When you sign up for an annuity or life insurance, the government and the companies selling these products want to make sure you have enough time to understand your purchase. That's why these contracts include a free look period, where you can change your mind after signing up.

Here's how this arrangement can help take the risk out of buying these products.

Breaking Down Annuity and Life Insurance

An annuity is a type of contract used to grow your savings and turn them into future income payments, including the option to receive guaranteed income for the rest of your life. With life insurance, your contract provides a death benefit payment for your heirs if you pass away while covered by the policy.

Both annuities and life insurance policies are typically meant to be long-term commitments. Annuities in particular expect you to keep the contract for several years. If you cancel before then, most come with something called a surrender charge, where you'll lose a percentage of your initial deposit. If you cancel in the first year, this is generally about 7% of your deposit, and then the charge goes down each year.

Life insurance is not quite as costly to leave early. For most contracts, you simply lose whatever you paid in monthly premiums. Some policies also include a cash value — money that you can take out while alive. There are different versions of cash value life insurance; some, such as variable life, could also include a surrender charge if you cancel early.

For both life insurance and annuities, it's best to set up a contract you'll stay happy with for the long term.

Understanding the Free Look Period

All annuity and life insurance contracts include something called a free look period. This starts the day you sign your contract to launch the plan and typically lasts between 10 and 30 days, depending on the rules of your state government as well as how the insurance company designs their contracts. They always need to meet at least the state minimum, but some insurers may opt to give you a longer period.

During this period, you can change your mind and return the annuity or life insurance. You would get all your money back without owing any penalty, interest, or surrender charge — just as if you had never signed up in the first place. This allows you to carefully review all the pages and terms of your contract to make sure it matches your reasons for buying.

Making the Most of the Free Look

Life insurance and annuity contracts can be somewhat lengthy and feature a lot of terms and provisions. The free look period gives you time to read through each page to see if you have questions. If there's anything you want to know about your annuity or insurance, you can reach out to your financial representative for detailed explanations.

The free look period also lets you review the formal offer for life insurance. When you apply, the insurance company will review your application during a process called underwriting. This is how they decide what benefits you qualify for and the premium cost. Your insurance agent could give you an estimate when you first apply, but you won't know the formal numbers until after you receive the contract. Rather than forcing you to decide right on the spot, the free look period gives you at least a week to consider the formal offer.

Using Your Free Look Period

If, after careful review, you decide that the annuity or life insurance offer is not for you, you can contact your agent or the company's customer service department and let them know. They will tell you what paperwork you need to submit to cancel, usually a short form, so you get all of your money back. As part of this discussion, you can decide whether any other products make more sense for you.

Annuities and life insurance can be valuable financial tools, but only when they are the right fit. With the free look period, you don't have to rush through these important financial decisions.