About Annuities

Buying an annuity is a little like creating your own pension plan. With a lump sum of money, you purchase a contract from an insurance company, which agrees to pay you back a certain amount of regular monthly income stream for as long as you or you and your spouse live—or for a fixed number of years, depending on the option you choose. The insurance company takes into consideration your age, gender and the purchase amount in computing the amount of income stream it will provide. In most cases this is an irrevocable decision. You can't change your mind and cancel an annuity contract once you begin to receive income. It's not an investment. An annuity is an insurance contract—and once you buy it, it's yours.

Fixed annuities, guaranteed income

Just as the name implies, a fixed annuity pays income at a fixed rate over a selected time period. You can buy a fixed annuity that pays income for life or over your lifetime plus your spouse's lifetime, which is called a joint life with last survivor annuity. Or, you can choose a time period such as 10 or 20 years. Retirees often choose a fixed annuity so that they can count on a certain amount of income stream to continue no matter how long they live. In purchasing a fixed income annuity, the guarantee of a lifetime income stream is only as good as the solvency of the insurance company, so stay with top rated companies and look for low fees.

Variable annuities, higher risk for higher potential return

A variable annuity offers the opportunity for lifetime income, but it does not come with the guarantee of a fixed rate of income. Instead, your money is invested in portfolios that are similar to mutual funds and the amount of income you receive from a variable annuity will go up and down with each payment depending on the performance of the portfolios you choose.

Buyer beware

Annuities have been around for many years, and they have earned low marks from some financial watchdogs because they can be complicated, expensive and sold inappropriately with bells and whistles the buyer doesn't really needs or through strong arm sales tactics to which retirees, in particular, can be vulnerable. That said, there are many solid insurance companies that sell straightforward annuities for relatively low fees. As with any other type of financial product, if it sounds to good to be true, it probably is.

AARP Financial Inc. does not provide tax advice. Please consult a tax advisor for information pertaining to your particular situation.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.

The Financial Advisors are investment adviser representatives of AARP Financial Inc., an investment adviser.

While AARP endorses the services provided by AARP Financial Inc., AARP does not offer financial products or services itself and cannot recommend that you or any specific individual should purchase any particular product or service. AARP Financial Inc. is an investment adviser and a subsidiary of AARP.