An annuity can be a useful long-term investment, especially for retirement. To buy an annuity contract, you give an insurance or investment company a large lump-sum payment. In exchange, the company invests your money and gives you monthly income for a predetermined period. Selecting an annuity is a major financial decision, as these contracts last many years and cost thousands of dollars. Annuity contracts are costly to cancel before their expiration, and early withdrawal penalties apply typically during the first five to seven years. To avoid this penalty and find the best investment, carefully evaluate your different annuity options.
Contact the annuity company you are researching and ask for illustrations on its different products. An annuity illustration clearly states the important information about an annuity, such as its rate of return, expected payment schedule, fees and penalties. These printouts are regulated by the government to ensure they are clear and accurate.Step 2
Check whether an annuity offers a fixed or variable return. A fixed annuity pays out a guaranteed interest rate each year, while a variable annuity's return depends on the performance of the stock market. A fixed annuity is a safer investment, because it can't lose money. A variable annuity can lose money when the stock market does badly, but it can also earn a significantly higher return than the fixed annuity when the stock market does well. A fixed annuity is better for investors who don't want risk, whereas the variable annuity is better for investors who can tolerate risk in exchange for a higher long-run return.Step 3
Review the expected future return of a product. Annuity companies publish their best estimate of how a contract will grow over time. By comparing these figures, you can see which annuity is expected to best build your investment for the future.Step 4
Compare an annuity's annual fees to its expected return. Annuity companies charge an annual fee to manage your money that will be deducted from your return. Ideally, your contract should have low fees. Subtract a contract's fees from its expected annual return to see your true earnings on each annuity you're considering.Step 5
Look up the early surrender penalty schedule of an annuity. Annuities typically charge a penalty for withdrawals during the first five to seven years. Each illustration should tell you how much money you would get each year after penalties should you decide to cancel. See how costly the penalty is and whether it drops over time.Step 6
Read through the illustration terms to see if the annuity allows for partial withdrawals. Some contracts let you take out a percentage of money early without charging a penalty. This is a nice feature to protect your liquidity.Step 7
Check when each annuity will stop making payments according to the illustration. Some annuities offer payments to you for the rest of your life, while others have an expiration date. Your annuity payout schedule should match your future income needs.Step 8
Research the annuity company's credit rating. If the company doesn't include this information, you can find the rating on the website of the major credit reviewers, such as Moody's and Standard & Poor's.
- Only invest with companies that have a strong credit rating -- such as A or better on the Moody's scale. If an annuity company goes bankrupt, you lose your entire investment.
Dylan Armstrong specializes in insurance, investing and retirement planning. He has also worked as a life and health insurance salesman and holds a Bachelor of Science in finance from Boston College.