Annuities

Summary: Those with fixed incomes or living on their retirement savings are often looking for a safe, low risk place to invest their money. They will often turn to annuities, which are sold through insurance companies.

Those with fixed incomes or living on their retirement savings are often looking for a safe, low risk place to invest their money. They will often turn to annuities, which are sold through insurance companies. Basically, an annuity is a contract between you and the insurance company that provided for tax-deferred earnings. There are a number of insurance guarantees that come with annuities, including the option to "annuitize," or turn the principal into a lifetime stream of income. However, the fees are often quite high, and the earnings are taxed as ordinary income, not long-term capital gain. The FDIC does not insure annuities, even if they are sold through a bank. The safety of your principal depends on the financial strength of the annuity provider. If the company fails, you might have $100,000 of coverage by your state's guaranty association. But these associations operate under state law, and vary on what they cover and how much they pay. Fixed-rate annuities With a fixed-rate annuity, you pay the insurance company a certain amount of money. The insurance company then guarantees you a certain periodic payment for the life of the annuity. This is often a way to se up a lifetime stream of income. The insurance company's goal is to invest your deposit and make more money than they have promised to pay you. There are often higher interest rates on annuities than on CDs. But fixed-rate doesn't mean the same thing for annuities as it does for a CD. With a CD, the rate is fixed for the full term of the CD. Fixed-rate annuities do not have a maturity date. The rate is usually only guaranteed for the first year. The rate will then drop after the guaranteed period, and then be adjusted annually. There may be penalties charged if you withdraw money during the penalty period. You may have to pay an 8% penalty if you withdraw money during the first year. After that, the penalty is usually decreased by 1% each year. Annuities have tax-deferred features, so if you withdraw money before the age of 59