Printable checklist for your desk
Print this checklist and answer each question honestly before you buy anything.
Download the PDF (large print)The short version. Regulators are clear that an annuity is not right for everyone. The SEC says annuities are only appropriate for investors with a long-term time horizon. If you may need the money soon, are paying high costs, or would be replacing a contract that works, a different choice may fit better. [1, 2]
Situations where an annuity may not fit
| Situation | What regulators say |
|---|---|
| You may need the money soon | The SEC says variable annuities are not suitable for short-term goals, and that it can take several years for an indexed annuity to break even. Early cancellation can cost principal. [2, 3] |
| You want easy access to savings | Surrender charges and market value adjustments can reduce what you receive. Our reading of these liquidity warnings is that an annuity is not a place for emergency money. [4, 1] |
| The costs are high | The SEC example shows a base contract fee of around 1.25% a year, plus fund, rider, and administrative charges. Caps, spreads, and lower credited rates are costs too. [5, 3] |
| The money is in an IRA or 401(k) | Tax deferral provides no extra benefit there. FINRA says most investors should consider annuities only after using their pre-tax retirement plans. [5, 6] |
| You would be replacing an existing contract | A new surrender period usually starts, you may lose benefits, and the seller may have an incentive. The SEC example showed an owner about $1,000 worse off after exchanging $20,000 into a contract with a 9% first-year surrender charge. [7, 8] |
| You are under 59 and a half | A 10% additional federal tax can apply to the taxable part of an early withdrawal, on top of any surrender charge. [1, 3] |
| You do not fully understand how it works | The SEC says indexed annuities are complex products, and that you can lose money in variable and some other types. If you cannot explain it to someone else, wait. [3, 5] |
These points are drawn from regulator guidance. An annuity can still make sense in other situations. See our other annuity guides for when features matter.
Things to check first
- Do you have other guaranteed income? Social Security and any pension may already cover part of your essential spending. We did not find a regulator rule of thumb on this, so see our guide on building an income floor and decide with your own numbers.
- Is your emergency money separate? Keep money you might need in a form you can reach without a charge.
- Are you comparing alternatives? See annuities compared with CDs and bonds.
- Did the seller explain how they are paid? The NAIC and FINRA both suggest asking. [4, 6]
You have a safety net after you buy
Most states give you a free-look period to cancel after you receive the contract. Regulators describe it as usually 10 to 30 days, and it varies by state, so check your contract and your state. [4, 6]
Rules that protect you at the point of sale
The NAIC best interest standard (Model 275) says agents and insurers may not place their financial interest ahead of the consumer's interest. Whether the standard applies to you depends on your state. Keep any written comparison and ask for it if you are replacing a contract. [9]
Before you decide
- What is this money for, and when will I need it?
- What would it cost me to get the money out in year two? Year five?
- What am I giving up compared with a simpler choice?
- What happens if I do nothing and keep my current plan?
- Who benefits if I say yes, and how are they paid?
Frequently asked questions
When is an annuity not a good fit?
Regulators urge caution for short time horizons, a need for easy access to money, high costs, money already in a tax-deferred retirement account, and replacing an existing contract.
Is an annuity suitable for emergency money?
Regulators do not use that phrase, but they warn about surrender charges and long surrender periods. Our reading is that emergency money belongs somewhere you can reach without a charge.
Can I cancel after I buy?
Most states give a free-look period, usually 10 to 30 days. It varies by state, so check your contract.
Sources and review notes
- SEC Investor.gov: Annuities
- SEC Investor Bulletin: Variable annuities
- SEC Investor Bulletin: Indexed annuities
- NAIC: Buyer's Guide to Fixed Deferred Annuities (revised 2013)
- SEC Investor.gov: Variable annuities
- FINRA: Annuities
- FINRA: Should you exchange your variable annuity?
- SEC: Guide to variable annuities (replacement example)
- NAIC: Annuity suitability and best interest standard (Model 275)
About this guide. This is general education, not tax, legal, or investment advice, and it is not a recommendation to buy or not buy any product. Nazim Lokhandwala is a licensed insurance professional who offers fixed and indexed annuity products. He does not offer variable annuities or registered index-linked annuities. This guide covers every type so you can compare, and an annuity is not the right choice for everyone. Annuity guarantees depend on the claims-paying ability of the issuing insurer. Product features, rates, and rules vary by company and by state, so read your contract and ask the seller to explain anything that is unclear.