Carriers
• How Annuity Contracts Work
• Product Options

There are a lot of online resources that are easily accessible. The National Association for Fixed Annuities provides digestible information on some annuities.

The Alliance for Lifetime Income is another website with resources that experts pointed to.

“There’s a lot of good information to be had out there,” Garofoli said.

I tell all my clients that investment planning is complicated and to ask a financial professional who is qualified and does this for a living. After all, when you have a toothache, you don’t go see a plumber, right? Annuities are great investment vehicles and play a role in financial planning. However, with so many different kinds and having tax and interest rate consequences, you need to understand the nuances and buy one that best fits your needs. That’s why asking for help from a professional and reading good material on websites like Annuity.org can help answer your questions.

Aamir M. Chalisa, MBA, LUTCF, MDRTGeneral Manager at Futurity First Insurance Group

Aamir M. Chalisa is the GM at Futurity First, leading Oak Brook’s top branch. With 30+ years’ expertise, chairs GAMA Global, driving diversity worldwide.

Understand How You Will Fund Your Annuity

One major area that experts emphasize customers should have a firm grasp of before beginning the buying process is knowing how they plan to fund their annuity.

This means where the actual money you put into your annuity will come from. One common source may be from an existing retirement account.

“They need to be allocating their funds in the right spots,” Stevenson said. “If it’s going to be a Roth, make sure they have everything in their Roth that they want to use for an annuity. Same thing for a traditional account.”

Garofoli highlighted the importance for customers to understand the various funding options available, which include making a lump sum deposit or contributing through periodic payments into an annuity.

A lump sum payment naturally requires more cash in the short term and is common for purchases such as a SPIA. Periodic payments are also an option with other types of annuities.

“Do you want to build value over time, or do you want to reposition existing funds?” Garofoli said.

Speak With a Financial Advisor or Insurance Professional

At the end of the day, buying an annuity is a big decision, and it might require professional help.

Doing your own research helps prepare you in a big way for the purchasing process, but speaking with an advisor and taking advantage of their expertise can open you up to options that you simply may not be able to identify on your own.

“You can make that general determination but, as always, getting the counsel of a duly licensed financial services professional is always recommended, where you can tap into their expertise,” Garofoli said.

Combining the help of an advisor with the research you did on your own and a strong understanding of your financial goals, your financial situation and how you will fund a potential product can set you up for a successful and worthwhile annuity purchase.