Questions to Ask Before Investing in an Annuity

Funding a comfortable retirement today requires more than relying on Social Security benefits. Annuities, with their promise of guaranteed revenue streams, appear to be attractive retirement investment vehicles.

So what is an annuity? In short, an annuity is an insurance investment that returns regularly scheduled payments.

To determine if annuities should be included in your retirement investing plan, pose these five key questions to your investment advisor.

Do My Circumstances Fit With the Benefits of an Annuity?

This question can really only be answered by someone with intimate knowledge of your financial situation and is fully aware of your retirement goals and needs.

How Does an Annuity Compare to my Other Retirement Investing Options?

To ensure that an annuity investment is right for you, compare it with other tax-deferred investment options, like 401ks and Investment Retirement Accounts (IRAs) and no-load mutual funds.

What are the Costs Associated with the Annuity?

Annuities can generate extremely high costs. If you purchase an annuity from an insurance agent, there will probably be a commission involved. There can also be high annual fees associated with annuities, especially variable annuities.

Most annuities include a surrender charge if money is withdrawn within the first years after investment. These surrender charges can run as high as 20%, but even more moderate rates usually run about 7%. This is in addition to the 10% early withdrawal penalty charged if you withdraw your investment before reaching age 59 ½.

As with any investment vehicle, rates and fees vary by product and provider.

What Payout Option is Right for You?

Discuss the following options with your financial advisor:

-- A period certain annuity provides a guaranteed payment for a predetermined period of time. Beneficiaries collect any unpaid payouts upon the death of the investor.

-- Lifetime payments guarantee payouts, either fixed or variable, for the life of the investor based on investment amount and life expectancy. No survivor benefits are paid when choosing this option.

-- A life with period certain benefit provides guaranteed payouts for the life of the investor as well as a guarantee of payments to a beneficiary if the investor dies before the period certain benefit amount is reached.

-- A joint and survivor annuity guarantees payouts for the investor's life and the life of the named beneficiary.

What is the Insurance Company's Credit Rating?

Any guarantee made on an annuity, including guaranteed payouts, is only as good as the insurance company behind it. Make sure you are investing in a sound company.