by Laury Adams

            Shop for an annuity?  We all understand the concept of shopping, but how many of us apply it to annuities? 

            If we need a new car, we shop for it by getting information on various models, comparing the features that are most important to us, scouting for the best price, and selecting the dealer who can best serve us. 

            We often spend more money and less time purchasing an annuity than buying a car, yet that decision has a far greater affect on our financial security.

            My clients are very bright professional people, but during the 28 years I have been in business, I have not had any who understood the annuity they bought.  Annuities are complex investments.   There are many different types and they all have their own unique features.  “Indexed annuities are sometimes referred to as ‘snowflake’ products because no two are alike,” said Timothy Pfiefer with Milliman USA Inc. of Seattle when he was quoted in Investment News 6/27/05.

            “Comparison shopping” is difficult, but we still must do this when we consider adding annuities to our investment portfolios.  The following questions will help you gather information.

  1. If you are considering an annuity, do you know what it is?


An annuity is an insurance company product, sold in the form of a contract that guarantees the annuitant a fixed or variable payment at a future date. 

Equity Index Annuities invest annuitants’ money in various securities.  Because they are insurance products they are regulated by state insurance regulators, not by the SEC.  Rules governing stock and fund sales require brokers to have a security license.  They must recommend appropriate investments and provide clients with a prospectus and a balanced assessment of risk and potential returns.  These federal rules do not apply to sales of insurance products.



  1. What is your purpose of buying an annuity?


If the purpose is to make tax deferred investments remember:

Although tax is initially deferred on investment profits, the money withdrawn from an annuity is taxed at one’s ordinary income tax rate.  If you buy a variable annuity with investments in mutual funds, you lose the advantage of capital gains tax of 10 or 15%. 

If you have many years before retirement, there are other ways to get tax deferral investments:  IRAs, employment tax-savings plans, etc.  It is neither necessary nor wise to buy an annuity within an IRA. 

If the purpose is to assure income for your lifetime, remember:
You may already have one source of income that acts like an annuity.  If you have Social Security or a pension plan,  your Social Security payments act as a type of annuity.  Perhaps your other investments need to be invested for long-term conservative growth to keep up with inflation.

When a person is in good health with a chance of outliving life expectancy projections and savings are limited, fixed income annuities may give peace of mind by having a guaranteed lifetime monthly amount.  But once you annuitize and start receiving monthly income, you lose control of your money.  There is no longer a lump sum available for unexpected medical expense or other purposes that you may choose. 

   3.Do you know how the sales person is being compensated for the sale of the annuity?  Be sure to ask!


“Sales commissions on annuities are lucrative for brokers, giving them added incentive to push them.  Commissions average 7.6% and can climb above 13%.” Wall St. Journal 10/15/05

  4.Has the sales person explained the company’s holding period for the annuity?  For most annuities, you are locked into a seven year time period, or charged a hefty surrender fee. 


  1. Has the sales person explained the surrender fee associated with the annuity? On a statement, it is common to see a surrender value that is much lower than the cash value.  That difference is the surrender fee you pay for terminating the contract early.  Annuities typically have surrender fees of up to 7% that gradually decline during the seven-year holding period.  Fidelity and Vanguard offer annuities with no holding period and no surrender fee.
  1. What are the TOTAL expenses for the annuity?


Fees on annuities are very difficult to determine.  Carefully read the company materials and ask questions.
What is the annual insurance company fee for the annuity?
What is the expense ratio for mutual funds in a variable annuity?

    1. What if I have to get out before age 59 1/2?
    • Annuitizing over life, withdrawing over 5 years


  1. Have you considered investments other than annuities that might better meet your financial needs? 
  1. If you are sure an annuity is your best investment, have you compared annuities and talked to different financial professionals who are selling them?  


  1. If you have an EXISTING annuity, is the it eligible for transfer to a
  1. If you intend to purchase a NEW Annuity:

            What is the rating of the insurance company selling the annuity?
How will you pay?

  1. What are the choices for investing the money within the annuity?
    • Is it a fixed (like a savings account with interest fixed—usually for a 12 mo period) or variable annuity (sub accounts)?
    • What are the sub accounts in the variable annuities? What type?
    • If indexed, what is the index? What assumptions are being made regarding the  return on variable annuity.  Best case/worst cast scenario?
    •  How have these performed?  Annual records of past performance?
    • What are the expenses on the sub accounts?





 What dollar amount could I walk away with
after 1 year?            $________
                        after five years?      $________
                        after eight years?    $________

  1. How does this annuity fit into my total financial plan? 


  1. Is this annuity the best way to reach my financial goal considering
    • All the investment alternatives and
    • Tax consequences?



The purpose of this web site is to give you other web sites that will provide you with the best information regarding a matter you are researching. 

The following web sites give a lot of detailed information about annuities. 
You must determine the “pros” and “cons” for your personal financial situation. 



Copyright 2008 Laury Adams