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I’ve talked a lot about stock investing, a bit about 401k’s, and a healthy chunk about saving.  An annuity is another investment vehicle sold by the insurance companies.  If there is one thing insurance companies are very good at is knowing their numbers.  An annuity is a way they can provide you a guaranteed income while they make themselves a healthy percentage.

There are many different packages of annuities, but all of them are essentially a standard investment (bonds, stocks, CDs, etc) that the insurance company guarantees a return for you (and then keeps the rest for their profit.)

The great part about an annuity is it grows tax free, the bad part is you are locked in until you are  59 or you pay big penalties to your friendly federal tax collector.

When you go to buy annuities you need to remember that it isn’t an investment professional selling them, but an insurance broker.  The commissions are higher for the sales person so often your information is less than helpful.  There are two major types of annuities:

1. Fixed Annuity – A fixed annuity simply gives you a guaranteed rate of return – these are usually invested in bonds, but can be invested in stocks as well.  What they are invested in doesn’t matter much to you because you’ve agreed to your rate of return no matter what.
2. Variable Annuity - A variable annuity is almost invested in mutual funds.  Your return is often tied to the performance of the funds, with a guarantee that you’ll earn so much per year, or won’t lose your principal, only if you hold the annuity for a certain number of years (usually more than 7.)

If you plan on holding a mutual fund for more than 7 years than there isn’t much risk in making the investment yourself.  If it wasn’t a great bet the insurance companies wouldn’t guarantee it for you.  I won’t be using annuities until all of my standard retirement accounts are being maxed out.  After that they are my next choice for tax free growth.

An interesting side benefit of an annuity is you can pass them on to someone after you die without being tied up in your estate.  If you wish to pass some money to someone the family may not agree with it’s a good way to make it happen automatically without a fight in probate court.

Related posts:

1. Reading The Details Of Your Fixed Annuity Contract
2. Car Insurance for Teenagers – Get it as Cheap as You Can