Question. I met with a financial advisor who thinks I should buy an annuity instead of funding my retirement accounts with mutual funds. What do I need to know about annuities before making this decision?

A. As a general rule, annuities are products that are made to be sold, not bought, and it should not be surprising that someone who is compensated for selling them would recommend that you buy them. It is OK to use a financial advisor, but choose a fee-only advisor, who is paid directly by you for advice. Taking advice from a commissioned salesperson is like going to a doctor who charges no fees but gets kickbacks from the lab and the pharmacy based on the number of tests ordered. That arrangement is illegal in medicine (for good reason) but legal in financial services.

An annuity, like whole life insurance, is another method of mixing insurance and investing. Instead of investing the money, either on your own or with others via a mutual fund, you purchase a contract with an insurance company. The insurance company usually provides guarantees of some type, and there are usually costly fees and surrender charges. Perhaps the best example of an annuity (and certainly the most useful) is the single premium immediate annuity (SPIA), where you give a lump sum to an insurance company and, based on your age, health, and current interest rates, the insurance company then provides you a monthly income for the rest of your life, no matter how long you live. You cannot get your money back, so when you die, even if it is the next week, the insurance company keeps the money. Typical rates range from 5 to 8 percent, so if you used $100,000 to purchase an annuity, you could get a guaranteed monthly payment of $417 to $667 every month for the rest of your life. Essentially, you have used a lump sum to purchase a pension. SPIAs can also have an inflation adjustment.

Annuities have other benefits. In some states, such as California, Florida, Indiana, Louisiana, New Mexico, and Texas, annuities offer substantial asset-protection benefits from creditors. Money in an annuity, whether in your name or that of a child, does not have to be listed on the Free Application for Federal Student Aid (FAFSA), although a physician’s family will rarely qualify for any need-based aid anyway.

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