Annuities are most often purchased through insurance companies, and they provide investors with a way to save money—generally for retirement—in a tax-deferred investment. Investors often find annuities attractive because they provide a way to receive a guaranteed future income in the form of regular payments, usually for the investor's lifetime. Despite the guarantee of regular income, annuities are not without risk.

There are two basic types of annuities—fixed and variable. With a fixed annuity, the insurance company agrees to make regular payments to you for the duration of your contract. If you have a fixed annuity, your insurance company will guarantee the amount of your principal and earnings. One drawback of a fixed annuity, however, is that there is no mechanism in place to adjust for inflation. Another disadvantage is that if you die earlier than expected, you do not receive the full value of your investment.

Variable annuities also carry some risk because the dollar value of the payments you receive is directly tied to the performance of your other investments. While the insurance company guarantees you a minimum payment after you have stopped making purchase payments on your variable annuity, subsequent payments can vary considerably because the amount is determined by the performance of the stocks, bonds, mutual funds, or other financial instruments that you have purchased with your payments. Also, if you need to withdraw cash from your annuity, you run the risk of losing money if the value of your investments is lower than when you originally purchased them.

Annuities carry some risk because once you make the investment, your money is not as liquid, or as accessible. For example, if you withdraw money from an annuity during a certain period—generally six to eight years after purchase—the insurance company will charge you a fee, known as a surrender charge. This fee is based on a percentage of the amount you withdraw from the annuity. See the SEC for more details at http://www.sec.gov/answers/annuity.htm and http://www.sec.gov/answers/annuitysurrender.htm.