Grade Your Annuity Offer: A Step-by-Step Self-Check

An annuity proposal can arrive as a glossy illustration, a few pages of numbers and a confident pitch. Before you sign, it helps to slow down and grade the offer yourself. This is not a grade of the product or the insurer. It is a grade of how well you understand this particular offer, and whether the process behind it followed the rules regulators already set for annuity sales.

The checklist below turns those rules into seven steps you can work through at your kitchen table. Give each step one of three marks: clear, unclear or missing. The more "unclear" and "missing" marks you collect, the more homework is left before any money moves.

This guide is general information, not financial, insurance, tax or legal advice. For help with your own situation, your state insurance department is a free public resource, and a licensed professional who is not selling you the product can review the offer with you.

Step 1: Pin down exactly what is being offered

Annuities differ in two big ways: when payments start and who carries the investment risk. The Texas Department of Insurance (TDI) annuities guide explains that deferred annuities let you save money for retirement or other reasons, while immediate annuities create an income stream. It also describes fixed annuities as guaranteeing a minimum interest rate, index-linked annuities as showing gains or losses based on returns in indexes, and variable annuities as letting you choose subaccounts similar to mutual funds, with a chance you could lose some or all of your money.

The type also tells you who regulates the sale. FINRA's annuities page notes that while all annuities are regulated by state insurance commissioners, variable annuities and registered index-linked annuities (RILAs) are also regulated at the national level by the SEC and FINRA.

Mark this step clear only if you can write one sentence naming the contract, its type, when payments would start and who bears the investment risk. The NAIC's Annuity Disclosure Model Regulation (2021 edition) calls for a disclosure document that gives the generic name of the contract, the company product name and form number, and the fact that it is an annuity. Ask for that document if you do not have it.

Step 2: Know who is selling it, how they are paid and whether they check out

The NAIC's Suitability in Annuity Transactions Model Regulation (#275, 2020 revision) calls for an agent, before recommending an annuity, to give you a disclosure form describing the relationship, which products the agent is licensed to sell, whether the agent can sell annuities from one insurer or several, and the sources and types of compensation. On request, the model calls for a reasonable estimate of the agent's cash compensation, which may be stated as a range. The NAIC's best-interest topic page (last updated November 2023) says most states have enacted the updated model, so your state's version may differ in details.

Then verify. TDI's annuities guide tells buyers to make sure the agent and company are licensed in the state, and, for variable annuities, to confirm the agent's registration with FINRA through BrokerCheck.

Mark it clear if you have the disclosure form in hand, understand how the seller is paid and have confirmed the licenses yourself.

Step 3: Check the fit with your own situation

Model #275 lists the "consumer profile information" an agent should make reasonable efforts to gather before recommending an annuity, including your age, annual income, financial situation and needs, financial objectives, intended use of the annuity, financial time horizon, existing assets, liquidity needs, liquid net worth, risk tolerance, the money used to buy it and your tax status. If no one asked you about these things, that is a mark against the process.

Answer the same questions for yourself. What is this money for? When might you need some of it? What else do you have for emergencies? TDI's guide puts one caution plainly: be careful about putting all your assets into an annuity. Mark this step unclear if you cannot explain why this money belongs in this contract.

Step 4: Separate guarantees from projections

Every annuity mixes promises with possibilities. Under the NAIC disclosure model, the disclosure document should describe the guaranteed and non-guaranteed elements of the contract. For fixed indexed annuities, it should also explain the elements used to figure index-based interest, such as participation rates, caps or spreads, and note that rates may change and are not guaranteed. Illustrations must be clearly labeled, and the model bars them from stating or implying that non-guaranteed amounts are guaranteed.

Take a pen and circle every number on the illustration that is not guaranteed. Then find the guaranteed values. Mark this step clear only when you know the worst case the contract actually promises, not just the attractive example.

Step 5: Price the exit, not just the entry

Many annuities are built to be held for years. FINRA's annuities page (checked October 2026) notes that variable annuities can feature surrender periods of eight years or more, with penalties if you cash out during that time. TDI's list of questions to ask includes the surrender period and charges, whether there is a free-withdrawal option and its terms, whether the annuity can lose value, and what the fees are.

Model #275 also expects the agent to have a reasonable basis to believe you were told about features such as the surrender period and charge, potential tax penalties, mortality and expense fees, rider charges, limits on interest returns and possible changes in non-guaranteed elements. If any of these were skipped, mark this step missing and ask for them in writing.

Step 6: If it replaces something, grade the swap separately

Replacing an existing annuity or life policy deserves its own review. When an exchange or replacement is recommended, Model #275 calls for the agent to weigh whether you would pay a surrender charge, start a new surrender period, lose existing benefits or pay higher fees; whether the new product would substantially benefit you over the life of the product; and, under the 2020 model text, whether you have had another exchange within the preceding 60 months. FINRA's annuities page adds that exchanging contracts "usually means the clock restarts" for early withdrawal penalties, and that you should only make a change "when it's better for you, not just better for the person recommending the new product."

Mark this step clear only if you have the current contract's value, surrender charge and benefits side by side with the new offer.

Step 7: Use the review window and tally your grade

Under the NAIC disclosure model, when the application is taken in a face-to-face meeting, you should get the disclosure document and the NAIC Buyer's Guide at or before the time of application. If they are not provided by then, the 2021 model calls for a free-look period of at least 15 days to return the contract without penalty. States set their own periods; TDI's guide (last updated October 2023) says annuities sold in Texas must have a 20-day free-look period, and replacement annuities a 30-day period. Check your own state's rule with its insurance department.

Now count your marks. All clear means you understand the offer well enough to make your own decision. Any unclear or missing mark is a question to resolve in writing before you sign, or before your free look runs out. A seller who resists that homework has told you something too.

Key takeaways

• Grade your understanding of the offer and the sales process, not the insurer or product in general.
• Get the agent's disclosure form and the annuity disclosure document, and confirm licenses yourself.
• Circle every non-guaranteed number and find the guaranteed worst case.
• Know the surrender period, charges and free-withdrawal terms before you buy.
• Treat any replacement as a separate decision with a side-by-side comparison.
• Use your state's free-look period to finish any unanswered questions.

Sources

• Texas Department of Insurance, Annuities guide (last updated October 16, 2023)
• National Association of Insurance Commissioners, Suitability in Annuity Transactions Model Regulation #275 (2020)
• National Association of Insurance Commissioners, Annuity Disclosure Model Regulation #245 (2021)
• National Association of Insurance Commissioners, Annuity Suitability & Best Interest Standard (last updated November 1, 2023)
• FINRA, Annuities