6 Questions to Ask Before You Buy an Annuity

Sam's List Editorial | 2026-08-04

6 Questions to Ask Before You Buy an Annuity An annuity is an insurance contract, not an investment account. That single distinction explains most of what confuses people about them, including why the fees are structured the way they are and why getting your money back early can cost you. Annuities are not automatically bad. Some do a job nothing else does as cleanly. But they are sold far more often than they are shopped, and the questions below are the ones that separate a contract doing real work from a contract doing commission work. Ask all six. Get the answers in writing. 1. What Problem Is This Contract Solving? The short answer: an annuity is worth considering when you need to convert a pile of money into income you cannot outlive. That is longevity risk, and pooling it with an insurer is a legitimate thing to buy. An income floor is the other defensible job. If your essential expenses exceed Social Security and any pension, reliable lifetime income for the gap can make the rest of the portfolio easier to invest sensibly, because you are no longer forced to sell into a bad market to buy groceries. What is usually not a good enough reason: "market protection." Downside protection inside an annuity is purchased with capped upside, credited-interest formulas, and fees. That may still be a trade you want, but price it as the trade it is rather than as free safety. If the salesperson cannot name the specific problem in one sentence, there may not be one. 2. How Is the Person Selling This Paid? Annuity compensation varies enormously and it is rarely volunteered. Commissions on some contracts can run into high single-digit percentages of the premium, paid by the insurer, which is why the product does not appear to cost you anything at purchase. Ask directly: what is your total compensation on this contract, in dollars, including any trail? Then ask the more useful follow-up: what would you recommend if you were paid a flat fee for advice instead? A fee-only advisor with no insurance license has no financial reason to steer you either way. That does not make them right, but it does make their answer a useful second data point. Sales compensation is not disqualifying. Hidden sales compensation is. 3. What Are the Total Annual Costs, Unbundled? Get a line-item list, not a summary. Depending on the contract type, the layers can include a mortality and expense charge, an administrative fee, the expense ratios of any underlying subaccounts, and a separate annual charge for every rider attached, including income and death benefit riders. Indexed contracts...

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