A Checklist for Reading Any Annuity Illustration
An annuity illustration is a contract document, not a sales brochure. Here are the five places to look before deciding whether a specific product fits a specific problem.
An illustration is the document a carrier produces to show what a fixed indexed annuity contract will do under different assumptions. It is not marketing copy, and it should not be read like marketing copy. It is the closest thing you get to seeing the contract's mechanics on paper before you sign. Here are five places to look.
1. Surrender period and surrender charges
Most fixed indexed annuities carry a surrender period of seven to ten years. During that window, there is typically a free withdrawal amount, often around 10% a year, that you can take without penalty. Anything beyond that triggers a surrender charge. The question to ask is whether the liquidity terms actually fit your situation: how much of this money might you need access to, and when, relative to the length of the surrender schedule.
2. Cap rate and participation rate
These two numbers determine your upside when the linked index is positive. The cap is the maximum return you can earn in a given crediting period. The participation rate is the percentage of the index's gain you actually receive. A higher cap generally means more upside potential. Both figures vary by carrier and by product, so they are worth comparing side by side rather than taking at face value from a single illustration.
3. Income rider fee and income account growth rate
If the contract includes a lifetime income rider, two more numbers matter. The income rider fee is what you pay, as a stated percentage, for the guarantee. The income account growth rate is the rate at which the notional income account grows during deferral, which is what your eventual payment is calculated from. A lower fee means less drag; a higher growth rate means more income built up by the time you turn it on. Neither number tells you much in isolation. What matters is the net income output: what guaranteed monthly payment does this specific product produce, at your age, starting on your intended date, after the fee is accounted for. That is the number to compare across products, not the fee or the growth rate by themselves.
4. The carrier's financial strength rating
The guarantee behind any annuity is only as good as the company standing behind it. Look for a carrier rated A or better by an agency such as AM Best, Moody's, or S&P. Don't reach for a slightly higher payout by taking on credit risk with a lower-rated carrier. It's also worth knowing that annuities are regulated at the state level, and every state has a guarantee association that protects policyholders if a carrier becomes insolvent, with coverage limits that vary by state but are commonly around $250,000 per individual per company. That backstop exists, but it is not a reason to deprioritize the rating itself.
5. The guaranteed column, not the projected column
Every illustration shows both a guaranteed and a projected set of values. The projected column assumes favorable conditions that may or may not materialize. The guaranteed column is the number the company is legally obligated to deliver regardless of what the market does.
The guaranteed column is what the insurance company is legally obligated to deliver. That's the number that matters.
When you're deciding whether a specific instrument closes a specific income gap, the projected column tells you a best case. The guaranteed column tells you what you can actually plan around. Build your floor on the number the contract has to deliver, not the number it might.
From the Podcast
This article is drawn from Episode 13 of The Income Standard podcast, What an Annuity Actually Is. Listen to the full episode for the complete walkthrough.
This article is for general informational and educational purposes only and does not constitute financial, tax, legal, investment, or Social Security advice. It is not a recommendation to buy or sell any product. Examples are hypothetical illustrations, not predictions of any individual result. The Income Standard is the educational platform of Long Financial Services, LLC (LFS), a licensed insurance agency operating across the United States. Insurance products are offered by independently licensed insurance professionals offering fixed insurance and annuity products only. Securities and investment advisory services, where applicable, are offered through an independently registered investment adviser, separate from LFS. This is not legal, tax, investment, or Social Security advice.