How to Buy an Annuity: A Step-by-Step Guide - SmartAsset

Annuities can create an additional stream of income for retirement that’s guaranteed and dependable. An annuity is a contract that you purchase from an insurance or annuity company. In terms of how to buy an annuity, it’s possible to start the process online with a free quote. But it’s important to do some careful research and planning beforehand to ensure that an annuity is right for you and that you understand the potential risks involved. For more help, consider speaking with a financial advisor.

What Is an Annuity and How Does It Work?

An annuity is a contract between the annuity purchase and an insurance company. When you purchase an annuity, you’re purchasing a promise of future income. You pay a premium to the insurance company and in return, the company agrees to make payments back to you beginning at a specified date. Immediate annuities begin making payments right away while deferred annuities may have a start date that’s several years down the road.

Depending on how the annuity is structured, those payments may arrive monthly for a set period of time or you may receive them for life. If you’re married, you can also structure an annuity so that your spouse continues to receive income payments after you pass away.

An annuity is similar to life insurance in a sense since there’s a guaranteed financial benefit received and a premium that must be paid. But life insurance typically provides those benefits to your beneficiaries only after you’ve passed away.

There are many different types of annuities you can purchase, depending on the kind of risk and reward you’re interested in. Fixed annuities earn a fixed interest rate while indexed annuities earn returns based on the performance of an underlying market index, such as the S&P 500. Variable annuities earn returns based on the range of investments you select within the annuity.

How to Buy an Annuity

Buying an annuity is a multistep process that begins with assessing your financial situation and needs. Specifically, how much income do you think an annuity will need to provide for you and how long will that income need to last?

Talking to your financial advisor can help you to put your current financial situation in perspective and figure out what you need an annuity to do for you. From there, you can look at different types of annuities to find one that aligns with your goals and risk tolerance, based on your age and how close you are to retirement.

For example, fixed annuities can provide reliable income but they may yield lower returns than variable annuities. On the other hand, variable annuities tend to have the highest risk so higher returns are not guaranteed. Indexed annuities, meanwhile, split the difference in terms of risk and rewards. Again, these are differences that you can discuss with a financial advisor.

The next step is choosing an annuity provider. This is the company that you’ll purchase the annuity from. Your choice of provider is critical because annuity companies are not all alike. Ideally, you want to find a company that has strong financial and credit ratings and a good reputation overall. The lower the company’s credit ratings, the greater the risk that the company could default on its obligation to make annuity payments to you when the time comes.

Once you select a provider, you can complete the annuity application. This involves sharing personal and financial information with the annuity company. It’s a good idea to review your application before submitting it to check for mistakes or omissions, as those could slow down the processing time.

The next phase of the annuity purchase process is paying the required premiums. This may be a one-time, lump-sum payment or a series of payments. You’ll need to decide how you want to pay these, i.e. from a savings account, brokerage account or some other source. Keep in mind that withdrawing money from a brokerage account or a tax-advantaged account to purchase an annuity could have tax consequences.

Once the annuity is funded, you’ll start the free look period. This is a window of time in which you can review the annuity’s terms and decide whether you want to keep it. If you decide an annuity is not right for you within the free look period, you can get your money back without a penalty. But if you decide to surrender your annuity later, you may have to pay a surrender charge to cancel the contract.

Can You Buy Annuities Online?

More companies are offering the option to purchase annuities online. The process is similar to how to buy an annuity in person, in terms of:

Choosing the right annuity option
Naming the annuitant and beneficiary
Deciding how to fund the annuity

Instead of signing paperwork by hand, you’d sign electronically. This can help to streamline and speed up the process of purchasing an annuity.

Buying an annuity online can also yield some other advantages. You may be able to avoid certain fees, including the agent’s commission fee, if you’re working directly with the annuity company online. And there may be less sales pressure overall since you’re guiding yourself through the purchasing process rather than working with an agent.

Is an Annuity a Good Investment?

Whether an annuity is a good investment for you personally can depend on your financial needs and goals. (It has been argued that annuities are no more a genuine investment than any other insurance product is an investment.) However, if you’re looking for a form of guaranteed income for retirement then an annuity can provide that. You may use an annuity as a substitute for Social Security if you’d prefer to delay taking those benefits so you can increase your monthly benefit amount.

Likewise, if you’re married and want to make sure that your spouse would be provided for if something happens to you, an annuity can help you to do that. You could structure the annuity so that your spouse continues to receive payments for the remainder of their life.

On the other hand, it may not make sense to purchase an annuity if you don’t have the cash on hand to cover the premiums or you haven’t taken full advantage of other savings options yet. Maxing out your 401(k) or an individual retirement account (IRA) each year, for example, can yield some important tax benefits. If you have access to a health savings account (HSA), that’s another opportunity to save on a tax-advantaged basis.

The Bottom Line

Knowing how to buy an annuity is important if you’re trying to put together a strategy for creating future income. But it’s equally important to consider if buying an annuity is something that makes sense for you. Looking at the complete financial picture can help you to decide how likely you are to get your money’s worth if you decide to move forward with buying an annuity.

Retirement Planning Tips

Annuities can provide supplemental income in retirement but they represent just one part of the financial puzzle. Investing in a 401(k) at work, an IRA or opening a taxable brokerage account online can help you to round out your retirement plans. When considering any of these options, remember to factor in taxes and fees. Fund expense ratios and other investment fees can detract from your returns while it’s important to consider your asset location for managing tax liability.
Consider talking to your financial advisor about how to buy an annuity and whether it’s something you should consider. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.