What to do during the free-look window after buying an annuity

The free-look window is the cheapest time you will ever have to change your mind about an annuity. Once it closes, leaving usually means a surrender charge, and sometimes a tax bill as well. Before it closes, in most cases you can send the contract back and receive a refund under the rule printed in the contract. The trouble is that the clock often starts when the contract is delivered, not when you signed the application, and the days pass quickly if nobody opens the envelope.

Treat the window as a short project with a start date, a deadline and a list of tasks. The plan below assumes a window of about thirty days, since the length varies. Many states set the period at ten to thirty days, some set a longer one for older buyers or for replacements, and the number for your contract is printed on the contract itself. If yours is shorter, compress the schedule; the order stays the same.

First, understand what the window is and is not

The free-look period is a legal right to cancel a newly issued contract and get a refund. Three features matter for planning.

• It starts at delivery in most cases. The contract or the state's rules say what counts as delivery: the date you received it, the date it was mailed or the date an electronic version was made available. Find the sentence and write the date down.
• The refund rule varies. In some states, and for some products, you get all of your premium back. In others, the company may return the contract value on the day it receives your cancellation, which for a variable annuity can be less than you paid if the markets fell. For fixed contracts, the premium is more commonly refunded in full. Read the free-look notice rather than assuming.
• It does not work like a trial of the advice. Cancelling may undo the purchase, but it does not necessarily undo what you did to fund it. If you cashed out another contract, let a CD mature or sold investments, those steps may not be reversible, and the money may have been out of the market or out of an interest-bearing account while you waited.

For the life insurance version of the same right, see the free-look period: returning a policy for a refund. The principle is the same; the annuity details, especially around markets and transfers, are different.

Day 0: The day the contract arrives

Do these things on the day it arrives, even if you are tempted to put the envelope in a drawer.

1. Note the date and the method. Write the date of receipt on the cover page, and keep the envelope or the e-mail with the delivery information. If the contract came by courier, keep the tracking record.
2. Find the free-look notice. Usually it appears on or near the first page, sometimes in a separate notice. Copy down the number of days, the deadline date you calculate and the instructions for cancelling.
3. Check that you received everything. The contract, the application copy, any riders or endorsements, the disclosure or buyer's guide and, for a variable or registered index-linked contract, the prospectus. If a document is missing, ask for it in writing and note the date you asked.
4. Set two reminders. One for the halfway point and one for five days before the deadline. A free-look decision made on the last afternoon is rarely a careful one.

Days 1 to 3: Verify the basics against what you applied for

Open the application copy next to the contract's data page. The data page, as described in how to read an annuity contract page by page before you sign, turns the general contract into your numbers. Compare, line by line:

• Names, addresses and Social Security numbers of the owner, annuitant and beneficiaries, including the percentage each beneficiary receives.
• The product name and the form number. If the agent described one product and the contract is another, you want to know now.
• The premium amount and the date it was received.
• The guarantee period, the interest rate or crediting terms, and the minimum guarantees.
• The surrender schedule, the free-withdrawal percentage and any market value adjustment.
• Riders you asked for, and riders you did not. Charges for a rider that was never discussed are a reason to call.
• Qualified or non-qualified status. A contract set up as the wrong type of account can create tax reporting trouble that is not easy to reverse.

Write down every mismatch, however small. Some are clerical errors that the company will fix with a correction form. Others mean the product is not what you were shown.

Days 3 to 7: Read the parts that decide whether you keep it

Now read the pages with real consequences. This is the same material you would ideally have seen before signing, so plan on a couple of hours.

The exit terms. Work out, in dollars, what you would receive if you surrendered in year one and in year three. For a hypothetical contract with $50,000 of premium, a first-year charge of 8%, a free amount of 10% and no market value adjustment, a full surrender would be charged on $45,000 (the amount above the free $5,000). The charge would be $45,000 × 8% = $3,600, and the owner would receive $46,400 before tax, plus any interest credited. If the dollars you would get back surprise you, that is information.

The guaranteed numbers. Identify what is promised and what can change. A cap, participation rate or renewal rate that the company may reset is not a promise for the whole term. The contract-reading post linked above shows how to sort each term, and annuity surrender charges and free withdrawals covers the exit costs.

The income and death provisions. If the agent mentioned a lifetime income feature, find the rider and read its conditions. If the agent talked about the death benefit, find what it pays and how withdrawals affect it.

The sales materials. Put the brochure or illustration next to the contract and highlight every statement that the contract does not repeat. Not every difference is a problem; marketing is shorter than contracts. But a promise that exists only in the brochure is not enforceable in the same way.

Days 7 to 10: Test the cancel process before you need it

Few people check how cancelling works until the last day. That is a mistake, because the instructions may require a signed form, a specific address, a medallion signature or a call to a service center. Use this stretch of the window to walk through the process without actually cancelling.

1. Read the instructions and note the requirements. Is a written request required? Must it be mailed, or can it be e-mailed or uploaded? Is a particular form needed?
2. Call customer service and ask questions. "If I decide to cancel within the free-look period, what exactly should I send, where, and how will you confirm receipt?" Note the date, the name of the person and what they said.
3. Ask the refund questions. Will I get my full premium or the contract value? How long does the refund take? Will it be paid by check or electronic transfer, and to whom?
4. Ask about the tax reporting. A cancellation within the window is generally treated as though the contract was never in force, but the company will tell you what it reports. If money came from a retirement account or another annuity, ask how a return would be handled.
5. Get the answers in writing if you can. An e-mail confirming the process is a record that a phone call is not.

If any part of the answer is vague, ask for a supervisor or the compliance department. The way the company handles questions in the window says something about how it will handle them later.

Days 10 to 20: Look at what the purchase replaced

If you funded the annuity by moving money from another source, especially another insurance contract, use this period to compare the old and the new. This matters because state rules on replacement often give extra protections, and because mistakes are most expensive here.

Questions to answer:

• What did you give up? Surrender charges paid on the old contract, a death benefit that no longer exists, a guaranteed rate that was higher than the new one, or an income rider with a built-up base.
• What did you gain? Be specific, in numbers. A higher rate on the new contract is only a gain if it is higher after considering the new surrender period.
• Was the tax handled correctly? A section 1035 exchange moves one annuity to another without immediate tax on the gain, but only if the paperwork is done as an exchange, with the money moving company to company. If you cashed out the old contract and sent a check, the gain may have been taxed. Confirm with the old company how the transfer was reported, and talk to a tax professional if you are unsure.
• Was the sale handled properly? States and securities regulators set standards for annuity sales, including the best-interest rules described in best interest rules for annuity sales. If a salesperson told you the old contract was "no good" without showing you numbers, or you were asked to sign forms you did not understand, those are the kinds of facts to write down.

A fuller checklist of what to examine is in before you replace an annuity: what to check about what you lose, and the risks to older buyers are covered in annuity sales abuses targeting seniors. If you are still undecided about replacing, the free-look window may be the last cheap chance to go back to the old contract, depending on whether it was surrendered or exchanged. Ask both companies what is possible before you act.

Days 20 to 25: Make the decision

By now you have a document-based view of the contract. Use a simple structure rather than a gut feeling.

1. Does the contract match what I applied for and what I was told? If not, can the difference be corrected, and is the correction acceptable?
2. Can I live with the exit terms? If you may need more than the free amount in the next few years, would the cost be tolerable?
3. Do I understand every charge? Including those that are not listed as a fee, such as caps and spreads.
4. Do I know who is protected if the company fails? The state guaranty association stops where its limits stop. Find your state's limits with the lookup on this site rather than relying on memory.
5. Would I buy this again today with what I now know? The honest answer to this question is often clearer than any list.

If the answers are mostly yes, keep the contract and file the paperwork. If there are one or two clarifications to make, ask for them in writing before the deadline and, if the answer is not in hand in time, decide whether to cancel and consider buying again later. If the answers are mostly no, cancel. A cancelled purchase costs nothing when the window is used properly; a kept purchase that does not fit costs real money.

A second opinion is worth it here. A fee-only planner, who is paid by the client and not by the sale, can look at a contract in an hour. A tax professional can answer questions about the funding source. Neither can be expected to guarantee a result, but both can check your reading. Be sure to book the appointment early enough that it fits inside the window.

Days 25 to 30: Act, and keep the proof

If you will keep the contract, finish the housekeeping. File the contract where your beneficiaries can find it, put the first anniversary and the end of the surrender period in your calendar, and make a note of the date any renewal notice is likely to arrive.

If you will cancel, do it with a margin of safety.

1. Send the request well before the deadline. In many cases the date that counts is the date you mail or submit it, but the contract's wording controls, and a delay in the mail should not decide the matter. When two dates are possible, plan around the earlier one.
2. Use a method that leaves a record. Certified mail with a return receipt, a tracked courier or an upload with a confirmation number. Keep a copy of everything you send.
3. Say exactly what you are doing. A plain letter: "I am cancelling contract number X under the free-look provision and request a full refund of my premium. Please confirm in writing." Add your contact information.
4. Follow up in a week. If you have no confirmation, call and note the name and time. If the company does not respond, the state insurance department takes complaints; see state insurance departments: what they do for you.
5. Check the refund when it arrives. Compare it against the rule you read. If the amount is less than expected, ask for the calculation in writing.

A note on the clock: some people receive the contract late or in pieces, such as an electronic copy first and a paper copy later. If the company's delivery was late, say so in writing, because the window may run from the later date. Do not rely on that argument if you can avoid it, and treat the earlier date as the deadline.

What if the window has already closed?

Sometimes the contract sat unopened. If the free-look period is over, you are not without options, but they are narrower and cost more.

• Read the surrender terms and check the free amount. A modest need can be covered by free withdrawals, which are taken without a charge.
• Check the state rules. Some states give additional rights for older buyers or for sales that fell short of suitability or best-interest standards. The department can tell you what applies.
• File a complaint if the sale was improper. Document what you were told and what the contract says, and see how to file a complaint against a life insurer for the steps.
• Wait out a short remaining schedule. If the charge ends in a year or two, waiting is sometimes cheaper than exiting.
• Consider an exchange only with full numbers. Exchanging to avoid a charge often adds a new one, which is why a replacement is a decision to weigh against the ones above.

A short checklist to keep with the contract

• Date contract received: ______ Deadline to cancel: ______
• Refund rule (premium or contract value): ______
• Cancel instructions (form, address, method): ______
• Data page matches application: yes / no / corrections requested on ______
• Dollar amount received if surrendered in year one: ______
• Questions asked of the agent or company, with dates and answers: ______
• Second opinion obtained from: ______
• Decision and date: ______

For the questions to ask at the start, before any signature, see questions to ask an agent before you sign an annuity application.

Key takeaways

• The free-look period usually runs from delivery of the contract, so record the delivery date on day zero and calculate the deadline from the contract's own wording.
• Compare the data page with your application, work out the exit value in dollars and sort the promises into guaranteed and changeable before the middle of the window.
• Learn the cancel process and the refund rule early; the refund may be your premium or the contract value, and the two can differ.
• If the annuity replaced another contract or investment, compare what you gave up with what you gained, and confirm how the transfer was reported for tax.
• If you cancel, do it with time to spare, by a method that leaves a record, and keep copies of everything.