In the past, buying an annuity was a lot of work.
The first step toward determining whether an annuity is right for your retirement plan is to do a little research. In most cases, the first step is to answer important questions such as:
- What is an annuity?
- Which type of annuity is right for me?
You then have to go through a bunch of information and listen to several sales pitches to pick a company or agent. Then you’re ready to apply, which means double-checking and reading the annuity contract.
As soon as you apply your funds, you might have to wait a little longer until the insurance company issues your policy.
In today’s world, however, online financial services are almost universal. In fact, managing your assets is easier than ever thanks to virtual tax advisors and digital banks.
It seems about time the annuity purchasing process got a little simpler, doesn’t it? The good news? You can finally buy an annuity online now.
What Is an Annuity?
Before going any further, let’s cover some annuity basics.
An annuity essentially guarantees you a certain income for a set period of time. They’re contracts that are sold or distributed by some sort of financial institution, where the money is invested. Often, these institutions are insurance companies.
Most people use them when they’re retired because they reduce the risk of outliving their savings. Basically, you pay the company upfront, then they pay you monthly. The contracts will set the age at which payments start, the interval between payments, etc.
You may receive those payments monthly for a set period of time or for life, depending on how the annuity is structured. Alternatively, you can set up your annuity to continue paying income to your spouse after your death if you’re married.
In a sense, annuities are like life insurance because there’s a guaranteed payout and a premium to pay. The difference? Those benefits usually go to your beneficiaries after you pass away.
The Main Types of Annuities
During retirement, most people purchase annuities to supplement their pensions and social security income. How come? The income is guaranteed for the rest of your life. As a result, if these other income streams dry up, they will still have money to live on.
So let’s focus on the four types of annuities that will help you get this peace of mind.
Fixed vs. Variable Annuities
There are two types of annuities: fixed and variable. How do they differ?
Fixed annuities are probably the most common and well-known type. In this case, a buyer buys a fixed annuity. As a result, the insurance company promises to pay a certain amount at a future date. While it might be decades away, it might be right now if you have an immediate annuity.
How does the insurance company make this money? A lot of insurers invest in safe investments like U.S. Treasury securities and high-rated corporate bonds.
You won’t become Elon Musk-rich through fixed annuities, as the returns on these investments aren’t high. However, they are predictable and safe. The regular monthly payments from fixed annuities make them a desirable option for people who don’t want to take risks.
Inflation can also reduce the purchasing power of fixed annuities. It is possible to plan for inflation in some annuity contracts, however.
With a variable annuity, an insurer invests in various mutual funds. Investments can, however, be chosen by the buyer. The performance of these funds determines the growth of the account. In addition, variable annuities can pay out a fixed amount or change based on performance.
Annuities with variable rates are more suitable for those who are willing to take on some risk in order to generate higher returns. Variable annuities are usually best for experienced investors who know about mutual funds and their risks.
Equity Indexed Annuities
In equity-indexed annuities, the interest rate is linked to a particular index, such as the S&P 500. The rate of growth of the contract will be determined by the insurance company. An equity-indexed annuity is complicated since insurers calculate index returns using various methods.
Despite not knowing how much you’ll get back, the calculations should give you a general idea. The return on equity-indexed annuities is not usually reflected in reinvested dividends, and surrender charges can be high.
Immediate vs. Deferred Annuities
Depending on when the payments start, annuities can either be immediate or deferred. When purchasing an annuity, you should ask yourself if you want regular income now or in the future.
Let’s quickly review each of their benefits and drawbacks in order to help you answer that question.
With deferred payments, your money grows over time. An annuity can accumulate earnings tax-free until you begin receiving payments, similar to a 401(k) or IRA. Continuing to accumulate that amount may result in higher future payments. Annuity terminology refers to this period as the accumulation period.
An immediate annuity is exactly what it sounds like. After the buyer pays the insurance company one lump sum, they can begin receiving payments.
A fixed or variable annuity can be a deferred annuity as well as an immediate annuity.
How to Buy an Annuity
Buying an annuity starts with assessing your financial situation. In particular, how much income do you think you’ll need from an annuity, and how long will it last?
Traditionally, a financial advisor would help you understand what you need from an annuity depending on your current financial situation. Based on your age and retirement status, you can choose an annuity based on your goals and risk tolerance.
For instance, fixed annuities can provide reliable income, but they may yield lower returns. Variable annuities on the other hand tend to have the highest risks. An indexed annuity splits risk and reward.
The next step is to pick an annuity provider. Choosing a provider is key since annuity companies differ. The preferred company to work with has a stellar reputation and strong financial and credit ratings. You’re more likely to lose your annuity payments if the company’s credit rating is low.
Once you’ve chosen a provider, you can apply. This requires sharing personal and financial information. Before submitting your application, make sure it’s accurate, as mistakes or omissions could slow things down.
Next, pay the required premiums. It can be a lump sum or a series of payments. Choose how you’ll pay these, either from a savings account, brokerage account, or some other source. If you withdraw money from a brokerage account or tax-advantaged account to buy an annuity, you might get hit with taxes.
When the annuity is funded, the free look period starts. If you want, you can review the annuity’s terms during this time. Your money is refunded if you decide annuities aren’t for you during the free look period. You might have to pay a surrender fee if you want to surrender your annuity later.
Can You Buy Annuities Online?
Short answer? Absolutely.
You should remember, however, that an annuity is a type of insurance product that can provide you with lifetime income. In terms of retirement planning, it can be a valuable tool. As such, It’s critical to consider factors like fees, customer service, and investment options when choosing a company. Because of that, you should use an annuity expert, otherwise, you might be putting your retirement in jeopardy.
As such, deferred annuities are great for people who want their funds to grow tax-deferred over time, while immediate annuities are excellent for people who need income immediately upon retirement. There are a few providers that are bringing the annuity process into the 21st century. Rather than going through an agent, you can purchase certain types of annuities directly online.
In fact, annuities can be purchased online from several reputable companies such as Vanguard, Fidelity, and TIAA-CREF.
What Are the Steps to Buying an Annuity Online?
It is easy, fast, and safe to buy an annuity online. Here’s how it works.
Get a quote.
Make sure you do your research before buying an annuity online. An expert can provide quotes based on your specific needs if you are interested in researching annuities.
Gather the information you need.
Your social security number, driver’s license, bank account number, and routing number will be needed. In the case of adding an annuitant other than yourself, you will also need their name, address, email address, phone number, and social security number (or green card).
The name of at least one beneficiary is always advisable. Providing the insurance company with as much information as possible about the beneficiary makes it easier for them to contact them if needed.
Answer these questions.
In addition to selecting your contract term and starting fund amount, you will be asked a few basic questions.
You may be asked:
- “What kind of emergency fund do you have?”
- “Will you need your money before 59 ½? ”
No, these aren’t trick questions. The annuity provider wants to determine whether an annuity is right for you, just as an insurance agent would.
Select the beneficiary and the annuitant.
In the event that your contract is annuitized, the annuitant is entitled to annuity payouts.
There is a possibility that this is you. The payouts can, however, be made to someone else (like your spouse or kids) instead of you. The annuity will still belong to you. It’s just that you won’t receive the payouts.
Alternatively, beneficiaries receive your annuity if you die before the contract ends. Typically, they won’t charge surrender charges for cashing out your premiums.
Decide how you will fund your annuity.
Don’t overlook deciding how you’ll fund your annuity. The most common way to transfer money is via a check or wire transfer.
Your annuity can also be funded with money from a 401(k) or IRA (qualified funds). You can also transfer an annuity from one insurance company to another.
Your application needs to be reviewed and signed.
Make sure your information is right, sign your documents online through a service like DocuSign, and you’re good to go. You’ll have a guaranteed retirement income within 48 hours.
Why Should You Buy An Annuity Online?
Convenience is the biggest benefit of buying an annuity online. From the comfort of your own home, you can also compare different annuities. Furthermore, you’ll have all the info you need at your fingertips. Annuities are cheaper online than through traditional brokers, too.
There are no agent fees.
Commissions are traditionally paid to insurance agents who sell annuities.
Although you may not pay an agent directly, you’re not out of the woods: commissions are usually included in your return. In other words, insurance companies give you a lower interest rate to compensate for the cost of your agent. When you buy an annuity online, you don’t have to deal with an agent, so there’s no fee for them. Since the insurance company doesn’t pay commissions to agents, they can offer you a better rate as well.
There’s no pressure to buy.
What’s the most appealing thing about buying annuities online? No one is trying to pressure you into buying an annuity on the spot. It’s okay to close your laptop, walk around, take another look at your retirement plan, call your financial planner, and come back to it later.
The process is faster and easier. When you buy an annuity online, you get straight to the point: owning one.
Even better? Conversations don’t drag on. You won’t hear any more sales pitches. You simply buy your annuity and you’re on your way.
How Risky Is An Online Annuity Purchase?
Annuities aren’t easy to understand, so buying them online can be risky. As such, before you commit to an investment, make sure you have done your research and you’re comfortable with it. As with any financial transaction, there is always the possibility of fraud. By using a credit card instead of a debit card and working with a reputable company, this risk can be mitigated.
Annuities should be purchased with caution, as with any other investment. You should not lock yourself into any products until you are sure that you fully understand them. The following are some things you should consider before buying an annuity online.
Having an expert on hand may be helpful.
In some cases, annuities are downright complicated, especially fixed and variable index annuities. A financial professional or insurance agent can help you understand complex annuity contracts.
The information you provide must be personal.
Data theft online is no laughing matter. Be sure your annuity provider keeps your valuable information secure before giving out your personal information online. In addition, make sure to buy your annuity through a trusted Wi-Fi connection, such as your home network, if you want to be extra safe.
You may not be able to purchase annuities from your online provider.
It’s not uncommon for some websites to advertise “online annuities” when, in reality, they’re just providing quotes. Their system generates annuity quotes from insurance companies in your area based on your personal information. However, you will still need to buy an annuity the traditional way, usually in person or over the phone. Moreover, some of these quote-generating sites sell your personal information to insurance companies.
You should avoid these sites if you hate receiving unsolicited calls and emails.
Online Annuities: Which Are Safe?
Fixed, fixed index, immediate, or long-term care annuities are often the safest to buy online.
- Annuities with fixed interest rates give you a guaranteed return. If your annuity contract is up, you will receive a lump-sum payment combining your original investment and interest.
- The S&P 500 or Nasdaq Index is used when calculating the interest rate on a fixed index annuity. As you earn interest, your money is not directly invested in the stock market, but rather used as a “measuring stick”. If your annuity contract expires, you’ll receive a lump-sum payment that includes your original investment plus interest.
- It is possible to convert a lump sum of money into an immediate annuity. This produces a guaranteed income stream for the rest of your life or for a fixed period.
With these annuities, you can rest assured that your money will not be lost due to stock market volatility.
What Annuities Are Best Purchased Directly From An Agent?
In general, it is better to consult with an agent rather than purchase an annuity since there are many poor-quality or poorly-rated annuities available. Additionally, the agent receives a commission from the insurance company instead of charging you a fee.
If you are considering buying variable annuities, you should consult a financial advisor. The reason? They are complex, have investment risks, and can be expensive.
How Should You Choose an Online Annuity Provider?
A high-quality insurance company will cost you a lot of money, so you should be careful when choosing one. Consider these five qualities before making a decision.
It’s important to remember that annuities aren’t insured by the FDIC, nor are they backed by the federal government — although insurers are backed by their state guaranty association. You should therefore choose an insurance company with good financial standing in order to protect your retirement income. What is the most effective way to ensure that?
Check the ratings of independent credit rating agencies such as Standard & Poor’s, Moody’s, Fitch, and A.M. Best, in order to assess your insurance provider’s financial stability.
Protection of data.
Personal information should be as critical to your insurer as it is to you. As technology evolves, reputable data security providers should partner with them and continue to update their software.
Also, they should explain why they need your personal information in a clear manner. You should be wary if they ask for your credit card number if it’s not related to buying an annuity. Last but not least, make sure the insurance company’s website is safe and encrypted.
Contact customer service to learn more about data protection for complete peace of mind.
Openness and transparency.
Even though annuities can be complex, your insurer should never take advantage of their complexity.
Even the tiniest details should be clearly spelled out in your contract by your insurer. In other words, know what to expect if you withdraw money early and what will happen if you pass away before you retire.
Advice from experts.
Online insurance buying should be simple. At the same time, if you need help, you should be able to speak with a licensed agent at your insurance company. It is a must for these agents to provide you with a clear explanation of the licenses they hold. In addition, they should answer your questions in plain English without trying to upsell you.
As a last step, ensure that your insurance company is actually willing to serve your needs. Look for customer complaints on the Better Business Bureau (BBB) or third-party review sites to get an idea of their service.
Selling Your Annuity
Are you aware that you can also sell your annuity? It’s true.
Many annuitants sell the rest of their annuity value when they no longer need the money. Either the entire annuity value or a specific portion can be sold. In order to sell your annuity, you have three main options.
An entire annuity can be sold.
The assets in your annuity will be liquidated if you sell the entire value. All future payments and income won’t be available to you. In accordance with your contract, you can take the lump sum amount from the buyer.
Partial sale of annuity payments.
Depending on your needs, you may wish to sell only a specific portion of your annuity. While enjoying the tax benefits, you can continue receiving periodic incomes. A partial period of payment can be sold to a buyer if you need hard cash urgently.
By selling one or four of your upcoming payments, for example, you will continue to receive your payment as normal once the period has ended.
You can sell a portion of your payments.
Payments can be sold in chunks as well. This is known as a partial buyout. In this case, you can accept a lump sum amount and agree to share a specific amount in your periodic payments.
The Benefits Of Buying And Selling Annuities
There are a lot of benefits to selling your annuity. For example, if you have any pending payments, liquid cash will help you pay them off. As a result, you’ll be able to meet your financial needs. And, more importantly, when you have your own money, you don’t have to borrow it.
Aside from that, an annuity has a lot of advantages. Besides providing annuitants with a stream of income, annuities also offer tax advantages. With its tax-deferred payment method, contributions are limitless. Also, all your money goes to your beneficiaries if you die.
1. When is the best time to buy an annuity?
You should buy the annuity as soon as you can. Ideally, though, you should choose the annuity if you’ve maxed out your limits in other retirement plans.
2. Is there a time when annuities shouldn’t be bought?
Annuities aren’t for everyone. For example, there’s no need to get one if you have something already that covers your retirement. It’s also not a good idea to buy one if you’re getting social security or pension benefits to cover all of your expenses. And, it may not be the best investment for you if you want high returns.
In addition, annuities aren’t for people with poor health or who are struggling in the current investment climate.
3. Are annuities guaranteed, and if so, by whom?
There’s no federal agency that protects your annuity’s principal value like the FDIC. So, it’s possible to lose some of your investment’s principal. In other words, you take the same risk when you invest in stocks, bonds, mutual funds, and ETFs.
It is possible to obtain up to $100,000 of coverage through a guarantee association in most states, however. In the event of a default by the insurance company, this would offer a measure of protection like the Securities Investors Protection Corporation (SIPC). In contrast to SIPC, the guarantee association isn’t government-backed.
It’s an industry arrangement between various insurance companies.
4. Can an annuity be a good investment?
In order to determine whether an annuity is a sound investment for you, you must first determine your financial needs and goals. You can however purchase an annuity if you want a guaranteed retirement income. If you want to boost your monthly benefit amount by delaying taking your Social Security benefits, you can get an annuity instead. In the same way, married couples want to make sure their spouses are okay if they pass away. Depending on how the annuity is structured, your spouse may still get payouts after you die.
If, however, you lack cash on hand to cover the premiums or you haven’t taken full advantage of other savings options, an annuity may not make sense. You can benefit from some important tax advantages if you max out your 401(k) or IRA each year. Another option to save tax-free is to use a health savings account (HSA).
5. Is the provider of the annuity financially sound?
By purchasing an annuity, you are trusting the company backing the annuity to pay you in the future. So it’s important to make sure the company is financially sound. You should only invest in an annuity provider that is consistently rated highly by the major credit rating agencies, like AM Best, Fitch, Standard & Poor’s, and Moody’s.