The Steps to Buying an Annuity and What to Know Before You Start

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

You buy an annuity by working with an insurance company, a financial advisor, or a bank that sells annuity products. The process starts with deciding what type of annuity fits your situation — when ready, deferred, fixed, or variable — then contacting a seller, providing financial information, and signing a contract that spells out how much you pay, when payments start, and how much you receive.

The actual steps vary slightly by annuity type and seller, but the core sequence is the same: you meet with a representative, review product options, complete an process with your personal and financial details, fund the contract (usually with a lump sum), and then the insurance company begins making payments on the schedule you chose.

Unlike retirement accounts where you open an account and contribute over time, an annuity is a single contract between you and an insurance company. You are not opening an account; you are purchasing a product that guarantees income or growth.

Key Takeaways

• You buy an annuity directly from an insurance company, through a financial advisor, or via a bank, and the process involves completing an process and funding the contract with a lump sum.
• Different annuity types — when ready, deferred, fixed, and variable — have different purchase timelines and funding requirements, so the type you choose affects how quickly you can start receiving payments.
• Before you buy, you need to understand the fees, surrender charges, payout options, and whether the product locks your money away or allows withdrawals.
• An annuity contract is permanent once signed, so reviewing the terms carefully and understanding what you cannot change later is critical.
• You can buy an annuity with money from a savings account, a lump-sum pension payout, or funds rolled over from a retirement account, but the source affects tax treatment.

Where to buy an annuity and what each seller offers

Insurance companies are the primary sellers of annuities. You can contact them directly — companies like Fidelity, Vanguard, Prudential, and MetLife all sell annuities — or you can work through a financial advisor or broker who represents multiple insurers. Banks also sell annuities, though usually through their investment or wealth management divisions.

Working directly with an insurance company means you see only that company's products and pricing. A financial advisor or broker can show you options from multiple insurers, which lets you compare terms and rates side by side. The trade-off is that advisors charge fees — either a flat fee, a percentage of the amount you invest, or a commission paid by the insurance company.

If you already have a relationship with a financial advisor or bank, asking them whether they sell annuities is often the fastest route. They already know your financial situation and can explain how an annuity fits with your other accounts and income sources.

The process and funding process

Once you have chosen a product and a seller, you complete an process. This form asks for your name, date of birth, Social Security number, income, assets, and sometimes health information. The insurance company uses this to verify your identity, assess risk, and determine whether you meet any age or income requirements the product has.

After the process is approved — which usually takes a few days to a week — you fund the contract. For most annuities, you do this with a single lump-sum payment. You can fund it with cash from a savings account, a check, or a wire transfer. If you are rolling money from a retirement account like an IRA or 401(k), the funds transfer directly from that account to the insurance company, and the seller handles the paperwork.

Once the contract is funded, the insurance company issues a contract document that outlines the terms: how much you paid, when payments start, how much you receive, and any fees or surrender charges. Read this document carefully. It is the legal agreement between you and the insurer, and changing the terms later is difficult or impossible.

when ready annuities versus deferred annuities and how that affects timing

An when ready annuity starts paying you within a few months of purchase — usually 30 days to six months. You fund it with a lump sum, and the insurance company begins sending you regular payments right away. The purchase and payout process is straightforward and moves quickly.

A deferred annuity does not pay you when ready. Instead, your money grows inside the contract for a period you choose — sometimes years — before payments begin. During the growth phase, you may be able to add money to the contract, withdraw some funds (though usually with penalties), or change certain terms. Once the payout phase starts, the contract works like an when ready annuity.

If you need income now, an when ready annuity is the right choice and the purchase process is faster. If you are buying an annuity years before you plan to retire, a deferred annuity lets your money grow before you start taking payments. The type you choose affects not just when you get paid, but also what options you have during the waiting period.

Fixed annuities versus variable annuities and what you are buying

A fixed annuity guarantees a specific payment amount for life or a set number of years. The insurance company invests your money and keeps the investment risk; you receive the same payment regardless of how markets perform. The purchase process is simpler because there are fewer moving parts — you fund it, the insurer locks in a rate, and payments are set.

A variable annuity ties your payments to the performance of investments you choose — usually mutual funds or similar options inside the annuity. Your payment amount varies based on how those investments perform. Buying a variable annuity involves more decisions: you choose which investments to hold, and you may need to complete additional paperwork or training to show you understand the risks.

Some sellers require you to meet with an advisor or complete a questionnaire before you can buy a variable annuity, because the product is more complex and the risks are higher. A fixed annuity typically has fewer barriers to purchase because the risk sits with the insurance company, not with you.

Fees, surrender charges, and what they cost you

Before you buy, understand what the annuity costs. Most annuities charge an annual fee — sometimes called a mortality and expense fee or administrative fee — that ranges from 0.5% to 2% of your contract value per year. Variable annuities often charge higher fees because they involve investment management.

Many annuities also have a surrender charge, which is a penalty if you withdraw money or cancel the contract within a set period — often five to ten years. If you surrender the contract early, the insurance company keeps a percentage of your withdrawal. Surrender charges typically decline over time; for example, you might pay 7% if you withdraw in year one, 6% in year two, and so on until the charge disappears.

Some annuities offer riders — add-on features that provide extra benefits like a may provide income floor, a death benefit, or long-term care coverage. Each rider adds a fee. Before you buy, ask the seller to show you the total annual cost as a percentage and explain what each fee covers. Compare this across products if you are looking at multiple options.

What happens after you buy: payout options and how long payments last

When you buy an annuity, you choose how you want to be paid. The most common options are life annuity (payments for as long as you live), period certain (payments for a set number of years, then they stop), and joint and survivor (payments continue to a spouse or beneficiary after you die). Each option has a different payment amount because the insurance company's risk and cost differ.

A life annuity pays the most per month because the insurer is betting you will live a long time. A period-certain annuity pays less because payments stop after a fixed date. A joint and survivor annuity pays less than a single-life option because the insurer may be paying two people instead of one.

Once you choose a payout option and sign the contract, you cannot change it. This is why understanding your options before you buy is so important. Some annuities allow you to take a lump-sum withdrawal instead of monthly payments, but this is rare and usually only available during a specific window after purchase.

Funding sources: where the money comes from and tax consequences

You can fund an annuity with money from several sources, and the source affects how taxes work. If you use money from a regular savings account or checking account, you pay tax on any gains the annuity earns during the growth phase, and you may owe income tax on part of each payment you receive. If you roll money from a traditional IRA or 401(k) into an annuity, the rollover itself is not taxed, but payments are taxed as ordinary income. If you roll money from a Roth IRA, payments may be tax-free if you meet certain conditions.

The insurance company and the seller should explain the tax treatment before you buy. If you are rolling retirement account money, the seller handles the paperwork to move funds directly from your old account to the annuity, which avoids a taxable distribution. If you are using savings, you straightforward fund the contract with a check or wire transfer.

Frequently Asked Questions

Can I change my mind after I buy an annuity?

Most states allow a free-look period of 10 to 30 days after you receive the contract, during which you can cancel and get your money back with no penalty. After that period ends, you are locked in. If you want to withdraw money, surrender charges explore. Changing the payout option or other contract terms is usually not possible once the contract is signed.

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, an advisor can explain how an annuity fits with your other retirement savings and help you compare products. If you use an advisor, ask upfront whether they earn a commission from the sale, because that affects whether they have an incentive to recommend one product over another.

What if I need the money before payments are supposed to start?

If you have a deferred annuity and need money during the growth phase, you can withdraw it, but surrender charges will explore. The amount you lose depends on how long you have held the contract. Some annuities allow penalty-free withdrawals in specific situations like a terminal illness, but these are rare and must be written into the contract before you buy.

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

Yes. You can roll a lump-sum distribution from a 401(k) into an annuity, and the rollover is not taxed. The money moves directly from your 401(k) plan to the insurance company. You will owe income tax on payments you receive from the annuity later, just as you would on 401(k) withdrawals. Ask your 401(k) plan administrator for the paperwork needed to set up a direct rollover.

How do I know if an annuity is a good fit for my situation?

An annuity makes sense if you want may provide income you cannot outlive, have a lump sum to invest, and do not need access to the money for several years. It is less suitable if you need flexibility, expect to withdraw money frequently, or have a short life expectancy. Consider talking through your situation with a financial advisor who does not earn a commission on annuity sales.