How you buy an annuity depends on the type and who sells it

You buy an annuity by contacting an insurance company, a financial advisor, or a bank that sells annuities, and then completing an process and underwriting process. The exact steps vary based on whether you want a fixed annuity (where the insurance company guarantees a set payment), a variable annuity (where your payment depends on investment performance), or an when ready annuity (where you start receiving payments right away). Most annuities require you to hand over a lump sum of money upfront — called the premium — in exchange for regular income later.

The process typically takes two to four weeks from initial contact to funding, though some when ready annuities can move faster. You will need to provide personal information, answer health questions, and review the contract terms before money changes hands.

Key Takeaways

  • You can buy an annuity directly from an insurance company, through a financial advisor, or via a bank, and each route has different fees and service levels.
  • The process requires personal information, income verification, and health details, and the insurance company will underwrite your request before approval.
  • You must decide between a fixed annuity (may provide payments), variable annuity (investment-linked payments), or when ready annuity (payments start right away), each with different costs and risks.
  • Read the contract carefully before signing, because annuities often have surrender charges if you withdraw money early, and some have high fees that reduce your income.

Where to buy an annuity

You have three main routes: buy directly from an insurance company, work with a financial advisor, or go through a bank. Buying directly from an insurance company — by visiting their website or calling their sales line — usually means lower fees because there is no middleman, but you do your own research and comparison shopping. Insurance companies that sell annuities include Fidelity, Vanguard, Schwab, Equitable, and Allianz, among many others.

A financial advisor can help you compare products and understand the contract, but they earn a commission on the sale, which means the cost to you is higher. Banks sometimes offer annuities alongside other products, though their selection is usually smaller than what an insurance company or advisor can show you. If you work with an advisor, ask upfront what they earn from the sale so you know whether they have a reason to push a particular product.

The process and underwriting process

Once you choose a product and a seller, you will fill out an process with your name, date of birth, Social Security number, income, and employment history. The insurance company will ask about your health — some annuities require a medical exam, while others just ask questions on the form. They use this information to calculate how long they expect you to live, which affects how much they will pay you each month.

The underwriting process usually takes one to three weeks. The insurance company verifies your income, checks your credit, and may order a medical report. Once they approve you, they will send you the contract to review and sign. You then send back the signed contract along with your premium payment — usually by check, wire transfer, or bank draft. Some companies let you fund the annuity electronically through your bank account.

Choosing between fixed, variable, and when ready annuities

A fixed annuity pays you the same amount every month for life or for a set number of years, no matter what happens in the stock market. The insurance company takes the investment risk. These are simpler to understand and safer, but the payment is usually lower than what you might earn if markets perform well. Fixed annuities often have surrender charges — penalties if you withdraw more than a small amount in the first five to ten years.

A variable annuity lets you choose how your premium is invested — usually in mutual funds — and your monthly payment goes up or down based on how those investments perform. Variable annuities have higher fees than fixed annuities because the insurance company has to manage the investment accounts. They also come with more risk: if markets fall, your income falls too. Variable annuities also typically have surrender charges.

An when ready annuity is designed for people who want to start receiving payments right away, usually within 30 days of purchase. You hand over a lump sum and the insurance company begins paying you monthly income for life or a set period. when ready annuities have lower fees and no surrender charges because there is no investment management involved. They are straightforward but offer no flexibility — once you buy one, you cannot get your money back.

What documents and information you will need

Have your Social Security number, driver's license or passport, and recent tax returns or pay stubs ready. The insurance company will ask for proof of income, especially if you are retired and living on Social Security or investment income. If you are buying the annuity with money from a retirement account like an IRA or 401(k), you will need to provide information about that account and may need to work with your current account custodian to arrange the transfer.

If you are married, your spouse may need to sign consent forms, depending on the type of annuity and your state's laws. Some annuities offer survivor benefits — meaning your spouse or heirs receive payments after you die — and those require additional paperwork. Read any documents about survivor options carefully, because they affect how much you receive each month.

Understanding fees and surrender charges

Annuities come with several types of costs. Surrender charges are penalties you pay if you withdraw more than a small amount (usually 10 percent per year) during the first five to ten years. These charges start high — sometimes 7 or 8 percent of your withdrawal — and decrease each year. After the surrender period ends, you can usually withdraw money without penalty, though some annuities limit how much you can take out annually.

Variable annuities charge mortality and expense fees (usually 1 to 1.5 percent per year) and investment management fees (typically 0.5 to 2 percent per year). Fixed annuities have lower ongoing fees but may charge a one-time fee when you buy. Some annuities offer riders — add-ons that provide extra benefits like a may provide income floor or long-term care coverage — and these cost extra, usually 0.5 to 1.5 percent per year. Ask the seller to show you all fees in writing before you sign.

What happens after you buy

Once your annuity is funded, the insurance company will send you a policy document that explains your payment schedule, any restrictions on withdrawals, and what happens if you die. Keep this document in a safe place. Your payments will begin on the date stated in the contract — when ready for when ready annuities, or at a future date you chose for deferred annuities.

You will receive payments by check, direct deposit, or electronic transfer, depending on what you chose during the process. If you need to make changes — like updating your address or changing how you receive payments — contact the insurance company's customer service line. Some changes are free; others may have fees or require you to restart the surrender period.

Frequently Asked Questions

Can I buy an annuity with money from my 401(k) or IRA?

Yes. You can roll over money from a 401(k) or traditional IRA into an annuity without paying taxes on the transfer, as long as you move the money directly from one account to the other. This is called a direct rollover. If you take the money out yourself first, you will owe income tax on it. Roth IRA money can also be rolled into an annuity, but the tax treatment is different — talk to a tax professional before you do this.

What if I change my mind after I buy an annuity?

Most states have a "free look" period — usually 10 to 30 days — during which you can return the annuity and get your money back with no penalty. After that period ends, you can still withdraw your money, but you will owe a surrender charge. The charge decreases each year and eventually goes away, but in the early years it can be substantial. Read the contract to see exactly when the surrender period ends.

Do I need a financial advisor to buy an annuity?

No. You can buy directly from an insurance company's website or by phone. However, annuity contracts are complex, and an advisor can help you understand the terms, compare products, and decide whether an annuity makes sense for your situation. If you work with an advisor, ask what they earn from the sale so you know whether they have a financial incentive to recommend one product over another.

What if the insurance company goes out of business?

Each state has a guaranty fund that protects annuity holders if an insurance company fails. The amount of protection varies by state but is typically at least $250,000 per person per company. Before you buy, you can check the financial strength of an insurance company through rating agencies like A.M. Best, Moody's, or Standard & Poor's. Stick with companies that have high ratings.

Can I buy an annuity for someone else?

You can buy an annuity for a spouse or dependent, but the person receiving the payments must consent to the purchase and sign the contract. You cannot buy an annuity for a stranger or someone who does not know about it. If you want to leave money to heirs, you can add a survivor benefit to your annuity, which means payments continue to your beneficiary after you die.