An investment option ... Know to Pros and Cons

An annuity is an investment option, generally long-term by nature.  It is a contract between you and an insurance company in which you deposit an amount of money and, in return, the insurer makes periodic payments to you, depending on the terms of the annuity. 

There are two types of annuities:

• Fixed annuities are those in which the insurer guarantees you will earn a minimum rate of interest during the time your annuity is in place -- perhaps 4-5% per year.  There is less risk, but less growth opportunity.
• Variable annuities are those in which your funds will be invested, based on your risk tolerance criteria, in a range of investment options, generally mutual funds.  There is a greater opportunity for growth if the market does well, but you can also lose part of your principal (original investment) if the market goes down.   Make sure you diversify the types of investments included in your account.

Benefits of an annuity are: The growth on annuities is tax-free until you start withdrawing money, at which time they are subject to income tax.  Annuities generally have a "life insurance" type death benefit, often with a guaranteed percentage growth per year.  You can withdraw money from the annuity gradually, so the remainder continues to grow.  Make sure you know the details on these points before investing.

Here is the main drawback to annuities:  They are long-term investments by nature, that being generally 5-7 years.  There are penalties if you withdraw money from your annuity prior to the full term so only invest money in an annuity that you won't need in the immediate future.  

For more complete information on how annuities work, go to www.sec.gov/answers/annuity.htm

For a full array of annuity providers, go to:  

www.totalreturnannuities.com/annuity-basics/index.html