If you’re looking for a way to create an additional income stream for retirement, you may consider purchasing an annuity. An annuity is an insurance contract that pays out money to you during your lifetime that you can use to cover expenses in your later years. If you’re thinking of getting an annuity, you should know about the free look period: a period of time (typically 10 days or more), during which you may terminate your contract without paying any surrender charges and receive a refund for the contract. Knowing what this is and how to use it to your advantage can help ensure that buying an annuity is the right choice.
Free Look Period, Definition
When you purchase an annuity you’re signing a contract. That contract spells out the terms under which you will pay a premium to the insurance company and the insurance company will then make payments back to you.
Annuities can be immediate, meaning payments to you begin within a short time frame after purchasing the contract. Or they can be deferred, meaning you begin receiving payments at a later date specified by the contract.
If your annuity contract includes a free look period, it means that you have set amount of time to review the contract to decide if you want to keep it or not. The free look period may last anywhere from 10 days to 30 days, depending on the terms of the annuity contract, the insurance company you’re working with and what state you live in.
There’s no set guideline for free look periods so they can vary greatly from state to state. In some states, there’s no legal requirement for annuity companies to offer a free look period, though it’s strongly encouraged that they do so.
What’s the Benefit of Having a Free Look Period?
Annuity contracts can be a useful tool in creating a long-term financial plan, but they aren’t always right for every investor. A free look period gives you an opportunity to look more closely at the annuity you’ve purchased to make sure it’s a good fit for your needs and goals.
You can use this time period to ask questions about the annuity, review the fees you’re being charged and gauge whether the income payments the annuity will eventually provide are sufficient. The free look period is also your chance to research the company issuing the annuity if you haven’t done that already.
One of the biggest risk factors with annuities is that the insurance company that sells it to you may not be able to make payments to you when the time comes. This can happen if the insurer isn’t financially stable. During your free look period, you can check the annuity companies ratings using a resource like AM Best to see how it compares to other annuity providers.
Free Looks Periods Can Save You Money
When purchasing an annuity, there are a whole host of fees you might pay. One of the most important to be aware of is the surrender charge.
A surrender charge applies if you decide to cancel your annuity for any reason. If you opt to cancel or return an annuity during the free look period, you won’t pay a surrender fee. And unless your annuity contract states otherwise, you’ll get all of the money you paid for the annuity refunded.
Having time to go over the terms of the annuity contract could also save you money if you’re using the free look period to shop around. For example, you might come across another annuity from a different company that charges fewer fees or has a lower cost. If you’re within the window to cancel without a penalty, you may decide to go with the other annuity instead.
How to Cancel an Annuity Contract
If you decide that an annuity you’ve purchased isn’t right for you and you’re still within your free look period, you just need to reach out to the company you purchased the annuity from to cancel. It’s important to keep in mind that the clock starts ticking on a free look period when the annuity contract is delivered to you.
When you get in touch with the annuity company you’ll need to tell them you want to cancel the contract. You don’t need to give a reason for doing so, though you may be asked to sign paperwork stating that you want to cancel.
From there, you should be able to have your money returned to you with no fees or penalties. It’s a good idea to get verification of the cancellation and your refund in writing so you have documentation in case the refund doesn’t arrive in the time frame the annuity company says it will.
Canceling an Annuity After the Free Look Period Ends
If the free look period for your annuity ends or your contract didn’t include one, there are other ways to get out of an annuity you no longer need or want.
First, you can check your contract to see if there’s a return of premium rider included. This rider lets you cancel the annuity and have any amounts you’ve paid toward the premiums returned to you.
Another option – assuming you’ve decided the pros of an annuity outweigh the cons – is using a 1035 exchange to switch from one type of annuity to another. This may be appealing if you still want to include an annuity in your income plans but find that a different kind of annuity is a better fit.
A third option is cashing out the annuity early. This can put a lump sum of money in your hands and release you from the annuity contract. But keep in mind that it may involve paying a steep surrender charge, not to mention taxes on the money you receive.
The Bottom Line
Free look periods offer some built-in protection when purchasing an annuity. If you’re considering buying an annuity, be sure to ask the company you’re considering purchasing it from whether a free look period is included and what the terms are. Once you receive your annuity contract, use the time that you’re given to go over it carefully to make sure the terms, benefits and costs align with your expectations.
Tips for Investing
- Consider talking to your financial advisor about whether annuities have a role to play in your retirement income plan. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor tool can help. This free tool allows you to get personalized recommendations for advisors in your local area. If you’re ready, get started now.
- Annuities can provide a steady income in retirement but it’s important to understand the basics. For example, you should know the differences between fixed and variable annuities and whether it makes more sense to choose an immediate or deferred annuity. You should also consider the premiums involved, the fees and potential tax implications of receiving annuity income.
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