4 Key Questions for Annuity Salespeople

Don’t buy an annuity without finding out these important facts.

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Annuities are popular as retirement investments. They are particularly popular with the people who sell them because of the commissions they receive. Annuities come in different types and with dozens of different features. Thus, buying an annuity is similar to purchasing a new car. You have a salesperson working very hard to sell you a complicated and expensive product with lots of bells and whistles. This is the time for you to ask a lot of questions, just like you would do on the car lot. Here are some suggested questions.

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1. How much will I actually be paying for this annuity? There are so many different fees associated with many annuities that even the salespeople don’t always understand them. Don’t let that deter you. Ask for a written list of the types and amounts of each upfront and recurring fee that will be paid from your investment each year. Start with what the salesperson will receive and go from there. If you are unsure of what a fee is for, ask. It may be a fee for a feature that you don’t need or want. Also ask if any of the fees can increase during the life of the product and by how much.

2. How much income am I guaranteed to receive from this annuity? You want to know what the guaranteed (not projected) return on your investment will be. Find out how much you will get and how long the payments will last. Also ask if the income paid to you is inflation adjusted. If it is not, ask if this feature is available and at what additional cost. If you are considering either a variable annuity with a living benefit or a life income annuity, compare the guaranteed payouts carefully.

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3. What happens if I need more money? One of the drawbacks to most annuities is that you may have little or no access to the money invested beyond the income that is promised to you. If you need more money in retirement to replace your roof or buy a new car, can you withdraw funds from your annuity account? If so, what are the surrender charges and how will this affect your future income stream.

4. What happens when I die? Annuities can be extremely costly if you die well before your life expectancy. In that case, you can lose your entire account value and the income payments may stop as well. Ask if that is the case and, if so, what are the alternatives? Many annuity products can provide for continued payments to your survivors or a partial return of your account value if you die early in the product life.

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A final word of advice: When you are receiving answers to your questions, insist that the salesperson point out and highlight in the sales literature and policy language where these answers can be found. Before making a purchase decision, read the highlighted language to be sure that it is consistent with what you are told. If it is not, find another sales person.

Mark Patterson is an engineer, patent attorney, baby boomer, and author of The Failsafe Retirement System. He blogs on matters of personal finance and retirement planning at Tough Money Love and Go To Retirement.