Buying Annuities: What Insurance Agents Must Disclose

Annuity sales, particularly to senior citizens, have soared in the last 5 years, according to the National Association of Insurance Commissioners.

These complex and often misunderstood investments are popular now, because they are considered stable income-planning vehicles, said life insurance and annuities expert, Lee Sellmeyer.

There are many types, however, and new benefits have been added to increase the versatility and suitability of some annuities. So it’s a good idea to shop around and understand what an insurance agent is offering.
“An annuity may be suitable for someone who wants to save money for retirement on a tax-deferred basis or who has assets he/she wants to convert to a retirement income now or in the near future,” said Sellmeyer, insurance company examiner specialist for the state of Iowa.

Basically an annuity is an insurance contract designed to provide a retirement income that you cannot outlive. Your contributions grow tax deferred until you take the money out by withdrawal or as annuity payments. The payout of benefits is based upon your age, gender and life expectancy. The many types of annuities include the following attributes: single premium, multiple premium, immediate, deferred, fixed, variable, and equity-indexed annuities.

Sellmeyer uses a simple test to evaluate an annuity and cost of life insurance at older ages: “Multiply the annual premium by 10 and compare the 10-year cost versus the face amount of the life insurance policy. If you would pay more in premiums than your beneficiaries would receive as a death benefit in 10 years, then the purchase might not be suitable for you.”

For example, an annuity might give someone income for life, but that income stream might be too small to matter. Or, someone might have enough money, so they don’t need an income stream from an annuity.

Sellmeyer suggested asking the agent for explanations about an annuities contract before the “free look” period ends. This is a stated number of days you have to look at the annuity contract AFTER you buy it. If you decide you do not want the annuity during this time, you can return it and get your money back.

“It’s always a good idea to shop around, and compare both current and minimum guaranteed payout rates being offered by insurance companies,” said Sellmeyer. “It’s important you fully understand the length of surrender charges, the free withdrawal amount, and any market value adjustments that might apply.”

As always, consult a professional tax advisor to check tax consequences of any investment.

Before buying an annuity ask these questions:
  • How safe is my money?
    What is the true rate of return?
    How difficult is it to get out once I sign on?
    Does ownership transfer easily?
    What about federal and state taxes?
    Can I get a partial withdrawal without charges?
    Is there a death benefit?