“I’d like to buy an annuity. How do I do that?” Although I’m not a fan of the term “buy” an annuity, it’s not uncommon that I hear that question. When I hear the word, “buy”, I think of a purchase that could depreciate in value – like a car, furniture, or even a stock. And to get my money back, I would have to “sell” it at whatever price the current market would offer me for it.
Well, you cannot “sell” an annuity. You can surrender it. You can transfer it. You can annuitize it. Or you can let it mature. But there is no process for selling an annuity to someone else or back to the company that issues it.
I guess if we were going to use the term “buy” in regard to an annuity, it would be appropriate for a Single Premium Income Annuity, or SPIA for short. That would indicate that you are sending a lump sum of money to an insurance company in exchange for a guaranteed income. However, if you were to die 6 months later then the insurance company would keep all of the money. So, you basically “bought” a guaranteed income with the understanding that you do not know how long you are going to live.
Of course, there are all kinds of options that you could choose from to prevent that from happening, but that is just one kind of annuity.
The annuities I deal with on a regular basis act more like a storage of money. You would “transfer” money to the insurance company and in exchange for letting them use that money to buy long-term bonds, they would give you a guaranteed interest rate, or the opportunity for growth through multiple indexing options.
Another option would be to add an income rider for an expense. But even this option would give you something in return if you decided not to keep it for the long-term. So, that’s my soapbox on the phrase, “buying an annuity.” Let’s move on to what the actual process looks like…
Finding the Right Annuity:
Before you find the annuity, you need to find the Annuity Advisor. There are a lot of idiots in this industry. The main thing you will want to look for is a “non-captive” agent or agency. “Non-captive” means this person is not beholden to any single company. They are independent and can look at all available annuity options using 3rd party software.
The other thing you will want to verify is that they are actually using 3rd party software. Some sort of program that will put all of the options right next to each other to verify that you are getting the best annuity for your situation. What you don’t want to hear is the advisor telling you, “This is the best annuity.” That literally means nothing without verification.
The Annuity Advisor will also help you pick an appropriate type of annuity for your purpose of the money (i.e., growth, guaranteed interest, income, etc.). After agreeing that the presented product and strategy fit your needs, then you move on to the next step.
Filling Out the Application(s):
This part can be tedious, but luckily most companies offer e-apps. The best part about e-apps is they can be completed virtually, they will auto-populate redundant information, and they’re idiot-proof. That way nothing is missed causing the application to get kicked back to the agent. That isn’t a huge deal, but it can be annoying to the person applying for the annuity because the advisor will have to come back to you and get the additional information and updated signatures.
Suitability:
A true Professional Annuity Advisor should know if a particular annuity or amount is appropriate for you before you even fill out the application, but once the application is submitted through an encrypted website, it will go through suitability. Suitability is protection for you, me, and the insurance company. They will want to verify that you have plenty of income and liquid assets outside of the annuity in case of an emergency.
I kind of laugh when people tell me that they “don’t want to put all of their money into an annuity.” I laugh because that’s not even possible. The insurance company will not allow it. The reason they only allow a certain percentage of your assets into an annuity is due to the scenario of finding yourself in a financial emergency and needing more than the 10% Free Withdrawal. If you must surrender your policy, they, in turn, must surrender some of their bonds which causes a loss, and that loss gets passed on to you.
Your advisor should be well aware of this situation and should only recommend funding an annuity with the amount that will help you achieve your income goal, or is within suitability range while verifying that you have plenty of liquid assets for emergencies.
Funding:
There are only 2 types of money that you can fund an annuity with:
- Qualified Money – i.e., tax-deferred from an IRA, 401(k), SEP, 457, 403(b), etc.
- Non-Qualified Money – cash, ROTH IRA’s, etc. Any money you have already paid the taxes on.
If you are funding with Non-Qualified Money, the process is very simple. After your application goes through suitability, you send the check directly to the insurance company and it gets applied to your policy.
SIDE NOTE: You should never make a check out to your advisor or their agency. That’s a red flag. There is never a scenario where the money should pass through your advisor’s hands. All funds should be sent directly to the insurance company.
If you are funding with Qualified Money, this process is a bit lengthier and more frustrating. During the application process, you and your advisor will fill out “transfer forms”. These forms will indicate the type of account the money is coming from, the current company it is being held with, and the amount to be transferred to the annuity. Then you will have to make sure the money has been moved to a money market or some sort of “cash equivalent” before it can be transferred to your annuity.
The reason this process is so frustrating is that most companies/advisors will not want to lose your business (i.e., they don’t want to lose the fees they are charging you). I’ve had clients lied to and flat out harassed by their former advisors when they tell them they are moving the money. I’ve seen companies state they haven’t received the transfer forms or continually have my clients transferred to “retention” departments when they call to have the money moved.
Not all companies will do this, but a lot of them do. This is the part of the process where you will need to be resolved in the idea of protecting your money and/or having a guaranteed income. Don’t be shocked if you must make multiple phone calls to your current advisor/brokerage company to verify that the money is indeed being transferred. Your Annuity Advisor would be happy to do this for you, but your current advisor/brokerage company will not talk to them without your permission. If you ever feel like you are being jerked around in this process, ask your Annuity Advisor to call the company with you and they will know what questions to ask and how to expedite the process. However, your participation in this process is not only necessary, it is vital!
This stage is by far the longest part of the process.
Policy Issue & Policy Delivery:
You did it! You made it! Once the funds have been transferred, the insurance company will issue the policy to your advisor, and he will then deliver it to you. They will answer any additional questions you may have, and you will sign the “Policy Delivery Receipt” to verify that you have received all of the issued paperwork.
This whole process can take anywhere from 2-6 weeks. Normally, 2 weeks for the person using Non-Qualified Money and has no obvious suitability issue. Most likely, it will be 4-6 weeks if you are using Qualified Money due to the exact scenario that I just described when trying to get the funds transferred.
Peace of Mind:
I know this can be scary. Making decisions about money that you have spent 30-45 years working for is not to be treated as a flippant subject. I just had a conversation this week with a super smart and super nice gentleman. Like me, he analyzes everything to death (we got along great!). And like me, he said that he was concerned about getting stuck in “analysis paralysis” over the strategy that I presented him.
With complete respect, I encouraged him to remember that this was his money, and he should do what he thinks is right. But I also let him know that I have had numerous clients describe a sense of peace once they made the decision to protect their money. The calm that comes from knowing your money is protected from market losses and having a plan that is on autopilot can only be known by those that have done it. This is why studies have shown that people with Defined Benefit Pensions are happier and live longer than those who have a big pile of money and are constantly worried about running out.
If you want to know what this peace of mind feels like, and you want to deal with someone who will treat your money with as much respect as you do, then I highly encourage you to watch my video series, “20% More Spendable Income in Retirement”. I will show you in detail how I use annuities to protect your money and get you more spendable income than the average advisor. There are 5 videos in this series, and they are between 11-15 minutes in length. Then take a moment to click the “Schedule A Call” button and find a time that works for you so we can have a short conversation.
All the best,
Marty