You buy an annuity by working with an insurance company or financial professional, handing over a lump sum or series of payments, and receiving income in return

Starting an annuity means contacting an insurance company or a financial advisor who sells annuities, deciding what type fits your situation, and signing a contract. The insurance company then holds your money and begins paying you according to the schedule you chose — when ready, later, or over your lifetime. The whole process typically takes two to six weeks from first contact to your first payment, though some when ready annuities can start within days.

The steps are straightforward, but the choice of which annuity to buy is not. You need to understand what you are paying for, how long you will receive payments, and what happens to your money if you die or need it back. This guide walks you through the actual process and the decisions you face at each stage.

Key Takeaways

  • You can start an annuity through an insurance company directly, a financial advisor, or a bank, and you will need to provide income and asset information before approval.
  • when ready annuities begin paying you within months; deferred annuities let your money grow for years before payments start.
  • The amount you receive each month depends on your age, the size of your payment, current interest rates, and how long you want the payments to last.
  • Annuities have surrender periods (usually five to ten years) during which withdrawing your money early costs you a penalty, so you should only buy with money you do not plan to touch.
  • You will receive a prospectus or product brochure before you sign; read the section on fees, surrender charges, and what happens if you die.

Where to buy an annuity and what information you will need

You can purchase an annuity from three main sources: directly from an insurance company, through a financial advisor or broker, or through a bank. Insurance companies include names like Fidelity, Vanguard, Prudential, and Equitable. Financial advisors may work for a brokerage firm or independently. Banks often partner with insurance companies to sell annuities to their customers.

Before you can buy, the company will ask for basic financial information: your age, income, existing savings, and sometimes your health history (especially for when ready annuities, where your life expectancy affects the payout). You will also need to decide how much money you want to put into the annuity. This can be a lump sum — say, $100,000 from a retirement account or inheritance — or a series of payments over time.

If you are buying through an advisor or broker, they will discuss your goals and recommend a product. If you are buying directly from an insurance company, you can call their sales line or visit their website. Either way, you will receive written materials explaining the annuity before you commit.

when ready annuities versus deferred annuities: which timeline fits you

An when ready annuity starts paying you within one to three months of purchase. You hand over your money, and the insurance company begins sending you monthly, quarterly, or annual payments right away. This is the choice if you need income now — for instance, if you have just retired and want to convert a lump sum into a paycheck.

A deferred annuity lets your money sit and grow for a set period — five years, ten years, or longer — before payments begin. During that growth period, you may earn interest or investment returns depending on the type. You choose when the payout phase starts. This works if you are not yet retired or do not need the income when ready but want to lock in a may provide payment stream for later.

The monthly payment you receive is higher with an when ready annuity than with a deferred one of the same size, because the insurance company has less time to invest your money before it starts paying you back. The trade-off is that with a deferred annuity, you have time to grow your balance before withdrawals begin.

How the insurance company calculates your monthly payment

Your monthly payment depends on four main factors: how much money you put in, your age when payments start, current interest rates, and how long you want the payments to last. A 65-year-old who buys a $200,000 when ready annuity will receive a different monthly amount than a 75-year-old with the same $200,000, because the 75-year-old has fewer years left to live, so the insurance company pays out more per month.

Interest rates matter significantly. When rates are high, insurance companies can earn more on the money you give them, so they pay you more each month. When rates are low, your monthly payment is lower. This is why the same annuity purchased in different years produces different income.

You also choose how long you want payments to continue. A life annuity pays you for as long as you live, no matter how long that is. A term-certain annuity pays for a fixed number of years — say, 20 years — and then stops, even if you are still alive. A joint-and-survivor annuity continues paying your spouse or beneficiary after you die. Each choice changes your monthly amount. Life annuities pay the most per month because the insurance company is betting you will not live very long; term-certain annuities pay less because the company knows exactly how long it will pay.

The surrender period and why you cannot easily get your money back

When you buy an annuity, you enter a surrender period — usually five to ten years, sometimes longer — during which the insurance company penalizes you for withdrawing money early. If you need to pull out cash before the surrender period ends, you pay a surrender charge, which is a percentage of your withdrawal. A 7% surrender charge on a $100,000 annuity means you lose $7,000 if you withdraw the full amount in year one.

This is why you should only buy an annuity with money you do not plan to touch. The surrender period protects the insurance company's investment in you and keeps your monthly payment stable. After the surrender period ends, you can usually withdraw money without penalty, though you may still owe income tax on any gains.

Some annuities include a "free withdrawal" clause that lets you take out a small percentage — often 10% per year — without penalty. Read the contract to see if yours does. If you think you might need access to your money, ask about this before you buy.

What happens after you sign: approval, funding, and your first payment

Once you have decided on an annuity and signed the contract, the insurance company processes your process. This usually takes one to two weeks. They may request additional documents — proof of income, bank statements, or a medical exam for certain types of when ready annuities.

After approval, you fund the annuity by transferring money from your bank account, rolling over funds from a retirement account like an IRA or 401(k), or sending a check. If you are rolling over retirement account money, the insurance company will coordinate with your current account holder to move the funds directly, which avoids taxes and penalties.

Once the money arrives, the insurance company sets your payment schedule. For an when ready annuity, your first payment typically arrives within 30 to 60 days. For a deferred annuity, your money begins growing, and you will receive a statement showing your balance. When the payout date arrives, payments begin automatically on the schedule you chose.

Reading the prospectus and spotting the fees you will pay

Before you sign, the insurance company must give you a prospectus or product brochure. This document lists everything: how much you pay, what you receive, fees, surrender charges, and what happens if you die. It is dense and written in legal language, but three sections matter most.

First, look for the surrender charge schedule. This shows what percentage you lose if you withdraw money in year one, year two, and so on. Second, find the annual fees or mortality and expense charges. These are ongoing costs, usually 0.5% to 1.5% per year, that the insurance company deducts from your balance. Third, check the death benefit section. This explains what your beneficiary receives if you die during the surrender period or payout phase.

If you are buying through an advisor, ask whether they earn a commission on the sale and how much. Commissions are typically 3% to 10% of your purchase price and come from the insurance company, not directly from you, but they affect the product you are offered. Some advisors are fiduciaries, meaning they are legally required to recommend products in your best interest; others are not.

Common mistakes to avoid when starting an annuity

The biggest mistake is buying an annuity with money you might need soon. Once you sign, your money is locked in for the surrender period. If an emergency happens and you withdraw early, the penalty can be steep. Only use money you are confident you will not touch for at least five to ten years.

A second mistake is not comparing products from multiple insurance companies. Payouts and fees vary. Spend time getting quotes from at least two or three insurers before deciding. Online quote tools from companies like Fidelity, Vanguard, and when ready Annuities can show you what different companies offer for the same amount of money.

A third mistake is choosing a payout option without thinking through what happens to your money after you die. If you choose a life annuity with no survivor benefit, your beneficiary receives nothing when you pass away — the insurance company keeps the remainder. If that matters to you, choose a joint-and-survivor option or a life annuity with a may provide period (which pays your beneficiary if you die within, say, ten years).

Frequently Asked Questions

How much money do I need to start an annuity?

Minimum purchase amounts vary by insurance company and product type, but typically range from $10,000 to $25,000. Some companies have no minimum if you are rolling over retirement account funds. Call the insurance company or ask your advisor what the minimum is for the specific annuity you are considering.

Can I change my mind after I buy an annuity?

Most states allow a "free look" period of 10 to 30 days after purchase, during which you can cancel and get your money back with no penalty. After that period ends, you are bound by the surrender period. Check your contract for the exact free look window in your state.

What if I need money before the surrender period ends?

You can withdraw, but you will pay a surrender charge — usually a percentage of what you take out. Some annuities let you withdraw up to 10% per year without penalty. If you face a genuine hardship, contact the insurance company; some will waive or reduce the penalty for medical emergencies or long-term care needs, though this is not may provide.

Do I owe taxes on the money I put into an annuity?

If you buy an annuity with after-tax money from a savings account, you do not owe taxes on the amount you contributed — only on the earnings when you withdraw. If you roll over money from a traditional IRA or 401(k), the entire withdrawal is taxable when you receive it. Consult a tax professional about your specific situation.

What if the insurance company goes out of business?

Each state has a guaranty fund that protects annuity holders if an insurance company fails. Coverage limits vary by state but typically protect up to $250,000 per person per company. This means your principal and may provide payments are protected, though it can take time to receive them while the fund settles the company's affairs.