5 Questions To Ask Before You Sign An Annuity Contract, Because Getting Out Can Take A Decade

The post 5 Questions to Ask Before You Sign an Annuity Contract, Because Getting Out Can Take a Decade appeared first on 24/7 Wall St..

An annuity can turn a lump sum into a paycheck that lasts for life. It can also lock that lump sum away for years. If you’re at or near retirement, you should be able to answer five questions from the contract itself, not from the sales illustration, before you sign.

1. How Long Is the Surrender Period, and What Does Leaving Early Cost?

A surrender charge is a fee the insurer takes if you cash out, or withdraw more than the contract allows, during the early years. On her Women & Money podcast, Suze Orman told listeners that surrender charges mean “you will have to pay a percentage of the amount of money that you put in every single year for a specific number of years. Usually that is 7 to 10 years.” In that May 16, 2024 episode, she said the charges usually step down “from 10% to 7% to 6 to 5 to 4,” reaching zero after roughly a decade. That range describes what she typically sees. Schedules vary by product and by insurer. In a May 26, 2024 episode, Orman said the charge stays in place until the insurer has “recouped all the money they paid to the salesperson who sold it to you.”

Ask for the full year-by-year schedule, the annual free-withdrawal allowance, and any waivers for nursing-home stays or terminal illness. Also ask whether a market value adjustment could cut your payout if rates change. Rates do change: the 10-year Treasury yield fell from 5.31% on October 5, 2026 to 4.90% on November 4, 2026. A long lockup means you’re stuck with your contract’s terms whatever rates do in the meantime.

2. What Are All the Fees, Including Riders?

Costs depend on the type of product. A plain multi-year guaranteed annuity (MYGA) usually builds its costs into the interest rate it credits. Variable annuities can layer mortality and expense charges, administrative fees and the expenses of the underlying funds. Income and death-benefit riders often charge a separate annual fee. Sometimes that fee is figured on a “benefit base” rather than on your actual account value. Indexed products limit your upside through caps, participation rates or spreads, which the insurer can usually reset.

Ask for:

• Every fee as a yearly percentage
• What each fee is calculated on
• Which fees the insurer can change after you sign
• How the seller gets paid, since commissions influence which products get sold

For comparison, the FDIC national average 12-month CD paid 1.76% as of October 1, 2026, and top online banks often pay well above that average. If an annuity’s return after fees barely beats a federally insured CD or a Treasury you can sell, the guarantee has to be worth the lost flexibility.

3. What Backs the Guarantee, and How Strong Is the Insurer?

Every “guaranteed” annuity promise depends on the insurer’s ability to pay claims. FDIC insurance doesn’t cover these contracts. Check the insurer’s financial-strength ratings from independent rating agencies. As a backstop, each state has a life and health insurance guaranty association that steps in if an insurer fails. Coverage limits differ from state to state and are capped. Ask your state insurance department what limit applies where you live, and consider whether a large purchase should be split among several insurers.

4. How Will Payments or Withdrawals Be Taxed?

The tax rules depend on whether the money is qualified (held inside an IRA or employer plan) or nonqualified (bought with after-tax savings).

• Nonqualified withdrawals before payments begin: Withdrawals count as earnings first and are taxed as ordinary income until the gain is used up, under 26 U.S.C. § 72(e)(2)(B) and (e)(3)(A).
• Converted to regular payments (annuitized): The exclusion ratio in § 72(b)(1) treats part of each payment as a tax-free return of what you paid in. That treatment stops once you’ve recovered your full investment, under § 72(b)(2).
• Early withdrawals: § 72(q)(1) adds a 10% tax on the taxable part of nonqualified annuity payouts. It doesn’t apply to money received at or after age 59½, under § 72(q)(2)(A). IRA annuities face a matching additional 10% tax under § 72(t).
• Required withdrawals for qualified money: According to IRS Publication 554 for tax year 2025, IRA owners generally must start required minimum distributions by April 1 of the year following the year in which you reach age 73.
• Switching contracts: § 1035(a)(3) lets you swap one annuity for another without owing tax on the gain. The new contract may start a new surrender schedule.

Orman has also questioned buying an annuity inside an IRA, calling it “a tax sheltered investment within a tax sheltered vehicle.”

5. What Happens to the Money if I Die?

A life-only income annuity pays the most per dollar because payments stop when you die, even if that’s a year after you buy. Other options include payments guaranteed for a set period, refund features, and joint-and-survivor payouts that continue for a spouse. Each one brings down the monthly check. Deferred contracts usually pay a death benefit, but it may equal the account value, the premiums you paid, or a higher amount available only through a paid rider. Confirm which payout option you’re choosing, check the beneficiary designation, and ask how much income each layer of protection costs you.

Who Should Sign and Who Should Keep Shopping

Signing can fit a retiree who:

• Has an emergency fund outside the contract
• Won’t need this money during the surrender period
• Has a specific income gap that Social Security and any pension don’t cover
• Can name every fee and the insurer’s ratings without looking them up

A buyer has good reason to keep shopping if the surrender schedule runs longer than they can commit their money, if the rider costs can’t be stated as a clear yearly figure, or if the pitch leaned on a first-year bonus. Orman warned against contracts with a high first-year rate or bonus where “the next years they drop you all the way down.” If the seller can’t answer all five questions in writing, that’s a reason to walk away.

The post 5 Questions to Ask Before You Sign an Annuity Contract, Because Getting Out Can Take a Decade appeared first on 24/7 Wall St..