Ten questions to ask before you buy an annuity
An annuity can be a useful tool or an expensive mistake. Often the difference is whether these questions were asked before signing.
Following Seas Retirement · Reviewed October 5, 2026 · General education, not personal advice
An annuity is a contract with an insurance company, usually a long one. Before you agree to it, you should know what it costs, how long your money is committed, what is guaranteed and by whom, and how the person offering it is paid.
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First, what an annuity is
It's a contract with an insurance company. You give the company money, and the contract says what you get back and when. Some annuities are built for growth, some for income, and some for both.
There are several kinds: fixed, fixed indexed, variable and income annuities. They work very differently from one another, so the first step is knowing which kind is in front of you.
The ten questions
A licensed agent should be able to answer every one of these plainly, and show you where it's written in the contract.
- What problem is this meant to solve for me? If the answer isn't specific to your situation, keep asking.
- How long is the surrender period? Most annuities charge you for taking out more than a set amount in the early years. Ask how many years, and what the charge is in each one.
- How much can I take out each year without a charge? Many contracts allow a portion each year. Know the number.
- What are all the fees? Include contract charges and the cost of any optional riders, as a percentage and in dollars.
- How does my money grow? For an indexed annuity, ask about caps, participation rates and spreads, and whether the company can change them.
- What exactly is guaranteed, and by whom? Guarantees are backed by the insurance company's ability to pay its claims. They aren't backed by the FDIC or the government.
- How strong is the insurance company? Ask for its financial strength ratings.
- How much of my savings would this be? Money in an annuity is harder to reach. Make sure enough stays available for emergencies and near-term needs.
- How is it taxed? Growth is generally taxed as ordinary income when it comes out, and withdrawals before age 59½ can carry an additional 10% federal tax.
- How are you paid on this? A fair question, and one a good agent will answer directly.
If you're replacing one you already own
Moving from one annuity to another can start a new surrender period and give up benefits you've built in the old contract. Ask for a side-by-side comparison of what you have now and what you'd be getting, including anything you would lose.
Take your time
Annuities come with a 'free look' period, set by your state, during which you can cancel and get your money back. Ask how many days you have.
More to the point, nothing about an annuity needs to be decided in one meeting. Take the paperwork home. Anyone worth working with will expect you to.
Common questions
What is a surrender charge?
It's a charge for withdrawing more than the contract allows during its early years. The surrender period and the charge for each year are written in the contract.
Are annuities insured by the FDIC?
No. An annuity's guarantees are backed by the financial strength and claims-paying ability of the insurance company that issues it.
How are annuity withdrawals taxed?
Growth is generally taxed as ordinary income when withdrawn. Withdrawals before age 59½ may also carry an additional 10% federal tax. A tax professional can speak to your situation.
Can I cancel an annuity after I buy it?
There's a 'free look' period, set by state law, during which you can cancel for a refund. After that, leaving early usually means paying surrender charges.
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What are you paying on your retirement accounts? →How much of your retirement is riding on the market? →Why a bad first year matters more than a bad tenth year →This guide is general education. It isn't investment, tax or legal advice, or a recommendation of any product. Rules and figures can change, so confirm current details with the IRS, the Social Security Administration, or a qualified professional before acting.