5 Things to Know Before Purchasing an Annuity

If you are looking to purchase an annuity, either today or in the next few years, here are five things you should probably know. I'm Tyler, a former financial advisor and portfolio manager, and I create financial content for free to help you navigate your investment options.

1. Understand the Terms and Fees

Annuities can be a great product for you if you fully understand the terms, the fees, and the products themselves.

2. Knowledge Gaps Among Agents

Most insurance agents I know do not fully understand these terms, fees, or products. There are numerous types of annuities, and even the same type might vary drastically from one firm to another. If you've seen an annuity prospectus, you’ll know it’s about the length of a short novel—and it might as well be written in Hungarian.

3. Fees and Risk Management

To be clear, you are paying a fee to limit your risk. This is how insurance works. But that stability comes at a cost, and it is your responsibility to understand all 27,000 fees associated with annuities.

4. Costs of Single Premium Annuities

The true cost of a single premium annuity, which requires a massive upfront fee, surfaces if you suddenly fall ill and have a shorter life expectancy. This results in fewer payouts and could have used that premium money for medical expenses. Unless you pay for a beneficiary protection rider, your heirs will not see a dime of this money.

5. Limitations of Indexed Annuities

The true cost of indexed annuities, like Indexed Universal Life (IUL), which link your returns to the performance of an index such as the S&P 500, is that they limit your returns. Over the last decade, and yes, this is cherry-picked data, the general market has returned on average 15.7%. Not only are your gains capped in an indexed product, but you may not even receive 100% of that participation all the time because you have to pay a higher fee to participate more in the upside.

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