An annuity is as safe as the insurance company backing it. That's why you want to consider the risk ratings of the annuity provider as part of the due diligence surrounding the investment decision. The likelihood of you losing your entire principal is pretty remote if you do your homework before signing the annuity contract.
Part of that homework is looking into the financial strength of the annuity provider. A.M. Best ratings for insurance companies place firms in three "group" categories: secure, vulnerable or not rated. Secure group ratings can vary from superior to excellent to good. I'm a conservative guy, so I'd want a secure firm with a superior rating. The firms with excellent ratings will tell you there's not enough difference between the superior and excellent ratings to justify crossing the excellent firms off your list. You'll have to decide that for yourself.
For the most part, the insurance industry is regulated by the states and not the federal government. Your state insurance commissioner also monitors the risk attributes of firms operating in the state. States typically have a guaranty association set up to act as a financial backstop should an insurance company become insolvent or file for bankruptcy. Talk to your state's office of the insurance commissioner to learn more about the guaranty funds available.
An immediate annuity just means the annuity payments start now. There are still three different types of annuities: fixed, indexed and variable. There are even more types of options you can tack onto annuities, including inflation riders, payment guarantees and income guarantees. Get comfortable with your investment before signing the contract. Getting buyer's remorse after signing will cost you a pretty penny in surrender fees.
Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.
Ask the adviserTo ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.