Annuities

A person should not put all his or her money into an annuity, because annuities don't allow withdrawals for unexpected expenses once the annuity income begins. Also, an annuity pays both principal and earnings, so while the annuitant gets a high guaranteed cash flow, heirs may receive considerably less.

An immediate annuity can be purchased with the funds available from a 401(k) plan, an individual retirement account (IRA), a savings account, a life insurance policy, an inheritance, or the money from selling a house. The following points should all be considered when shopping for an annuity.

Health status. One's health must be considered. After all, the reason to buy an annuity is the risk of outliving one's assets. For a person in good health, an annuity makes sense, but for someone in poor health, it's less likely to be a good buy unless an annuity with survivor benefits for the use of a spouse or heir is purchased. Some companies offer impaired life annuities to purchasers with medical conditions likely to shorten their lives, such as diabetes or heart disease.

Use a strong insurer. Check the financial rating of the insurance company to make certain that the company is going to be there for many years.

Find good rates. Compare rates among different insurers using a trusted insurance agent, accountant, actuary, tax professional, the Internet, or a personal contact. Comparing contracts for fixed annuities requires no physical work or paperwork. Comparing rates for variable annuities is a little more complex, and one should not be in a hurry to lock in interest rates. Money can be put in other investments until one is ready to buy an annuity.

Seek other help. A state insurance department won't recommend a company, but it can help if there are problems with a company or representative. Check to see how the annuity would be covered in the event that a company ever becomes unable to pay benefits. Some states won't guarantee any more than $100,000 worth of annuity value.