Before You Sign an Annuity, Check the Fine Print

A recommendation from a financial adviser to buy an annuity often arrives at a nervous moment, when stock prices are swinging and savers are looking for something steadier. That timing is understandable, but it is also when a product built around guarantees can be sold harder than it should be. Before deciding whether an annuity belongs in your plan, learn which kind you are being offered, because the main types carry very different risks.

A fixed annuity pays a set interest rate for a set period, somewhat like a certificate of deposit issued by an insurer. A fixed indexed annuity ties returns to a market index but usually caps how much of the gain you receive, and it may exclude dividends. A variable annuity invests in sub-accounts that rise and fall with the market, and it typically adds mortality, expense and rider charges that accumulate over the years. Ask which type is proposed and what each year will cost you.

The most consequential terms tend to sit in the fine print. Surrender charges can lock up your money for several years, with penalties that start high and shrink over time. Withdrawals taken before age 59½ may also face a 10 percent federal tax on earnings. Gains are taxed as ordinary income rather than at the lower capital gains rate. Ask for the full surrender schedule, the withdrawal rules, and the cap, participation rate or spread that determines your credited return, along with whether the insurer can change those terms later.

This article cannot speak to the current rate environment, and any figures quoted in a sales pitch should be checked directly against the contract and the insurer's current published rates. Also look at the insurer's financial strength ratings from agencies such as A.M. Best. State guaranty associations back annuity obligations if an insurer fails, but only up to limits that vary by state.

Compensation deserves a direct question. Many annuities are sold by commissioned agents, and the commission can amount to a meaningful share of the premium. Ask whether your adviser is acting as a fiduciary for this recommendation, how they are paid, and what they would earn if you chose an alternative such as a bond ladder, a CD, or a low-cost index fund paired with a cash reserve. A fee-only planner can offer a second opinion without a sales incentive.

Most contracts include a free-look period, commonly 10 to 30 days depending on the state, during which you can cancel for a full refund. Use that window. Before signing, write down the job the annuity is meant to do, such as guaranteed lifetime income or setting aside money you will not need for a decade, and confirm the product actually does that job. If the answer stays vague, the annuity is probably not the right move yet.