How you buy an annuity depends on the type and who sells it
You buy an annuity by working with an insurance company, a financial advisor, or a broker who is licensed to sell them. The process is simpler than buying a home but more involved than opening a savings account — you'll need to provide financial information, choose the type of annuity that fits your situation, decide how much to invest, and sign a contract that locks in the terms.
The seller matters. Insurance companies sell annuities directly through their websites or phone lines. Financial advisors and brokers sell annuities from multiple companies and earn a commission on the sale. Banks sometimes offer annuities through their investment divisions. Each route has different costs and different levels of guidance, but the end result is the same: you own a contract with an insurance company.
You can buy an annuity with a lump sum of money (called a single premium) or through regular contributions over time (called flexible premium). Most people use a lump sum — often money from a retirement account, an inheritance, or savings they've set aside for retirement income.
Key Takeaways
- You can buy directly from an insurance company, through a financial advisor or broker, or sometimes through a bank's investment division.
- The purchase process requires you to provide financial and health information, choose an annuity type, set the contract terms, and sign the contract.
- Commissions paid to advisors and brokers are built into the annuity price, so comparing costs across different sellers is important.
- Most annuities have a surrender period of 5 to 10 years during which withdrawals beyond a small annual amount trigger a penalty.
- You can fund an annuity with a lump sum or through regular contributions, depending on the type you choose.
Buying directly from an insurance company
Insurance companies like Fidelity, Vanguard, Schwab, Allianz, and Equitable sell annuities directly to consumers without a middleman. You visit their website or call their annuity department, answer questions about your age, health, income, and how much you want to invest, and receive a quote.
The advantage is transparency on cost. When you buy direct, you see the insurance company's pricing without a broker's commission layered on top. The disadvantage is that you are making the decision alone — the company will explain the contract terms, but they won't advise you on whether an annuity is right for your situation or which type suits you best.
The timeline is usually one to two weeks from quote to contract signing. You'll need to provide proof of funds (a bank statement showing you have the money) and may need to answer health questions if the annuity includes a death benefit or lifetime income rider. Some companies offer when ready annuities with faster underwriting — sometimes as little as a few days.
Buying through a financial advisor or broker
A financial advisor or broker can show you annuities from multiple insurance companies and help you compare them. They earn a commission from the insurance company when you buy, typically 3 to 10 percent of the amount you invest, depending on the annuity type. That commission is built into the price you pay — you don't write a separate check for it.
The advantage is guidance. A good advisor will ask about your retirement income goals, how much risk you can tolerate, and what happens to your money if you die early. They'll explain the surrender period, the withdrawal rules, and the riders available. The disadvantage is that the advisor has a financial incentive to sell you an annuity, so you need to verify they are acting in your interest.
To find an advisor, ask for referrals from friends or family, search the Financial Industry Regulatory Authority (FINRA) BrokerCheck database by name or firm, or contact your state's securities regulator. Make sure the person is licensed to sell insurance products — a Series 7 or Series 65 license, or an insurance license, depending on the state.
What information you'll need to provide
Whether you buy direct or through an advisor, the insurance company will ask for personal and financial information before issuing a contract. Have ready your date of birth, Social Security number, current income, and the amount you want to invest. Some companies also ask about your health history, especially if the annuity includes a death benefit or a may provide income rider.
You'll also need to decide on the contract terms: how long the surrender period lasts (usually 5, 7, or 10 years), whether you want a death benefit, whether you want a rider that guarantees a minimum income, and whether you want the income to start when ready or at a future date. These choices affect the price and the monthly or annual payment you'll receive.
If you're funding the annuity with money from a retirement account like an IRA or 401(k), you may need to provide documentation that the withdrawal is allowed under the plan rules. Some plans require the account custodian's approval before the money can be moved to an annuity.
Comparing costs across different sellers
Annuity costs vary by company, by type, and by the riders you add. A fixed annuity from one company might pay 4.5 percent annually, while another pays 4.2 percent. A variable annuity with the same underlying investments might charge 0.5 percent in annual fees at one firm and 0.8 percent at another. These differences compound over decades.
To compare, get quotes from at least three sources: one insurance company directly, one advisor or broker, and one online annuity marketplace like when ready Annuities or Cannex. Write down the annuity type, the amount you're investing, the payment amount or rate, the surrender period, and any riders. Then compare the net result — what you'll actually receive each month or year.
Be aware that an advisor's quote may include a higher commission than another advisor's quote for the same annuity. Ask directly: "What commission does your firm earn on this sale?" The answer is public information, and a transparent advisor will tell you.
The underwriting and approval process
After you submit your information, the insurance company's underwriting department reviews it. For when ready annuities and fixed annuities, underwriting is usually quick — one to five business days. For variable annuities and annuities with complex riders, it can take one to three weeks.
During underwriting, the company verifies your identity, checks that you have the funds to pay the premium, and reviews your health information if you've provided it. If everything is in order, you'll receive a contract to sign. You have a right to review it before signing — take time to read the surrender period, the withdrawal rules, and any fees or charges listed.
Once you sign and return the contract, the company has a free-look period (usually 10 to 30 days, depending on your state) during which you can cancel without penalty and get your money back. After that period ends, you're locked into the contract for the surrender period.
Funding the annuity and when payments begin
You fund the annuity by transferring money from your bank account, brokerage account, or retirement account to the insurance company. The company will provide wire instructions or a check-deposit address. Most companies require the funds to arrive within 30 days of the contract date, though some allow longer.
Once the company receives the funds, the annuity is active. If you bought an when ready annuity, payments usually begin within 30 to 60 days. If you bought a deferred annuity (one that grows before you take income), the money sits in the annuity account and grows according to the contract terms — either at a fixed rate, a variable rate tied to market performance, or an indexed rate tied to a stock market index.
You can set up payments to go to your bank account monthly, quarterly, or annually. The company will ask for your banking information and will continue payments for as long as the contract specifies — either for your lifetime, for a set number of years, or until the account is depleted.
What happens if you need to withdraw money early
Most annuities have a surrender period — typically 5 to 10 years — during which you can withdraw a small amount each year (often 10 percent) without penalty. Any withdrawal beyond that amount triggers a surrender charge, which is a percentage of the amount withdrawn. A 7 percent surrender charge on a $10,000 withdrawal costs you $700.
The surrender charge decreases each year. In a 10-year surrender period, the charge might be 10 percent in year one, 9 percent in year two, and so on, reaching zero in year 11. After the surrender period ends, you can withdraw as much as you want without penalty, though you may owe income tax on the gains.
Some annuities include a waiver of surrender charges if you need the money due to a serious illness, long-term care, or financial hardship. Ask about this when you're comparing annuities — it can make a real difference if your circumstances change.
Frequently Asked Questions
Can I buy an annuity inside a retirement account like an IRA?
Yes, you can buy an annuity inside an IRA, a 401(k), or another retirement account. The money grows tax-deferred, just as it would in any other IRA investment. However, you still owe income tax on the withdrawals when you take them, and you still face the annuity's surrender charges if you withdraw early. Some financial advisors caution against buying an annuity inside a retirement account because the tax deferral is redundant — the account already provides it.
What's the difference between buying an annuity and buying an investment?
An annuity is a contract with an insurance company, not an investment you own outright. You don't own shares or bonds; you own the right to receive payments according to the contract terms. If you die, the insurance company keeps any remaining balance unless you chose a death benefit rider. With a regular investment, your heirs inherit what's left. This is why annuities are best for income you need to last your lifetime, not for wealth you want to pass on.
Do I need a financial advisor to buy an annuity?
No, you can buy directly from an insurance company without an advisor. However, an advisor can help you understand whether an annuity fits your retirement plan, which type suits your situation, and how the costs compare across companies. If you choose to work with an advisor, make sure they are licensed and ask them to explain their compensation and any conflicts of interest.
How long does it take from decision to first payment?
For an when ready annuity bought direct from an insurance company, the timeline is usually two to four weeks from quote to first payment. If you buy through an advisor, add a few days for the advisor to gather quotes and explain options. If you're funding from a retirement account, add time for the account custodian to process the withdrawal. Deferred annuities follow the same timeline to purchase, but payments don't begin until you request them, which could be years later.
What if I change my mind after I buy?
Most states give you a free-look period of 10 to 30 days after you sign the contract. During this time, you can cancel and get your full premium back, no questions asked. After the free-look period ends, you're bound by the surrender period. If you withdraw money before the surrender period ends, you'll pay a surrender charge. After the surrender period expires, you can withdraw or cancel without penalty, though you'll owe income tax on any gains.