Questions to ask before Buying an Annuity

Don’t be confused by thinking that annuities are just another investment vehicle. Most annuities are insurance policies that pay out to the living and end with death. They are roughly the exact opposite of life insurance. With life insurance you pay a little each month expecting to have a large payout to your heirs on your death. You are betting that you will die, and the insurance company is betting you will live until they have collected enough from you to cover your death benefit.

Annuities look for a lump sum inserted into an account. Here, you bet that you will outlive your assets. The insurance takes the counter bet that you will die before your money plus what they can earn with it will be exhausted. Since they deal with a much larger investment pool and pay professional managers to build your estate bigger than you can, their options allow them to earn a lot more than you probably could with the same money.

Because of this, you will be able to draw more per month or year for more years. If you outlive the actuarial tables, you win and get a great deal from the annuity. Should you die early, you lose and probably turn a large pile of money into a much smaller one for your estate.

In buying an annuity, you need to find out what kinds of guarantees are built into it regarding rate of earnings and payout. Sometimes the monthly payout is based on actual returns earned rather than a fixed amount that is set for the term of the annuity. Ask about what happens if die prematurely. Is there a provision to conserve some of your nest egg for your heirs or is it a total forfeit? This is especially important if your spouse is left and will need the income.

If you invest several years before you anticipate drawing it out, you need to find out what happens if you change your mind. You may be locked in or you may have some favorable cash out options. Ask first.