Buying an Annuity and Exiting a Variable Annuity: What to Know

Navigating Your Retirement Income Choices

As independent insurance professionals serving communities across Illinois and Indiana, we field questions every week from clients trying to make sense of their retirement options. Securing guaranteed income is a top priority for families and business owners who have worked hard to build their wealth. However, the financial terminology surrounding these products can feel incredibly overwhelming.

Whether you are looking to turn a portion of your savings into a dependable monthly paycheck or you are frustrated by the unpredictable performance of an old policy, understanding your options is the first step toward peace of mind. This guide explores the practical side of these financial tools. We will walk through the purchasing process, break down expected costs and payouts, and explain the strategies available if you realize you are stuck in a policy that no longer fits your needs.

The Current Market and Why People Are Buying

We are currently in a period that financial experts call "Peak 65," a time when millions of Americans are reaching traditional retirement age every year. Because fewer workers have access to traditional corporate pensions today, many are turning to the private market to create their own secure income streams.

According to LIMRA, total U.S. annuity sales reached a record $464.1 billion in 2025, driven by a desire for protected lifetime income and favorable interest rates [1]. People are actively seeking ways to shield their nest eggs from market volatility while ensuring they do not outlive their savings.

Fundamentally, an annuity is a long term contract between you and an insurance company. You provide a premium, either as a lump sum or through a series of payments, and the insurer promises to provide you with regular income immediately or at some point in the future. While the concept is straightforward, the execution requires careful planning. There are fixed options that provide guaranteed interest, indexed options that offer growth potential based on a market index without direct downside risk, and variable options that tie your money directly to investment subaccounts. Choosing the right path, or correcting the wrong one, requires a clear understanding of the mechanics.

The Purchasing Process: Where to Start

Many clients sit across from us and ask, "Exactly how do you buy an annuity?" The answer involves more than simply signing a check. It is a structured process designed to ensure the product aligns perfectly with your timeline, risk tolerance, and income needs.

If you are wondering how do you purchase an annuity logistically, the journey generally follows these fundamental steps:

• Assess Your Goals: Before looking at products, we need to define the mission for your money. Do you need income to start next month, or do you want the funds to grow tax deferred for another ten years?
• Evaluate the Types: Once we know your timeline, we can look at specific categories. A Single Premium Immediate Annuity is ideal for instant income. A Multi Year Guaranteed Annuity acts similarly to a bank certificate of deposit but often with better tax deferral benefits.
• Compare Carriers: Not all insurance companies are created equal. We look at the financial strength ratings of the carriers to ensure they have the stability to honor a commitment that might last thirty years.
• Submit the Application: A common question we receive is, "Logistically, how do I purchase an annuity?" Once you select a product, your licensed agent will help you complete a formal application. The insurance company will review your age, your initial premium amount, and the specific riders or guarantees you selected.
• Fund the Contract: You can fund your new policy using cash from a savings account, proceeds from a home sale, or by rolling over funds from a 401(k) or IRA. People often want to know where and how to get annuities. While you might see advertisements online from direct to consumer companies, these contracts are issued by life insurance companies and are best acquired through licensed, independent insurance professionals. Working with an independent agency allows you to compare multiple carriers rather than being pushed toward a single company's proprietary product. You can learn more about our approach to this process in our guide to Annuities and Life Insurance Planning in Illinois and Indiana.

Costs, Premiums, and Expected Payouts

Clients frequently ask us, "Exactly how much does it cost to buy an annuity?" The wording here is important. Unlike buying a car or a television, buying an annuity does not typically involve paying an upfront out of pocket "fee" just to get the product. Instead, the "cost" is your premium deposit, the money you are transferring to the insurance company to fund the contract.

However, there are internal costs depending on the type of contract you choose. Fixed annuities generally have no visible annual fees because the insurance company makes its money on the spread between what they earn on their investments and the interest rate they guarantee to you. Variable annuities, on the other hand, can carry significant internal expenses, often totaling 2 percent to 3 percent annually to cover mortality and expense charges, administrative fees, and underlying mutual fund management fees.

When it comes to the income side of the equation, the numbers become much more concrete. For example, people frequently ask, "Exactly how much does a $200,000 annuity pay per month?"

The exact monthly payout is determined by your age, your gender, prevailing interest rates at the time of purchase, and the specific payout structure you select. Based on 2026 market data, a 65 year old male purchasing a Single Premium Immediate Annuity with a single life payout option can expect to receive approximately $1,230 to $1,288 per month for the rest of his life [2].

Alternatively, if you search online for "how much does a 200,000 annuity pay per month" you might see varying estimates because joint life payouts or period certain riders will lower that monthly figure. If that same 65 year old wants the income to continue for his spouse after he passes away, the insurance company has to plan for a longer payout period spanning two lives. Consequently, the initial monthly payment will be lower, perhaps closer to $1,050 a month, depending on the spouse's age. For more details on structuring these payments, review our resource on Annuity Setup and Payout Questions.

Navigating an Exit: Leaving a Variable Annuity Behind

While modern fixed and indexed annuities offer excellent stability, many consumers purchased variable annuities years ago and are now unhappy with their performance. Variable annuities expose your principal to market risk, meaning your account value can drop significantly during a stock market downturn. Combined with high internal fees, this can severely limit the growth of your retirement nest egg.

This leads to one of the most common rescue questions we get: how to get out of a variable annuity.

If you are realizing that your variable contract is no longer serving your financial goals, you are not permanently trapped. However, exiting requires careful strategic planning to avoid unnecessary tax burdens or financial penalties. Here are the primary ways to transition out of a variable contract.

The Free Look Period

If you just recently purchased the policy and immediately realized it was a mistake, you have a brief window of time to reverse the decision. State insurance regulations mandate a "free look" period, usually lasting between 10 and 30 days after the contract is delivered. During this window, you can cancel the policy and receive a full refund of your premium without any surrender charges or tax penalties.

Surrendering the Contract

If you are past the free look period, you can request a full surrender of the policy, which means the insurance company cuts you a check for your account value. However, this is usually the least efficient way to exit.

First, you will likely face surrender charges. Insurance companies impose these fees to discourage early withdrawals, and they typically start as high as 7 percent or 10 percent in the first year, gradually decreasing over a period of five to ten years. Second, a full surrender is a taxable event. Any growth or gains you experienced in the contract will be taxed as ordinary income in the year you surrender it. Furthermore, if you are under the age of 59.5, the IRS may impose an additional 10 percent early withdrawal penalty on those gains.

The Section 1035 Exchange

For most clients looking to upgrade their strategy, the best approach is a Section 1035 exchange. Named after a specific section of the IRS tax code, a 1035 exchange allows you to transfer funds directly from one annuity contract to another without triggering any taxes on your investment gains [3].

This is incredibly useful if you want to leave the market risk of a variable annuity and move your funds into a safer fixed or fixed indexed annuity. The funds move directly from the old insurance company to the new one, preserving your tax deferred status.

However, it is vital to remember that while a 1035 exchange avoids taxes, it does not magically erase the surrender charges from your old policy. You still have to do the math to ensure that the benefits of the new, safer policy outweigh the cost of any exit fees from the old one. Additionally, the new policy will likely have its own fresh surrender period. When we help clients through this process, we run a side by side comparison of the contractual guarantees to ensure the move makes undeniable financial sense.

Annuitization

If you are still within your surrender period and want to avoid exit fees, another option is to "annuitize" the contract. This means you convert the accumulated cash value into an immediate, guaranteed stream of income payments. Many contracts allow you to do this without paying surrender charges, provided you agree to receive the payments over a set number of years or for the rest of your life. This locks in your value and removes the ongoing market risk, though it also removes your ability to access the funds as a lump sum later.

Local Considerations for Illinois and Indiana Residents

When dealing with complex financial tools, having a knowledgeable local guide is vastly superior to calling an anonymous 1-800 number. Insurance regulations, including the specifics of the free look period and the protections offered by state guarantee associations, vary depending on whether you reside in Illinois or Indiana.

At The Haley Agency, we believe that your retirement income strategy should not exist in a vacuum. It needs to align with your overall risk management plan, from protecting your physical property to securing your family's legacy. By working with a local agency that understands both your community and the broader insurance landscape, you ensure that every piece of your financial puzzle fits together perfectly.

For those looking for guidance on building a comprehensive safety net, we highly recommend reading our insights on Choosing an Insurance Agency in Illinois and Indiana. We also specialize in tailoring policies to your exact lifestyle, which you can explore further in our Personal Insurance section, or read about legacy protection in our guide to Life Insurance Planning in Indianapolis for Families and Business Owners.

Securing Your Financial Future

Entering retirement should be a time of excitement, not a period defined by financial anxiety. Annuities remain one of the only financial instruments capable of guaranteeing an income stream that you simply cannot outlive. Whether you are actively shopping for a new fixed contract to generate reliable monthly payouts, or you need professional help mapping out a tax efficient exit from an underperforming variable policy, clarity is your best asset.

Take the time to assess your true income needs, carefully compare the contractual guarantees of different products, and never hesitate to lean on a trusted professional to run the exact numbers for your unique situation. When implemented correctly, these tools do more than just protect your principal, they give you the freedom to actually enjoy the wealth you spent a lifetime building.

The Haley Agency

We are committed to excellence in client focused service, building lasting relationships through trust, transparency, and education. We believe that you deserve to understand exactly how your money is working for you, without the confusion of high pressure sales tactics or dense industry jargon.

Ready to protect what you’ve built with coverage that actually fits? Contact The Haley Agency today to schedule a personalized policy review for your home, auto, life, or business insurance across Illinois and Indiana. Whether you need to evaluate an old policy or start building a new foundation for your future, we are here to provide the dependable, value added guidance you deserve. Get in touch with us to start the conversation and request a quote today.

By Joshua Haley & Team