Types of Annuities

• Deferred annuities such as fixed, variable and indexed annuities have an accumulation phase before withdrawals begin. Fixed annuities offer contract owners a minimum rate of return for a designated number of years. Variable annuities allow contract owners to invest in mutual funds or fixed products. The annuities insure the client from losses in the event of death but generally do not cap the returns. Indexed annuities provide clients with a return based on the performance of a particular index over a number of years. Immediate income annuities provide account owners with an income stream for the rest of their lives in exchange for a lump sum cash investment.
  
  

Time Frame

• Funds in IRA accounts are subject to a 10 percent penalty if withdrawn before the owner reaches age 59 1/2. Banks offer CD IRAs that last days, weeks, months or years so someone close to retirement age need not tie the funds up in a CD that lasts beyond their retirement date. Most fixed annuity contracts last between five and seven years. Some index annuity products offer terms lasting 10 or 15 years.
  
  

Benefits

• Funds in annuities enjoy the same tax-deferred status as IRA funds. Variable annuities offer potentially higher returns than fixed products because they expose some funds to the stock market through mutual funds. The death benefit of a variable annuity covers the beneficiaries from any market losses if the annuitant dies during the accumulation phase when the funds are illiquid. People trying to out-pace inflation often use mutual funds as a growth device. Fixed annuities often have higher rates than fixed CD products, and many annuities allow small penalty-free withdrawals.
  
  

Considerations

• Variable annuities feature benefit riders that provide annuitants with guaranteed income, growth and extended death benefits. The riders deplete the cash value of the annuity over time. Annually assessed maintenance fees, death benefit, mutual fund fees and rider expenses often amount to a 3 or 4 percent charge to the account each year. Annuities also assess early termination penalties that typically start at 7 percent and decrease annually over the course of the designated term.
  
  

Warning

• The Federal Deposit Insurance Corp. covers IRA money invested in CDs and other bank products up to $250,000 per-person per-financial institution, as of 2010. Annuities are not covered by FDIC insurance but are backed by the financial strength of the issuing company. States regulate insurance companies, and consumers should read state insurance regulations to determine what measures protect funds in fixed annuity accounts. Variable annuity accounts exposed to the stock market offer insurance guarantees on income and death benefits, but a down market could deplete the lump-sum cash value.