3 Key Components of an Annuity Purchase

A fixed annuity can offer many benefits, especially safety and security, in this very rocky economic downturn we are currently in. Although the annuity can offer these very enticing features, it can be somewhat of a complex product. No product is right in every situation and not all annuities have the specific benefits that are important to you. It is very important to find a financial advisor that is knowledgeable in all pats of the annuity. It is equally important that the advisor takes time to understand your unique situation so that an annuity can be identified that can best help you. There are at least 3 key areas to address as you examine whether an annuity can be beneficial to your financial situation.


Part of the application for an annuity product includes a suitability questionnaire. The suitability questionnaire details your financial picture. This includes looking at your emergency fund, your liquid investments, net worth and more. You and your advisor will take an in depth look at when you would expect to need the money from your annuity. You will look at what plans you have in place for expected future healthcare costs and other similar scenarios. Your financial advisor will also be required to give a detailed explanation of why they are recommending the product for you. The suitability portion of the application is checked by the insurance company to ensure that you are not being sold a product unnecessarily or that is not suitable for your financial future.


Annuities have a surrender period. The surrender period is a set period during which a financial penalty will be imposed for removing your funds. The reason for this is that the annuity company needs to have a certain amount of time to invest premium and let it grow in order to be able to guarantee the payouts for life. The surrender period time frame and penalty amounts will be detailed in the product illustration you review with your advisor before getting to the application; however, it will also be detailed again in the application. Typically, in a fixed annuity, the penalty for early withdrawal is waived at death of the admittance to a nursing home. Also, normally each year you have access to a certain percentage of the principal (This is after 10%) without being subject to any penalty. Since there are surrender penalties, you want to make sure you have enough cash available in case of an emergency. You want to be sure that you have a plan in place so that you will not need to access this money before the surrender period is up.

Risk Tolerance

Annuities provide safety and security. Your principal is never at risk of loss. Many retiree’s will want some of your money in accounts such as a fixed annuity, that provides complete principal protection. A portion of the overall allocation may also be put in more risky investments such as the stock market. Your overall risk tolerance is a measure of how much you are willing to have in each bucket. It is very important to discuss with your financial advisor your overall risk tolerance. This is a measure of how much you are willing to risk losing in a down market.

Consumers are leery of annuities because they have only worked with annuity salesmen. They haven’t spent time with a Financial Planner that is taking a holistic approach to their plan. Annuities are an important product for consumers to consider when building their retirement plans but the decision to purchase goes deeper than Annuities are actually very beneficial for retirement planning when suitability, surrender period and start date are all carefully reviewed from the beginning.    

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