A. An annuity is a contract between you and an insurance company. Here are some basic types:
1. Variable annuity: funds invested in mutual funds or a pool of managed investments. You have the upside if the market rises, but you have to pay fees and could lose money in a down market.
2. Fixed annuity: no fee and it pays you a guaranteed rate of return, for example, 5% per year.
3. Fixed-index annuity: this gives you exposure to the equity market but at no risk of losing principal. It is basically a fixed annuity with a variable return that is based on an index, such as the S&P 500 index. There is a cap on the upside.
4. Immediate annuity; you give the insurer a lump sum in return for a set ratio of return and regular income payments until death, or for a specified period. There is no fee.
Except Variable annuity, you can think that annuities lower the risk of your investment portfolio, with no investment expense and no fee. The disadvantage is your upside is limited.