What to do before, during and after your annuity free look period

A free look period is an important window of time provided by insurance companies to policyholders. It offers a last chance to review an annuity and its contract in detail and cancel without penalty if it doesn’t align with your financial goals. This period typically lasts at least 10 days, but it can vary depending on the state you reside in and the annuity company.

What to do before an annuity free look period

Before receiving an annuity contract, it’s essential to conduct thorough research and gather information. After all, buying an annuity is a major financial decision, so you want to be as prepared as possible prior to submitting your application.

Do your research

Before you receive your contract, make sure to research prospective insurance companies along with the type of annuity you want to buy.

This is also a good time to assess your financial goals and determine if an annuity is even a good fit for you.=

To determine if an annuity fits your needs, ask yourself the following:

• Will an annuity’s passive income help fill a gap in your retirement budget?
• Are you willing to accept lower long-term returns for the guaranteed income of an annuity, compared to the potentially higher returns of stocks or other well-performing investments?
• Do you prefer income for life or income for a fixed period?
• Do you want the annuity to provide payouts only for yourself or for a surviving spouse as well?

Unlike bank deposits, annuities aren’t backed by the U.S. government. That means if the insurance company providing your annuity goes belly up, your money could go with it, though state guaranty associations offer some protections. Before you plunk down your hard-earned cash, do your due diligence.

To evaluate a provider’s financial strength, look for high ratings from reputable agencies like A.M. Best. Also consider customer reviews and satisfaction scores from sources like J.D. Power.

After you select a company, ask plenty of questions along the way. Get details about the annuity’s rate of return and how it’s calculated. Understand the product’s fees and commissions, along with any penalties for accessing your money after annuity payments begin. 

Scott Witt, an actuary and fee-only insurance advisor at Witt Actuarial Services, says consumers should figure out what they really want well before they sign the contract.

“The free look period just provides some additional time to look at things that should have been looked at before the purchase was done,” says Witt.

Understand what a free look period is

An annuity free look period is a grace period, typically between 10 and 30 days, during which you can decide if the annuity isn’t right for you and return it for a full refund. 

Free look periods vary by state. For example, in Texas, it’s 20 days for new annuities and 30 days for replacement annuities. However, in some states such as Montana and Oklahoma, a 15-day free look period is only required if the insurer fails to provide you with a buyer guide and necessary disclosure documents.

Some insurance companies may offer free look periods longer than the state minimum requirement, too.

If your annuity doesn’t offer a free look period, proceed with caution — it might be a warning sign of an unscrupulous annuity provider.

If you recently purchased an annuity without a free look, contact your state’s insurance department to inquire about your rights. You can find contact information for your state insurance department on the National Association of Insurance Commissioners website.

Speak with a financial advisor

Most annuities have high commissions baked into the contract, giving insurance agents and brokers a financial incentive to get you to sign on the dotted line — even if that annuity isn’t the best option for you.

That’s why it’s beneficial to speak with a fee-only financial advisor or fee-only insurance advisor first. These professionals are required to act in your best interest, and can provide valuable advice and personalized guidance based on your unique situation.

A fee-only advisor is paid by you — not an insurance company — so you can rest assured their advice is truly unbiased. They can help you assess the suitability of an annuity, explain complex terms and identify potential alternatives.

“It boils down to suitability,” says Witt. “It’s a matter of determining if the product is a good fit for what you need or is it something that’s just being sold by a salesperson.”

New to annuities?

Annuities are complex and a bit different from other financial products. Learn how annuity fees and commissions work and the common annuity terms that are helpful to know.

What to do during an annuity free look period

The free look period is your final opportunity to evaluate an annuity and decide if it’s the right investment for you. Otherwise, getting out of an annuity can be very difficult, if not impossible.

Once the period expires, the annuity contract’s terms and conditions take effect. Canceling or withdrawing from the annuity after this can result in surrender charges or other penalties.

Here’s how to make the most of this window.

Read the contract

Your free look period starts when you receive your annuity contract. Begin reviewing the document right away to make an informed decision.

Pay attention to these key points in your contract.

• Rate of return: Look for an explanation of the initial interest rate, including any bonuses or introductory periods, as well as the duration of the rate and how it might change in the future. 
• Payouts: How often will you receive regular payments from the insurance company?
• Death benefit: Understand if your contract provides a death benefit to your heirs and how the benefit is calculated. 
• Withdrawal provisions: Familiarize yourself with the rules on withdrawals, including surrender charges. Find out how much you can withdraw from the account each year without penalty. Review how the value of your annuity will change if you make withdrawals. 
• Fees and expenses: Be aware of all the fees associated with the annuity, including management fees, mortality and expense risk charges, and surrender charges. You should find a list of specific dollar amounts or percentages for each fee along with clear explanations of how they apply.
• Investment options: If you’re purchasing a variable annuity, research the available investment options and their performance history.
• Taxes: Look for a summary of the federal, state and local tax implications of your annuity. 

Annuities are complex, so carefully read the contract to fully understand your rights and responsibilities. Even after thorough review, seeking advice from a lawyer, financial advisor or tax professional is a smart move.

Likewise, if you have any questions or concerns about the contract, don’t hesitate to contact the insurance company and ask them to clarify.

This is also a good time to explore alternative investment options. Take the time to re-evaluate whether an annuity aligns with your overall financial goals and objectives.

Know how to cancel the contract

Having second thoughts? If you decide you want to walk away from your annuity during the free look period, here are the general steps you’ll need to take to cancel your contract.

1. Notify the annuity company: Contact the insurance company that issued the annuity. Provide them with your contract number and clearly state your intention to cancel the contract. You don’t have to explain why.
2. Submit required documentation: You may need to submit documentation to confirm your cancellation request, such as a signed letter or form.
3. Request a refund: Once your cancellation is confirmed, request a refund of any premium payments made. The insurance company should provide you with a check or other payment method.

Make sure to keep copies of all correspondence with the insurance company too, including the cancellation request and any refund documentation. Remember, if you cancel your contract during the free look period, you should receive a full refund of your premium without any penalties.

What to do after an annuity free look period

Once your free look period comes to an end, you’ve made an important decision: You’ve either chosen to keep or cancel your annuity contract.

Here’s what comes next.

Keep the contract

If you chose to keep your annuity, make sure to retain a copy of the contract for your records. You’ll want easy access to this document for future reference, especially when it comes to making withdrawals or addressing any issues.

Once you start receiving payouts, you should receive a statement from the insurer at least once a year. This document will outline the accumulation and cash surrender value, if any, of your annuity at the end of the reporting period along with the total amount that’s been credited to your contract or paid out during the reporting period.

Make sure to get your money back

An insurance company is legally required to honor your state’s free look provision. If you canceled the contract during this window, but are having issues getting your refund, you can contact your state’s department of insurance or your state guaranty association and file a complaint.

Check the National Organization of Life and Health Insurance Guaranty Associations for contact information for your state.

Bottom line

The free look period is designed to protect you and your financial interests. It offers extra time to carefully review a new annuity contract and make an informed decision. Ultimately, the choice of whether to proceed with an annuity is yours alone. Remember, it’s your money and it’s your future. Choose wisely.