This Morningstar post written by El Toro is a worthwhile read for any investor considering an annuity.

---

An annuity is a contract between an annuitant and an insurance company in which the annuitant makes a lump sum or series of investments during an accumulation phase in exchange for a series of payments beginning immediately or at some future date. Investors unfamiliar with the terminology used in this material should refer to Annuity.Net's or Annuitywiz.com's Glossary for a definition. A more detailed explanation on Annuities can be found at retireonyourterms.com. Who should consider annuities? Before investing in an annuity, a question to be asked: Is an annuity right for me?. Investors fearful of out-living their assets should consider an annuity for a portion of their assets in exchange for a guaranteed lifetime income. An annuity can be a viable estate-planning tool for families with modest estates. However, it is strongly recommended that a qualified estate planner and Elder Law Attorney be consulted prior to annuitizing assets are per the following article on Annuities and Medicaid. Types of annuities Deferred - allows for tax deferred growth of accumulations Immediate - converts assets into a guaranteed income stream The types of investments within an annuity contract are: Fixed - provides a fixed return Variable - provides a variable return by investing in a mutual fund portfolio Equity-Index - links your investment to an equity index Annuity Payout options The criteria determining the amount of the annuity payment is Actuarial life expectancy Period certain Survivorship option Tailor An Income Stream To Fit Your Needs The above criteria can be combined in the following combinations: Single life Joint life/survivorship Single life with period certain Joint life/survivorship with period certain Period certain with no life provision Lump Sum The use of period certain and inflation-adjusted options result in lower payments. Annuity Fees & Expenses Surrender charges Mutual fund expenses Mortality fee Administrative fees Annual contract fees Shopping for an annuity Questions to ask before buying! Research the financial strength of the insurance company prior to purchasing an annuity because annuity payments may stretch over several decades. Therefore, the use of good unbiased rating services, such as Standard & Poor's or A.M.Best, to evaluate the financial strength of the chosen insurance company is recommended. For immediate annuities, shop around to get quotes from several high-quality insurance providers because the payout amounts can be substantially different between companies. An un-biased summary of the Pros & Cons of annuities can be found at AAII. Alternatives to consider before investing in a Variable Annuity Contributing maximum to QRPs, IRA & ROTH IRA Considered I-Bonds for tax deferred growth DCA into an Index or tax managed mutual fund Pros Simplicity Guaranteed lifetime income Unlimited contributions Tax deferred growth for VAs Cons Inflation risk higher expenses & fees Beware of high initial teaser rates Annuitization is irrevocable Limited investment options Surrender charges for VAs Premature withdrawal penalty for VAs No step-up in cost basis at death for VAs Appreciation taxed as ordinary income instead of LTCG References FAQs Annuity payout calculator Annuity taxation Section 1035 tax-free annuity exchange