What Are The Pros And Cons Of Annuities? 
Pros Immediate annuities are , in my opinion , the most useful of the suite . For Americans who will not be retiring with a meaningful stream of pension income , immediate annuities offer that potential . Because an immediate annuity is purposefully consuming both interest and principal to create an income stream , the individual distributions are likely to be higher than anyone could justify taking from a balanced portfolio of investments , where maintenance of the principal balance is often the goal . Fixed annuities allow an investor to lock in rates of return that are comparable to CDs , but likely for longer terms -LRB- whereas CDs are typically quoted in months , fixed annuities are quoted in years ranging from one to 10 . -RRB- The most common are three , five and seven year fixed annuities . If -LRB- read : when -RRB- interest rates rise from abnormally low rates to abnormally high rates , it could be a wise time to allocate some of one 's fixed income exposure to a fixed annuity . And unlike a CDthe interest from which is paid out and taxed annuallythe interest or gains earned in annuities are deferred until distributions are taken . Many annuities promise some level of principal protection . Even in certain variable products -LRB- invested in equities -RRB- , a portion of your principal or even future income may be guaranteed by the company . The advantages of equity indexed annuities are , frankly , hard to find amidst the overly-simplistic marketing pledges shrouding their overly-complex underlying construction . ... Whoever sells you the policy will likely be going on a nice vacation sooncommissions on these products range into double-digit percentages . Additionally , you could suspend disbelief and allow yourself to think you 're getting the upside of the market without any downside . Ignorance can be blissful , if only momentarily . Cons Unfortunately for each of the pros , there are pretty significant cons . At this time , prevailing interest rates -LRB- and correspondingly the rates used to calculate immediate annuity payouts -RRB- are so low that committing funds could expose you to a meaningful amount of inflation risk . So even if you 're predisposed to lock in a more secure income stream with an immediate annuity , consider waiting until rates normalize . The same could be said for most fixed annuities . The tax deferral of annuities is worth something , but there 's a priceor prices , reallyto be paid . All of your gains will be taxed at your ordinary income rate . Especially if you 're investing in a variable annuity with equity exposure , you 're trading the tax privilege of capital gains for a ratedeferred or notthat could be twice as much . Another negative tax implication is the loss of a `` step-up '' in cost basis to your heirs . Capital assets that were purchased at a low costlike stocks and real estate , for exampleare afforded a step-up in their cost basis upon your death . If you sold those assets during life , you 'd paid capital gains tax . If you gave them to your heirs while you were alive , your heirs would inherit your cost basis . But if you wait to pass them to heirs until after your death , they will receive a step-up in their basis to the cost of the holding on your date of death . Annuities with significant appreciation , however , receive no such benefit . In fact , not only will your heirs inherit your cost basis , they 'll be paying tax at their ordinary income rate and may be forced to distribute the policy and take that gain in short order , resulting in a tax time bomb for those you hope to bless with an inheritance . There are more pros and cons - please visit my website or call me to discuss your particular situation . 