What to look for when buying an annuity

An annuity can be a useful tool for long-term care planning, but it is a complex financial product that can be hard to understand. If you are purchasing an annuity, you need to consider your options carefully.

An annuity is a contract with an insurance company under which the consumer pays the company a certain amount of money and the company sends the consumer a monthly check for the rest of his or her life, or for a certain term. Annuities come in many flavors. They can be deferred (begin paying out at a later date) or immediate (begin paying out right away). They can pay a fixed amount each month or pay a variable amount based on how the money is invested.

If you have decided an annuity is an appropriate choice for your long-term care or retirement plan, you need to shop around to find the right product. Here are some purchasing tips:

  • Check the terms. Be sure to read the annuity contract carefully. Annuities often have surrender charges that penalize you for withdrawing your money too early. You need to understand when payouts begin, and if there are fees associated with the annuity. Understanding the fees will allow you to shop around to find the best product.
  • Choose your salesperson. Insurance companies often pay generous commissions to the brokers who sell their particular annuities. Ask your broker questions to determine how he or she is being paid. You may want to seek a second opinion to make sure your salesperson isn’t steering you into a product that isn’t right for you.
  • Select a sound insurance company. Annuity payments are often intended to last a lifetime, so you want an insurance company that will stick around. Make certain that the insurer is rated in the top two categories by one of the services that rates insurance companies, such as A.M. Best, Moody’s, Standard & Poor’s, or Weiss.
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