You often hear and read about annuities, but many people don’t know exactly what they are. An annuity is a contract between you and (usually) an insurance company.
In exchange for a big chunk of cash today, the insurance company agrees to pay you an income for a specified period, which can be a certain number of years or the rest of your life.
Here are three broad categories of annuities:
Lifetime income annuities: These are basic, classic annuities — you hand over a lump sum and get a specified income for the rest of your life. The best ones offer cost-effective insurance against outliving your money. They’re worth serious consideration if you’re near retirement and your nest egg isn’t as big as you’d like.
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Equity-indexed annuities: Promising a “guaranteed” rate of return based on the performance of an index. But the fine print reveals that your return will be several percentage points lower than the index’s.
Variable annuities: These generally sport high fees, iffy returns and “surrender charges” if you need your money back.