Skip to main content

3 Key Components of an Annuity Purchase

By March 19, 2020March 26th, 2020Annuities, Financial Services
Annuitiy Purchase

A fixed annuity can offer many benefits in this very rocky economic downturn we are currently in. They offer safety and security. Annuities offer very enticing features but can be somewhat of a complex product. No product is right in every situation. Not all annuities have the specific benefits that are important to you. It is very important to find a financial advisor that is knowledgeable in all parts of the annuity. It is equally important that the advisor takes time to understand your unique situation to identify the annuity best for you.

There are at least 3 key areas to address as you examine whether an annuity can be beneficial to your financial situation.


The application for an annuity product includes a suitability questionnaire. The suitability questionnaire details your financial picture. The suitability questionnaire looks at your emergency fund, your liquid investments, net worth and more. You and your advisor will take an in depth look at when you would expect to need the money from your annuity. You will look at what plans you have in place for expected future healthcare costs and other similar scenarios. Your financial advisor will also be required to give a detailed explanation of why they are recommending the product for you. The suitability portion of the application is checked by the insurance company to ensure that you are not being sold a product unnecessarily or that is not suitable for your financial future.


Annuities have a surrender period. The surrender period is a set period during which a financial penalty will be imposed for removing your funds. This is because the annuity company needs to have time to invest premium and let it grow in order to be able to guarantee the payouts for life. The surrender period time frame and penalty amounts will be detailed in the product illustration you review with your advisor. It will also be detailed again in the application. Typically, in a fixed annuity, the penalty for early withdrawal is waived at death or the admittance to a nursing home. Also, each year you normally have access to a certain percentage of the principal without being subject to any penalty. This is often 10%. You want to make sure you have enough cash available in case of an emergency since there are surrender penalties. You also want to be sure that you have a plan in place so that you will not need to access this money before the surrender period is up.

Risk Tolerance

Annuities provide safety and security. Your principal is never at risk of loss. Many retiree’s will want some of their money in accounts such as a fixed annuity, that provides complete principal protection. A portion of the overall allocation may also be put in more risky investments such as the stock market. Your overall risk tolerance is a measure of how much you are willing to have in each bucket. It is very important to discuss with your financial advisor your overall risk tolerance. This is a measure of how much you are willing to risk losing in a down market.


Consumers are leery of annuities because they have only worked with annuity salesmen. They haven’t spent time with a Financial Planner that is taking a holistic approach to their plan. Annuities are an important product for consumers to consider when building their retirement plans.  Annuities can be very beneficial for retirement planning when suitability, surrender period and start date are all carefully reviewed from the beginning.