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Annuities 101

Written by Carrie T. Ratzlaff    Tuesday, 20 December 2011

One of the four main varieties--an immediate annuity--can sometimes make sense. The rest? Not so much. TRADITIONAL DEFERRED FIXED ANNUITY How it works: An insurance company invests your money in bonds, crediting your account with a set portion of the interest. after a holding period, you have the option of receiving a guaranteed monthly sum for life. Bottom line: MONEY usually doesn't recommend these products, in part because they Tend to carry high surrender charges. VARIABLE ANNUITY How it works: You control how your money is invested--in stock funds or bond funds, for example--and your payments rise and fall along with the value of your account. Variables are riskier than fixed annuities but can pay more too. Bottom line: Generally an inferior choice, thanks mostly to high fees. INDEX ANNUITY How it works: This deferred fixed annuity pays interest tied to the performance of at least one stock market index. A cap (currently about 4.5%) limits how much you can earn each year. When you cash out, your account value is compared with a guaranteed minimum (usually 87.5% of your premium plus interest of 1% to 3%); you get whichever is higher. Bottom line: The negatives--including complexity, high expenses, and low returns--Outweigh the positives. IMMEDIATE ANNUITY How it works: A fixed annuity with no deferral period, it starts paying guaranteed lifelong income right away. Bottom line: Putting part of your portfolio into an immediate annuity can be a good idea if you're a retiree worried about outliving your money.

Last Updated ( Tuesday, 20 December 2011 )