Annuities

• An annuity is a structured contract with an insurance company that's similar to a pension plan. When you purchase an annuity, you either make a lump-sum payment to the insurance company or you pay the company over time, and you expect to receive your contributions back in future payments, according to the terms of the contract. Essentially, you are purchasing a tax-deferred investment by loaning your money to the insurance company. The insurance company then transfers that capital to its balance sheets.
  
  

Fees

• Insurance companies charge fees to set up, manage and dissolve annuities. If you choose a variable annuity, you also will pay management fees for the accounts in which your money is invested. Fees are also incurred if you withdraw your money early.
  
  

Reversion of Funds

• Annuities serve as guaranteed income during your lifetime, which means that in some instances, as with a life annuity, your investment may revert to the insurance company if you die before it has been paid out in its entirety.
  
  

Investment

• A fixed annuity offers you a guaranteed return on your investment, but this return usually is below market even when compared to the return on United States Treasuries. The difference between what your money earned and what the insurance company pays you is absorbed by the insurance company.
  
  If you own a variable annuity, the insurance company charges an assumed interest rate (AIR), typically 3 percent to 4 percent. If the annuity's investments perform well, the insurance company gets the AIR and you get the amount over that percentage. However, if they perform below the AIR, the insurance company still gets the AIR and your payment is reduced.