Annuities can be a very valuable part of an investment portfolio.  Unlike stocks & bonds, they provide guaranteed income for as long as you live (at least to the extent supported by your state’s Life & Health Insurance Guarantee Association).  But getting help on what kind of annuity to buy (let alone which one specifically) can be surprisingly difficult.  Here’s why.

The first thing to know is that an annuity is a contract between you and the issuing insurance company.  You give them money up front and they promise you a stream of income over your (and possibly your spouse’s) remaining lifetime.  Obviously you need to read the contract in order to understand the details of how you will be paid back.  That’s where it gets complicated.  For the simplest annuities, single premium immediate annuities (SPIA), the documentation is fairly straightforward.  But for more complex variable annuities such as equity indexed annuities (EIA) or Guaranteed Minimum Withdrawal Benefit (GMWB) annuities, the contract can run to 20 or 30 pages, and the details of how the various calculations and limitations are defined can have a significant impact on your actual withdrawal or income benefits.

If you do not have the inclination to figure it all out yourself, where do you turn for advice?  All insurance products are sold via commission.  You may or may not get a good detailed explanation about a specific annuity from the salesperson, but you certainly will not get a comparison of that annuity with other similar annuities from other companies that might have better benefits or lower premiums.  You are also unlikely to get help comparing the annuity income with alternative investments that might be more appropriate for your situation, simply because the salesperson doesn’t sell them.

Consumer support organizations and publications such as Consumer Reports logically would be another good source.  But again, because there is no standard for annuities like there is for auto and home insurance, a review of one annuity wouldn’t tell you much about any others.  As a result you won’t find more than general information and advice about annuities from these kinds of sources.

That leaves financial planners and independent advisors.  Because they are held to a higher standard than insurance agents (they are required to have a fiduciary responsibility to their clients, meaning they must put their clients’ interests ahead of their own), they must consider alternatives and recommend what they believe is the best choice specifically for you.  Many advisors don’t like annuities because of their complexity and lack of standardization.  Each one is different, and even similar sounding annuities from the same insurance company can have different terms & conditions.  And, just as with auto and home insurance policies, the premiums for annuities with similar benefits can vary widely from company to company.  The only way a financial planner can do a cost-benefit analysis of a complex annuity is to read the contract in detail, which involves a lot of time and effort.  And then he or she needs to compare it to other annuities as well as to other investments.  Imagine how many hours that all takes.

Are there alternative investments that are safe but better than annuities? Again, it depends on the specific annuity, as well as your goals in considering one.  I evaluated one client’s EIA by comparing it to an equivalent amount invested mostly in ultra-safe zero-coupon 10-year US treasury bonds (called strips) plus a small amount in an S&P 500 index fund.  I compared the returns over the 10 year period from 1990 through 1999, which was one of the best performing decades for the S&P 500 in recorded history (432% cumulative), and over the 10 year period from 2000 through 2009, one of the worst decades (-9% cumulative).  I found that in the best decade, the investment beat the annuity by 107% to 48% (cumulative). In the worst decade, the annuity returned 36%, while the investment, without any guarantees, returned 29%, not much worse.  The client, who was very risk-averse, appreciated the fact that an investment mostly in US government bonds (which, by the way, are safer than any annuity investment) can mitigate much of the risk even without minimum guarantees.  His insurance agent did not explain any of this.

Again, annuities can be useful tools for retirement.  But the decision to include one in a retirement portfolio depends on a number of factors specific to each family’s situation. If you are considering annuities on your own, especially complex ones such as EIAs or GMWBs, there’s a lot of due diligence you really need to perform to make sure you’re getting what you think you’re getting.  And until the various state regulatory agencies impose standards on annuity contracts, you should plan to devote many hours learning about them before making a decision to buy one.

The bottom line: Caveat emptor!