Annuities

Annuities are a type of insurance product, though they often are promoted as an investment.

When you buy an annuity, you are signing a contract with an insurance company that promises to pay you money over a period of time. Your annuity payments may be immediate, which means they will start right away, or deferred, which means you will begin receiving payments at a later date.

• With a fixed annuity, you will get a specific amount of money for the rest of your life or a set period of time.
• With a variable annuity, the amount of money you receive depends on the performance of investments within the policy.

They can be complicated and carry high fees, so make sure you do your homework before purchasing one. Most experts recommend that you make the maximum contributions to such retirement accounts as IRAs or 401(k)s before you purchase an annuity. Since annuities are already tax-deferred, there's no tax benefit to investing IRA contributions in an annuity.

Variable annuity alert! Because of marketing abuses, variable annuities (VAs) have been dubbed one of the "Top 10 Schemes, Scams and Scandals" by the National Association of Securities Administrators Association. Regulators are concerned that older investors are often persuaded to lock up their money in a VA for years, with steep surrender charges for early withdrawal. "Variable annuities make sense only for consumers willing to invest for 10 years or longer, but they are not suitable for many retirees who cannot afford to lock up their money for a long time," according to the report. Another concern is the hefty sales commission agents usually earn when they sell a VA. Some investors are also misled with claims of guaranteed returns, when in reality a VA's return will fluctuate with the performance of its underlying investments.