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5 Things to Ask Your Annuity Agent

One of the biggest mistakes that annuity buyers make is to fail to ask the right questions of the person selling the annuity. While you should expect an annuity agent to be knowledgeable about annuity products, they may not always present the information in way that addresses your specific concerns. It’s their responsibility to match your needs with the right annuity product and then explain how it addresses your needs. But, it is your responsibility to fully understand your needs and equip yourself with some basic knowledge of how annuity products work and how they differ, so you can confirm the choice of products.

Don’t be afraid to walk into a meeting with your annuity agent with a list of questions on a notepad and the expectation that you will have them all answered to your satisfaction. This is not only essential in order to get the information you need for your decision, it is an excellent test to determine how credible and forthcoming the agent is. Any hesitation in the answer, or attempt to deflect the question, should be considered as a red flag. Don’t hesitate to let the agent know that you don’t feel as though your question was answered.
There are dozens of possible questions you could ask, and you will want to compile your own list. Here are five questions that should always be asked of an annuity agent:

What is your background and experience with annuities?

Annuities are complex products, and there are many different types of annuities all designed to work differently to meet a variety of financial needs. It truly requires a person with an in depth knowledge of annuity products and a fair amount of experience in matching annuity products with peoples’ needs. Choosing annuity options such as investment accounts, guaranteed options, income options, etc., are crucially important decisions and most investors need professional guidance in making them.

Annuities are sold by many different types of financial professionals: bank reps, stockbrokers, life insurance agents, financial planners, all who might specialize in financial products other than annuities. It is important to work with someone who specializes in annuities, preferable someone who has obtained some professional designations such as a CFP or CLU.

How many annuity products do you offer?

Annuity reps who only offer one or two annuity brands aren’t in a position to find the very best match for your financial needs. It would be important to work with someone who isn’t limited to selling a proprietary product. Agents that offer a broad range of annuities from different providers can focus on finding the one that best meets your needs, and they are better positioned to find the most competitive product. Independent insurance brokers or financial advisors tend to contract with many annuity providers. It would be important to know that they work with the more highly rated providers.

How do you go about choosing the right annuity for me?

Annuity sales people will sell you a product that suits them – either because it’s the only one they have to sell, or it pays them the best. A true financial professional, will spend as much time as is needed to fully assess your needs, preferences, concerns, and risk tolerance. They will want to know how your assets are currently allocated, your qualified plan contribution level, and your tax situation. Any annuity agent who doesn’t want to uncover this information from you before recommending a product, is just an annuity sales person. Avoid them. If you find the right financial professional, you should be able to entrust him or her with your information and know that they can’t properly make a recommendation without it.

Will you provide me with a complete breakdown of my expenses, including your commissions?

There are two things you are looking for with this question: How much will your annuity cost you now and over time, and how your agent gets compensated. First, if an agent is not willing or able to do this, then walk away. Secondly, you want to see the depth in which your agent is willing to go to fully explain all of your costs and how it will impact your investment over time. Annuity sales people try to avoid the expense confrontation, and they are uncomfortable explaining how they get paid. A financial professional won’t hesitate, and will be able to provide you with a detailed explanation of the annuity costs and where the money comes from to compensate him.

If I have questions or concerns about my annuity, who will I contact?

Truth be told, if your annuity is issued by a top notch provider, with a solid customer service protocol, you’re probably better off talking directly with customer service reps of the provider. But, what you want to hear from your annuity agent is that he or she is ready, able and willing to ensure that your needs are met. It is especially important to have an engaged and proactive agent to work with during the annuity application and transaction process. Also, if you require changes or access to funds, it’s your annuity agent that should be able to light a fire under the provider to make sure you receive the most responsive service.

Don’t worry, your annuity agent was well compensated. You probably didn’t pay the commission out of your deposit or account value, as it is usually paid by the insurance company from other fees it receives from your annuity. Regardless, you can demand and expect that your annuity agent will be there to act on your behalf.

Indexed Annuities Vs Mutual Funds

At first glance, it may seem that indexed annuities and mutual funds are the same, but they do have differences that need to be considered before any investment is made. Mutual funds are professionally managed pools of money that are taken from other investors. The mutual fund manager has the ability to use those funds and buy stocks or other investments that grow the funds. Mutual funds are strictly regulated by the Securities and Exchange Commission.

Anyone is able to invest or purchase stock in a mutual fund. That growth, depending on how it is invested can be taxes immediately. An investor might be able to secure a dividend payment every month or elect to have the dividend reinvested in the mutual fund. An investor would be able to purchase those funds through a retirement-like account such as a Roth IRA or IRA where that investment would be deferred until the withdrawal is made.

When investors enter into a contract for purchasing an indexed annuity in exchange for a future payment amount, they agree to future distribution that is yet to be determined by the market’s performance. After the “accumulation” period occurs the “distribution phase” begins. This is where the insurance company who issued the annuity will make installment payments or a “lump sum” payment to the investor. Gains during the accumulations period are protected from taxation on a yearly basis up until the investor makes his first withdrawal, making this an exceptional favorite among many investors.

Since the rate of return for the investor relies on the performance of the index market, it is possible for the purchaser of the annuity to get less in return than what he may have paid into the annuity. In addition, index annuities are cashed out before maturity or a specified date then significant fees and penalties will apply. A mutual fund, purchased on its own as a standard investment would not be penalized the standard 10% early withdraw penalty. The investor is still obligated to pay taxes on the growth of that mutual fund investment.

When it comes to annuities, certain contract features of the indexed annuity may determine that the investment may or may not be registered with the SEC. Generally, for SEC registered securities, for example, the insurance company must provide a minimum rate of return for the investor. Of course this may not always be guaranteed due to the built in nature of predictable market fluctuations and the type of investment. To be sure most mutual funds with equity stock vested in them are regulated by the SEC. Nevertheless, index annuities provide a great option for investors who would like to diversify their portfolio and peg their earning directly to the performance of the market with a particular investment vehicle. In addition, with index annuities, there may also be ceilings, or the maximum rate of interest which can be earned by the investor.

Though both mutual funds and fixed annuities provide stable ways to grow their money, they may be used for different purposes. Index annuities are a great option for the long-term investor who would hedge a percentage of their future retirement income stream based on the market’s historical trend for increased growth. In either case, the investor should read the prospectus and investigate the health of the fund or the company issuing the annuity.

Life Insurance and Annuities

It is not often that the topics of life insurance and annuities are brought up in the same discussion, primarily because they serve two very distinct purposes. Although they are both products of life insurance companies, life insurance policies are protection against dying too soon, and annuities are protection against living to long. However, when utilized in the context of a complete financial plan built on a solid foundation of family and financial security, the two work hand-in-hand to protect the complete circle of life.

Life Insurance as a Capital Creator

The basic premise of life insurance is that most people, throughout their financial lives, have obligations and expenses that need to be paid, both now and in the future. In the earlier stages of life, these are funded through cash flow and accumulated savings. But, when a person dies too soon, these obligations and expenses are usually left unpaid because not enough time has passed to be able to accumulate the capital needed. For instance, an outstanding debt, say of $10,000, is paid down through monthly payments. When a person dies, the outstanding balance is left unpaid.

Or, if a family is saving for college, and has only accumulated a portion of the required funds when one of the primary breadwinners dies, the future obligation is unfunded, and the likelihood of continued savings towards to goal is diminished.
Life insurance becomes the source of the much needed capital to fulfill these obligations and pay down debt. Essentially, it replaces the income earning capacity of a breadwinner and ensures that the family can continue to maintain the lifestyle to which it is accustomed, which is why it is important to accurately assess the financial needs of the family in order to have enough protection.

Life insurance is used as a capital creator in any instance where an untimely death could leave a family, a business or an estate in a precarious financial position. If a fledgling business were to lose a key person or partner, it could suffer a devastating financial loss. Life insurance provides the capital a business needs to maintain continuity while searching for a replacement or rebuilding client goodwill. When a person dies and leaves a sizable estate, life insurance provides the liquidity the heirs need to pay estate settlement costs and taxes so that assets don’t have to be forced into liquidation.

Annuities as a Capital Protector

In the later stages of life, after savings and assets have been accumulated, annuities serve to protect this capital so that it can be preserved for future use. The unique characteristics of annuities combine to create a shield of protection that allows the capital to accumulate while guaranteeing its full return to investors. Additionally, annuities will protect the distribution of the capital to ensure that it will fully fund a lifetime income stream without interruption or loss of value.

Annuities are also issued by life insurance companies as a contract much like life insurance policies, except that they insure individuals against the possibility of living too long and outliving their income sources. When a person transfers a portion of his assets to an annuity, it can be left to accumulate, or it can be converted to income (annuitized). In either case, the principal balance is guaranteed as is the minimum rate of interest.* Annuities provide an extra measure of capital preservation by allowing the earnings inside to accumulate without being taxed currently, although they will be taxed when they are eventually received.

Once an annuity begins to make periodic payments, the principal balance is committed, irrevocably, to the life insurer who then commits to making the payments until all of the principal and interest earnings have been fully distributed – over a specific time period, or for the life of the individual.

The payments, which are fixed (except in the case of variable annuities in which payment amounts can fluctuate based on market fluctuations), are based on the amount of the original principal balance, the project earnings from interest, and the number of payment periods. Individuals, who rely upon their assets for their income, often use annuity income to inject stability and predictability into their overall income portfolio that may also consist of more risk oriented assets.

Businesses use annuities when they need to fund installment payments or an income stream as part of a compensation arrangement with a key person, or as a funding vehicle in a buy-out situation.

Life Insurers as Circle of Life Protectors

Life insurance and annuities are both issued by life insurance companies. Both provide a form of protection that entails the risk of mortality for which the cost is actuarially calculated by the life insurer. In both cases, those costs are borne by the individual in the form of a premium. In both cases, the life insurer must calculate the amount of reserves it needs to have on hand to be able to pay all future obligations, either as death benefit proceeds or as annuity income payments (or surrenders).

The financial strength and stability of life insurers is paramount to the ultimate security of life insurance and annuity policyholders. The safety track record of life insurance companies dates back two hundred years during which there has not been one instance of a failure to fulfill an obligation to a policyholder. While there have been some cases of life insurer insolvency, the number is miniscule as compared to the banking industry which has recorded hundreds of failure in just the last few years. In most of the life insurer insolvencies, the assets and obligations of the insurers were assumed by a larger or financially stronger life insurance company.


In peoples’ financial life, the need to create capital and preserve it is essential to meeting their most important obligations and providing the financial security all families need. No other financial instrument can create capital as quickly or as inexpensively as life insurance and no other financial product can preserve capital and guarantee its complete distribution over a lifetime like annuities. For most people a complete financial plan will include both if their current and future financial security is a priority.
*In some variable annuity contracts the principal and minimum rate guarantees are options that require additional premiums.

Pros and Cons of Annuities

As an investment product, annuities can meet a wide range of needs for investors of all stripes, but as is the case with any investment product, they may not be suitable for all investors. Investors need to weigh the pros and cons of any investment product in the context of their own particular needs and priorities. Only then can it be determined whether an investment is best suited, over any other alternative to any one type of investor.

The features and characteristics of annuities are unique enough to be able to evaluate them in light of most peoples’ circumstances. Here, we consider the pros and cons of annuities for people who meet the basic criteria as a potential annuity investor: high tax bracket, concerned with market volatility, concerned with safety of principal, long term time horizon, sufficient liquidity in other investments or savings, and fully utilized qualified retirement plans.

The Pros

Deferred taxes on earnings

The earnings in annuity accounts are given the same tax treatment as qualified retirement plans in that they are allowed to accumulate without being taxed currently. Although they will be taxed when they are withdrawn, earnings can compound more quickly during the accumulation phase of the annuity. Investors who pay taxes at the higher income tax rates will benefit more than those who are taxed at the lower rates.

Above market rates

Fixed annuity rates are determined by the issuing life insurer based on the returns they generate out of their own investment account. Because they invest in a range of fixed income securities, they have the ability to generate yields that are higher than current market interest rates. Historically, annuity rates have always been higher than the rates available on other fixed yield investments.

Minimum growth rates

Most annuities offer some sort of initial rate guarantee for a period of time. While the rate guarantee will eventually expire, and, the new rates can potentially be adjusted downward, they can’t fall below the minimum rate guarantee.

Capital preservation

The primary objective of the life insurance company is to preserve capital. They accomplish this by investing their assets conservatively and constantly monitoring their liquid reserves to ensure that there is always enough capital to cover all of its obligations. Additionally, most of the states provide protection in the form of guaranty fund that will cover annuity deposits. The coverage varies from state to state and ranges from $100,000 to $500,000.


Annuities are meant to be long term investments, however, they do include a withdrawal provision that allows for access to account values. They limit the withdrawals to 10% of the account value during the surrender period, over which they will charge a surrender fee. At the end of the surrender period, which range between five and 12 years, the funds are accessible without limit.

Income for life

Investors who are concerned with the possibility of outliving their income use annuities to secure an income for life. Essentially, annuities are insurance against the possibility of living to long.

The Cons

Tax Consequences

Annuity withdrawals are taxed as ordinary income. This could be a disadvantage if you find yourself in a high tax bracket in retirement.

IRS penalties

The IRS treats annuities similarly to qualified retirement plans, such as IRAs, in so far as early withdrawals are concerned. For any withdrawal made before the age of 59 ½, the IRS may levy a penalty of 10% of the withdrawal.

Surrender period

The withdrawal provision in annuities allows for access to funds, but if the withdrawal is made within the surrender period that exceeds 10% of the account value in a given year, a fee is charged. The fees are initially high, in the range of 6 to 12%, and then gradually drop each year of the surrender period until they disappear all together.


Annuities do have costs and expenses associated with them, and, in some instances, they can mount up pretty quickly. Because they are a form of insurance, there are mortality charges, and since they are issued as contracts, they do require some paper pushing that result in administrative fees. Fees are charged each year as a percent of the account value, ranging from .75% to 1.25%. Variable annuities have investment management fees, similar to those charged in mutual funds. These fees can range from .5% to 1.3% depending on the type of investments that are being managed.


For some annuity investors, the cons could possibly offset the pros to the extent in which they achieve no real advantage from investing in annuities. For example, if surrender fees are paid on withdrawals made during the surrender period, they could completely offset the advantages of tax deferral. Or, annuities held for a shorter period of time, may not allow the tax deferral of above market interest rates to accumulate to the point of offsetting the expenses of the contract.

For investors who can commit to a longer term time frame, from 12 to 20 years, the pros of annuities should always outweigh the cons, which is why it so important to evaluate annuities in light of your total financial situation. For the right investor, annuities can perform like no other investment.