“Free Look” for Annuities Offers Safety Valve If Rates or Circumstances Change

By Ken Nuss

Occasionally it makes sense to cancel a new policy and get a better one. With most financial products, you’re committed once you buy. After you’ve bought a stock or a mutual fund, you can’t cancel the purchase and get your money back if you’ve changed your mind or the stock market has plummeted. Even with a bank certificate of deposit, you usually can’t cancel without penalty.

Annuities are different.  Because they can be complex, states require that insurance companies that underwrite annuities offer a “free look” period. During that window, you can cancel the contract and the insurer will return all your money. You won’t, however, earn any interest on the cancelled policy.

Most states require a free-look period that lasts for the first 10 to 30 days after the receipt of the contract. A few states require longer periods for senior citizens. A few states mandate a free look period for replacement funded contracts but not for annuities funded with new money. At least two states don’t require a free look at all.  And some insurers offer a longer period than required.

While it’s unlikely that you’ll use the free-look provision, it provides peace of mind. It lets you examine the annuity contract closely and perhaps ask a trusted advisor for an opinion. If there’s anything you don’t like about it, or you’ve simply found a better deal in the interim, you can cancel without penalty. 

If a major life event, such as the death of a spouse or losing your job, happened just after you bought the annuity, that might also be a valid reason for canceling.

The free look provision applies to all types of annuities: fixed-rate, fixed-indexed, variable and income annuities. If you’re thinking about cancelling your annuity, contact your annuity agent or the issuing insurance company to make sure you can meet the free-look deadline. You’ll need to notify the insurer in writing and return the policy.

Pros and cons of using the free look

If you compared products from multiple insurance companies before you bought, you probably won’t need to cancel your contract. If you didn’t, the free-look period gives you a chance to compare products. My company, AnnuityAdvantage, for instance, is one of several companies that provide updated rates for fixed-rate annuities online.

Normally, rates on fixed annuities don’t change dramatically from month to month.  Suppose you purchase a four-year fixed-rate annuity at 3.00%. After 20 days, rates have gone up to 3.10%? Is it worth it to cancel the policy to get the higher rate?

Right at the start, you’ll forfeit the first 20 days of interest on your already issued policy.  Then it will take one to two weeks for the insurance company to return your money.  Next, you’ll have to apply for the new annuity and have it issued.

All told, you may lose 45 days of interest. On a $100,000 deposit, that’s approximately $370 in interest. Since your new annuity only pays 0.10% more, it will take 3.5 years to make up the difference.  Is it worth the effort in this case?  Probably not.

When cancelling would be worth it

Once in a great while, there’s a dramatic change in the financial markets—for example, in September 2008. Then rates can spike so much that you might be better off cancelling and getting a new higher-paying annuity. Suppose rates during the free-look period shot up unusually, from 3.00% to 3.50%. In this case, you’d make up the $370 in lost interest in just nine months, and getting the better rate would likely be worth the effort.

Like a seat belt, the free-look provision is a safety valve you probably won’t ever need, but it’s good to know it’s there, at least in the vast majority of states—just in case. 

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. He’s a nationally recognized annuity expert and author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com  or by calling (800) 239-0356.