On the whole, most annuities are relatively safe investments. There are two main types of annuities: fixed and variable. Fixed annuities provide a guaranteed return on your investment. Variable annuities actually use the amount invested to purchase mutual funds, index funds, and other investment vehicles that fluctuate with the markets. Hence, variable annuities are riskier.

Fixed annuities guarantee a specific payment to the investor, and are therefore low-risk. The interest gains and payment amounts are guaranteed by the annuity's issuer, which assumes the risk of investing. The primary risk with a fixed annuity comes with the type of payout selected.

Variable annuities come loaded with substantially more risk than fixed annuities. When an investor purchases a variable annuity, the payment(s) are invested in a choice of separate accounts, which then invest in stocks, bonds, and money market funds. The final payout(s) depend on the performance of the underlying securities in the separate accounts. Unlike fixed annuities, the value of the account is not guaranteed; the investor assumes all the risk involved in investing premiums in exchange for potentially higher returns. The initial principal and any growth can be lost if the subaccounts perform poorly.

The only guarantee with a variable annuity is that the death benefit, if elected, will never be less than the total of the premiums paid minus any withdrawals. Some variable annuities offer additional death benefit options that may or not be a better fit with the investors overall goals.

There are a variety of payout options available for annuities. The risk involved with the payout depends on when the payment(s) are received and when the annuitant dies. The primary risk is that the investor dies early and leaves the vast majority of the principal investment.

Some annuity options that increase or decrease the payout risk:

The annuitant can receive all of the funds at once in a lump sum payment.

A life annuity makes payments of regular income for as long as the annuitant lives. When they die, the payments stop, no matter how much money was paid. Some life annuities may come with a death benefit, however.

Joint and survivor annuities make payments for the life of the annuitant and a beneficiary, such as a spouse.

Period certain annuities make regular payments for a set term, whether or not the annuitant dies. These payments can go to a survivor or an estate.

A life annuity with refund option provides the annuitant with a guaranteed income for life. Upon death, payments go to the beneficiaries according to the refund provision. With the refund provision, the beneficiaries receive the difference between the annuity's accumulated value prior to annuitization (payout) and the total of benefits received by the annuitant.

With a fixed amount option, the annuity holder selects the size of the benefit payments, which determines the length of time over which the benefits are received. This option is less commonly used.