If you could purchase a product that promised to give you a steady income for life and take the worry out of outliving your assets, would you jump at the chance? While it sounds like an easy decision, this type of product, called an annuity, may not be appropriate for everyone.\r\nWhat is an annuity?\r\nAn annuity is an insurance contract that is typically used to provide a guaranteed income for life. In the world of personal finance, however, \u201cguarantees\u201d usually carry hefty price tags, and annuities are no exception. You should fully understand the pros and cons of these products before you decide whether an annuity is right for your investment portfolio. Additionally, these products are most often sold by a broker who receives a hefty commission for selling these products. Before you buy, it may be in your best interest to\u00a0consult a fiduciary financial advisor\u00a0before purchasing an annuity.\r\nWhat types of annuities are there?\r\nThere are two basic types of annuities \u2013 immediate and deferred.\r\n\r\n \tImmediate annuity\u00a0\u2013 If you need a guaranteed stream of income right away, you can convert a lump sum to an immediate annuity that pays out monthly, quarterly or annually.\r\n \tDeferred annuity\u00a0\u2013 If you are years away from your retirement and want to make sure you have a fixed income coming in every month in your retirement, you can get a deferred annuity. You invest tax deferred money in the annuity to receive payments at a later date.\u00a0Until you are ready to start receiving the payments your money will grow tax free like your 401k.\r\n\r\nEach of these annuities can have multiple options \u2013 single premium, flexible premium, fixed annuity, variable annuity, life income annuity, joint annuity, and equity-indexed annuity, to name a few.\r\n\r\n \tSingle premium\u00a0\u2013 You buy an annuity using a lump sum.\r\n \tFlexible premium\u00a0\u2013 You pay multiple premiums to the company.\r\n \tFixed\u00a0\u2013 Your money will earn a fixed interest rate set by the insurance company. When you begin receiving income, a fixed payment is guaranteed.\r\n \tVariable\u00a0\u2013 Your money will be split into sub-accounts depending on your risk level, and be invested in mutual funds. \u00a0The annuity may pay a guaranteed minimum income based on the annuity value and performance, but the downside is it has substantially higher fees than traditional investment vehicles.\r\n \tEquity-Indexed\u00a0\u2013 A variation of a fixed annuity where the interest rate is based on an outside index, such as a stock market index. Like variable annuity this product pays a minimum rate which might go up if the index performs better.\r\n \tLife income\u00a0\u2013 You receive income as long as you live - even if payments exceed the amount of money you put into the annuity. If you buy an installment refund rider your beneficiaries will continue to receive payments even after you die\u00a0until the total amount paid to you and your beneficiaries equals the premium. If you didn\u2019t buy any rider, the insurance company will keep the money.\r\n \tJoint-life income\u00a0\u2013 This policy is typically purchased by couples, and payments are organized in a similar manner as life-only, except payments will continue until either you or your spouse pass away. Although you will get a lower monthly income than if you purchased a life-only option, the joint-life annuity option\u00a0ensures that income will continue for the surviving spouse.\r\n\r\nWhat are the advantages and the disadvantages?\r\nAdvantages\r\n\r\n \tPeace of mind that you won\u2019t outlive your retirement assets\r\n \tWith a variable annuity you can take risks (via the underlying investment options) and still have control of the outcome (via the option of guaranteed minimum income)\r\n \tDeferred annuity earnings are tax deferred \u2013 which can add a good chunk of money to your nest egg\r\n \tThere is no yearly contribution limit for a non-qualified annuity meaning you can store away large amounts of cash and defer paying taxes. So, to put it in context, in the realm of tax-deferred vehicles such as an IRA or a 401k, there is a limit to what you can contribute. Whereas in an annuity, you can put in as much money as you want\r\n\r\nDisadvantages\r\n\r\n \tAnnuities can be expensive in terms of the benefits they provide. Below is a laundry list of costs that come with annuities\r\n\r\n \tAnnual contract fee: Either fixed dollar amount or an expense ratio; for high value annuities, this fee may be waived\r\n \tInvestment management fees\r\n \tOptional rider fees\r\n \tCommissions\r\n \tWithdrawal or surrender charges\r\n\r\n\r\n \tYou already own an income annuity \u2013 it\u2019s called Social Security\r\n \tReduced liquidity\r\n \tAnnuity earnings when you start drawing the payments are taxed as ordinary income\r\n \tLack of transparency \u2013 annuities are very complex insurance products\r\n\r\nOur Takeaway: Before You Buy an Annuity\r\nIt\u2019s important to keep in mind that by buying an annuity, you are signing a contract with an insurance company to make payments for a set period of time or for your lifetime. Not to mention, any type of \u201cguarantee\u201d comes at a high cost and not everyone will need one. On top of that there are so many different varieties of annuities with hundreds of options, riders, disclaimers, footnotes and contingencies, making them extremely complex. Locking your money up for a long time will take away flexibility and it\u2019s important to think through what your true needs are.\r\n\r\nRead our Free Personal Capital Insurance Guide\r\n\r\nFor more questions about your long-term financial goals,\u00a0schedule a free appointment with an advisor today.\r\n\r\nPersonal Capital Insurance Series\r\nLife Insurance \u2013 How Much is Enough?\r\nTerm v Permanent Life Insurance\r\nWhole Life Insurance v Universal Life Insurance\r\nCase Study: Permanent Insurance and a Down Payment\r\n\r\nAll insurance analysis and insight provided is extended to you as a courtesy for educational purposes only. You should not rely on this information as the primary basis of your insurance planning decisions. We are not licensed insurance professionals. You should consult a qualified licensed insurance professional regarding your specific situation.