Annuities

Prepare for the long-term using fixed or variable annuities
By Greg Brown Annuities are contracts which function as insurance policies in reverse. (In fact, annuities are sold by insurers.) If you buy an annuity, you pay a lump sum or make a series of periodic payments to a financial institution.
 

The annuities seller then invests the money and, under contract terms, must pay to you a series of fixed, periodic payments beginning at an agreed date for a period or, perhaps, as long as you might live. Annuities are useful for providing a stream of guaranteed income during retirement, much like a pension.

In this guide to annuities, you'll learn about:

1. The basic features of annuities.
2. Fixed vs. variable annuities.
3. Getting quotes on annuities.
4. Protecting yourself from annuities scams.

Learning more about annuities

Annuity providers are quick to say that annuities are best considered a source of income to complement others, like tax-deferred savings in 401(k) plans. Unlike private pension plans, however, they are far more flexible and can allow for greater amounts to be saved tax-deferred.
Try: Bone up on annuity basics at the Insurance Information Institute, a trade group representing insurance companies.

Fixed vs. variable annuities

Most people who buy an annuity are seeking to reduce their involvement in investing and potential investment cycles. However, you can have it both ways. Fixed annuities provide a set return over a set period, but a variable annuity -- as the name implies -- varies in payout according to rising or falling values of the underlying investments, like stocks and bonds.
Try: Fixed annuities are relatively simple, but check out the Securities and Exchange Commission site on annuities for more on how fixed annuities work. Pay particular attention to the SEC page on variable annuities, and their various "caution" statements regarding these types of annuities. If you find the warnings hard to grasp, definitely get expert advice before buying variable annuities.

Getting the best deal on annuities

In general, any financial website or brochure you see offering annuities is simply reselling a product from a major provider. You should go directly to an insurance agent you trust to buy your annuity. Or, buy an annuity through a large financial institution, like a mutual fund seller.
Try: You'll find a comprehensive list of insurance providers at the Insurance Information Institute. Some large mutual funds companies that also sell annuities include Fidelity, Vanguard and Schwab.

Don't be a victim of an annuities scam

As you can imagine, the idea of an older person sitting on a pile of cash to invest is incredibly tempting to thieves. Annuities scams are common and are relatively easy to detect (common sense helps a lot), but there are classic signs of an annuities scam for which you should carefully watch.
Try: The state of California provides an excellent checklist of what annuities should -- and should not -- provide. Also, always look up your potential annuity vendor, an insurance company, at A.M. Best, which provides ratings of insurers' financial condition.

• Annuities are a tool, not a complete answer. If your concerns are long-term, take a look. If not, a 401(k) might be a better choice.
• Never buy an annuity under pressure. An ethical annuities provider will not force you to choose by a deadline to get a deal.
• Annuities, increasingly, come with provisions to pass on their benefits to heirs. Ask carefully about terms.