You buy an annuity directly from an insurance company, usually through a financial advisor or broker

An annuity is a contract you purchase from an insurance company. You give them a lump sum of money (or agree to make payments over time), and in return they promise to pay you a stream of income — either when ready, later in retirement, or both. You do not explore for an annuity the way you would a government benefit. Instead, you shop for one, compare options, and buy it like you would any other financial product.

The process typically takes two to four weeks from the time you decide to buy until the contract is funded and payments begin. Most people work with a financial advisor, insurance agent, or broker who helps them choose which annuity fits their situation. You can also contact insurance companies directly, though most still require you to work through a licensed representative to complete the sale.

The main steps are: decide what type of annuity you need, get quotes from multiple insurers, review the contract terms, sign the paperwork, and fund the annuity with your money. Each step involves real decisions about how much income you want, when you want it to start, and what happens to your money if you die.

Key Takeaways

  • You purchase an annuity from an insurance company, not from a government agency, and you need a lump sum of money or the ability to make regular payments to buy one.
  • Most annuity purchases happen through a financial advisor, insurance broker, or agent who is licensed to sell insurance products in your state.
  • The type of annuity you choose — when ready, deferred, fixed, or variable — determines when payments start and how much they will be.
  • You will need to provide personal and financial information, pass a basic underwriting review, and sign a contract before the annuity is funded.
  • Annuity contracts are complex and often include fees, surrender charges, and conditions that affect how much money you actually receive.

Decide what type of annuity matches your situation

Before you contact anyone, you need to know what you are looking for. The main division is between when ready annuities and deferred annuities. An when ready annuity starts paying you within a year of purchase — often within 30 to 90 days. You give the insurance company a lump sum, and they begin sending you monthly or annual payments right away. This is the choice if you are already retired or about to be, and you want may provide income now.

A deferred annuity is money you invest now that grows over time, and you do not take payments until later — sometimes years or decades later. You might buy a deferred annuity in your 50s and not touch it until you are 75. During the growth phase, your money either stays in a fixed account earning a set interest rate, or it goes into investment accounts where the value can go up or down. When you finally start taking payments, the amount depends on how much your money grew.

Within each type, you also choose between fixed and variable. A fixed annuity pays you a set amount each month — the insurance company guarantees it, and it does not change. A variable annuity's payment amount depends on how the underlying investments perform, so it can go up or down. Fixed annuities are simpler and safer; variable annuities offer more growth potential but more risk.

Get quotes from multiple insurance companies

Once you know what type of annuity you want, contact at least three insurance companies or brokers to get quotes. The same annuity type can pay very different amounts depending on the insurer, current interest rates, your age, and your health. A quote shows you the monthly payment amount (for an when ready annuity) or the projected value at a future date (for a deferred annuity), along with the fees and terms.

You can request quotes directly from major annuity providers like Fidelity, Vanguard, Principal, Equitable, or Nationwide. You can also work with an independent insurance broker who represents multiple companies and can shop around for you. Some brokers charge a fee; others earn a commission from the insurance company. Ask upfront how they are paid, because that affects whether they have a reason to steer you toward a particular product.

When you compare quotes, look at the monthly payment amount, the fees (which may include surrender charges if you want to withdraw money early), and any riders or add-ons you are paying for. A rider is an extra feature — for example, a may provide that your payments will increase with inflation, or a may provide that your heirs will receive a minimum amount if you die early. Each rider costs money and reduces your payment.

Provide personal and financial information

To get a real quote, the insurance company needs to know about you. You will provide your date of birth, health history, current income, and how much money you have to invest. For an when ready annuity, your age is the biggest factor in your payment amount — the older you are, the higher your monthly payment, because the insurance company expects to pay you for fewer years.

Some insurers also ask health questions. If you have a serious illness or a short life expectancy, some companies will offer you a higher monthly payment (because they expect to pay you for fewer years). This is called a medical underwriting or impaired life annuity. You are not required to disclose health information if you do not want to, but if you do, it can increase your income.

The insurance company will also verify your income and assets to make sure you can afford the purchase and are not being pressured into it. This is a regulatory requirement, not a judgment about whether you are worthy. They are checking that you understand what you are buying and that it makes financial sense for your situation.

Review the contract and understand the terms

Before you sign, you will receive a detailed contract called a prospectus (for variable annuities) or a product brochure and contract (for fixed annuities). This document is long and dense, but it contains critical information: the exact payment amount, when payments start, what happens if you die, what happens if you need to withdraw money early, and all fees and charges.

Pay special attention to surrender charges. These are penalties you pay if you withdraw money from a deferred annuity before a certain date — often 5 to 10 years after purchase. If you surrender the annuity early, you might lose 5 to 10 percent of your money. Some annuities have no surrender charges, but they may have other fees instead. There is no free product; the question is which fees and restrictions you can live with.

Also check the payout option. You can usually choose to receive payments for your lifetime only (higher monthly amount, but payments stop when you die), or for your lifetime plus a may provide period (lower monthly amount, but your heirs receive payments if you die within that period). These choices permanently affect your income, so understand them before you sign.

Sign the paperwork and fund the annuity

Once you have chosen an annuity and reviewed the contract, you will sign the process and contract. You may do this in person, by mail, or electronically, depending on the company and your broker. The company will ask you to sign a statement saying you understand the product, the fees, and the terms. This is a legal requirement.

After you sign, you fund the annuity by transferring money from your bank account, brokerage account, or another source. If you are using money from a retirement account like an IRA or 401(k), there are special rules about how much you can move and whether you owe taxes. A financial advisor or the insurance company can walk you through those rules, but you may also want to consult a tax professional.

Once the money is received and processed, the insurance company will issue your annuity contract. For an when ready annuity, your first payment usually arrives within 30 to 90 days. For a deferred annuity, your money begins growing according to the terms you chose, and you will receive statements showing the value.

Understand what you are paying in fees

Annuities are not free. The insurance company makes money by taking a cut of your investment, and you pay for that in several ways. Mortality and expense fees (often 0.5 to 1.5 percent per year) cover the cost of the insurance may provide and the company's overhead. Investment management fees (often 0.5 to 2 percent per year) explore if your money is invested in funds. Rider fees (often 0.25 to 1 percent per year) explore if you add extra features like inflation protection or a death benefit.

These fees are usually taken directly from your account each year, so you do not see a bill — they just reduce the value of your annuity or the amount of your payment. Over time, fees can significantly reduce how much money you end up with. This is why comparing quotes from multiple companies matters: a 0.5 percent difference in annual fees might not sound like much, but over 20 years it can add up to tens of thousands of dollars.

Fixed annuities typically have lower fees than variable annuities, because there is less to manage. when ready annuities have no ongoing fees after you buy them — you just receive your payment each month. Deferred annuities, especially variable ones, can have substantial ongoing fees that reduce your growth.

Know what happens if you change your mind

Most states require insurance companies to give you a free look period — usually 10 to 30 days after you receive your contract — during which you can cancel and get your money back with no penalty. This is your chance to review the contract at home, have a lawyer or advisor look it over, and back out if you have second thoughts. After the free look period ends, you are locked in, and early withdrawal penalties explore.

If you are using money from a retirement account to buy the annuity, the rules are different. You may owe income taxes on the withdrawal, and if you are under 59½, you may owe an additional 10 percent penalty. These taxes and penalties are separate from any surrender charges the annuity itself might have. Before you move retirement money into an annuity, understand the tax consequences.

Frequently Asked Questions

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

Yes. You can roll money from a 401(k) or traditional IRA into an annuity without owing taxes on the transfer itself, as long as you move it directly from the retirement account to the annuity. If you withdraw the money first and then buy the annuity, you will owe income taxes and possibly a 10 percent early withdrawal penalty if you are under 59½. Ask your retirement plan administrator or a tax professional about the direct rollover process.

What if I need to access my money before the annuity starts paying?

For a deferred annuity, you can usually withdraw money, but you will pay a surrender charge if you are still in the surrender period (often 5 to 10 years). The charge is a percentage of your withdrawal, typically 5 to 10 percent. Some annuities allow you to withdraw a small amount each year without a penalty. For an when ready annuity, you generally cannot get your money back — that is the trade-off for may provide income.

Do I need a financial advisor to buy an annuity?

No, but most people use one. You can contact insurance companies directly and buy an annuity on your own. However, an advisor or broker can help you compare options, understand the contract, and make sure the annuity fits your overall financial plan. If you work with an advisor, ask how they are paid — whether they earn a commission from the insurance company or charge you a fee.

What happens to my annuity if the insurance company goes out of business?

Each state has a guaranty fund that protects annuity holders if an insurance company fails. The protection limit varies by state but is typically $250,000 per person per company. Before you buy, you can check the financial strength rating of the insurance company through agencies like A.M. Best or Moody's. Stronger companies are less likely to fail.

Can I change my mind after I have owned an annuity for a few years?

It depends on the type and the terms. If you are still in the surrender period, you can withdraw your money but will pay a surrender charge. After the surrender period ends, you can usually withdraw without a penalty, though you may owe taxes on any gains. For an when ready annuity, you cannot change your mind — the payments continue for life as agreed. If you want to exit an annuity early, talk to the insurance company about your options.