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Common Annuity Questions

Find answers to the most frequently asked questions regarding annuities. Click on a question to expand the answer.

Find answers to the most frequently asked questions regarding annuities.

What is an annuity?

An annuity is an insurance product that pays out a stream of income or a lump sum, immediately or starting at a future date. It can be purchased through a one-time premium or through a series of payments.
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How does an annuity work?

An annuity works similar to other retirement plans, in which the money you invest grows tax-deferred over time. The contract between you and the issuing company varies in terms of how soon you begin receiving payments, how your capital grows, and what fees are associated in it.
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What are the advantages and disadvantages of annuities?

One of the main advantages of an annuity is that it allows you to save more money and defer taxes until later, especially if you have maxed out your IRA or 401(k) contributions.  This investment then grows year after year, which can be a big advantage over other taxable methods.

Meanwhile, the biggest disadvantage annuities probably have is that it’s easy to end up with sub-performing investments due to high fees, hidden charges and commissions. It’s very important to understand the gains, risks and fees associated with an annuity before considering a purchase.
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How do I know if an annuity is right for me?

An annuity may be suitable for you if you have maxed out your other retirement plans (such as 401(k) plans and IRAs for the year, and you still have money left to set aside for retirement. Also consider whether you’re willing to leave those funds in an annuity for around five to seven years, as withdrawing during this surrender period will impose charges of up to 7% of your account.
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What investment and payout options do I have?

For investment options, a variable annuity lets you choose which sub-accounts in the annuity to invest in, whose performance determines your account’s growth. In a fixed annuity, the insurance company handles this responsibility. You can choose to receive payments for a set period of time or for the rest of your life.
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When should I exchange my old annuity for a new one?

Only consider this once you thoroughly understand what it entails, what fees it can incur and how much. You need to know whether exchanging will be truly to your benefit, and sometimes you can’t take your agent’s word for it.
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What happens to my annuity if I die?

The payout option you chose for your annuity as well as its type determines what happens to your investment when you pass away. Some allow you to name a beneficiary who will receive your annuity’s money when you die.
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What happens if I withdraw my investment?

Taking money out of an annuity can be expensive so review your annuity’s terms carefully. By federal law, withdrawals made before you reach 59 ½ years old will subject your investment earnings to a 10% penalty plus regular income tax.

Annuities will also typically have a surrender period, which is generally five to seven years after purchase. Withdrawing during this time may result in a surrender charge, usually 7% of the withdrawn amount. This surrender charge drops by a point yearly until it reaches zero. Some annuities allow a withdrawal limit of up to 10% without a penalty.
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