Annuities can range from very simple to extremely complicated. It's not uncommon for a variable annuity prospectus to have over 700 pages! So how do you cut through all the contract language and get to the actual nuts and bolts?
Well, there is no universal formula. Unfortunately, the most useful source will likely be the brochure or prospectus that came with your contract. The issuer's website may also provide some pertinent information.
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But the reality is even after digesting all of the printed and digital material provided by the issuing company, you may still feel like you're in the dark. We've crafted what we think are some critical questions to ask your financial professional to help you get a clear understanding of your annuity:
What class of annuity are we considering? There are many different types of annuities and they each have their own risk/volatility profiles. And, of course, with different risk comes different returns and methods of crediting investment gains.
How much direct compensation do you get by my purchasing the annuity? Most annuities will pay a broker a large commission. You have to decide for yourself if that presents a conflict of interest.
Is any of my lump sum account value subject to market loss? Many variable annuities have protection against loss only if you give up control of the money and decide to take an income stream. It's important to know how market volatility can affect your account values.
Can I get a written statement that spells out ALL of the charges in the annuity? Many times, added features called riders carry extra expenses. Also, in variable annuities, total charges can be difficult to calculate because fees are layered.
What are the ways I can get out of the contract? Most annuities don't allow you to terminate the contract and get your funds back without paying a penalty during the first 7-10 years. These penalties are called "surrender charges" and they can be significant. It goes without saying that you must be sure the annuity fits your goals before making the purchase.
Starting with these 5 questions will make it much easier for you to get a sense for whether or not the annuity will be a good fit in your portfolio.
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