Should You Buy an Annuity? What to Ask Before Committing

Investors rattled by market volatility are increasingly being steered toward annuities by financial advisers, but consumer advocates consistently urge caution before locking in any long-term insurance contract. The recommendation to purchase an annuity is not inherently problematic, but the suitability of the product depends heavily on an individual's age, income needs, tax situation, and overall retirement timeline.

Annuities are insurance products that convert a lump-sum premium into a stream of future income payments. They come in multiple forms — fixed, variable, and indexed — each carrying distinct risk profiles, fee structures, and surrender-charge schedules that can significantly erode returns if the contract is exited early. Critics argue that the complexity of annuity contracts often benefits the seller more than the buyer, particularly when high commissions are involved.

Read more Should You Buy an Annuity? What to Ask Before You Commit →

Seeking a second opinion from a fee-only fiduciary adviser — one who is legally required to act in the client's best interest and does not earn commissions on product sales — is widely considered a prudent step before committing to any annuity contract. A fiduciary review can help determine whether a simpler, lower-cost alternative such as a Treasury ladder or a diversified bond portfolio might achieve similar income-protection goals at a fraction of the cost.

Market volatility can make guaranteed-income products appear especially attractive, but financial planners note that the perceived security of an annuity must be weighed against the long-term opportunity cost of removing capital from growth-oriented investments. Liquidity constraints embedded in most annuity contracts also deserve close scrutiny, particularly for investors who may need access to funds within the contract's surrender period.

Continue reading at MarketWatch.com