Whether you want to grow your savings, preserve wealth, or create a consistent cash flow in your portfolio, annuities are powerful long-term investment products. But buying your first annuity can feel intimidating. With so many contract types and legal terms to review, there's a lot to consider when adding an annuity to your portfolio.

Traditionally, you purchase an annuity from a broker (the middleman between you and the insurance provider). But these days, digital providers like Gainbridge^® offer a more direct approach. Read on to discover how to buy an annuity that fits your financial situation.

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How to buy an annuity: A 5-step guide

The lengthiest part of buying an annuity is finding a contract that aligns with your goals. Here’s a five-step guide to help you narrow down your options and find a suitable plan.

1. Evaluate your financial goals

Start by considering your “why” when buying an annuity. A popular selling feature of annuities is their earning potential. Deferred annuities can take decades to mature, providing plenty of time for compounding returns. Plus, annuities are typically tax-deferred, so paying the IRS isn't necessarily a concern as your investment increases. Although the long time horizon means annuities aren't as liquid as other assets, they're a near-guaranteed way to grow funds.

Some annuities also offer financial security during retirement. When you invest in fixed annuities, for instance, you know upfront how much you'll gain in interest payments.

Add-on features called riders give you even more power to create an annuity that aligns with your financial vision. For example, with a Guaranteed Lifetime Withdrawal Benefit (GLWB), you'll receive income payments for the rest of your life — which may be a good option if you're concerned about outliving your savings. Other riders provide extra funds for medical emergencies, payout adjustments for inflation, and minimum guaranteed withdrawals, giving you further tools to personalize your investment. 

2. Research different annuity types

Each annuity type has unique characteristics you should compare against your financial goals. Since the annuity type you pick determines your risk profile and expected returns, take your time evaluating each option. 

Fixed annuity

Fixed annuities offer a flat compounding interest rate on your deposit for the agreed-upon term. The number on your fixed annuity's annual percentage yield (APY) is the amount you'll get on your deposit until you receive payouts. If you favor simplicity and want to lock in a guaranteed rate of return, a fixed annuity may be a good option.

Variable annuity

Unlike a fixed annuity, there's no way to predict your gains in a variable annuity. Instead of offering a stable rate of return, with variable annuities you select one or more subaccounts for your deposit. The value of a variable annuity depends on the performance of your subaccounts. 

Variable annuities offer the greatest potential for gains if your subaccount consistently rise in value. But they don't have downside protection, so you could lose your principal deposit in unfavorable market conditions. 

Fixed index annuity

A fixed index annuity tracks a market index’s performance (like the S&P 500) and gives you price exposure to its fluctuations. But unlike variable annuities, fixed index annuities guarantee you won't lose money if the underlying index drops in value. With a fixed index annuity, you don’t actually invest in the stock market, instead you are credited interest based on the performance of the index your fixed index annuity is tracking.

Say a fixed index annuity guarantees 0% downside. You’d lose 0% on your deposit even if the S&P 500 falls. To account for this downside insurance, fixed index annuities often have a cap on gains, which limits your upside potential. So if a fixed index annuity has a max cap of 5% and the S&P 500 rises by 7%, you are only credited 5% interest your account.

3. Choose a reputable annuity provider

Unlike bank-issued investments like certificates of deposit (CDs), annuities are insurance policies and don't qualify for federal protections like FDIC insurance 

Trustworthy annuity providers have high rankings from independent credit rating agencies to prove their financial security. For example, Gainbridge Insurance Company maintains an A- (excellent) score from A. M. Best, highlighting financial stability and a superior safety profile¹.

Also review each annuity provider's fee schedule, noting any hidden charges and commissions. And ask each of your prospects questions — perhaps via email or a website chat box — to test their customer service for responsiveness and professionalism.

4. Submit your application

Before completing the annuity process, carefully read your contract's terms and conditions to understand all legal requirements and fee expectations, like high surrender charges for withdrawing funds early, administrative fees that reduce returns, or market value adjustments if you transfer or cash out at unfavorable times. Some annuities may also have mortality and expense risk fees or rider fees for added benefits, which can impact your overall investment returns.

If anything isn't clear in an annuity's terms, ask for further clarification from your representative at the insurance company. Also, double-check that your annuity has the guarantees and additional riders you’d expected.

5. Fund your annuity 

Finally, deposit funds into your account by either investing one lump-sum payment through a bank transfer or — if the annuity type and insurance provider allow it — via frequent and smaller payments over a set timeframe.

If you open a non-qualified annuity, you'll use after-tax dollars to fund your account. And if you open a qualified annuity, you could use pre-tax dollars in a retirement account like a traditional IRA or 401(k). 

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What’s the minimum annuity investment?

An annuity's minimum deposit varies between providers and contract types, but the average range is typically around $5,000–25,000. It's common for fixed annuities to have lower minimums compared with variable and fixed index annuities, but always check with your insurance company for specifics.

Also, on top of your initial deposit, many contracts allow you to  make frequent payments on deferred annuities throughout the accumulation phase. These continuous contributions may reduce your initial deposit requirement — depending on how much you agree to pay each month.

When to buy an annuity: The best time to make an annuity purchase 

While you can buy an annuity if you’re 18 and over (as long as there aren't any provider-specific age restrictions), the “right” time to buy varies between individuals.

People most commonly buy annuities when planning for retirement. Since most deferred annuities take about a decade to mature, you might start seriously considering an annuity as you near your 50s. The benefit of opening an annuity around 50 is that you'll probably begin to receive penalty-free payouts once you qualify for retirement per the IRS at 59½. That said, there are non-tax-deferred annuities that allow you to invest and withdraw without an IRS penalty — regardless of your age.

Although buying an annuity as you approach retirement is common, consider your current situation, goals, and projected income needs.

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¹ A.M. Best Company assigns ratings from A++ to S based on an insurance company’s financial strength and ability to meet obligations to contract holders. A- (excellent) is the 4th highest of 16 ratings. For more information about the rating, click here: www.ambest.com.

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Annual Percentage Yield (APY) rates are subject to change at any time.

All guarantees are based on the financial strength and claims paying ability of the issuing insurance company. 

SteadyPace^TM is issued by Gainbridge Life Insurance Company (Zionsville, Indiana.)