A person calculating how much they owe.

At its heart, an annuity is simply a type of investment that accumulates funds and then pays them out in an income stream.  Think of it as pouring several gallons of water into a container and then turning on the spigot to let it slowly dribble out.  Annuities are widely used for retirement, long-term care and Medicaid planning.

Annuities are also used by unscrupulous agents to scam elders.  Aside from being unnecessary, there can be huge downsides to annuities.

The trick is to know enough to distinguish between a good annuity and an old-fashioned rip-off.

Annuities can be legally sold by a licensed life insurance agent, an insurance company, a financial planner or a broker.  Agents and companies licensed by the Texas Department of Insurance can legally sell annuities in Texas.  You can verify the license status by using the Agent Lookup and Company Lookup on its website.

There are two primary types of annuities.  A deferred annuity allows you to save money and postpone paying taxes.  An immediate annuity allows you to create an immediate income stream.

Within those two types, there are several different products.  A fixed annuity is the most conservative, and offers a guaranteed minimum interest rate.  An equity-indexed annuity is a low- to- moderate risk;  it could earn a higher interest rate, but there is no guaranteed minimum interest rate.   A variable annuity is a high risk:  it gives you choices of sub accounts for investment, but you could lose some or all of your money.

To decide if an annuity is a good choice for you, ask your agent some questions:

Interest rate:  What is the guaranteed minimum interest rate?  What is the current interest rate? Is there a bonus interest rate and, if so, how do I receive it?

Surrender charge: What is the surrender period and associated charge?

Withdrawal options:  Does this annuity have a withdrawal option?  If so, what are the terms?

Guaranteed Value:  Does this annuity have a guaranteed value?  Can it ever lose its value?  Does the value reset?

Death benefit:  Will the annuity pay my beneficiaries anything when I die?  How is that calculated?

Annuitization date:  What is this, and what is the date that it happens?  When will I start receiving payments, and how much will I receive?

Fees:  What are the fees for the annuity?  What is your commission?

Funding:  How do I fund it – a single payment or periodic payments?

Most importantly, shop around.

There can be a big difference in the amount of commissions, premiums and benefits between companies.

If you currently have an annuity, then be extra wary.  An agent who recommends a replacement annuity may be breaking the law if his or her motivation is to earn a commission.

Seniors are a favorite target for annuities scammers.  If you are an incapacitated senior and you have been sold a bad or unnecessary annuity, contact the Texas Department of Insurance.  You may be able to reverse the transaction.