An annuity is a contract with an insurance company: you pay a lump sum or a series of payments, and the insurer promises growth on that money, a stream of income, or both, often for life.
With an immediate annuity you pay once and income typically starts within a year; one that pays for life works like a private pension and protects against outliving your money. A deferred annuity grows first and pays later. Deferred annuities come as fixed (a guaranteed minimum interest rate), fixed indexed (interest linked partly to an index such as the S&P 500), and variable (invested in subaccounts that can lose value).
Costs and access are the main issues. Variable annuities often carry surrender charges if you withdraw during the first several years, commonly six to ten after each payment, plus insurance and rider fees on top of fund expenses. Most contracts include a free look period, usually 10 to 30 days, to cancel without a surrender charge.
Annuities are often sold on commission. A fee-only advisor can still recommend one, usually a version without a commission, and earns nothing from the choice.
How to check
Before buying, ask for the surrender schedule, every annual fee as a percentage, and how the seller is paid. Look up the seller on FINRA BrokerCheck; anyone selling variable annuities must be registered.
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