What to check before signing an annuity contract

An annuity contract can run 50 pages or more, and the details matter. Surrender periods, fee structures, payout formulas, and the financial strength of the issuing company all affect what you actually get down the road. This checklist walks through the main items to review before you sign, with a focus on what North Carolina residents should verify and the questions worth bringing to a licensed professional.

The point is not to turn you into a contract analyst. It is to help you spot the sections that deserve closer attention and know what to ask about.

Check the insurer's financial strength

An annuity is only as reliable as the company behind it. Unlike bank deposits, annuities are not FDIC-insured. The guarantees in your contract, whether those are interest rates, income payments, or death benefits, depend on the insurer's ability to pay claims years or decades from now.

Independent rating agencies grade insurance companies on financial stability. The four main ones are:

• AM Best
• S&P Global Ratings
• Moody's
• Fitch Ratings

No single rating tells the whole story, so checking more than one source is reasonable. Look for recent changes in ratings, not just the current grade. A company that was downgraded last year is a different situation than one that has held a top rating for a decade.

You can also verify that the insurer is licensed to do business in North Carolina through the NC Department of Insurance. If a company is not licensed in the state, the guaranty protections discussed below may not apply.

Read the surrender charge schedule

Surrender charges are the penalty you pay for withdrawing money from an annuity during the early years of the contract. In North Carolina, these typically apply for the first 5 to 15 years, though the exact schedule varies by contract, according to the NC Department of Insurance.

What to look for in the contract:

• How long the surrender period lasts. Some contracts have 7-year surrender periods. Others run 10 or even 15 years. The longer the period, the longer your money is locked up without penalty.
• The surrender charge percentage each year. Charges usually start higher and decline over time. A contract might charge 7% in year one and drop by about 1% per year after that, but ranges vary widely.
• Whether there is a free withdrawal allowance. Many annuities let you take out 10% of the contract value each year without triggering surrender charges. Not all contracts offer this.
• What triggers the surrender charge. Withdrawals above the free amount, full surrender, and sometimes even death benefit payouts can be affected.

The cash surrender value, what you would actually receive if you closed the contract early, can end up less than what you paid in. That is worth understanding upfront.

Understand all fees, riders, and ongoing costs

Annuities can carry several layers of cost, and they are not always obvious at first glance. Some are built into the contract. Others are optional features, called riders, that add a benefit and a corresponding charge.

Items to check:

• Mortality and expense charges. Common in variable annuities; may not apply to fixed annuities.
• Administrative fees. Some contracts charge an annual flat fee or a percentage of the account value.
• Rider costs. Income riders, death benefit riders, and long-term care riders each add a fee, sometimes 0.5% to 1.5% per year or more. The rate depends on the rider and the contract.
• Market value adjustments. Some fixed annuities include a market value adjustment that can reduce your surrender value if interest rates have risen since you bought the contract.

The contract disclosure should list all charges in one place. If it does not, or if the charges are hard to find, that is worth asking about. For more detail on how fees work in fixed annuities specifically, see our guide on how annuities work and the different types available.

Review payout options and income guarantees

Annuities offer several ways to receive money once the contract's accumulation phase ends. The options available, and how they calculate your payment, vary by contract.

Common payout structures include:

• Life income. Payments continue for as long as you live. The amount depends on your age at the time payments start and the contract terms.
• Period certain. Payments for a set number of years, regardless of how long you live.
• Joint and survivor. Payments continue to a spouse or other beneficiary after your death, usually at a reduced amount.
• Lump sum. Taking the full value at once. This has tax implications worth discussing with a tax professional.

If the contract includes an income guarantee rider, read the terms carefully. Some guarantees promise a minimum income level, but the details can be complicated. Understand what is actually guaranteed by the contract language, not just what the sales illustration shows.

All guarantees in an annuity contract depend on the issuing insurer's claims-paying ability. That circles back to the financial strength check above.

Know the tax rules (general education only)

Annuity earnings grow tax-deferred, meaning you do not pay income tax on gains until you withdraw them. When you do take money out, withdrawals are taxed as ordinary income, not at capital gains rates.

A few general points worth knowing:

• If you withdraw before age 59 and a half, the IRS may impose a 10% early withdrawal penalty in addition to regular income tax, with some exceptions.
• North Carolina generally follows federal tax rules for annuity income, with no special state-level tax treatment beyond those rules according to general understanding. Individual situations vary, however.
• How you take money out (lump sum vs. periodic payments) affects your tax bill in any given year.

This is general education, not tax advice. Your tax situation depends on your total income, filing status, deductions, and other factors. A tax professional can help you think through the specifics.

Confirm your free look period

North Carolina gives you a window to review the contract after you receive it and return it for a full refund if you change your mind.

• New annuity contracts: 10-day free look period.
• Replacement contracts (replacing an existing annuity or life insurance policy): 30-day free look period.

This comes from North Carolina Administrative Code 12.0447. The free look period starts when you receive the contract, not when you sign the application. Use this time. Read the contract on your own, away from any sales presentation. Check the surrender schedule, the fee disclosures, the ratings, and the payout terms against what you were told.

If anything in the contract does not match what you discussed with the agent, that is the time to ask questions or return the contract.

Questions to bring to a licensed professional

Annuity contracts are long, and the language can be dense. A licensed insurance agent or financial professional who is not the one selling you the contract can offer an independent perspective. Here are questions worth asking:

• How do the total fees affect my returns over the surrender period?
• What happens if I need to access my money early beyond the free withdrawal amount?
• Who is the issuing insurer, and what are their current financial strength ratings?
• How are the income guarantees calculated, and what conditions apply?
• What are the tax consequences of withdrawals in my specific situation?
• Is this contract a replacement for something I already own? If so, what am I giving up?
• How does this annuity compare to other options for the same purpose?

If you are buying through an agent, North Carolina requires that the agent be licensed by the NC Department of Insurance. You can verify an agent's license status through NC DOI's online tools.

Where to verify information in North Carolina

A few official resources for Cary and Triangle residents:

• NC Department of Insurance Consumer Services. You can call 855-408-1212 or file a complaint online at my.ncdoi.com. They can answer general questions about annuities, verify agent licensing, forward complaints to insurers, and review compliance. They do not provide legal advice or act as your representative.
• North Carolina Life and Health Insurance Guaranty Association. If an insurance company fails, this association provides limited protection for NC residents. For annuities, the coverage limit is $300,000 per owner per company. This is a safety net, not something to plan around. The association's website at nclifega.org has details on what is and is not covered.
• Financial rating agencies. AM Best, S&P, Moody's, and Fitch all provide insurer ratings. Some are available free online. Your local library may also have access.
• NAIC Buyer's Guide. The National Association of Insurance Commissioners publishes a buyer's guide for fixed deferred annuities that explains contract features in plain English.

North Carolina also adopted strengthened best-interest standards for annuity transactions in 2022, requiring agents to act in the consumer's interest when making recommendations. This does not eliminate the need for your own review, but it does set a legal expectation for the sales process.

Next steps

There is no shortcut around reading the actual contract. Sales illustrations and marketing materials are summaries. The contract is what governs.

If you have an annuity contract in hand and are not sure what to make of a section, a licensed professional who reviews contracts for a living can walk you through it. The NC Department of Insurance is also a resource if you want to verify an agent or understand your rights.

For more background on annuity types and mechanics, visit our annuities hub. If you have a specific question about annuity contracts, insurance, or other financial topics, you can ask us here and we will point you to useful information.

CaryFixedIncome.com is an educational resource, not a financial planning firm, insurance carrier, or tax advisor. This article does not recommend any specific annuity product or contract. For advice about your specific situation, speak with a licensed professional who can review your individual circumstances.