Annuities come with a few caveats

Annuities are big business in Washington.

Insurance companies sold annuity contracts worth about $3.6 billion in 2004, according the most recent available government statistics and private research.

High numbers of affluent retirees in the state, along with fresh memories of an unpredictable stock market, make annuities an attractive choice for people who want to make sure they have a steady, predictable income no matter how long they live.

“The people in Washington are right in line with what others are doing, partly because of wealth and awareness,” said Michael Vaughan of J.G. Wentworth, a finance company in Bryn Mawr, Pa.

Annuities sales in Idaho reached about $500 million in 2004.

On a national scale, Americans have about $2 trillion in annuity assets, making them a potent part of retirement planning.

Yet annuity contracts are not for everyone. They can be misused by unscrupulous salespeople and companies eager to collect fees, say federal and state regulators.

Before buying an annuity, investors should learn a few things about how the contracts work and ask themselves some important questions, the first of which should be, “Why?”

There are basically two types of annuities. One is fixed, in which the insurance company guarantees regular payments that can last anywhere from 20 years to a lifetime. They are most attractive to conservative investors.

The second is a variable annuity. These allow people to choose where to invest their money, typically in mutual funds. The amount a person receives varies depending on the performance of the investment option selected. They are more attractive to people comfortable riding the ups and downs of the market.

Variable annuities have been growing in popularity, while sales of fixed annuities have fallen, according to the Insurance Information Institute, a national nonprofit organization that tracks and reports on insurance issues and trends.

Some people look to a annuities as a way to defer income taxes on the money invested until the money withdrawn. While tax benefits are a popular sales pitch, discuss the pros and cons with a financial or tax advisor who isn’t trying to sell you the annuity and collect fees.

The U.S. Securities and Exchange Commission offers up the reminder that variable annuities offer no additional tax advantages than a traditional IRA or a 401(k) plan, other than there are no limits on annual annuity contributions.

On the plus side, annuities are insured by state guaranty associations. Unlike other types of investments, if the insurance company that sold the annuity contract fails, the terms are honored.

In Washington the maximum liability limit is $500,000. In Idaho the liability ceiling is $100,000.

Occasionally, annuity-holders want to cash in a policy because of changes to their retirement plans or life circumstances.

That’s possible in most cases, albeit with surrender charges and possibly tax penalties, according to the National Association of Securities Dealers.

There’s also a secondary market for annuities in which a firm will pay a lump sum now in return for the future income stream.

When buying annuities, be sure to work with a reputable company and compare features and prices, paying special attention to fees and the cost of add-ons. Ask the annuity salesperson how much they will be paid to sell you the annuity.

Someone selling a variable annuity must be registered with the NASD and the SEC. If the salesperson balks at the question, take your business elsewhere.