An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. Annuities are most often bought for future retirement income. An annuity is neither a life insurance policy nor a health insurance policy. It is not a savings account or a savings certificate. You should not buy an annuity to achieve short-term financial goals. There are many kinds of annuities.

Immediate or Deferred Annuities. With an immediate annuity, income payments start no later than one year after you pay the premium. You usually pay for an immediate annuity with one payment. The income payments from a deferred annuity often start many years later. Deferred annuities have an accumulation period, which is the time between when you start paying premiums and when income payments start.

Fixed or Variable Annuities. During the accumulation period of a fixed deferred annuity, your money (less applicable charges) earns interest at rates set by the insurance company or in a way set forth in the annuity contract. The insurance company guarantees that it will pay no less than a minimum rate of interest. During the payout period, the amount of each income payment to you is generally set when the payments start and will not change.

During the accumulation period of a variable annuity, the insurance company puts your premiums (less any applicable charges) into a separate account. You decide how the insurance company will invest those premiums, depending on how much risk you want to take. You may put your premium into a stock, bond or other account, with no guarantees, or into a fixed account, with a minimum guaranteed interest. During the payout period of a variable annuity, the amount of each income payment to you may be fixed (set in the beginning) or variable (changing with the value of the investments in a separate account.)

Tips on Buying Annuities

• Check with your state's insurance department to make sure the company is licensed in your state.
• Be sure the company is financially strong. Many independent services rate the financial strength of insurance companies, such as A.M. Best Company, Fitch Ratings, Inc., Moody's Investor Services Inc. and Standard & Poor's Insurance Rating Services.
• Review all of your other savings plans, pensions or other retirement funds to determine whether you need an annuity. Is there a possibility that you could outlive your assets?
• Determine whether you want your investment to be steady and fixed or variable in hopes of capitalizing on market highs.
• Review the annuity contract thoroughly to ensure that you understand the terms of the annuity and all fees, charges, penalties etc.