Annuities are not for everyone, and not all annuities are the same, there are many types of annuity products available. Since annuities are tax deferred bond-like investments, as it may be difficult to get investment money back quickly. Also, there is a tax penalty on early withdrawal of an annuity.

Annuities are bonds that pay the investor a series of equal payments at regular intervals with interest compounded at a specified rate. Annuities can be a wise long term retirement investment strategy. However, annuities require a long-term commitment of ten or more years in order to build value. Sometimes tied to a life insurance policy, annuities can provide a steady stream of income for retirement, but they are not free from risk. Depending on the type of bonds, an annuity can gain or lose in value.

Insurance companies and financial institutions offer different types of annuity products. Each has its own degree of risk. There are two basic types of annuities, fixed and variable. Both types offer immediate or deferred distribution. The annuity grows based on your investment. A fixed annuity is similar to a certificate of deposit (CD). A variable annuity is similar to a mutual fund. An immediate distribution annuity, either fixed or variable, offers an immediate return not only on investment income, but also on a portion of the principal. Immediate return on an annuity means, however, up to one year before an investor receives any money. A deferred annuity has two phases: accumulation and distribution. Accumulation tends to be a period over ten years. Distribution is a specified period of years determined at the time the annuity is purchased.

If a person is over 65 years of age, annuities are not a good investment strategy because annuities take often over ten years to build in value. Also, the annuity tax rate is higher than capital gains. For your heirs, all profits on an annuity are taxable as ordinary income and can potentially create a large tax obligation. Variable annuities often have high fees. The tax deferred benefit is rarely worth the cost of cumulative fees. For annuities with a life insurance benefit, it is important to remember that life insurance is not an investment tool. Purchasing an annuity in an IRA (individual retirement account) or other tax-deferred account generally makes no sense, since you pay additional service fees with no additional tax benefit.

Most states impose a “free look” period on annuity sales, which allows the customer to cancel the contract and receive the investment back in full. Remember annuity payments are not adjusted for inflation and there are stiff penalties for early withdrawal.

For more information visit the U.S. Securities and Exchange Commission at http://www.sec.gov/answers/annuity.htm.