How to Buy an Annuity: The Step-by-Step Process

How you actually buy an annuity

Buying an annuity means signing a contract with an insurance company where you give them a lump sum of money (or make payments over time) and they promise to pay you income later — either when ready or years from now. You do not go through a government office or a bank's regular lending department. Instead, you work with an insurance agent, a financial advisor, or you contact an insurance company directly.

The process has three main stages: deciding what type of annuity fits your situation, getting quotes from insurance companies, and signing the contract. Most people spend a few weeks on this, though you can move faster if you know what you want.

Key Takeaways

• You buy annuities directly from insurance companies, through insurance agents, or through financial advisors — not from banks or government offices.
• The insurance company underwrites your purchase, meaning they may ask health questions or request medical records depending on the annuity type.
• You will receive a contract (called a prospectus for variable annuities) that spells out exactly what you pay, what you receive, and when payments start.
• Once you sign and fund the annuity, you cannot undo the purchase, so comparing quotes and understanding the terms before you commit is essential.
• Fees vary widely — some annuities charge surrender fees if you withdraw early, while others charge annual management fees or commissions to the agent.

Where to find annuity providers and get quotes

Insurance companies that sell annuities include major names like Fidelity, Vanguard, Transamerica, Principal, and Equitable, but there are dozens of others. You can contact them directly through their websites or by phone. Many have online quote tools where you enter your age, the amount you want to invest, and when you want income to start — and they show you what monthly or annual payments would be.

You can also work with an insurance agent or a financial advisor who represents multiple companies. Agents often have access to quotes from several insurers at once, which saves you time calling around. However, agents are usually paid commission by the insurance company, so they have an incentive to steer you toward products that pay them more. Ask any agent upfront what they earn from the sale.

Some financial advisors charge a flat fee or an hourly rate instead of commission, which means they are paid by you rather than by the insurance company. This arrangement can reduce conflicts of interest, though you will pay out of pocket for their time.

What information the insurance company will ask for

When you request a quote or start the purchase process, the insurance company will ask for basic personal information: your name, date of birth, address, and Social Security number. They will also ask how much money you want to put into the annuity and when you want payments to begin.

For some annuities — particularly when ready annuities and certain fixed annuities — the company may ask health questions or request medical records. This is called underwriting. They do this because they are betting on how long you will live; if you are in poor health, they may offer lower payments or decline to sell you the annuity at all. For other annuities, especially variable annuities, health questions are less common because the company's risk is lower.

You will also need to provide proof of funds — a bank statement showing you have the money you say you do. This is a standard check to prevent fraud.

Reading and signing the contract

Once you move forward, the insurance company will send you a contract. For a fixed annuity, this is usually a straightforward document that states the amount you are investing, the interest rate or payment amount, when payments start, and how long they last. For a variable annuity, you will receive a prospectus — a longer, more detailed document that explains the investment options, fees, and how your money will be invested.

Read the section on fees carefully. Common fees include surrender charges (penalties if you withdraw money in the first 5 to 10 years), annual management fees (usually 0.5% to 2% of your account value per year), and mortality and expense fees (charged by variable annuities to cover the insurance company's costs). Some annuities also charge riders — extra features like may provide income or death benefits — which add to the cost.

The contract will also spell out the payout options: will you receive payments for life, for a set number of years, or until your money runs out? Can your beneficiary receive payments if you die early? These choices affect how much you receive each month, so understand them before you sign.

Funding the annuity

Once you sign the contract, you need to send the insurance company the money. You can usually do this by check, electronic bank transfer, or by rolling over money from a retirement account like an IRA or 401(k). If you are rolling over retirement funds, the insurance company will handle the paperwork with your old account provider — you do not have to do it yourself, though it may take a few weeks.

After the insurance company receives and deposits your money, the annuity is active. For an when ready annuity, payments typically start within 30 to 60 days. For a deferred annuity, your money grows (either at a fixed rate or through investments you choose) until the date you specified for payments to begin.

What you cannot do once you buy

Once you sign the contract and fund the annuity, you are locked in. You cannot cancel it and get your money back without penalty — this is a major difference from other financial products. If you withdraw money during the surrender period (often 5 to 10 years), the insurance company will charge a surrender fee, which can be 5% to 10% of the amount you withdraw. After the surrender period ends, you can usually withdraw without penalty, but you may still owe income tax on any gains.

This is why it is critical to compare quotes and understand the terms before you commit. Take your time reading the contract, and do not let an agent pressure you into signing on the spot. If something is unclear, ask the agent or the insurance company to explain it in writing.

Comparing annuities side by side

When you have quotes from two or more companies, lay them out in a straightforward table. Write down the amount you are investing, the monthly or annual payment amount, the fees, the surrender period, and the payout options. This makes it straightforward to see which annuity gives you the most income for your money and which has the lowest fees.

Keep in mind that the highest payment is not always the best deal if it comes with high fees or a long surrender period. A slightly lower payment with lower fees and more flexibility might be worth more to you in the long run. Also check the financial strength of the insurance company — you want to know they will be around to pay you. Rating agencies like A.M. Best, Moody's, and Standard & Poor's publish financial strength ratings for insurance companies; you can find these online.

Frequently Asked Questions

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

Yes. You can roll over money from a 401(k), IRA, or other retirement account into an annuity. The insurance company will coordinate with your old account provider to move the money directly, which avoids taxes and penalties. This is called a direct rollover. The process usually takes two to four weeks.

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

Each state has a guaranty fund that protects annuity owners if an insurance company fails. The fund typically covers up to $250,000 per person per company, though the exact amount varies by state. This is why checking the insurance company's financial strength rating before you buy is important — you want to avoid that situation in the first place.

Can I change my mind after I sign the contract?

Most states have a free-look period, usually 10 to 14 days, during which you can cancel the annuity and get your money back with no penalty. The exact length varies by state and by the insurance company. Check your contract for the free-look period and the instructions for canceling if you change your mind.

Do I have to work with an agent, or can I buy directly from the insurance company?

You can buy directly from the insurance company's website or by calling them. Many people do this to avoid paying agent commission. However, agents can sometimes offer products or discounts that are not available online, and they can answer questions about which type of annuity makes sense for your situation. Decide based on whether you want that guidance and whether you are comfortable with the agent's fee structure.

What is the difference between buying an annuity and investing in a mutual fund?

An annuity is a contract with an insurance company that guarantees income; a mutual fund is an investment that goes up and down in value. With an annuity, you trade liquidity and flexibility for the promise of steady payments. With a mutual fund, you keep control of your money and can withdraw it anytime, but you bear the investment risk. They serve different purposes in a financial plan.