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6 Steps to Buying an Annuity - Annuity Checklist

6 Steps to Buying an Annuity

Annuities are an investment product sold by financial institutions. The purpose of the annuity is to increase the value of invested funds to provide a steady income at a future date, usually after retirement. There are various steps in choosing the right annuity for your needs. There are also additional features you can add to an annuity to cover various contingencies. Buying an annuity is a serious matter and one that should be done with care to ensure your financial future.

1. Which type of annuity is best for you

Deferred Variable, Immediate Fixed, Immediate Variable?

With so many options available it is important to learn about the various types of annuities to choose the one that best suits your needs. This is the second step in purchasing an annuity. The first step is thinking about your financial situation and goals and discovering how an annuity helps to meet those goals.

After deciding that an annuity is right for your retirement plan, consider an immediate or deferred annuity or a fixed or a variable annuity. With an immediate annuity, you invest a large lump sum payment and receive regular monthly payments almost immediately. With a deferred annuity the owner makes regular contributions over a period of many years to increase the value of the annuity. At retirement age, the owner gets regular income payments. It is called a deferred because taxes are deferred until the owner starts to receive the income.

With both immediate and deferred annuities, you decide in advance whether you want the annuity to be a fixed or variable annuity. A fixed annuity offers the same payout each month. A variable annuity offers a varied amount each month. A fixed annuity offers stability and lower risk. A variable annuity has more risk, but also more potential for higher monthly payments.

2. Which Death Benefit riders would you like to include in your annuity contract?

Most annuities offer death benefits, but you have to choose a beneficiary and name him in the contract. The beneficiary is the person or organization that receives the annuity payments after the death of the annuity owner. The amount of the death benefit varies depending on many factors. In most cases the financial institution setting up the annuity guarantees a minimum death benefit. The least amount a beneficiary receives is the total amount of all the invested money the annuity owner put into the annuity.

3. Consider Guaranteed Minimum Benefit riders

A rider is an extra option an annuity owner adds to the annuity. These guaranteed minimums cost money, but are useful in some situations. The minimum helps to safeguard the money in the account for either the annuity owner or the beneficiary. Not every annuity owner needs a rider but they are available if an owner wants peace of mind. A few examples of riders are guaranteed lifetime withdrawal benefits (GLWB); guaranteed minimum withdrawal benefits (GMWB); guaranteed minimum accumulation benefit (GMAB); guaranteed minimum death benefit (GMDB); and guaranteed minimum income benefit (GMIB). It is important to understand how these riders work before purchasing one. For more information on riders, please read the related article Guaranteed Minimums.


4. Choosing a broker

When choosing a broker or a financial adviser to set up your annuity, you must exercise caution and common sense. When choosing a broker or other financial expert, you need to investigate their backgrounds and their credentials. Any broker you are consider should have years of experience in setting up an annuity. Ask the broker for references and actually call up each reference. After you have narrowed down your list, meet each broker in person for an interview. A good broker is one who takes the time to answer all your questions and to explain all the fees and charges you will have to pay in setting up and maintaining the annuity. Your final choice should be an experienced professional who you feel comfortable with.

5. Choosing an annuity issuer

The annuity issuer is also a very important choice. The smart thing to do is to only work with a reputable issuer with an excellent credit rating to ensure the safety of your money. Another good idea is to find an annuity issuer with a long history of successful operations and good customer service. A good company to deal with also has a strong track record of earnings growth. You want the issuer to grow the funds in your annuity just as well.

6. Review and Sign the Contract.

The final step in purchasing an annuity is signing the contract. But before signing any papers, it is important for you to read them carefully and make certain you understand what is involved. Once the annuity owner signs the contract he needs to keep a copy of the documents in a safe place.

Purchasing an annuity takes time and consideration. There are annuities and riders for every financial goal. The trick is doing the research to find the best annuity for your financial needs and those of your beneficiaries. Then you must do research to find the best broker and annuity issuer to create the annuity that gives you what you want. Setting up the right type of annuity takes time and effort, but it is worth it in the long run.