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Shopping for an Annuity

Although many insurance companies offer annuities with the same (or at least similar) features, that doesn't mean that all products and all companies are the same. As with all financial products, you should shop around and compare. Here are some things to consider when shopping for annuities.

Financial stability

Moody's, Standard & Poor's, and A. M. Best all rate insurance companies for financial stability and customer satisfaction. When purchasing an annuity, it is best to consider buying only from companies that have received high ratings from each of these services.

If you're buying a variable annuity (as opposed to a fixed annuity), you can be less concerned about the financial stability of the issuing company, because assets held in the subaccounts of a variable annuity are not subject to the claims of the creditors of the issuing annuity company.

Get the best performer

When shopping around for a fixed annuity, the one offering the highest initial interest rate is not necessarily the best value.

Often, companies will offer a very high initial rate, guaranteed for one or more years, as a way to induce a sale. After the guarantee period ends, the rate drops steeply. Ask the issuers to provide the historical returns for their annuities that they have paid over the last 10 to 20 years. Those returns are a better indicator of what to expect in the future from that company.

Also, check the guaranteed minimum interest rate. Although 3 to 4 percent is common in today's market, you may be able to find a company that offers an annuity with a higher minimum rate guarantee (annuity guarantees are subject to the claims-paying ability of the annuity issuer.)

Compare fees

Annuity products in general, and variable annuities in particular, have a number of fees structured into the product. These fees can vary greatly from sponsor to sponsor and from product to product.

Higher fees can offset a higher rate of return if the fees are significant enough. Therefore, the smart consumer factors the amount of fees that will be deducted from the investment return before making a final decision.

Watch out for surrender charges

It's common for annuities to have contingent deferred sales charges, commonly known as surrender charges, that are assessed when you surrender some or all of the annuity within a certain number of years after purchasing the annuity. Typically, the surrender charge will begin at about 7 percent and decrease by 1 percent annually. Ideally, your surrender charge is not longer than the interest rate guarantee on a fixed annuity. If it's not, and the insurance company drastically reduced the interest rate it is paying, you may find yourself with the choice of keeping the annuity and earning a low rate, or surrendering it and paying a surrender charge.

Many variable annuities can be purchased without a surrender charge. However, you can expect to pay slightly higher annual fees when buying these annuities.

Do your homework

Many resources are available that allow customers to compare products and features. Several websites, for example, list competing products and features. Also, several publications that you might find in your local library offer this information, usually updated on a monthly basis. Since you will have to purchase your annuity through a licensed broker in any event, you may want to consult your investment advisor, stockbroker, or insurance professional to see what they can offer.

Note:Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.