Before You Buy an Annuity, Ask These Questions

Buying an annuity is not simply a decision about earning interest or receiving retirement income. It is a decision about how you want a portion of your financial life to work when employment income becomes less certain.

That distinction matters because an annuity is an insurance contract designed to address long-term financial goals. Depending on the contract, it can provide tax-deferred growth, periodic income, death benefits, or other guarantees. Yet every feature comes with terms, costs, restrictions, and conditions that deserve careful attention.

Annuities have also become a significant part of the retirement conversation. LIMRA reported $105.4 billion in U.S. annuity sales during the first quarter of 2025, the sixth consecutive quarter with sales above $100 billion. Its research also found that only about half of pre-retirees believed they had enough guaranteed lifetime income to cover basic expenses.

That interest makes one question especially important:

Should an annuity be part of your retirement strategy at all?

Before you consider a product, ask yourself these questions.

#1. What Retirement Income Do You Actually Need?

Start with your expenses, not the annuity.

Estimate how much income you will need for housing, food, healthcare, transportation, taxes, insurance, travel, and other recurring expenses. Then identify the income sources you already expect to receive.

Social Security, pensions, investment income, employment income, and savings may already cover part of your needs. The purpose of an annuity should be evaluated against that existing foundation.

The Federal Reserve reported that 67% of U.S. adults in 2024 had assets specifically designated for retirement income, including tax-preferred retirement accounts and defined-benefit pensions.

The practical question is simple: What income gap, if any, are you trying to solve?

Guaranteed Income Should Have a Job

An annuity becomes easier to evaluate when you know what role you want it to play in your retirement income planning.

You might want to create predictable income for essential expenses. You might instead be interested in tax-deferred accumulation or protecting part of your retirement assets from certain market risks.

Those are different objectives. They can lead to different product considerations.

#2. How Long Can You Leave the Money Alone?

Annuities are generally long-term products. That makes your time horizon one of the most important questions to answer before purchasing.

Ask yourself when you expect to need the money and whether you could tolerate restrictions on withdrawals.

Many contracts impose annuity surrender charges during an initial period. Some allow limited withdrawals without surrender charges, but the amount and conditions vary by contract.

If you may need substantial cash soon, a long surrender period deserves particular scrutiny.

Liquidity Has Real Value

Imagine that you place a large portion of your savings into an annuity and later face an unexpected medical expense or major family obligation.

The contract may permit access to some money, but withdrawing more than the permitted amount could trigger charges or other contractual consequences.

Predictability can be valuable. So can annuity liquidity.

Your decision should account for both.

#3. What Is Your Tolerance for Investment Risk?

Different annuities address risk differently.

A fixed annuity may provide a stated interest rate for a specified period. A fixed indexed annuity may calculate interest credits using an external market index while applying contractual features such as caps, participation rates, or spreads.

Variable annuities generally expose contract value to investment performance through underlying investment options.

The important question is not which product sounds safest. It is which combination of risk and potential return fits your circumstances.

Investor.gov recommends understanding how an annuity’s investment performance works and considering how its risks, features, and fees fit your financial situation.

#4. What Assets Do You Already Own?

An annuity should not be considered in isolation.

Look at your entire financial picture. Include retirement accounts, taxable investments, cash reserves, real estate, pensions, Social Security, business interests, and other assets.

Your existing portfolio may already provide substantial diversification and income.

The Federal Reserve found that 61% of U.S. adults in 2024 had a tax-preferred retirement account, while 35% held stocks, bonds, ETFs, or mutual funds outside retirement accounts.

That matters because an annuity may complement your existing assets, but it can also create concentration in one type of financial contract.

Think in Terms of the Whole Retirement Plan

The better question is not, “Is this annuity good?”

Ask: “What does this annuity add that my existing assets do not already provide?”

That question shifts the decision from product selection to retirement strategy.

#5. What Will the Annuity Cost You?

Annuities can involve several types of costs.

Depending on the contract, you may encounter annuity fees and charges, surrender charges, administrative charges, rider fees, transaction expenses, or other costs. Some products may not present costs as a simple annual fee, instead reflecting them through contract economics or limits on potential returns.

You therefore need to understand the total economic cost.

Ask how much you pay, when you pay it, and what you receive in return.

If an optional income or death-benefit rider carries an additional charge, determine whether the benefit is actually valuable for your circumstances.

Investor.gov specifically recommends asking about upfront, surrender, ongoing, and implicit costs, along with limits on investment performance.

#6. How Will Your Money Be Taxed?

Annuity tax treatment can affect the real value of an annuity.

Annuities generally provide tax-deferred growth, meaning taxes on interest or investment gains are generally deferred until money is withdrawn or distributed under applicable rules. The precise treatment depends on how the annuity is owned and distributed.

The IRS explains that taxation can differ depending on whether payments are periodic or nonperiodic and whether the contract contains an after-tax investment basis.

That makes your tax situation an important part of the analysis.

An annuity should not be purchased simply because the phrase “tax deferred” sounds attractive.

Ask how the contract interacts with your existing retirement accounts and your broader tax strategy.

#7. What Happens to the Money When You Die?

Annuity death benefits and beneficiary provisions deserve attention before you sign.

Ask who receives the remaining value, how the death benefit is calculated, when beneficiaries receive it, and whether different payout choices affect the benefit.

Some annuities provide death benefits, but the structure varies considerably by contract. Investor.gov specifically recommends asking how the death benefit is calculated during both accumulation and payout phases and understanding potential tax consequences for beneficiaries.

The IRS also notes that beneficiaries can face specific tax rules when receiving pension or annuity benefits.

Your retirement plan should therefore consider not only how the annuity supports you, but also what happens afterward.

#8. How Strong Is the Insurance Company?

An annuity guarantee comes from the issuing insurance company.

That makes the insurer’s financial strength and claims-paying ability important considerations. Investor.gov explicitly warns that an insurer’s financial difficulties can affect its ability to fulfill contractual obligations.

Look beyond the product illustration.

Consider the insurer’s financial strength ratings, reputation, history, and ability to meet long-term obligations.

This does not mean that ratings eliminate risk. They provide another piece of information when evaluating the institution behind the contract.

#9. Do You Understand the Contract?

If you cannot explain how the annuity works in plain language, you probably need more information before buying it.

Read the annuity contract and disclosures. Ask what you do not understand. Pay attention to surrender periods, withdrawal provisions, interest-crediting methods, fees, guarantees, renewal provisions, riders, death benefits, and payout conditions.

Investor.gov recommends carefully reviewing the contract and asking questions about features, benefits, risks, and fees before purchase. It also notes that state law generally provides a limited “free look” period after receiving an annuity contract, although the duration varies.

Do not let an attractive illustration substitute for understanding.

#10. Is an Annuity Appropriate at All?

Because not every retirement need requires an annuity, this may be the most important question.

An annuity is not automatically the right answer simply because you want retirement income.

The right decision depends on your objectives, time horizon, liquidity needs, risk tolerance, tax circumstances, existing assets, and desired legacy outcomes.

The NAIC’s current annuity framework emphasizes that recommendations should address the consumer’s financial situation, insurance needs, and objectives. Its 2020 revisions to Model Regulation #275 incorporated a best-interest standard for annuity recommendations, including obligations concerning care, disclosure, conflicts, and documentation.

The evaluation principle reinforces a useful discipline: Start with your needs, then evaluate the product.

The Best Annuity Question Is Often the Simplest

Before you ask which annuity you should buy, think about what problem you are trying to solve.

Do you need predictable retirement income? More accumulation potential? Protection from certain market risks? A structured legacy benefit? Greater tax deferral? Or perhaps greater liquidity than an annuity can provide?

The answers matter more than the product’s marketing language.

A sound decision begins with your retirement plan, not with a sales illustration. Once your objectives are clear, you can compare contracts according to their guarantees, costs, restrictions, risks, and benefits.

That approach also leaves room for an important conclusion: Sometimes the most appropriate annuity decision is not buying one at all.

Educational and Financial-Information Notice

This article is designed to help you understand the questions that belong in an annuity decision, not to determine the answer for you. It does not recommend any particular annuity, insurer, strategy, or transaction. Contract terms, costs, guarantees, tax consequences, withdrawal rules, and beneficiary provisions differ among products and circumstances. Before acting, review the applicable documents and seek advice from appropriately licensed professionals who can evaluate your individual financial situation.