Frequently Asked Questions About How to Evaluate Annuities

What do the ratings for annuity providers indicate?

Ratings indicate the relative financial strength of insurance companies. The two largest rating agencies, A.M. Best and Standard & Poor's, use their own individual criteria to grade insurance providers. Because the federal government does not guarantee annuity products, prospective buyers should use these ratings to gauge risk.

How much income can I receive every month with an annuity?

The amount you will receive every month depends on a number of factors: your age, gender, state of residence, how much money you invest in the annuity and what different insurance companies are quoting for their particular annuity products. (Different annuity insurance companies will quote different prices for the same product with the same features. It is important to compare annuity companies.)

Other factors that will determine how much income you receive include the type of annuity you specify (fixed annuity, variable annuity, tax deferred annuity, indexed annuity, guaranteed variable annuity, etc...) and the features you apply to that annuity (asset protection, guaranteed principal protection, etc...)

Can I alter the amount of my cash for annuity payments after purchase?

Once you've purchased your annuity, it's generally not possible to alter or accelerate payments. You can purchase more income within your plan at a later date, but you can't elect to lower your payments for a refund of principal.

Are there any age requirements for buying an annuity?

Most plans require that you are younger than 80 years old to purchase an annuity.

Is a medical exam required when I purchase an annuity?

No. Medical exams are not usually required to purchase an annuity.

What percentage of my assets should I use to buy an annuity?

That depends on your particular financial situation. We recommend that you speak with an independent retirement financial planner or other trusted advisor when you are evaluating an annuity.

Some retirement financial planners recommend that people reserve at least 40 percent of their retirement assets for unforeseen circumstances. Because most annuities are designed to provide steady income over time, they are not ideally suited to cover large unplanned expenses.

How are annuities different from life insurance?

Life insurance pays your beneficiaries a substantial cash benefit should you die during the term of the policy -- essentially protecting them against the risk that you might die prematurely, placing them in financial jeopardy. Benefits from life insurance policies are designed to replace "lost" income; they usually provide significantly more than you've paid into the policy.

Annuities are completely different -- they are designed to provide you with income during retirement.

If I have an emergency can I terminate the plan?

In most cases, you cannot terminate your annuity once you've signed up. Certain outstanding circumstances may, however, enable you to cancel and recover some of your investment.

If I die prior to recovering my original investment, what will happen to my payments?

Some annuities offer premium protection as a standard feature. With this feature, you or your beneficiary will continue to receive scheduled periodic payments until the cumulative payments equal your net investment -- even if you die beforehand.

In states where a premium tax is levied on annuities, your net investment is your premium, less the state premium tax. Some plans also offer an option that provides for a specified number of guaranteed payments to be made to your beneficiary in the event of your death. You can elect to opt for higher annuity payments each month by forgoing these options, but there's no guarantee that you will recover all or part of your original investment.

What is the minimum investment to purchase an annuity?

Generally, it is recommended that you have at least $30,000 to put toward an annuity. However, each individual's situation is unique.

Can I buy inflation protection?

Reputable annuity providers offer automatic cost-of-living-adjustment (COLA) as a standard feature. COLA will protect you against inflation.

Can I do a 1035 exchange on my annuity?

No. Because annuities carry no cash value, performing a 1035 exchange to other products is not permitted. However, you can use a 1035 exchange to transfer funds into an annuity.

Can I buy a Lifetime Income Plan with qualified funds?

Yes. Funds from 401(k), 403(b) and other qualified retirement plans can be used to purchase an annuity.

What is the exclusion ratio, and how does it work?

If you buy an annuity with non-qualified after-tax dollars, the Exclusion Ratio is the percentage of your lifetime income payments that you will not have to treat as income (for federal income tax purposes).

Can an annuity cover both myself and my spouse?

You can have your paycheck last for your lifetime alone or until both you and your spouse die.

Can I specify how my beneficiaries will receive money after I die?

You can set up your annuity so that if you die, your beneficiaries will receive payments for a particular period of time. Or, if your annuity contract has funds remaining after you die, your beneficiaries can receive them as a lump sum.

How do I decide how much I want to commit to an annuity?

The larger your initial premium, the larger your paychecks will be. Ideally you can purchase an annuity that will provide you with enough guaranteed income to cover your expenses in retirement.