When I first started working in financial services, I never thought I’d buy annuity products. My only experience with them was the immediate annuity type. An immediate annuity begins paying you right away and usually last the rest of your life. Once I started working with an insurance company, it was then that I became familiar with a variable annuity. A variable annuity did not pay you right away. Your money was invested in subaccounts that mirrored mutual funds. These seemed great because they were tax deferred, but you did have to pay a fee for insurance inside the contract. This insurance cost pays the death benefit of at least equal to the amount you invested to begin with. Every annuity is different so you have to read the contract.
If you are considering buying an annuity, you’ll have to purchase it from an insurance company because of the built in insurance inside the contract. I was not a big believer in buying annuities for a 401k rollover. That kind of changed this year because the market was so far down. One company that a friend of mine works at offered an annuity that guaranteed your principal investment even if the market went down. He had clients that chose to annuitize their contracts because they could recover their lost principal. Talk about a deal. Needless to say, they don’t offer those contracts any more.
I think you might buy annuities if you’ve already maxed out all of your qualified accounts as far as the IRS is concerned. You might buy an annuity to protect your principal in case of your death. But the most common thing people use an annuity for is to guarantee an income stream from you principal for life.
To me the biggest down side to buying an annuity that’s variable are the surrender charges inside the contract. Some surrender charges last for a significant period of time. If you would need to cash your annuity in, or move it, you could incur a substantial fee. As far as the types of annuities I sold the most of, it was the variable type. Those contracts had nice investment options inside them that you could direct on your own. Most of the time, I was trained to rollover qualified money into them to fund IRA’s. I don’t know that I would do that today. The insurance the annuity provides though would have really helped someone had the died during the last year, because you might not have lost as much money. Check around before you buy annuity contracts as every company is different.