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By Eileen AJ Connelly -- AP Personal Finance Writer

NEW YORK (AP) — These days, safety is alluring.  Aware that deflated 401(k)s have many fearing for their financial future, insurance companies are filling the airwaves with promises of security.

One type of investment heavily marketed to shell-shocked investors is annuities, which can provide a guaranteed income after retirement. What the ads don't say is that some annuities can be just as risky as buying stocks.

Trying to choose the right contract from myriad products can be overwhelming. Consumers must decide how much risk they're willing to take, when they want to get their money back and what additional features they might want.  What's more, fees and charges vary widely, making comparisons between different plans frustrating.

"I think that in general, the public gets real confused when the term annuity comes up," said Christopher Brown, president of Ivy League Financial Advisors in Rockville, Md.

Before you make an investment, here's a primer on some of the differences between various types of annuities and their pros and cons.


The first thing an annuity buyer must decide is when to start getting money back.

For people close to retirement age, an "immediate" annuity will start payments right away, and can last for as long as they live. The payment amounts will depend on a person's age, how much is invested and the interest rate in the contract.

For individuals with time before they stop working, or enough current income from other sources, a "deferred" annuity can act as a savings vehicle.

The next choice is between the two types of annuities — fixed and variable.

Fixed annuities come with a guaranteed rate of return on the investment, currently between 2.75 and 5.25 percent, depending on the length of the contract. They can be immediate or deferred, and have a specific payout schedule.

Variable annuities typically invest in a set of mutual funds that the buyer chooses, which means the investments are exposed to potential market losses. They can also be immediate or deferred, although most are deferred.

Not surprisingly, variable annuity sales, which rose sharply in the bull market, dropped more than 15 percent to $155.6 billion last year. Meanwhile, fixed annuity sales, which declined steadily as the market soared, jumped 50 percent in 2008 to $109.4 billion as investors sought safety.

Some companies also sell equity-indexed annuities. These are fixed annuity hybrids that combine a guarantee on principal with market-based investments to help the money grow.

One criticism of indexed annuities, which had 2008 sales of $26.5 billion, is that gains are usually capped at a certain percentage. During boom years, that cap could fall well below actual returns. "You don't get the full upside of the stock market," said John Wesley, director of after-tax annuities for TIAA-CREF.

But others say the value of that guarantee is clear in bear markets. "Worst case scenario, if you buy a bad indexed annuity, you'll make a little less interest," said Keith Singer, a financial planner in Boca Raton, Fla. "But you're not going to have 40 percent less money in a year."


The problem with annuities is that there are multiple layers of expenses, said John Coumarianos, an analyst with Morningstar.

Annuity holders will pay annual maintenance fees, for instance, typically between 1.25 percent and 1.4 percent per year. Those with variable annuities also must cover the fees related to the mutual funds they hold.

With both types, you can also choose a variety of features and add-ons, and each drive up the fees. This is where the choices can get perplexing.

Among the most common features is a death benefit. In its most basic form, it allows you to designate a beneficiary to receive either whatever is left in the account, or a guaranteed minimum amount, which will cost more up front.

There is also a slew of other options, including inflation protection on payouts and cash withdrawal features.  You'll also find individual and joint policies, as well as options such as survivor benefits and long-term health insurance.

But each of these bells and whistles comes at a price. "By the time you add them all up, you're faced with a ridiculous overall expense," Coumarianos said.

When researching annuities, ask for a detailed accounting of how much each feature would cost over time. It may be less expensive, for example, to skip the long-term care insurance and buy a separate policy.

Given recent market performance, some people might be willing to pay for some extra security, but experts say be wary. "Unfortunately, there haven't been a lot of studies that would really give you some way to determine if the benefit is worth what you're paying," said Ray Benton, a Denver-based financial planner. Some choices may come down to risk tolerance. "Nobody knows what their risk tolerance is until the market collapses," he observed.

Another cost annuity buyers must understand is the "surrender charges," or the amount the insurance company will take if you withdraw cash early.

Typically, surrender charges are highest in the first year you hold the annuity, and phase out after a set number of years. For instance, charges may start at 8 percent, and drop by 1 percent each year, so you withdraw cash in the ninth year with no penalty. Some accounts may designate a certain amount that may be withdrawn earlier, or each year, without triggering surrender charges, or you may be able to add that feature for a fee.


One of the selling points for annuities is that your money grows tax free.

But there's a large amount of academic research that shows the tax advantages don't translate into substantial savings, said Anthony Webb, a research economist with the Center for Retirement Research at Boston College. He noted that senior citizens, those most likely to be taking annuity payouts, often don't pay taxes, or have low tax burdens.

Annuity tax advantages should only be a lure for investors who are already contributing the maximum to their 401(k) and IRA plans, which offer better tax savings and wider investment opportunities, said Coumarianos, of Morningstar.  "Too many people own (annuities) without maxing out their 401(k) or IRAs."

As for choosing an annuity as part of a 401(k) or IRA plan, Brown, of Ivy League Financial Advisors, said that would mean an unnecessary layer of tax protection, because those retirement savings vehicles already get tax-free growth. "Putting one inside the other is equivalent to staying indoors, putting on a raincoat and opening up an umbrella when it's raining outside," he said. "You just don't have to do it."


For many people, nothing says "safety" like insurance. But despite their reassuring advertising, insurance companies can be shaky in today's climate, and some industry watchers are concerned about the burden the market meltdown has placed on company assets.

Yet even with its name sullied, AIG was second only to MetLife in annuity sales last year.

Unlike banks, which are backed by the Federal Deposit Insurance Corp., insurance is regulated by states. All 50  have industry-funded protection for policy holders if their insurance company goes belly up, typically up to  $100,000 for annuities.

But it still makes sense to be cautious about where you buy. Annuities are "as safe as the insurance company that backs them," said Benton.

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