In the NASDAQ article, “Thinking of Buying an Annuity?,” Josh Stelzer gives an interesting perspective on annuity terms through the eyes of someone who has sold them. He really stresses the importance of reading the entire prospectus associated with your specific annuity. This document, detailing the terms and conditions of your annuity, can be long and seemingly boring. But it is crucial to understand all of these details before signing on the dotted line. You may have a 5 year fixed annuity or a variable annuity with a much longer term, so spending the hours reading your prospectus is always worthwhile.
Pay close attention to the fees, any surrender charges, and the motivation of your advisor in selling you this annuity. While the fees will be in the prospectus, it is valuable to ask your advisor to write all the fees out for you in plain terms. There are administration fees, charges for mortality and expense terms, expenses related to the underlying mutual funds, and fees associated with any additional riders on your annuity. These fees can add up, but keep in mind that you are usually getting guaranteed income payments for life with your annuity purchase so they can most definitely be worth it.
Take note of your surrender charges. Tapping into an annuity product before the surrender period is up could cost you 7-10% of your annuity, so make sure you have an emergency fund separate from the income you receive from your annuity. While these charges can add up, annuities are not meant to be withdrawn early and offer a multitude of benefits for leaving your money until the surrender period has expired. Make sure lastly to see what commission your annuity seller is making off of your purchase. With annuity rates low, you want to be sure that the product you are purchasing is best for your unique situation and not for the product’s commission.
