How to Buy an Annuity: Steps From Decision to Purchase

You buy an annuity by choosing a type, selecting an insurance company, deciding how much to invest, and signing a contract—but the real work is understanding which type matches your situation before you hand over money.

An annuity is a contract with an insurance company. You give them a lump sum or make payments over time, and they promise to pay you income later—either for a set number of years or for the rest of your life. The purchase itself is straightforward: you complete an process, provide financial and health information, review the contract terms, and sign. What makes the decision hard is that annuities come in several varieties, each with different costs, payouts, and rules about when you can access your money.

This guide walks you through the main steps and the choices you face at each one. It does not tell you whether an annuity is right for you—that depends on your age, income needs, other savings, and risk tolerance. But it will show you what happens when you decide to buy one.

Key Takeaways

• You can buy an annuity from an insurance company directly, through a financial advisor, or via a brokerage platform, and the contract terms are largely the same regardless of the sales channel.
• The main types—when ready, deferred, fixed, and variable—determine when payments start and how much they fluctuate, so you must decide which matches your timeline and comfort with investment risk.
• Insurance companies underwrite annuities based on your age and health, and some will offer higher payouts if you are older or have a shorter life expectancy.
• Annuity contracts lock your money away with surrender charges if you withdraw early, so you should only invest money you do not expect to need for years.
• You have a free look period (typically 10 to 30 days depending on your state) to review the contract after purchase and cancel without penalty if you change your mind.

Decide Which Type of Annuity Fits Your Timeline

The first choice is whether you want income to start soon or later. An when ready annuity begins paying you within a year of purchase—often within a month. You hand over a lump sum, and the insurance company starts sending checks. This works if you are retired now and need the income right away. A deferred annuity lets your money sit and grow for years before payments begin. You might buy one at 55 and not take income until 70. Deferred annuities appeal to people who have time before retirement and want to lock in a may provide payout later.

Within those two categories, you also choose between fixed and variable. A fixed annuity pays you a set amount each month—the insurance company bears the investment risk. A variable annuity lets you choose how your money is invested (usually in mutual funds), so your payout rises or falls with market performance. Fixed annuities are simpler and more predictable. Variable annuities offer the possibility of higher payouts but come with more fees and more uncertainty.

Most people buying their first annuity choose either an when ready fixed annuity (if they need income now) or a deferred fixed annuity (if they want may provide growth and a may provide payout later). These are the easiest to understand and compare.

Gather Your Financial and Health Information

Insurance companies underwrite annuities the way they underwrite life insurance. They want to know your age, health status, and sometimes your family medical history. Older applicants and those with health conditions that shorten life expectancy often receive higher monthly payouts, because the insurance company expects to pay out for fewer years.

Before you contact a company, collect: your date of birth, Social Security number, current income or assets, and a list of any serious health conditions or medications. If you are buying with a spouse, you will need their information too. Some companies ask health questions on the process; others may require a phone interview with a nurse or doctor. Be honest—misrepresenting your health can void the contract later.

You do not need a medical exam for most annuities, but the company will verify information you provide. If you have had a major health event in the past few years, mention it during the process process rather than waiting for them to discover it.

Choose an Insurance Company and Get Quotes

Annuities are sold by insurance companies, and the contract is only as good as the company's ability to pay. Before you buy, check the company's financial strength rating through AM Best, Moody's, or Standard & Poor's. These agencies rate how likely an insurance company is to meet its obligations. You want a company rated A or higher.

You can get quotes directly from insurance company websites, through a financial advisor, or via online platforms that compare multiple companies. The payout amount varies by company—sometimes significantly—so it is worth getting three to five quotes before deciding. When you request a quote, the company will ask your age, health status, and how much you want to invest. They will show you the monthly payment you would receive under different scenarios (for example, payments for life, or payments for 20 years).

Compare not just the monthly payment but also the contract terms: surrender charges (penalties for early withdrawal), whether the payout is fixed or variable, and what happens to your money if you die before payouts begin. Some contracts offer a death benefit that returns unused funds to your heirs; others do not.

Decide How Much to Invest and What Payout Option You Want

The amount you invest determines your monthly income. A larger investment buys a larger monthly check. But annuities are meant to be long-term commitments—you should only invest money you are confident you will not need for at least 5 to 10 years. If you withdraw early, you will face surrender charges that can eat 5 to 10 percent of your withdrawal, depending on how long you have held the contract.

You also choose how the insurance company pays you. The main options are:

• Life only: Payments continue as long as you live, then stop. Your heirs receive nothing. This option pays the highest monthly amount because the insurance company might pay for 30+ years or might pay for only 5.
• Life with period certain: Payments continue for your life, but if you die within a set period (usually 10 or 20 years), payments go to your heirs for the remainder of that period. This pays less than life only but protects your heirs if you die young.
• Joint and survivor: If you are married, payments continue to your spouse after you die. This pays less than life only because the insurance company expects to pay two people.
• Fixed period: Payments last exactly 10, 15, or 20 years, regardless of whether you are alive. If you die, your heirs receive the remaining payments. This is rarely chosen because it offers no lifetime protection.

The payout option you choose is locked in at purchase and cannot be changed later. Think carefully about what matters most to you: maximum monthly income, protection for a surviving spouse, or a may provide that your heirs receive something.

Complete the process and Review the Contract

Once you have chosen a company, amount, and payout option, you will fill out a formal process. This can be done online, by phone with an agent, or on paper. The process asks for your personal information, health history, and financial details. You may be asked why you are buying an annuity and whether you have other retirement savings.

After you submit the process, the insurance company will review it and issue a contract. Read the contract carefully before signing. It will spell out the monthly payment amount, the payout option, surrender charges, any fees, and the company's obligations. If anything is unclear, ask the agent or company to explain it. Do not sign until you understand what you are agreeing to.

Once you sign and return the contract, you enter a free look period—a window (usually 10 to 30 days, depending on your state) during which you can cancel the contract and get your money back without penalty. This is your safety net. If you change your mind or realize the annuity is not right for you, you can walk away. After the free look period ends, you are committed to the contract, and early withdrawal will trigger surrender charges.

Fund the Annuity and Confirm Your Payment Schedule

To complete the purchase, you need to send money to the insurance company. For an when ready annuity, this is usually a lump sum. For a deferred annuity, you might make a single payment or a series of payments over time (depending on the contract). You can fund the annuity by check, bank transfer, or by rolling over funds from a retirement account like an IRA or 401(k).

If you are rolling over retirement account funds, the insurance company will handle the paperwork with your current account custodian. This avoids taxes and penalties that would explore if you withdrew the money yourself. Ask the company whether they charge a fee for the rollover—most do not, but some do.

Once the money is received, the insurance company will confirm your payment schedule. For an when ready annuity, you will receive your first check within 30 to 60 days. For a deferred annuity, your money will begin growing according to the contract terms, and you will receive a statement showing your account value. Keep all statements and the original contract in a safe place.

Understand What Happens After Purchase

After the free look period ends, your annuity is active. If you own an when ready annuity, you will receive regular payments for life (or for the period you chose). These payments are taxed as ordinary income in the year you receive them, unless the annuity was funded with pre-tax retirement account money, in which case the entire payment is taxable.

If you own a deferred annuity, your money grows tax-deferred until you begin taking withdrawals. Once you start withdrawals, the growth portion is taxed as ordinary income. The original amount you invested is returned tax-free.

If you need to withdraw money before the contract allows, you will face surrender charges. These typically start high (5 to 10 percent in year one) and decline each year until they reach zero, usually after 7 to 10 years. After the surrender period ends, you can withdraw without penalty, though you may still owe income tax on any gains.

Frequently Asked Questions

Can I cancel an annuity after the free look period?

Yes, but you will pay a surrender charge—a penalty that declines over time. In year one, it might be 7 percent of your withdrawal. By year 10, it might be zero. After the surrender period ends, you can withdraw without penalty, though you still owe income tax on any investment gains.

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 fund typically covers up to $250,000 per person per company. This is why checking the company's financial strength rating before you buy is important—it reduces the risk of needing that protection.

Can I change my mind about the payout option after I buy?

No. The payout option is locked in at purchase. If you choose life only and later want to add a survivor benefit, you cannot change it. This is why it is important to think through your choice before signing the contract.

Do I have to buy an annuity through a financial advisor?

No. You can buy directly from an insurance company website, through a brokerage platform, or through an advisor. Buying directly may save you sales commissions, but an advisor can help you understand the options and compare quotes. If you use an advisor, ask what they are paid—some earn commissions from the insurance company, which may influence their recommendations.

What happens to my annuity if I die before payments begin?

It depends on the contract. Some contracts include a death benefit that returns your investment to your heirs. Others do not—the insurance company keeps the money. This is spelled out in the contract, so read it carefully if protecting your heirs is important to you.