Annuities

Annuities are a type of insurance product, though they often are promoted as an investment. They can be complicated and carry high fees, so make sure you do your homework before purchasing one.

When you buy an annuity, you are purchasing an insurance policy with which the insurance company promises to pay you money over a period of time. With a fixed-rate annuity, you will get a specific amount of money for either a set period of time or even for the rest of your life. With a variable-rate annuity, the amount of money you receive depends on the performance of the investments within the policy. Your annuity payments may be immediate, which means you start receiving money right away, or deferred, which means you will accumulate benefits for a period of time, then start receiving payments at a later date.

Most experts recommend that you make the maximum contributions to such retirement accounts as IRAs or 401(k)s before you purchase an annuity. There is no benefit to purchasing an annuity to hold within one of these types of retirement accounts.

Tip: Watch out! High sales commissions and misleading advertising has led the National Association of Securities Administrators Association to dub variable annuities as one of the "Top 10 Schemes, Scams and Scandals." Regulators are concerned that investors aren't being told about high surrender charges and the steep sales commissions agents often earn when they move investors into variable annuities. Some investors also are misled with claims of guaranteed returns when variable annuity returns actually are vulnerable to the volatility of the stock market. "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.