IMMEDIATE ANNUITY: An immediate annuity begins to distribute periodic payments (generally to someone designated the annuitant) shortly following the deposit of the initial funds. The payment period can be for a specific amount of time, for an individual's life, or for a combination of the two (for example, the payout instructions could read something to the effect of: monthly payments in the amount of X will be made to Mr. and Mrs. Jones, so long as either Mr. or Mrs. Jones is alive, but in no case for a period of less than ten years. Should neither Mr. nor Mrs. Jones survive for ten years, the balance of the payments due will be made to their designated beneficiary). Annuities are the only investment that can guarantee a payment stream for life. This guarantee is only as good as the financial strength of the issuing insurance company.

DEFERRED ANNUITY: A deferred annuity has an accumulation period before distributions are made. During this accumulation period, long standing tax law permits the owner of the annuity to defer payment of any taxes due on the growth or earnings portion of the investment. This can be advantageous if an investor is able to defer taxes on the growth of the annuity during peak earning years, avoiding the higher taxes that would be due (Bank CDs, in contrast, require that taxes be paid on interest earned, as earned each year). The annuity owner could wait to receive annuity payments (and pay the tax due) until retirement when he/she could well be in a lower tax bracket.

DEFERRED ANNUITIES HAVE LIQUIDITY RESTRICTIONS: Most deferred annuities limit access to the account to no more than 10% of the account value per year during the initial "surrender period" (3 to 15 yrs).

SPECIAL TAX RULES FOR ANNUITIES: The "trade-off" for the tax deferral aspect of annuities is the rule that you will be penalized an additional 10% by the IRS for withdrawals (that do not qualify for one of the exceptions) made before attaining age 59.5 (similar to IRA rules).

FIXED ANNUITIES: A fixed annuity is the original, traditional tax-deferred annuity. They pay a certain rate, guaranteed in advance, and provide a guaranteed minimum rate of return. Like all investments, there exists an inverse relationship between risk and reward. Because of their minimum guarantees, fixed annuities are conservative investments and generally don't pay much more than bank CDs. However the ability of the annuity to accumulate the interest while deferring taxes makes them attractive for certain investors. Annuities are not protected by the same FDIC guarantees as bank CDs.

INDEX ANNUITIES: The Index Annuity is the newest type of annuity, and some interest crediting methodologies are quite complicated. Although there are a huge number of variations in how the interest rate is computed, the classic Index annuity credits an interest rate in arrears - at the end of a contract year, by applying a formula to the change in a stock- market index (such as the Standard and Poor's 500 Index) during the year. EXAMPLE: If the index went up, say, 10% during a contract year, and the annuity calls for an 80% participation rate, the investor would be credited with an 8% return for the prior twelve month period. Many companies also impose a "cap" on the rate (which can change from year to year). Thus if the annuity in our prior example had a 7% cap for the most recent year, the maximum credited rate would be 7%. Since the Index Annuity owner is not "in" the stock market, the annuity cannot lose value if the index declines during the year. Conceptually, the Index Annuity was designed to provide more upside potential than a regular Fixed Annuity and less downside risk than a Variable Annuity.

VARIABLE ANNUITIES: A Variable Annuity, in a simplistic sense, is like a limited menu of stock and bond mutual funds, wrapped inside of an annuity. The annuity owner is able to create a portfolio of stock and bond mutual fund "sub-accounts" within the annuity. Since annuities grow tax-deferred until withdrawals are made, the annuity owner is able to move money around between investments inside the annuity wrapper without current tax consequences. In addition to protection from taxation, the annuity "wrapper" provides certain types of guarantee features for a fee. Since the accounts inside the annuity represent actual investments in the stock and bond markets, the owner could be subject to market losses and reduction in principal. For many years Variable Annuities have been criticized by industry experts for their excessive fees, disadvantageous tax treatment (compared to regular mutual fund investments) and confusing and expensive "guarantee riders" that can appear more valuable than they actually are. Still, there are certain types of investors for whom variable annuities are appropriate.